CGI says it's poised for European expansion, reports lower than expected earnings

TORONTO – CGI Group Inc. (TSX:GIB.A) posted lower than expected earnings Wednesday but said it’s poised to expand in Europe as it prepares for its $3.1-billion takeover of the U.K. IT services firm Logica.

“The continued improvement in our European operations over the last year positions us well for the integration with Logica,” said president and CEO Michael E. Roach during a conference call Wednesday.

“Despite the economic headwinds (in Europe), there are some tailwinds in the business.”

Canada’s largest IT services company added about 30 new clients in Europe and Asia in the past year, said Roach.

CGI said the final regulatory hurdles for its acquisition of Logica should be cleared in the coming days. The combined company will be the sixth-largest IT services provider in the world and will double the size of CGI’s global workforce and revenue.

Increasing the size of its European footprint is part of the company’s strategic plan.

CGI reported net earnings of $87.2 million, or 33 cents per diluted share, in its third quarter compared with $123 million, or 45 cents per diluted shares, in the same period last year.

Revenue was $1.06 billion for the quarter compared with $1.01 billion in the year ago period, with the company crediting strong year-over-year growth in the company’s U.S. operations, which were driven by strong financial services and health sectors.

Analysts expected revenue to be about $1.09 billion, according to a poll by Thomson Reuters.

The company said earnings were negatively impacted by the cost of acquiring Logica and financing costs, while last year’s results benefited from favourable tax adjustments.

The IT giant will pay the equivalent of $2.8 billion to buy Logica. It will also assume Logica’s net debt of $515 million, pushing the total value of the deal above $3.1 billion.

The combined company will have approximately 72,000 employees in 43 countries and revenue of $10.4 billion.

The Montreal-based company also said it saw double-digit growth in western Canada, and sees opportunities to expand its Canadian operations.

Tom Liston, an analyst at Versant Partners Research, said while the adjusted earnings were slightly lower than his estimate of 39 cents per share and consensus of 40 cents, “very very strong” bookings and excellent growth in its U.S. segment helped to offset that weaker data.

He said the $1.5 billion in bookings reported was the highest amount in 10 quarters.

“We recommend investors maintain a core position in CGI,” he said.

Founded in 1976, CGI Group is one of the largest independent IT and business process services firms in the world with about C$4.3 billion in annual revenues.

It has some 31,000 employees in Canada, the United States, Europe and Asia Pacific.

The takeover deal, which Logica’s board has unanimously agreed to recommend to its shareholders, is expected to close in September.

CGI shares closed down 38 cents, or 1.6 per cent, to $23.47 on the Toronto Stock Exchange.