EuroBusiness Media (EBM): Capgemini, one of the largest providers of Consulting, Technology and Outsourcing Services, reports earnings for the first half of 2009. Paul Hermelin, welcome. As the CEO of Capgemini, what are your comments on the Group's performance in the first half, the Group's financial situation, and what is your comment on the trend of bookings?
Paul Hermelin (PH): So, the first thing, I'm quite proud that we just delivered to our previous commitments. Pretty early in the year we had seen a slowdown of the demand and that day we were the first ones to announce it. And we have delivered a modest revenue decline, minus 2%. It's significant because last year we were growing, but this is still a modest decline. And I think we were good in predicting that early. The second point, against the previous downturn, we wanted to show that the Group has gained an ability to resist and deliver a margin. And I'm quite happy that we delivered within the guidance that we had given, 6.6% operating margin. This is a good resistance and it shows that the Group’s profile has changed. The last point is that everybody has worked hard because it is a difficult market. It has proved a little more difficult even than what we had thought initially. Some good surprises, but people fought, people have won contracts. It's a difficult market. So our bookings in the first half were slightly below last year, but we still have a book-to-bill at 1.1, which means that we have signed bookings above our predictions. So we have added. We have increased a little bit the backlog, which is pretty good in this market.
EBM: And what about the financial situation of the Group today?
PH: This has become a little bit a motto of the Group: an extremely good cash collection. We could have fears about a fight for cash. Actually, all our days receivable have been reduced by 4 days, which I think in this market is a very good performance. So, a very strong cash position with a net positive cash of €576 million. We are quite happy with the way the market has welcomed our convertible bond that we issued in April. That was oversubscribed many times. Quite happy with the very strong buy-in of the top management. I offered some kind of a pay. So no free stock options. It was an option that a manager could buy at a price that was kind of certified by the market authority. And we had tremendous support, 100% of the Executive Committee. Of course, that's pretty normal. 80% of the top management. So I think that we have the management that believes and that has bought options for a target price at least 25% above the current price. So we have a motivated management, a good market support, and an extremely solid balance sheet.
EBM: Speaking of employee shareholding, you're planning a share ownership plan for all employees in September. What's your objective in so doing?
PH: The share warrant that we just issued was subscribed by 600 people. So it's a little bit of a risky product. We want to have our employees become permanent shareholders. So through a regular share purchase plan, the goal would be to have our employees owning 6% to 10% of the Group shareholding. So that's a very different philosophy. The question is… When we address 90,000 people, you secure it or you allow some banks to help in a kind of counter-guarantee, because you talk with a mass of people with very different levels of income. For the top management, I wanted them to bet on the Group's success, which was quite bold and more courageous.
EBM: Which parts of your business are the most resilient in the current environment and which parts are suffering the most?
PH: As expected, Outsourcing. A year of recession is a good year for Outsourcing. Customers wants cost reduction and accept externalization. So, we have a very good bookings progression, 35% for Outsourcing. We have a growth of Outsourcing revenue of +2.5%. So that's expected. That works as we anticipated and that was the reason why we had rebalanced our mix with more Outsourcing revenue. The most cyclical service lines are Sogeti and Consulting. Consulting: -14% in the second quarter. I have seen some figures that are worse in that industry, but it shows that Consulting will resume its growth when customers will start drastic reorganizations, mergers and acquisitions. So today, the Consulting market is tough. Sogeti is a very cyclical business. They protect well the margin, but Sogeti is a kind of a luxury. You pay for somebody to help you, but when you don't have the money you try to live without this support. So Sogeti is extremely well managed but, as expected, bleeds a little bit in this market.
EBM: Isn't pricing pressure the most significant risk for your business today, as suggested by some analysts' reports? Other analysts also write that your profitability will be impacted by the shift of your business mix that you mentioned more towards Outsourcing, which has lower margins. What do you reply?
PH: The first point is, I keep talking with analysts, who claim we're going to incur a big price war. We hear of difficult price negotiations, but we report our price points, they are stable, so far. And when we collect bottom up the forecast for H2, there is not a big slide. Some, notably in the financial sector, in some countries that are a little bit difficult. But overall the price resistance is better than people feared. Second point, you're right. If we were to grow Outsourcing from 35% to 60%, that would change the targeted margin for the Group. In a downturn, Outsourcing will grow from 35% to 40%, maybe 43% or 44%. So it will have a minor but a secondary impact on our targeted overall margin, a minor one I would say.
EBM: What is your situation update today about the business trends you're observing in the US market, which tends to be a leading indicator for your industry?
