After Restructuring, CGI Targets More Recurring Revenue

With a nearly $43 million restructuring program in its rear-view mirror, tech consulting behemoth CGI is focusing on growing its recurring-revenue business as it aims for growth in the back half of its 2016 fiscal year, its CEO said Wednesday.

’The goal that we have is to increase our recurring revenue,’ Michael Roach told analysts following the company’s second-quarter 2016 earnings report Wednesday morning. He noted that CGI is working to utilize long-term contracts across its business, and recently introduced them into geographies where they previously did not execute long-term deals, such as Germany and France.

Roach said that with the longer-term contracts, Montreal-based CGI - No. 15 on CRN's Solution Provider 500 list – can invest regularly in a long-term contract plan, and capture the increased revenue from that investment much faster than the company could without it.

[RELATED: After Dumping Debt, CGI Says It's Ready To Acquire]

To illustrate his point, Roach used a 10-year contract as an example. Every three-years, he said, CGI would be able to invest new technologies and services into the contract, while seeing a return on the third, sixth and ninth years of the contract.

’We can bring more benefits to clients, and we also have some certainty around investing in our business,’ he said.

CGI has been gaining recurring revenue business due to a combination of market conditions and customer demand for outsourcing and managed services, according to Roach.

’There is a significant amount of time, money and energy being pushed into transforming companies and governments into digital organizations,’ he said, adding that CGI is focusing on providing the services that those customers will need when their IT infrastructures become more digitized.

’We are very focused not on where the customer is, but where they are going,’ Roach said.

He added that although CGI seeking longer-term contracts represents a strategic shift, especially for the company’s acquired businesses like Logica, a European-focused technology services company that CGI acquired in 2012, there are many benefits.

One, he said, is the fact that recurring revenue provides stability for CGI in case of economic downturn.

’We have 60 percent recurring revenue - we have a floor here – so, regardless of where the economy is going, we are not going to go below 60 percent recurring revenue,’ he said, calling it a defensive move that can protect both CGI and its shareholders.

During its earnings report, CGI said it boosted revenue 5.7 percent over the same quarter last year, to $2.2 billion, and upped its net earnings by 12.6 percent, to $224 million.

Although revenue has been improving consistently with each quarter since CGI announced its $42.7 million restructuring program last year –(Launched last summer, it cut jobs, as well as CGI’s presence in several geographies.) Roach said growth is essentially flat year over year and that CGI has established what he called a ’good platform’ to drive revenue growth during the second half of this year.

’Our plan is to gradually move to positive growth in the back half of 2016, and we are on our way to that,’ he said, explaining that the company is going to move forward cautiously and only add business that are part of CGI’s current services mix.

Roach said that although CGI has paid off all of its short-term debt, has access to about $2 billion in cash and a list of hundreds of potential acquisition targets in its sights, the company will take the same, cautious approach with its acquisitions and will look only to acquire businesses that will be add revenue for CGI.

’We don’t buy things for short-term gains,’ he said.

However, Roach added, if the company does not find an acquisition it wants to make, CGI will spend the cash on more share buybacks, such as the 7.1 million shares it announced in March that it would buy back from major stockholder Caisse de dépôt et placement du Québec. It still holds 51 million – or 26.4 percent - of CGI’s outstanding shares after the repurchase.

’Investing in our company has always been a good investment for our shareholders,’ he said.