CGI Group Seen Rebounding From Obamacare Website FailureFrederic Tomesco
CGI Group Inc. Chief Executive Officer Michael Roach told investors at a conference two weeks before the debut of the Obamacare website that the contract marked the start of a “long-term relationship” and a “significant growth opportunity.”
Instead, Canada’s biggest technology company is now a visible face for software snags on the U.S. government site for the 2010 Patient Protection and Affordable Care Act. That’s made CGI known in the U.S. for the wrong reasons, prompting a five-day stock slide and threatening to dent its reputation.
“CGI is the scapegoat,” money manager Brandon Snow of CI Investments Inc.’s Cambridge Advisors unit said in a telephone interview. Cambridge oversees about C$9 billion ($8.64 billion) in assets in Toronto and owns shares of Montreal-based CGI.
The Obamacare software breakdowns are a setback for CGI, which has the backing of Caisse de Depot et Placement du Quebec, the province’s largest pension-fund manager, and which made more than 20 acquisitions in the last decade to challenge companies such as International Business Machines Corp. Created in 1976 by billionaire founder Serge Godin, CGI is the world’s fifth-largest information technology services company, according to an Oct. 16 report by Jason Kupferberg of Jefferies LLC.
About 8.6 million people visited www.healthcare.gov in the first week, running into long waits that prevented many from registering to check out insurance options. At one point, the site posted error messages in at least 24 states.
“Nobody’s madder than me,” U.S. President Barack Obama said this week, while Republican critics of the health law renewed their denunciations. House Majority Leader Eric Cantor of Virginia called the rollout “nothing short of a debacle.”
That was the political backdrop for a CGI executive’s testimony to Congress yesterday in Washington that “end-to-end testing” by a U.S. government agency of all the site’s systems didn’t occur until less than two weeks before the Oct. 1 debut.
“It would have been better to have more time,” Cheryl Campbell, a senior vice president at CGI Federal, the site designer, told the House Energy and Commerce Committee. She declined to say when the site would be free of impediments, and said it would be ready to meet all deadlines in the health law.
Inadequate testing “appears to be the root of the problem,” Thanos Moschopoulos, a BMO Capital Markets analyst in Toronto who rates CGI as outperform, said yesterday in a note to clients. The risk for CGI is “difficult to assess” and “will ultimately depend on what comes out of the hearings, and how much blame sticks to CGI.”
The hearing was meant to determine whether breakdowns at the Obamacare website were caused by the contractors or “were they told to do it this way” by the Department of Health and Human Services, Representative Tim Murphy, a Pennsylvania Republican, told reporters Oct. 23 in Washington.
In addition to CGI Federal and the Quality Software Services unit of Minnetonka, Minnesota-based UnitedHealth Group, lawmakers heard from a division of Atlanta-based Equifax Inc. and a U.S. unit of Serco Group Plc, a U.K. services provider.
The U.S. delays come about a year after Ontario abandoned a CGI-managed effort to start a diabetes registry. CGI underestimated how long the work would take and failed to effectively manage completion of project components, the province’s auditor said in a 2012 report. Lorne Gorber, CGI’s senior vice president of investor relations in Montreal, didn’t return messages seeking comment yesterday.
Even with the negative publicity, Snow and other investors say the Obamacare incident is unlikely to have a lasting effect. Scott Penner, a TD Securities Inc. analyst in Toronto, estimated yesterday in a note that the contract is valued at about C$290 million, or less than 3 percent of CGI’s annual sales of about C$10 billion.
Excluding some costs and gains, CGI probably will post a profit of 62 cents a share, the average estimate in a Bloomberg survey of 15 analysts, when it reports fiscal fourth-quarter results on Nov. 14. Revenue is projected to more than double to C$2.52 billion. CGI employs about 69,000 people globally.
CGI dropped 0.8 percent to C$35.59 at the close in Toronto, paring the stock’s surge this year to 55 percent and leaving the company’s market value at about C$11.1 billion.
“There’s near-term noise but I don’t think this hurts the company in the long term,” said Snow of CI’s Cambridge Advisors. “They worked on the federal website, but they also worked on a lot of state websites and a lot of these have actually been performing well. I’m just waiting for the lemmings to get off the cliff before I add to my holding.”
CGI gained the most among Canadian information-technology stocks through September, rising 58 percent to more than double the 27 percent jump of the seven-member Standard & Poor’s/TSX information technology index. Since then, CGI has fallen about 1.6 percent, trailing the index’s 2 percent advance.
Health care made up 8 percent of CGI’s revenue and 10 percent of its backlog of future contracts in the fiscal third quarter. Sales in that business climbed 90 percent in the third quarter from a year earlier, mostly driven by the impact of changes in U.S. law.
CEO Roach told analysts on a July 31 conference call he expected the pattern to continue “as additional states stand up new health exchanges, while others expand the capabilities of those already in place or under development.”
U.S. sales accounted for 26 percent of third-quarter revenue, according to a July 31 filing. The company has offices in 22 states from Vermont to Hawaii, as well as the District of Columbia, according to CGI’s website.
“There is a reputational risk for them with this Obamacare story,” Philippe Le Blanc, president of Cote 100 Inc., said in a telephone interview from Saint-Bruno, Quebec. “It will all be forgotten in a few months. I remain confident in their long-term prospects,” said Le Blanc, whose firm owns CGI stock among the C$400 million it manages.
Those prospects depend on CGI’s success in integrating its biggest takeover: Logica Plc of the U.K., bought last year for 1.7 billion pounds ($2.8 billion). CGI said in April it’s targeting annual savings of C$375 million at Logica by the end of fiscal 2014, up from a previous goal of C$300 million.
Roach and Chairman Godin have spent at least $6 billion in the past decade on acquisitions, gaining scale to compete with the likes of IBM in selling information technology services. CGI has added more than 70 companies since its start in 1976, Godin said last year.
“In the long term, the story at CGI is more about the integration of Logica,” said Le Blanc at Cote 100. “In the short term there’s a problem in the U.S., but I’m confident it will get sorted out.”
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