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Also, check out: "IGS Profits, Productivity Surge," "EDS: Growth Slows, Equity Grows,"  "CSC: A Mouse That Roars?", "A Solid Quarter", "EDS Sets New Records", "Andersen: Another Super Year", "Cap Gemini: The Most Improved?"

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 Analysis of Cap Gemini Group's 1997 Financial Results

CGG: The Most Improved!

A Spectacular Growth in Equity and Market Capitalization








PHOENIX - "Mirror, mirror on the wall, who is the fairest of them all?" demanded to know Snow White's wicked stepmother in an ancient fairy tale. "You are, Your Majesty," the mirror would answer. Until one day, the mirror replied, "Snow White is the fairest in the land," sending the former beauty queen into a rage.

Substitute "the most improved" for "the fairest" and the IT industry for Snow White's fairy tale kingdom in the above dialogue, and the Annex Research mirror's answer for 1997 will have to be - Cap Gemini Group (CGG). As reported earlier in the Annex Bulletin 98-15 (4/01/98), this Paris-based IT services firm had a 36% rise in revenue, a 57% increase in operating profits, and a 170% surge in its net profit compared to 1996. Translated into the U.S. dollars, which gained ground against the French Franc in 1997, the CGG growth figures are somewhat lower - 17%, 35% and 132% respectively - but nonetheless still impressive.









But perhaps the most impressive part of CGG's Annual Report was a spectacular rise in the company's shareholders' equity and capitalization. The CGG equity jumped by 211% in 1997, following a 373% rise in 1996. Its market capitalization increased by 199% and 207% respectively in the last two years, as CGG' stock price nearly doubled in 1997 alone.

Guess one can draw at least one general conclusion from the above figures: That some European stock exchanges, like the Paris bourse, still reward the companies the old fashioned way - for making money, rather than for spending it on stock buybacks, as Wall Street did in IBM's case, for example.

Another is that CGG's performance in the last five years is one of the IT industry's most remarkable turnarounds. The company has gone from significant losses in 1992 and 1993 to record revenues and profits in 1996 and 1997 (see the chart).

Geographic Market Analysis

U.S. For the second year in a row, CGG's once-beleaguered U.S.-based operations (see Annex Bulletin 94-09, 2/23/94) continue to lead all other geographic segments in terms of growth. Although still a relatively small part of the company (16% of worldwide total), in 1997, the U.S. revenues cracked the half billion dollar mark for the first time, after a 35% surge from the year before.

In part, this success is due to CGG's U.S.-developed and ITAA-certified "y2k" solution - the Trans Millennium™ Services - which has been also licensed to other IT services companies. In 1997, CGG signed over 200 "y2k" contracts which involved reprogramming of some two billion lines of software code.

CGG's win last year of a 10-year outsourcing contract at the U.S. Chamber of Commerce, a customer to which the company's Annual Report refers as "the world's largest business organization," is another example of a big turnaround of the company's U.S. operation.

Europe. For the second year in a row, CGG's U.K.-based operations recorded the second highest annual revenue growth rate among the company's geographic units - up 30% over 1996 (in U.S. dollars). As a result, the U.K. is now nipping at the heels of CGG's "home country" and still its biggest national organization - France. Translated into the U.S. dollars, the 1997 British market revenues were $680 million versus $770 million in France.

Yet, even CGG French unit's performance was not too shabby last year. Its revenue also grew in double digits (up 30% in FF; up 12% in U.S. dollars), marking another turnaround of sorts.

Just as the "y2k" change has helped boost CGG's business in the U.S. and globally, the drive toward the "euro," a common European Union currency, has created lots of opportunities for this IT services firm on the Old Continent. Based on its engagements at the German Federation of Private Banks, and at the Dutch Central Bank, CGG has developed its euro-Transformation™ Services offering. This has helped CGG land a contract at Fortis, for example, a major financial services and insurance firm with over 100 subsidiaries in many countries.

The business in other (mostly European) countries was a little less robust than in the U.S. or France, growing at 26% in FF, and at 9% in U.S. dollars.

If CGG has any global weaknesses, it is its rather small presence in Asia. Singapore, Hong Kong and Taiwan, for example, are lumped together under its "U.K., Ireland and Asia" organization. Japan, Australia and New Zealand don't even make the CGG world map. Yet, considering the financial crisis which has hit Asia in the last nine months, this weakness has turned out to be a blessing in disguise (just as in EDS's case, although EDS' Asian business was a little more substantial that CGG's - see Annex Bulletin 98-07, 2/05/98).

Industry and IT Functional Market Analysis

CGG's IT and management consulting practice, boosted by the improved results and Gemini Consulting, and its 100% acquisition of Bossard management consulting group (of which CGG had owned 49% before 1997), recorded the fastest growth (+27% in U.S. dollars) of all "horizontal" (IT functional) segments. Systems integration, software products and education followed with 17% growth rates relative to 1996. And even the relative CGG "laggards" - software development and outsourcing - increased in double digits (at about 12% each).

As for CGG's "vertical" (i.e., industry) segments' performances in 1997, at 27% of total revenues, the financial services continues to be its biggest and the fastest growing sector (it accounted for "only" 22% of the total two years ago - see Annex Bulletin 96-25, 4/19/96).

Considering that this has been the case - time and time again with so many IT services competitors world over - which are all reporting booming business results in the banking and insurance sectors - it would appear that the global IT business executives could borrow a strategy tip for the balance of the 1990s and into the 21st century from the bank robbers. Asked why he chose to make a career out of robbing banks, a notorious American bank robber replied: "Because that's where the money is."

Guess the global IT services companies have come to the same conclusion, especially in light of the "y2k" and the "euro" challenges. J

Happy bargain hunting!

Bob Djurdjevic

Annex Research is a well respected consulting firm serving the information needs of today's senior IT executives, for over 28 years. For more information please call 602/824-8111.

Volume XIV, No. 98-17
April 7, 1998

Editor: Bob Djurdjevic
Published by Annex Research;

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