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Analysis of Cap Gemini’s 2003 Business Results

Another, Smaller Loss

Operating Profit Margins Improve on Shrinking Revenues

PHOENIX, February 27 – Cap Gemini Ernst & Young (CGEY), soon to be renamed Cap Gemini again, reported yesterday its second annual loss in a row on sharply lower 2003 revenues (down 18% in €uros; down 4% in U.S. dollars) - also for a second consecutive year. 

The loss narrowed - from $549 million in 2002, to $248 million in 2003 (from €514 million to €197 million), and the operating margins improved (from 1.6% to 2.7%).  But the revenues dropped more precipitously than the year before.

Not surprisingly, Cap Gemini’s stock took a dive.  It was down 9% on the day to 33.35 (see the chart in the full client edition).


Record New Contract Sales

To be sure, there were some encouraging sings in Cap Gemini’s latest release.  New contracts record, for example, was one of them.  The company set a new high in 2003, signing up €11.7 billion ($14.7 billion) of new business, thanks, in part, to its big win at Britain’s Inland Revenue (see “Biggest Feather in Cap’s Cap,” Dec 2003).


Business Segment Analysis

Horizontal.  New contracts will also continue to boost the Outsourcing share of revenue.  Its share has already soared from 21% two years ago, to 30% in 2003 (see the chart).  By the end of 2004, it will probably account for over one-third of the business.

Local Professional Services (LPS), Cap Gemini’s euphemism for small and medium business (SMB) market, was another bright light in 2003.  With the Transiciel acquisition (in September 2003), Cap Gemini is now positioned well for expansion in a market segment with the greatest growth potential in the future (SMB).


Geographies.  One of the reasons for a sharp decline in revenues in 2003 was a deteriorating business climate for Cap Gemini in North America (read mostly the U.S.) and in France.  Since these two regions are the two biggest geographic segments, they dragged down the performance of the rest of the company.


Industries.  As the company said in a statement that accompanied the earnings release, “even if we were able to observe a slight pickup in demand at the end of the year from telecom operators and the financial services sector, it was only the public sector that significantly increased its spending in 2003.”

In other words, in a global war economy only the government sector is a surefire growth business.  It’s the same story that we keep hearing over and over again from each of the top six global IT services vendors.


Summary and Outlook

If Cap Gemini continues on the downward track that is has been on for the last couple of years, one thing is likely – the company will become a takeover target for larger and hungrier competitors.  Already there have been rumors of CSC and HP, for example, supposedly having a taste for Cap Gemini.


But some other predators might not be so bashful if Cap Gemini’s stock continues to slide.  So the best way to insure its continued independence is for Cap Gemini to start growing again.  The company leaders seem to understand that. 

“The management has set itself the priority of growing the top line (revenue) in 2004,” they said in a release.  The executives also said that the growth would come in the second half of the year.

That’s pleading for patience and understanding – for a third year in a row now.  It remains to be seen how patient the investors will be.

"That's all she wrote," we're afraid, for those of you who are NOT Annex Research clients, and who are now reading the complete Annex Bulletin (10 pages in print edition), along with all charts which back up our story.

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Happy bargain hunting!

Bob Djurdjevic

For additional Annex Research reports, check out... 

2004: Cap Gemini: Another, Smaller Loss (Feb 2004); IBM: Greed De-clawed (Feb 2004); "CSC: Good Quarter Gets Boos" (Feb 2004); EDS:Hot Air Jordan" Flaunts Flop as Feat (Feb 2004); "Cronyism Is Alive and Well at EDS" (Jan 2004);  "Five Most and Least Likely Forecasts for 2004" (Jan 2004)

2003 Cap: Biggest Feather in Cap's Cap (Dec 2003); The 10-year Glitch (Mar 2003) 

A selection from prior years - Cap

Analysis of CGE&Y 2001 Results (Feb 21, 2002), Analysis of Cap Gemini Ernst & Young 2000 ... (2001),  CGG 1999 Preliminary (Mar 10, 2000),  CGG Annual Report 1998 (June 18, 1999),  CGG: The Most Improved (1998)

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

Volume XX, Annex Bulletin 2004-06
February 27, 2004

Bob Djurdjevic, Editor
(c) Copyright 2004 by Annex Research, Inc. All rights reserved.
e-mail: annex@djurdjevic.com

P.O. Box 97100, Phoenix, Arizona 85060-7100
TEL/FAX: (602) 824-8111

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