PH: Two remarks. There are two markets that stumbled first, financial sector and the US overall. And in finance, we start to see banks that prepare new investments. So today the market has not recovered, but there are some hopes for recovery before the end of the year, because we work today with our customers on projects that may start, and that should start, before the end of the year. It’s not done, we should be conservative and prudent, but the feeling is that the financial sector will be the first one to get out of the downturn. North America – more difficult to say. Our pipeline – first, the second quarter bookings were disappointing a little bit, which is why we have a revenue shortfall in the second half. But when I was there in mid July, I saw first that we are successfully redirecting our sales force organization toward the public sector, not just selling the Federal business but also the State and local business. And we start to record some wins there, so that will give us a more resilient profile in the US. Second point, the bookings look better because we work there too on many projects. So our US colleagues are a little more optimistic but, as you know, Americans are either completely depressed or they are always optimistic. I got the feeling of an economy that starts to fight on the recovery now. They made up their mind, the recession is behind them.
EBM: What initiatives are you undertaking to improve your top line?
PH: The key points. Historically, in a recession people under-invest and after the recession there are always some technology jumps or evolutions. So what do we see in this market? The first point, the most breakthroughs that we have seen are no longer in the functional application area, but around hardware, middleware and the interface. So we will see a lot of projects around that, which is why I think we will push Infrastructure Consulting that will lead to Cloud Computing and Software as a service. So, the interface of all these layers of the technology stack. The second point is, the customers now want more for less money. So they are ready to go for more packaged solutions. So we will develop sectorial kernels. We have one very powerful one in telecoms, one in the utilities segment, one in retail. So, this will be developed on a bed that will be entertained and updated in India, most probably. And the last point is, there are new domains for the downturn, BI in general. So we will push BI and we will push, in general, something new that was probably introduced in our industry by the Indian pure players, which is a cycle between application development and maintenance. So, there are new things. Our people are excited. We will deploy – with energy and across the board, across disciplines – some new offerings. The Group Executive Committee has worked on that all spring, and the deployment will start just after the summer break.
EBM: You've recently had to adjust your offshore capacity. What does this tell us about the outlook for your offshore development? Do you still stand by your plan of having 40% of the staff – 40,000 employees – offshore in 2010?
PH: The overall Group has understood the direction that we call I-cube (industrialisation, innovation, intimacy). But at the start of the year there was a very weak utilization rate onshore, with what we call in our business a ‘bench.’ And people that are not billed onshore, it's very expensive, so there was a big effort to clean that ‘bench’ and recover utilization. That explains the kind of sluggish evolution of our offshore accounts in H1. Now that it is done I am more optimistic. I think we will recover a serious growth of the offshore headcount in the second half, in spite of what we could qualify as some protection in some economies. This being said, we see some domains where we grow rapidly and we have to diversify offers. So you see that we grow our platform in new continents – like Latin America, Morocco – and we just opened something in Romania. So overall, I think, directionally, we are in line. Can we reach 40,000 at the end of 2010? Probably not. We had not anticipated that downturn. So it will be delayed by a few quarters, but directionally that's where we go.
EBM: As an IT services company, you seem to be a late-cycle company, entering the downturn a bit later than other industries. Does this also mean that we should expect the decline to continue for Capgemini in the second half, and perhaps even into 2010, after other sectors possibly begin to pull out of the recession? What is your level of visibility, and what is your outlook and guidance for the second half?
PH: Frankly, we again give a guidance for the second-half which is a little lower that what we could have hoped three months ago, so -4% to -6% for the second-half, with some doubts about the fourth-quarter. We'll see after the summer break if our customers are allowed to spend their budget. If they can spend their budget, it will be -4%. If there are some savings to prepare next year, it will be -6%. That's the kind of range where we are. When you read the newspapers you just don't know. I heard recently that Germany could go better before the end of the year. There are some hopes about the US. My general conviction is that a few countries will be better next year, but there will be some laggards, notably in Continental Europe where we will not recover the true recovery next year. So 2010 will be a mixed year, where some countries will be back pushing and growing, and some others will still be lagging behind.
EBM: You've told us earlier that margin preservation is one of your top priorities. But you've also said that you expect revenues to decline in the second-half of this year. Therefore, what is your margin outlook for the second-half of this year?
PH: In spite of that little more conservative outlook for revenue, we stick to what we had said before. We have never formally given a full-year guidance, but we have seen the consensus around 7%. And we say we will – we are comfortable with that. So we will deliver that margin.
EBM: Paul Hermelin, CEO of Capgemini, thank you very much indeed.
PH: Thank you.
