POLITICS

CGI expects growing health-care opportunities in U.S. even if Obamacare repealed

04/25/2012 11:24 EDT | Updated 06/25/2012 05:12 EDT
MONTREAL - CGI Group Inc. said it has high hopes for continuing to grow its U.S. health-care business even if the Supreme Court invalidates Obamacare later this year.

The U.S. high court recently held hearings in which the justices asked blistering questions that prompted many observers to suggest it would repeal the president's signature legislation.

"I don't want to predict what will happen at the Supreme Court of the U.S. but my sense is that the bigger issue that the health-care industry and government are facing is the cost of health care," CEO Michael Roach said Wednesday during a conference call to discuss the company's second-quarter results.

"Regardless what happens there, the cost of health care continues to rise and information technology is part of the solution."

CGI (TSX:GIB.A) derives about 11 per cent of its total revenues from health-care services to commercial and government clients. Revenues from this segment grew by nearly 20 per cent in one year to $107 million in the second quarter.

The Montreal-based company is active with health exchanges, automating health records and auditing Medicaid and Medicare claims.

During the second quarter, CGI's U.S. revenues grew 9.6 per cent to $521 million because of government and health verticals.

Overall, the information technology and business process services firm said Wednesday that net profit in the quarter was $105.7 million or 40 cents per diluted share, in line with analyst forecasts.

That fell from net earnings of $118.7 million, or 43 cents per share, in the same year-earlier period.

A favourable tax adjustment, along with unusually strong Canadian results a year ago, were among the reasons for a $13-million decline in profits.

Revenue was $1.07 billion, down from $1.11 billion.

"We continue to identify not only profitable growth opportunities but actions that will reduce our cost base and create significant value for shareholders over the long-term," Roach said.

Canadian revenues decreased by 11.3 per cent to $314 million as it sold an operation and ended a low-margin business last year. Excluding those factors, revenues were down 5.6 per cent.

Adjusted operating earnings increased five per cent to $71.5 million, well below the 54 per cent increase in the U.S.

Roach said revenues in the second quarter last year were an anomaly for the Canadian operations.

"The margins are exceedingly strong in Canada. We continue to look at opportunities even to improve those, so on balance I'm very optimistic about the Canadian operations."

He noted the Canadian economy is very strong, helped by a booming oil and gas business in Western Canada, strength in Montreal and opportunities in Toronto.

Analysts had predicted bookings would be light in the seasonally slow quarter given the small number of deals announced during the period, among the lowest number in two years.

Maher Yaghi of Desjardins Capital Markets said the results were in line with expectations even though bookings were "soft."

"Overall, we maintain our view that CGI's revenue growth remains lacklustre, although we acknowledge that the trajectory of organic revenue growth should improve given the lapping of lost contract renewals that occurred in fiscal 2011," he wrote in a report.

Roach said CGI will focus in the near-term on getting more business in its core markets, which account for 70 per cent of the world's IT spending, instead of expanding into developing countries.

Some defence contracts expected in the second quarter were delayed until later in the year. It also received "hunting licences" for order opportunities totalling $5.6 billion over several years.

Meanwhile, CGI hasn't totally lost hope despite being outbid by Accenture on a US$617 million IT contract with the State of California.

"It was an extremely close award and against the technical criteria, or fit, we won against every item on that technical list. We were beat on price."

Founded in 1976, CGI Group is one of the largest independent IT and business process services firms in the world with about C$4.1 billion in annual revenues.

On the Toronto Stock Exchange, its shares gained $1.06 or more than five per cent to close at $21.60.