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CGI Group not worried by U.S. budget woes as shares hit all-time high

MONTREAL - CGI expects to continue growing its U.S. government business despite budget restraints that have delayed some contract awards.

The Montreal-based information technology company's backlog decreased in the second-quarter as the so-called budget sequestration limited public spending.

But CGI chief executive Michael Roach said U.S. President Barack Obama's budget included a US$2 billion IT increase.

"Our growth rate is coming down within the year based on what we're seeing," he said Tuesday during a conference call to discuss second-quarter results.

"But in the end, our outlook is that we will still grow year over year, organically, our federal government business."

Despite the budget uncertainty, CGI said it has US$1.1 billion of outstanding federal bids. It also sees growing potential for work by state and local governments.

CGI (TSX:GIB.A) shares surged to an all-time high Tuesday after the company reported better-than-expected results. The company earned $114.2 million or 36 cents per diluted share in the quarter. That compared with $105.7 million or 40 cents per diluted share in the year-earlier period.

Shares reached a new plateau of $32.20 before closing at $31.90, up $4.87 or 18 per cent.

Revenue soared to $2.53 billion from $1,065 billion, reflecting CGI's acquisition last year of Europe-based Logica.

Excluding $81.4 million in integration costs, CGI said it earned an adjusted profit of $175.9 million or 56 cents per share on revenue of $2.53 billion in the three months ended March 31.

Analysts surveyed by Thomson Reuters had, on average, expected the company to earn $151.6 million or 50 cents per share on $2.56 billion un revenue.

During the quarter, the company booked $2.2 billion in new contract wins, extensions and renewals. At the end of March, its backlog of signed orders stood at $18 billion, up $4.9 billion compared with a year ago.

Maher Yaghi of Desjardins Capital Markets said the bookings in the quarter were a little less than he forecast, and down from $2.8 billion in the first quarter.

"The lower bookings are a result of a difficult macroeconomic environment. In the U.S., sequestration is resulting in lower bookings. While in Europe, economic uncertainty is still negatively impacting business at Logica," he wrote in a report.

Despite the short-term challenges from a weakening IT spending environment, CGI remains attractive because of the positive long-term outlook for Logica and the expected improvement in margins, he added.

CGI said Tuesday that it expects to generate more cost savings from the integration of its Logica acquisition as it completes the process a year earlier than planned.

The company is increasing its integration investment 31 per cent to $525 million from $400 million. But it expects the annual savings, mostly from reducing the number of employees, should rise by $75 million to reach $375 million.

So far, about 3,000 jobs have been eliminated as CGI has invested $345 million, including $235 million in the first six months of the year.

The integration is running ahead of schedule and should be completed in two years, instead of three.

Roach said the latest change in the integration should be the last.

"I think we've probably have got to what we'll probably get from the restructuring part here," he told analysts.

"We are beginning to see the benefits of this strategy on the bottom line as we continue to proactively run off, shut down or divest money-losing or low-margin engagements."

CGI has some 69,000 employees and clients around the world.

Note to readers: This is a corrected story: A previous version said earnings per share were six cents

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