Dominique Raviart
Capgemini posts solid Q2
Capgemini has posted H1 07 revenues of €4.4bn, up by 16.2% and 11.5% organically. Operating margin in H1 reached 6.1%, up from 4.8% the year before. The company has confirmed its intention to grow revenues by at least 9% at constant currency (vs. 12% in 2006) and an operating margin of 7% for 2007 (up from 5.8%).Comment: Capgemini is consistently improving its performance over time. Outsourcing Services in particular has improved its operating margin to 4.5%, up from 4.1% in H2 06. This is a positive sign for the business unit, which has been responsible for the sharp recovery in revenues but has also held back profitability. Another positive sign: Capgemini now targets 19,400 staff in India by year end, up from 15,000 in June 2007. The company has accelerated its hiring effort to 1,000 staff a month. Capgemini seems confident in lowering its attrition at Kanbay, which has risen to 22% after the acquisition of the firm.One area of concern is growth in outsourcing. Revenue growth from outsourcing has slowed down from 18% in Q1 to 9% in Q2, reflecting the decline in the Aspire business. It has been now more than a year since Capgemini signed a large outsourcing contract (apart from the recent Rijskwaterstaat deal in Netherlands) and revenue growth in H2 in outsourcing will be flat. Worse, outsourcing bookings were soft in Q2 at €460m. CEO Paul Hermelin explained that the company had focused on improving its operating margin and been too selective in deciding which bids to go after. This is a concern to us: as highlighted by Capgemini, the OS market is moving from mega deals to mega relationships where clients are awarding more and more project work to their outsourcing suppliers. HMRC is a clear example of this as Capgemini has been able to grow its business with the client far more than anticipated initially. Capgemini therefore needs to win more of those very large outsourcing contracts, even if the company is finding smaller deals more profitable. The company seems to act on this and its pipeline is currently up 55% in outsourcing.A second area of concern is the UK. With Aspire now waning as a growth driver, the question is whether Capgemini can stabilise its operations there and rely on project services. In Q2, growth in the UK/Ireland region reached just 2%. The company needs to balance the decrease in spending from HRM&C and find new engagements for the consultants and developers it used for this client.Ultimately the Q2 announcement suggests that Capgemini is at a cross-roads. The company is doing well. But there are growing areas of concern too. Q2 may only have been a temporary bump reflecting the intense transformation of the company in the past three years. Or Q2 may also signal that the company was fighting so much in so many places that eventually something had to go wrong. We think the former is the case: in our view Capgemini's overall strategy is sound. We like in particular what it wants to achieve with India. But ultimately, it is all about execution.
