Douglas Hayward, Dominique Raviart
Aspire once again powers Capgemini's growth
We took part in the Capgemini analyst call yesterday to discuss the H1 revenue figures. Capgemini released some interesting country revenue growth figures: Central Europe grew 12% organically to €122m in Q2, North America grew 4% to €334m, France grew 3% to €434m, and the UK grew an incredible 29% to €556m (£383m, giving H1 revenues of €715m), once again off the back of the Aspire outsourcing deal with HM Customs & Excise. Comment: Capgemini's outsourcing revenues are still mostly driven by Aspire, still growing strong despite being in its ninth quarter of full production. Aspire growth in H1 was driven by substantial application development work (classified as outsourcing revenues) and a significant extension of the original deal perimeter. It is worth noting that in Q2, Aspire accounted for an astounding €300m (or 16% of Capemini's Q2 revenues!). No wonder CFO Nicolas Dufourcq used the term "beautiful" to describe Aspire.The UK Metropolitan Police contract and the global General Motors contract only accounted for €5m and €8m, respectively, in Q2, but will start to contribute seriously (€50m and €40m, respectively) in H2. They have to - at some point Aspire simply has to stop growing and settle into comfortable middle age. Capgemini actually budgeted for this to happen in 2006, but clearly maturity has been delayed to at least 2007. CEO Paul Hermelin also made it clear that, leaving Aspire aside, Capgemini is seeing growth in the UK and in particular in public sector - a statement aimed at highlighting Atos Origin's current difficulties in the UK.France, unfortunately for Capgemini, is not the UK! Capgemini's outsourcing business there is still the "problem child" with disappointing revenues from the Schneider Electric contract, albeit with the SAP implementation improving. Schneider has been a big disappointment and Hermelin seemed to hint that the worst may not be over. 'It's a demanding contract, that's for sure,' he told analysts. Outsourcing revenues declined slightly in France in H1 - a sign that Capgemini France still needs time to digest Schneider and finalise the downsizing of its OS operations. Fair enough, Schneider is a complex deal. Yet it's currently a sixth of the size of Aspire. So what makes Aspire so efficient or Schneider so painful?The Nordic region seems difficult. Revenues were only up by 2%, hit by a combination of Easter and June vacations and bank holidays, which reduced billable hours for time & materials work. TietoEnator has cited the same reasons for its mixed performance in Q2. That is especially important as Capgemini is mostly active in outsourcing in Finland (it sold its Nordic infrastructure management business last year to EDP Business Partner). However, the company has had wins in AM with TDC and Nordea.Interestingly, Capgemini's outsourcing funnel is moving away from infrastructure management towards AM (application management) and BPO (business process outsourcing), which account for respectively 21% and 43% of its funnel value. This is very much the direction that Capgemini wants to move in - it's looking to rebalance is current 60/40 outsourcing revenue split (60% infrastructure versus 40% applications and BPO) to a 40/60 split. Capgemini certainly has strong credibility in AM. In BPO, we are slightly less optimistic on the number of deals it can gain in the offshore-delivered F&A BPO market it targets. An interesting statistic: 41% of all contracts worth over €1m for Capgemini in H1 2006 had an Indian delivery element. Capgemini reported 4,670 staff in India, a 32% increase since the end of 2005 but still short of its 6,300 target for December 2006 and 10,000 for December 2007. This explains a recent branding campaign to attract graduates in Indian universities that has attracted 400 youngsters so far.We said yesterday that Capgemini should turn its business model even further towards outsourcing. Quick numbers will help understand why this is so, despite it doing well in consulting and in systems integration (especially complex SAP-related projects). Overall, revenues in Technology Services (Capgemini's systems integration unit) were up 11.3% in H1. Not bad, but taking Technology Services work done as part of large outsourcing contracts and recorded as outsourcing revenues (e.g. a big chunk of Aspire), this growth amounts to 16.3%, several times market growth rate. In other words, outsourcing brought an extra 44% growth to Technology Services in H1 this year. We think it is a compelling enough argument.
