CGI defends role in U.S. health exchanges as analyst lowers revenue outlook

MONTREAL – CGI Group has defending its role in building health insurance exchanges in the United States despite the premature end to a contract tied to President Barack Obama’s defining political achievement.

“We still stand by the quality of work we have and the track record we have behind it and maintain that 95 per cent of our work is still delivered on time and on budget and that’s better than anyone else in the industry,” spokesman Lorne Gorber said in an interview Monday.

The Montreal-based information technology company’s reputation has taken a hit since initial technical problems with the U.S. government’s website prevented people from enrolling in private health insurance plans.

The Obama administration on Friday said it wouldn’t renew the company’s contract and, instead, signed competitor Accenture to a one-year agreement valued at US$90 million.

CGI Federal’s contract is slated to expire the end of February but could have been renewed for one or two years.

It was selected in September 2011 as the lead contractor and awarded a US$93.7-million contract over two years to design and build the government’s health insurance website. It will actually have received about US$180 million in billings, but will lose out on the website maintenance phase.

Gorber said the company has been reassuring clients since problems surfaced in October and expects the problem-plagued contract will be raised at CGI’s (TSX:GIB.A) annual shareholders meeting Jan. 30.

“We’re proud of our people and proud of having such a complex unprecedented system be today working the way it should.”

An industry analyst warned Monday that CGI’s revenues in the United States could take a hit over the next two years due to negative attention it has received over the deal.

“The headlines will add to the reputational damage that CGI has already suffered,” said Thanos Moschopoulos of BMO Capital Markets, even though the direct financial impact of the health-care contract is “fairly modest” for a company with more than $10 billion of annual revenues.

He expects U.S. federal, state and commercial revenues will be down by six per cent this year and by another eight per cent in fiscal 2015.

And he forecasts that U.S. federal business will drop by 12 per cent in each of the next two years while state, local and commercial business is expected to be unchanged this year and down three per cent next year.

He previously assumed that the U.S. business would grow by two per cent this year followed by a six per cent decline.

“The non-renewal is unusual given the extensive work that CGI has already performed to date and the switching costs that will be involved in transitioning to a new contractor,” he wrote in a report.

The analyst said it remains unclear whether CGI “dropped the ball” on the work it was expected to perform, was “made a scapegoat” for the federal project’s challenges, or a bit of both.

Gorber acknowledged that politics surrounds Obamacare but declined to say if that played any role in the government’s decision not to renew.

“I don’t know exactly what constitutes dropping the ball (but) what I have read in the media over the last few months has been by and large sensationaized and not really the same type of discussion we’ve had with the client.”

CGI will remain a strategic partner with the Centers for Medicare and Medicaid Services as it has been for 15 years and will continue to win “mission-critical” IT contracts that are the backbone of the government, Gorber said.

And while the company would have preferred not to have faced the intense scrutiny, CGI’s exposure has grown as a result of the attention of large U.S. media outlets like the Wall Street Journal and CNBC.

“What’s out there is that people are aware and you need to shape it based on results rather than long explanations.”

The decision not to renew the federal contract follows decisions by Massachusetts and Vermont to stop payments to CGI over challenges in developing the state exchanges.

Gorber said the company was working to address concerns of both states and that observers fail to recognize that CGI was also responsible for exchanges in Kentucky and California that are viewed as among the best.

Scott Penner of TD Securities said the health-care contract’s non-renewal will have a “negligible impact” on U.S. operations or CGI’s business because of the growing importance of its European operations since the 2012 acquisition of U.K.-based Logica.

“Our view, put simply, is that there is no impact of substance on the U.S. federal government business, which comprises myriad agencies and departments,” he wrote in a report.

Moschopoulos said it was inevitable for a company CGI’s size to have the occasional troubled contract, especially when dealing with the politics and bureaucracy of the public sector.

Partially offsetting the revenue decreases are benefits from the depreciation of the loonie against the U.S. dollar and the Euro.

Moschopoulos said CGI’s challenge is securing new outsourcing deals while existing customers are more likely to base their renewal decision on the company’s performance than outside factors.

On the Toronto Stock Exchange, CGI’s shares closed down one cent at $34.36 on Monday.