Annex Newsflash 2005-25                                   July 29, 2005



Analysis of Capgemini's Second Quarter Business Results 

Capgemini Beats Forecasts, Stock Drops

Solid Results Across the Board, Especially in Europe; Big Outsourcing Wins Pulling in Additional Engagements

PHOENIX, July 29 - What a difference a year makes.  Twelve months ago, Technology Services (TS) and Europe were among Capgemini's "enfant terrible" (problem children).  Now both are leading the company's turnaround with 20% and 26% revenue growth rates in the second quarter, according to the company's just-released financial results.  The overall second quarter revenues increased by 18% as reported or 22% "organically" (in constant currency and on an apples-to-apples basis).

What is the reason for such a swift recovery in Europe and in TS?  A sudden surge in European GDPs?  Not exactly.  A burst of customer spending?  Not necessarily, though there has been some pick up in that respect in Europe from the first quarter (see "IBM Bounces Back." July 2005; "Accenture: Smashing Records," July 2005).  Aggressive price cuts?  No.  Profit margins of all competitors are also rising. 

Broader Benefits of Outsourcing 

So what is it then?

In a word, the answer is outsourcing, according to Pierre Danon, the company's COO, who addressed analysts in North America in a post-release teleconference on July 28.  "Our big outsourcing megadeals have become 'go-to-market' sales channels for additional engagements," Danon said.  And they are pulling in a lot of TS work.

In the case of Britain's Inland Revenue's "Aspire" contract, for example (see "Biggest Feather in Cap's Cap," Dec 2003), Capgemini now has over 2,000 TS people developing solutions for the U.K. equivalent of the IRS.  At Schneider, another "megawin" the company has had in France, there are several hundred Capgemini people doing the same thing.  In the U.S., work is under way at TXU to develop applications that the two companies hope to market to other utilities (see "Capgemini Hits Texas-size Home Run," May 2004).  These three deals represented between 14% and 16% of global revenues in the first half of 2005.

Speaking from Paris to analysts earlier in the day, Capgemini's CEO Paul Hermelin said the Aspire contract, for example, was "a true success, with a very solid margin and higher than expected revenue."  The TXU deal, on the other hand, was "more demanding."  But "we are 12 months ahead on the profit generation," he added.  The Schneider contract was also "a little bit more demanding," Hermelin said, according to a Reuters report.

If these three Capgemini megadeal experiences are at all typical around the industry (and we have not heard other vendors extol the drag-along virtues of their big deals), they would shed a whole new light on the virtues of outsourcing.  Since megadeals are always very competitive, they tend to have meager profit margins (if any... see our "game of chicken" theory).  But if companies saw the potential of more profitable TS business down the road, they may get even more aggressive in bidding the outsourcing megadeals.

So far, there is no indication that such is the case.  CSC, Accenture etc. have said that they did not see any additional pricing pressures as a result of IBM's first quarter problems in Europe, for example.  So Capgemini's new "go-to-market sales channel" may be indeed a unique creation.

Results Up, Stock Down

Meanwhile, Capgemini's second quarter results exceeded stock market analysts' expectations, according to a July 28 Reuters report.  So you'd think that the stock would be up?  Think again.  Capgemini shares dropped by over four points following its release of the second quarter results.

The reason?  Who knows... fickle fans?  Some analysts had expected Capgemini to raise its full year outlook following the strong quarterly performance.  And when the company chose prudence over ebullience, the stock market punished it.

"I am very comfortable with the guidance given for 2005," CFO Nicolas Dufourcq told the participants in the conference call.  Capgemini has predicted revenue growth of 10%, and an operating margin of 3% or better in 2005.

In May of this year, Capgemini launched a vast plan to revamp its loss-making U.S. business dubbed "Booster."  The company said it expected that the net cash of about 500 million euros from asset sales and restructuring benefits should bring its North American net income back into the black.

That would be the first bottom-line surplus since the second half of 2001.  Danon, the COO, who is overseeing the "Booster" restructuring plan, said "there is a new mindset in (Capgemini's) North America."  He added that he expected this region to come in "close to break even" in the second half of the year, and to be profitable in 2006.

Capgemini CEO Hermelin said his company was now "back in order and ready to deliver."

Business Segment Analysis

And deliver solid improvements across the board is what Capgemini did in the second quarter.

In North America, for example, the company's third and the worst "enfant terrible," revenues increased by over 3% as reported, and by 9% on an organic basis.

As previously noted, European revenues jumped by 23% as reported, and by 26% on an organic basis.  The U.K. was by far the best country in terms of revenue growth, surging by 62% and 65% respectively as reported and on an organic basis.  Nordic countries came in second with 20% and 31% corresponding growth rater, while France was third with a 15% jump in both categories.  Capgemini executives sounded especially proud with the profitability improvement in their home country (France).

