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CGI’s PPACA rebound sees new US deals

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(Bloomberg) — CGI Group Inc., the Canadian company that lost the Patient Protection and Affordable Care Act (PPACA) website contract after a botched rollout, is pursuing new federal and state government work in the U.S. to bolster sales in its biggest market.

“Our view is that the brand isn’t damaged,” said Chief Executive Officer Michael Roach, 61. “We may see one-offs here and there, but I don’t see anything that will last. We’re prepared to talk to our clients about what we’re learning here. We’ve not been banned from anything. We’re not barred.”

CGI, Canada’s largest technology company, has bids in for about $1.3 billion in potential U.S. government business, Roach said yesterday in an interview at the firm’s Montreal headquarters. Roach said he’s also seeking contracts with states and corporate clients.

See related story: CGI wanted help weeks ago

Roach’s challenge is separating CGI from the fallout that followed PPACA’s Oct. 1 debut, as delays and error messages foiled applicants on the insurance exchange serving 36 of the 50 U.S. states. After years of providing services as basic as running the Medicare website and processing 25 percent of all U.S. passports, CGI found itself thrust into partisan sniping over the Patient Protection and Affordable Care Act of 2010.

“There have been many instances in our industry where other companies have run into something similar, and it’s passed with time,” Roach said. “There’s no doubt about it, this one got a lot more publicity.”

Enter Accenture

Nowhere did the spotlight burn brighter than in the U.S., the source of about C$2.5 billion ($2.26 billion) in revenue in the year ended in September, or about 25 percent of CGI’s global sales. Last month, the U.S. government said Accenture Plc would take over from CGI when its contract expires Feb. 28.

CGI rose 1.2 percent to C$33.23 in Toronto today. The shares slumped 19 percent through yesterday since reaching an all-time closing high of C$40.72 in November after President Barack Obama named Jeffrey Zients, his choice to become chief White House economic adviser, to fix the PPACA website’s software.

Lorne Gorber, CGI’s investor relations chief, declined to comment yesterday on the value of the PPACA contract beyond the $93.7 million total announced when the company won the job in 2011. Scott Penner, a TD Securities Inc. analyst in Toronto, estimated in October that the project generated C$290 million, or less than 3 percent of CGI’s annual sales.

PPACA risk

PPACA “is still a risk” for CGI, according to Eyal Ofir, an analyst at Clarus Securities Inc. in Toronto.

“Obviously there is some reputational damage,” Ofir said. “The question is how much of an impact this will really have. Management seems to think there is no impact, but the only way to tell is when we start to look at the orders they book over the next two quarters” — and whether the so-called book-to- bill ratio of orders to sales increases.

CGI said Jan. 29 that its book-to-bill ratio in the U.S. was 1.02 for the quarter ended in December, and 1.08 for the last 12 months. U.S. work made up 26 percent of CGI’s global backlog of C$19.3 billion.

“If we see a March quarter decline in the ratio, and it doesn’t rebound in June, this would send a signal to the market,” Ofir said in a telephone interview. “If it remains above 1 it would be positive.”

Analysts’ ratings

Ofir cut his rating on CGI to hold in October, saying the shares had become too expensive. He is one of five analysts with that recommendation, while 14 say buy and one says sell, according to data compiled by Bloomberg. On Jan. 29, CGI said it was renewing a plan to buy back as many as 21.8 million shares, or 10 percent of the public float.

“The cheapest opportunity in the world is to buy back their own stock right now,” Brandon Snow, a fund manager at CI Investments Inc.’s Cambridge Advisors unit, said in a telephone interview from Toronto. Cambridge oversees about C$9 billion in assets in Toronto including CGI stock.

The federal government makes up the biggest share of CGI’s U.S. business, with about C$1.4 billion of revenue last year, according to Gorber, the investor relations chief. That compared with about C$500 million for state and local governments and C$600 million for U.S. companies, Gorber said.

CGI may be interested in acquiring some information- technology companies to expand its U.S. business, Roach said, without identifying targets. CGI made its biggest-ever purchase in 2012, paying C$2.7 billion for London-based Logica Plc, which was then northern Europe’s second-largest information technology company.

Acquisitions ahead?

Chairman Serge Godin told shareholders Jan. 29 in Montreal that CGI wants to double annual revenue over five to seven years, and will use acquisitions as a means to get there.

Roach, who has been CEO since 2006, wouldn’t discuss what went wrong with the PPACA contract, citing a desire to preserve existing and future U.S. business.

“I don’t think it’s a good time to get into details while you’re working on those contracts,” he said. “While it’s tempting to go there, it’s not the right thing to do in the services business. Other customers look at how you’re handling this — and there but for the grace of God goes another customer.”

CGI will continue to work on the PPACA website until its contract runs out at month’s end, Roach said.

“We weren’t fired,” the CEO said. “Feb. 28 is when our contract expires. There was an option year, which the customer chose not to exercise.”

Roach said he remains optimistic CGI can start picking up business in the U.S. this year as the pace of federal contract awards returns to normal following the 2013 government shutdown.

CGI’s ties with the federal government remain “very important,” Roach said. PPACA “turned out to be a very political hot potato in the U.S. — not only in relation to technology work, but the policy itself. I’m not sure I’ve ever seen anything like it in the past, and I’m not sure I’ll ever see anything like it again in the future.”

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