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Analysis of Capgemini's Third Quarter 2004 Results

Revenue, Stock Soars

Revenues Up in Double Double Digits; U.K. , Central Europe Lead Recovery; U.S. Slowly Catching Up, Too

PHOENIX, Nov 12 - Capgemini caught investors by surprise again on Nov 9 when it released its preliminary third quarter business results.  This time, however, the market was surprised by a strong report card.  The company's third quarter revenue soared by 21% (13% in constant currency) to 1.6 billion ($2.1 billion), led by its U.K. (+47%) and Central European (+22%) units.

"The third quarter clearly shows a return to growth," said Paul Hermelin, Capgemini's CEO, during a Paris conference with analysts.  He added that the 13% growth exceeded the company's target of 9%.

Capgemini's stock also soared.  Its shares went up by more than 10% the day the results were released (Nov 9).  And they continued climbing the next three days, ending up with about a 15% gain for the week. 

The week's rise reversed a yearlong decline (see the charts).

Capgemini's turnaround should come as no surprise.  Here's what we wrote on Sep 9, after its shares were trashed following its release of the first half 2004 results:

In short, we would not be selling Capgemini short, both literally and figuratively.  Maybe some others are realizing that, too.  Capgemini's stock bounced back almost three points today (9/10/04) to close at 20.07.

(An excerpt from Capgemini Stock Plummets on Unexpected Loss, Sep 2004)

We also reiterated this point in an Oct 4 Business Week interview.  Here's an excerpt:

"SEXIEST DEALS."  Capgemini has its bright spots. The U.S. market should start to pick up, thanks to a $3.5 billion outsourcing deal inked with Dallas-based energy company TXU (TXU ) in 2004, says (Bob) Djurdjevic. He calls the 10-year pact the first "megadeal" in the U.S. won by a foreign-based IT services company, saying: "They have scored probably what is one of the sexiest deals in IT services."

Also looking up is Capgemini's unit for small and midsize businesses, Local Professional Services, which now represents 17% of revenues. Already Capgemini's most profitable, the division has strong growth prospects. Until recently, IT-services outfits have spent most of their energy going after big customers. The small-to-midsize field "is pretty rich," says Djurdjevic. "And nowhere is the opportunity greater than in Europe, which is their home turf."

On the order-book front, the news is also encouraging. As of June 30, Capgemini had $15.50 billion in booked orders, more than double what it had chalked up at this point in 2003.

(An excerpt from "Is Capgemini Up for Grabs?", BW, Oct 4, 2004)

U.S. Market - "Problem Child" Recovering

Despite a rapid revenue growth in the latest quarter, Capgemini's CEO cautioned that its operating margin in the second half of the year would be closer to two percent.  The company's earlier guidance has been a two to three percent range.  

The main reason for a lower profitability is the same old "problem child" - the U.S. market.  "The range hinged on the recovery of the United States, which is slower than expected," Hermelin explained.

Since Capgemini reports its results in Euros, a weaker U.S. dollar isn't helping its recovery in the U.S., either.  While the third quarter U.S. revenues were up 3% in constant currency, they declined 5% as reported (in Euros).

Sequentially, Capgemini's U.S. revenues were up 19% in constant currency (up 17.7% as reported), as the TXU megadeal has now started to contribute to the Capgemini revenues.  So signs of recovery are evident even with the "problem child."

Good New Contract Sales

New contract sales are another important indicator of how well Capgemini's recovery is proceeding.  They were virtually flat with those in the third quarter a year ago (1.3 billion each).  But the 1.6 billion-Schneider megadeal, which the company won in the fourth quarter, alone surpassed the third quarter total.

So if Capgemini closes in the fourth quarter as much "non-megadeal" business as it did in the third, its total will likely surpass even the all time record set in the fourth quarter 2003, when the company won its biggest prize yet - the U.S. Inland Revenue contract (see Biggest Feather in Cap's Cap, Dec 2003).

The Schneider deal also has a relatively quick ramp-up.  It will start contributing to Capgemini's revenues and profits in early 2005, and will account for about 150 million of its next year's revenue.  The transition phase should be over by mid-2005.

With an 8% "build" and a 92% "run" content, the outsourcing contract that covers 26 European countries, also promises to be profitable.  Capgemini estimates a "high single digit profitability" and positive cash flow throughout the 10-year deal.

In short, all we can say by way of a summary is to repeat what we wrote two months ago: "In short, we would not be selling Capgemini short, both literally and figuratively."

Happy bargain hunting!

Bob Djurdjevic

For additional Annex Research reports, check out... 

2004 IT: Capgemini: Revenue, Stock Soars (Nov 2004); EDS: Jordan's Swan Song? (Nov 2004);  To Russia with Love and $ (Oct 2004); IBM: Slow Quarter No Longer (Oct 2004); Accenture: Revenues, Profits Up, Stock Down (Oct 2004); Capgemini: A Takeover Target? (Oct 2004); Sellout of America (Oct 2004); Spy Wars (Sep 2004); Outsourcing Boomerang (Sep 2004); EDS to Cut Up to 20,000 More Jobs (Sep 2004); Capgemini Stock Plummets on Unexpected Loss (Sep 2004); HP Savaged by Wall Street (Aug 2004); Moody's Lowers the Boon on EDS (July 2004); HP: Delivering Value Horizontally (June 2004); Accenture: Revving Up a Notch (June 2004); Beware Your CFO! (May 2004)IBM: Changing of the Guard (May 2004); Capgemini: Texas-size Home Run (May 2004); Following the Money (May 2004);  EDS: On a Wink and a Prayer (Apr 2004); HPS Wins by a Nose! (Octathlon 2004); Accenture: Burning the Track (Mar 2004);  IGS: "Crown Jewel" Restored? (Mar 2004); HP: Still No Cigar (Feb 2004); Cap Gemini: Another, Smaller Loss (Feb 2004); CSC: Good Quarter Gets Boos (Feb 2004); EDS: "Hot Air Jordan" Flaunts Flop as Feat (Feb 2004); IT Industry: Whither Goeth It? (Jan 2004); Cronyism Is Alive and Well at EDS" (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 appropriate  keywords.

Volume XX, Annex Newsflash 2004-22
November 12, 2004

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

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