<%@ LANGUAGE=VBScript %> <% Set asplObj=Server.CreateObject("ASPL.Login") asplObj.Protect Set asplObj=Nothing %> CLIENT CONFIDENTIAL - Analysis of Capgemini 1Q07 business results (Apr 26, 2007)

Annex Bulletin 2007-17                              April 26, 2007

A CONFIDENTIAL client edition


To Buy (back shares) or Not to Buy? - Analysis of stock buybacks in corporate U.S.

No Surprises in Good Opening Quarter - Analysis of IBM 1Q business results [Annex clients click here]


Updated 4/27/07, 8:30AM PDT, adds IBM "service products," Serbia...

Analysis of Capgemini's First Quarter Business Results

Growth Accelerates

Company Raises Revenue Guidance for the Year 

SCOTTSDALE, Apr 26 - Capgemini seems to be going from strength to strength.  Having finished last year on a high note (see "Capgemini Caps Great Year, Saves Best for Last," Feb 2007), the company started 2007 onCAP_1.JPG (31358 bytes) an even higher one.  First quarter revenues were up 18.5% to 2.2 billion ($3.0 billion), as reported (up 14% on an organic basis).  They were also up 9% sequentially (up 4% on an organic basis) from the fourth quarter.  As a result, the company raised it revenue growth guidance for the year from 8% to 9%.

The stock market liked what it saw initially, but then sold off the stock later in the day, closing at 57.20, down 1.5 points.  In the last 12 months, however, Capgemini shares have nearly doubled, especially since their lows reached last summer (see above chart).

Business Segment Analysis

CAP_2.JPG (97823 bytes)All major geographies, except for Capgemini's home country (France), grew in double digits.  The largest country (U.K.) surged by 24%, while France, the second largest, was up 7%.  North America, the third largest area, had a 29% revenue increase as reported (up 13% organically).  Europe's Nordic countries and Italy were also strong, rising 22% and 21% respectively, as was Germany (up 18% - see the left chart).

"I can't remember the last time Italy had such a strong performance," said Pierre-YvesCAP_3.JPG (41976 bytes) Cross, Capgemini's director of strategy, speaking in this morning's call with analysts.  "And I've been with the company for 18 years," he added.  He also said Italy had a profitable quarter.

But it was Capgemini's newest and the smallest geographic segments that showed the fastest growth.  Led by China and Australia, the Asia/Pacific region was up 73% (up 38% organically).  In both of these countries, Capgemini installed new leaders who wasted no time leaving their mark on the company's results.

CAP_4.JPG (33790 bytes)The Kanbay integration is also progressing well.  This new acquisition hasn't missed a beat, surging by 27% in the quarter, nearly double the company's overall organic growth rate.  Kanbay now accounts for just over 4% of Capgemini's total revenues (see right chart).  Cros said he expected it to be fully integrated, including the branding, by about September.

17_Cap1.jpg (19106 bytes)Outsourcing was the strongest of the horizontal segments, rising 18% organically and 5% sequentially from the fourth quarter (see left chart).  But Local Professional Services, Capgemini's euphemism for SMB (small and medium business market), lagged behind the rest of the sectors, growing by only 8% in the quarter.  Asked if that meant that the company's emphasis on SMB is waning, Cross said that it was not.

"About 40% of that business is in France," he said (the slower growing country in the period), "and we are taking management action to correct the situation."  He added that the rest of the Local Professional Services business has healthy growth rates, in line with the performance of other higher-growth areas of the company.


New contract bookings, a sign of future growth, were also solid in the quarter.  TheyCAP_5.JPG (52160 bytes) amounted to 2,148 million compared to 2,990 million for the first quarter of 2006 (see right chart).

They were down by a billion Euros in outsourcing because of the large contracts with General Motors and HM Revenue and Customs that were signed a year ago.  But the bookings for the other horizontal segments (Consulting Services, Technology Services and Local Professional Services) were up by 14%.  

And the book-to-bill ratio was strong 108% overall, with North America leading the other segments by 135%.

