EuroBusinessMedia (EBM:) Capgemini, one of the world’s leading companies in consulting, technology and outsourcing services, just reported earnings for 2008, Paul Hermelin welcome.
Paul Hermelin (PH): Good morning.
EBM: You are the CEO of Capgemini. What are your key takeaways from the group's performance in 2008?
PH: The first point is that we delivered a truly solid performance. What I like is that in spite of all the economic turbulences of the second half mainly, we delivered exactly our early 2008 guidance. So we delivered the 5% growth which is the top of the range that we had given to the market. We delivered a margin with a solid 1.1% improvement of operating margin. The net is just slightly higher than the 2007 net income. Cash collection was good. So what I like is resilience and predictability. And frankly, since September, we knew we could head for these results and we delivered what we had in sight in September, in spite, I repeat, of a pretty rocky second half.
EBM: How would you rate your ability to preserve margins in today’s current difficult macro economic environment?
PH: The first point is that the profile of the group has changed compared to the previous downturn. We have expanded our outsourcing footprint, which goes with a little diluted margin but long-term contracts that provide some visibility and we are now very solid in the public sector that represents 26% of the group revenue. So we have two tools that provide stability. In addition, the group has truly become a massive player in offshoring and for the customer that wants to protect their IT investment, but save on costs, this is the ultimate solution. And by developing what we call the “rightshore” model, which is a combination of onshore intimacy and very industrialised offshore production centres, I think we are truly very advanced in that respect.
EBM: Looking ahead to 2009, what would you say will be your priority: margin preservation or commercial dynamism and growth?
PH: I’m not very happy with the share price evolution because I think that Capgemini shares have been handicapped because in the past the group has not shown resilience and in a downturn our margin had truly weakened. So this time I want to show that the group has gained additional resilience and margin protection will be key. What I say is that if a group of people and services looses its focus on customers, then the story starts to become pretty sour. I don’t need to remind you what happened to us in 2003, as you remember we went down because we were too focused on costs. It’s a story where you need to keep strong customer focus, even to protect the margin.
EBM: Do you expect that the current crisis will accelerate your offshore transformation because of a pressing need to lower costs for customers?
PH: I would probably think so. In the last years we could frankly grow massively our offshore presence and still grow slightly our onshore headcount. I fear that in the next quarters that won’t be possible, because customers want massive price reductions that lead to an increased leverage of offshore skills. I still think that the market should allow us to do that with very minimum restructuring because there is an underlying people attrition and we will become far more stringent on replacing the leavers. So we could reduce our headcount pretty, if I can say so, naturally.
EBM: Does this crisis create some interesting acquisition opportunities for you? Inversely, would you expect some Indian players to start looking at acquisitions in Europe, now that their market valuations have fallen back in line with that of their European peers?
PH: I think yesterday there was a meeting at the Nascom, which is the Indian IT profession, and they said Europe is a nut that is far more difficult to crack than the US and they say “we will need some acquisitions to enter some accounts”. So we should expect that. Regarding Capgemini we have a very strong balance sheet, a positive net cash situation, so we are ready for acquisitions. We will only do that at the end of the recession, so it’s far too early today when nobody knows how long it will last. But I would say today, my only view is that when we feel a little more secure and somewhat certain about the economic outlook going forward, we shall prioritise acquisitions that are pretty focused so that the integration is local and will not create a distraction at group level. We acquired a sizeable operation last year in Holland. Holland is one of our strongest countries with a very strong management - I do not feel the market distraction there.
EBM: Has there been a Satyam effect, in other words have some of their clients started to show a new interest in your offering? Has being a European player taken on a new meaning lately -- has it suddenly become a selling point again in the eyes of some clients who had drifted towards Indian providers?
PH: The first point is that I’m very proud, because we have just got a rating as an Indian provider. I think it was based on customer assessment in the UK where we are ranked number 3 in terms of quality after two Indian pure players, ahead of the others, and clearly ahead of let’s say IBM, Accenture or Atos, so today we master pretty well the offshore skills and talents and combine that with onshore. I can say that some customers have asked us how we can guarantee that nothing of the kind of what happened at Satyam can happen in Capgemini. I remember precisely a large financial player – European - that asked for a one-to-one with our CFO about how we control - which shows that customers don’t want that to happen. And by the way, we have won one large Satyam customer that was eager to diversify its supplier base.
EBM: How resilient do you think IT spending will be in this economic downturn compared to the previous ones, and why?
PH: There is a big discrepancy. IT spending had grown by 20% every year because of the cumulative impact of the year 2000 preparation, the euro and the first dot.com bubble. Last year IT services were growing by 6% - so a very different pattern. I would say, if it is a recession that still means our economic growth will decline by 1 or 2 points, I would say IT spending will remain central and most of the customers will delay a little, but keep an eye on their investment and productivity investment. If we enter a kind of black hole with massive disruption, it’s more difficult to predict. If I look at today, even banks need a lot of IT and order a lot of IT. They are very demanding on offshore leverage price points. At this stage the automotive industry has nearly frozen its IT investment, because they are today in a storm and they want to know how they will get out of that storm. The rest of the world is still ordering IT and it’s a soft market, it’s not a very bad market.
EBM: What is your level of visibility for 2009? Are you able to provide the market with any kind of guidance and outlook statements this early on in the year?
PH: Frankly, we talked about that at length in the board meeting yesterday. I would say today our coverage for H1 is such that we can say that we have a guidance for the first half of the year. Today we should frankly monitor the situation and be ready to adjust our course to H2 news flow. So we will guide the market today only on six months. And I would say a very modest revenue decline, so quite prudent and even with very restrictive hiring and price pressure, I think we can commit that our margin will not decline by more than 1 point, so we want to deliver a margin above 6.5% in the first half.
EBM: In the current environment the prevailing sentiment is that cash is king. As a result, some companies have even decided to suspend their dividend. Is there any chance that you’ll be tempted to do the same thing?
PH: Frankly the cash collection has been quite good. I think we beat the consensus on our net cash position, which is clearly positive. We have more than 775 million of positive net cash situation, so it’s very difficult for our shareholders to understand that we don’t remunerate and pay a normal dividend, so we have decided to keep a normal pay out ratio, and as we have maintained our net earnings we will maintain the dividend at 1 euro per share.
EBM: Paul Hermelin, CEO of Capgemini, thank you very much indeed.
PH: Thank you