They also sounded pleased with the "stability" of new contract sales in the first half of 2005, especially given the absence of any megadeal wins. The outsourcing bookings jumped sharply in the second quarter (from 276 million euros to 483 million euros), while consulting and systems integration new business increased moderately from 1.16 billion euros to 1.25 billion euros.

Annex Clients: Click here for detailed Capgemini forecast

Happy bargain hunting!

Bob Djurdjevic

For additional Annex Research reports, check out... 

2005 IT: Capgemini Beats Forecast (July 2005); Fujitsu: Losses Reversed; Forecast Upgraded (July 2005);  IBM: Polaris Eclipses T-Rex (July 2005);   IBM Bounces Back (July 2005); Accenture: Smashing Records (July 2005); Merrill's New Bull (EDS) (May 2005);  IBM Trumps Trump (May 2005);  Tweaking Big Blue (May 2005); Hurd's First RBI (May 2005); Dell Rings the Bell (May 2005); Stock Buybacks: The Phantom Is Back (May 2005); EDS Misfiring on All Cylinders (May 2005);  HP Surges, Dell Slumps; Lenovo Completes IBM Deal (May 2005);  Fujitsu Revenues Flat, Lower Net (Apr 2005); Capgemini Jettisons Healthcare in N.A. (Apr 2005); HP: From India to Poland (Apr 2005); IBM: Slammed and Dunked (Apr 2005); Hurd Advice: Up Mount Market Cap (Apr 2005); Accenture: Roaring Ahead (Apr 2005);  Fujitsu Unveils New Servers (Mar 2005);  EDS Executive Suite; HP's New CEO (Mar 2005);  An iSeries Revival (Mar 2005); EDS Booster Club Fees Rise (Mar 2005);  An Upside-Down View (Mar 2005);   The Worst of Both Worlds (Mar 2005);  Octathlon 2005: Accenture Wins (Mar 2005);  IBM Global Services: Smaller, Shorter - Better? (Mar 2005);  IBM 5-yr Forecast: Quality over Quantity (Mar 2005); Rumor Lifts EDS', Fujitsu's Shares (Mar 2005); Capgemini: Turning the Corner (Feb 2005);  IBM Servers to Grow Again (Feb 2005);  Carly's Fickle Fans (Feb 2005);  CSC: Gearing Down on Purpose (Feb 2005);  EDS: Grossly Overpriced Stock (Feb 2005);  IBM Historical Update: 2004 Shot in the Arm (Feb 2005); New HeadTurners Series #1 (Feb 2005); IBM: A Crescendo Finale! (Jan 2005); Accenture: Strong Finish, Better Start (Jan 2005); Annex Coverage 2004: IT Services Dominate (Jan 2005)

2004 IT: EDS: The Titanium Stock (and other Wall Street tales) (Dec 2004); IBM PC: Good Riddance (Dec 2004); Fujitsu: Recovery Continues (Nov 2004);  IBM Server Renaissance (Nov 2004);  HP Hits Home Run (Nov 2004); Capgemini: Revenue, Stock Soars (Nov 2004); EDS: Jordan's Swan Song? (Nov 2004);  To Russia with Love and $ (Oct 2004); IBM: Slow Quarter No Longer (Oct 2004); Accenture: Revenues, Profits Up, Stock Down (Oct 2004); Capgemini: A Takeover Target? (Oct 2004); Sellout of America (Oct 2004); Spy Wars (Sep 2004); Outsourcing Boomerang (Sep 2004); EDS to Cut Up to 20,000 More Jobs (Sep 2004); Capgemini Stock Plummets on Unexpected Loss (Sep 2004); HP Savaged by Wall Street (Aug 2004); Moody's Lowers the Boon on EDS (July 2004); HP: Delivering Value Horizontally (June 2004); Accenture: Revving Up a Notch (June 2004); Beware Your CFO! (May 2004)IBM: Changing of the Guard (May 2004); Capgemini: Texas-size Home Run (May 2004); Following the Money (May 2004);  EDS: On a Wink and a Prayer (Apr 2004); HPS Wins by a Nose! (Octathlon 2004); Accenture: Burning the Track (Mar 2004);  IGS: "Crown Jewel" Restored? (Mar 2004); HP: Still No Cigar (Feb 2004); Cap Gemini: Another, Smaller Loss (Feb 2004); CSC: Good Quarter Gets Boos (Feb 2004); EDS: "Hot Air Jordan" Flaunts Flop as Feat (Feb 2004); IT Industry: Whither Goeth It? (Jan 2004); Cronyism Is Alive and Well at EDS" (Jan 2004)

Or just click on and use "financial engineering" or similar  keywords.

Volume XXI, Annex Newsflash 2005-25
July 29, 2005

Bob Djurdjevic, Editor
(c) Copyright 2005 by Annex Research, Inc. All rights reserved.

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