So with the overall health of the business being so good and well balanced, and with Kanbay firing on all cylinders, we think that Capgemini's revenue guidance increase by only one point is actually a rather conservative outlook.   Nevertheless, even at rate rate, the company is likely to surpass $11 billion in revenues this year.  And by the end of 2008, our Octathlon 2007 gold medal winner should be well passed the $12 billion-mark (see above chart).

And that's big, even in the league of global IT services giants. 

Click here for detailed Capgemini forecast table (Annex clients only)

Happy bargain hunting!

Bob Djurdjevic

IBM Makes "Service Products" Available to Partners, Buys Serbian Maintenance Business 

SCOTTSDALE, Apr 27 - Remember IBM's "service products" that we dubbed "services in a box," announced last September?  The company said at the time it had created a set of reusable assets for use in specific industries or processes which it would start marketing as discrete solutions to customers (see "IBM Services in a Box," Sep 2006).  

Well, now IBM Global Services (IGS) has taken one step further in propagating this type of approach to IT services business.  IBM is making its "service products" available to its business partners.  To start with, the partners will be able to sell service products for Business Continuity and Resiliency Services, Security and Privacy, Server, Storage and Data Services and Maintenance and Support.

We see it as another indication of IBM's concerted efforts to push into and develop its SMB (small and medium size business) market.  

"IBM Business Partners can also help SMBs simplify system deployment for faster implementation and fewer business disruptions by selling IBM Implementation ServicePacs," IBM said in an Apr 26 release. "IBM Implementation ServicePacs are offered as fixed-price and fixed-scope implementation services for key IBM server and storage products."

Which is a good example of synergy between three parts of IBM's business.  Services, software (that's imbedded in "service products") and hardware can all benefit from this type of packaging and delivery of services, as can the IBM business partners.

"By directly aligning our services portfolio with our Business Partner go-to-market approach, we're taking another step in our strategy to improve on the world's largest global and most efficient delivery network," said Candy Shaughnessy, Vice President of Channels, IBM Global Technology Services (GTS).

IBM Buys Serbian Maintenance Business

IBM's GTS is also expanding geographically.  This IBM unit announced yesterday that it is acquiring an IBM hardware maintenance services business in Serbia.  Serbian Business Systems (SBS) is a privately held IT hardware, software and services company, headquartered in Belgrade, Serbia.  Financial terms weren't disclosed.  Upon completion of the deal, SBS's IBM hardware maintenance unit will become part of IBM's Global Technology Services maintenance and technical support business.

SBS is a leading provider of information technology in Serbia, providing the local market with hardware, software and maintenance services, based on the solutions of several business partners including IBM, Cisco, Symantec and others.  IBM is only acquiring SBS's hardware maintenance unit, which has been dedicated to providing maintenance services for IBM's entire line of hardware systems and servers in post warranty and non-warranty periods.

"This acquisition illustrates IBM's commitment to Serbia and the region by leveraging local talent and skills," IBM said in a release. "It establishes IBM's maintenance and technical support services business in Serbia, to deliver reliable, integrated services that reduce complexity, deploy rapidly and build upon IBM's global expertise."

Serbia is a tiny European country with mighty IT and English language skills.  A former part of the former country (Yugoslavia), Serbia had been for decades the most "western" of the Eastern European countries.  

During a research trip there in September 2005, we found out that 43% of the people there use English as a second language.  The percentage is even higher for university graduates who typically comprise the IT employees.  That's a much higher English proficiency than that even in Italy and France, for example, not only other Eastern European countries (see the thumbnail chart).  

Flag of SerbiaAlas, there are only 10 million people in Serbia (click on the flag for more demographic data).  So the chances of it ever becoming "another India," the latest IBM move notwithstanding, are pretty slim.

Click here for PDF (print) version

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Volume XXIII, Annex Bulletin 2007-17
April 26, 2007

Bob Djurdjevic, Editor
(c) Copyright 2007 by Annex Research, Inc. All rights reserved.
e-mail: annex@djurdjevic.com

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