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IT SERVICES

Updated 5/05/09, 9:30PM PDT

Analysis of Capgemini's 2008 and 1Q09 Business Results

Steady As She Goes

Paris-based Capgemini Is Another Global IT Services Company Weathering Economic Storm Reasonably Well

HAIKU, Maui, May 5 – "Steady as she goes," an old seafarers' adage, would be a good way to describe the Capgemini's recent voyage through the stormy global economic seas.   In 2008, the largest European IT services company reported flat revenues of €8.7 billion in Euros despite having to face headwinds most of the year.  But the rise of the dollar against the Euro last year took them down 13% to $11.1 billion in U.S. currency.

In the latest quarter, Capgemini actually reported a 1% revenue increase in Euros to €2.2 billion.  New contract sales also rose slightly, with outsourcing doing well (up 40%), while consulting and systems integration declining 9%. 

The better-than-expected results boosted the Capgemini stock, which closed at €29.11 today, close to the highest levels it has attained in the last six months.  As a result, Capgemini, whose shares trade on the Paris Bourse, has outperformed both the Dow and the S&P indexes during the same time frame.

Business Segment & Profitability Analysis

What also buoyed investors in the last six months was that Capgemini has found ways to actually improve its profitability during a period of slow or no growth (left chart).

Operating margin – which was up in all four horizontal activities (right) – was €744 million in 2008, or 8.5% of revenues.  That's up over a point from 7.4% the year before.  Net profit for the year, after some restructuring charges, amounted to €451 million, or 5.2% of revenues, up from 2.5% in 2007.

In terms of geographies, the Benelux countries reported the best performance in 2008, with about a 12% growth.  Revenues in the rest of Europe and Latin America were also strong, rising about 8% last year.  France and North America were also up, 5% and 3% respectively (the latter in terms of organic growth, i.e., adjusted for currency translations).  But Capgemini's biggest geographic region - U.S. and Ireland - was down 14% as reported, and 0.5% organically.

Overall, the company reported a 5% organic growth in 2008, despite varying rates of change across the world.

In the latest quarter, Italy and the U.K. recorded highest rates of growth on an organic basis (up 8% and 7% respectively), while North America's revenues declined 7%, measured the same way.

Manufacturing and distribution continues to be Capgemini's biggest industry segment, accounting for about 28% if total revenues.  It is follows by the public sector, which represents about 26% of the total.  Financial services and utilities are next with 17% and 12% revenue shares.  Despite the media headlines which highlighted the banking sector woes, there has not been any major changes in Capgemini's industry alignment since 2007.

Summary & Outlook

As you can see from the preceding, Capgemini has managed to sail through turbulent waters in the last two years with minimal damage to its business.  In fact, its "steady as she goes" strategy, which included increasing offshoring of its services deliverables, has served it well.  As a result, the company's bottom line profitability has grown a little faster than its top line revenues.

The company management have been reluctant to forecast the full year's results for 2009, citing unstable global economic conditions as the reason.  But they have guided the analysts who follow the company toward a slight revenue decline in the first half of the year.  It remains to be seem whether or not the steps Capgemini has taken to reallocate its costs to lower labor markets will be sufficient to sustain its profit margins at a time when revenues are under pressure.

 Happy bargain hunting!

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