EuroBusiness Media (EBM): Capgemini, one of the world's leading IT services and management consulting companies, has just reported earnings for 2005. Paul Hermelin, welcome. You are the CEO of Capgemini. What are your comments on the company's full-year results?
Paul Hermelin (PH): I think it was a year of solid progress, since for the first time we combined solid gains in market share and a nice surge in our operating profit. We are back in the team. We are coming back, but we are not yet at the forefront. So I would not be overly happy. But to combine a 15% top line growth with a 3.5% margin improvement, I think that's overall a pretty nice performance. And when you collect solid cash in addition - since we ended the year with a positive net cash position of 900 million euros - that gives the legitimate impression that the Group is back under control, and back on the market fighting.
EBM: You've increased the dividend significantly, as a proportion of your profit, which surely means that you are more confident about the future?
PH: Historically, the company has paid out about one-third of its net profit as a dividend. A third this year would have meant something below 40 cents. Together with the board, we thought our shareholders have been patient - with hopefully the bulk of them supporting us in this long recovery - and we thought we could pay them a kind of tribute for their support by increasing the payout rate. But I think that in the future we will get back to that normal payout ratio of one third.
EBM: You are currently restructuring the outsourcing business, and the market also expects to hear your progress report about the recovery in the US? What is the latest news on both of these topics?
PH: The program that started in January 2005 was the restructuring of our US operation, code name Booster. That was designed in January and February; the restructurings were launched as of March; a new operating model was in place July 1st. My true satisfaction is to see that, for the first time after four years of decline, we were able to grow in the US. We probably gained market share in the last quarter. The growth in the second half is 6% -- that's OK. We went for double-digit growth for the last quarter - which means stealing a little bit of market share from our friends and competitors. And we were operationally in the black. Not yet for the full operating margin after central allocations, but since September in the US we are in the black. That is quite satisfactory. What that shows is that we took the risk of significant restructuring, but the main decision was to focus on some growth platforms. We decided that we could not afford to be a generalist, without priorities and focus, in the US marketplace. We decided to select the segments where we can strive for one of the top three positions: in the utilities segment in North America (including Canada, of course), in the retail space, in telecoms, and in SAP, where we are a leading player, we want to be a part of the game and the market. Not being dominant, but being a major player. In the future, we will add new segments, such as financial services, which will be added to rebuild a position. Today, we are a kind of multi-specialist, and we plan to add new specialties.
Now, looking at the outsourcing market, the first task was to bed down the mega-contracts that we had signed in 2004. That was done in the first half. After we did that, we launched a design phase, to design a program to support margin improvement. This is code named MAP: Margin Acceleration Program. Now MAP is becoming a normal operational project. All the MAP team is in place, and all the MAP streams are followed and monitored carefully.
EBM: The market is wondering whether we can expect to see a large outsourcing contract soon ?
PH: The market knows that we dream of extending the Inland Revenue contract to the sister Customs Administration, because they have now been regrouped. That could be quite sizeable. Beyond that, I think that the customers tend to slice up their outsourcing relationships, and select the best provider for each bit and piece. If you look at General Motors, they had one very large contract with EDS. When they opened it for further competition, they sliced the contract into 41 pieces. We selected to bid on six of these pieces, and we were extremely lucky and won the six of them. It shows that a mature customer like General Motors felt that they could handle a relationship with multiple service providers, and tailor their needs so that they can find the best answer to each piece of their need.
EBM: Concerning ongoing contracts, can you confirm that costs are in-line, and that we shouldn't fear any overruns ?
PH: Before what I called LEAP (which was an organization of the Group per service line), because we had mixed in single business units management consultants, IT engineers, people who could not share the discipline of their relative competences, we had an unexpected high level of overruns. We cleaned it up, we had flying squads all over the place. In 2005 we halved the level of overruns : it's now between 2%and 3%. Can we gain some more? Half a point maybe, because in our business a fraction of the contracts are difficult, so we must live with a small envelope for adjustment for overruns. But we probably corrected the bulk of what we had to.
EBM: There's lots of speculation about Capgemini wanting to make a significant acquisition in India. Would you care to comment ?
PH: Three things. First, we have a balance sheet such that people will rapidly ask us : "What are you going to do with your cash and with no debt?" So that's a normal question. The second point is : we have been through a difficult merger, so some people will wonder : "Will they make another risky move?" On that point I will be very clear : we may go for some specific add-ons but I will certainly not trigger a move that could generate some turmoil. We are back in the market, we want to gain marker share, and we will gain market share organically. The last point is : among the possible add-ons, could we try to go quicker in India through an acquisition ? That would be welcome because we're currently growing very rapidly, 80% per year, and 80% per year in the people business is very demanding. It means that we promote a lot of people every week, every month, that we on-board a lot of people. Gaining size through an acquisition could be a way to stabilize our Indian operation. But certain acquisitions could destabilize, because then people would be busy with an integration instead of serving customers. There are some potential brides that would be exactly the right fit, that wouldn't be in Mumbai, Bangalore, Calcutta where we are present, and be in Hyderabad or Punay or another Indian city. Does that exist ? I'm not sure. I'm just saying that organically we have 4,000 people today and the goal is to get to 6,000 by the end of this year, and 10,000 organically in 2007. Can we go further ? Can we get through an acquisition skills that we did not develop ? That would be nice…
EBM: Compared to the competition, you seem to be the only European player moving ahead so quickly in India. How would you explain Capgemini's strategic choice versus its peers ?
PH: I think it's the reward for being present and active in the US. The US market is 18 to 24 months ahead of European trends. That's where we saw the off-shoring trend, that's where we saw the appetite of customers for the new generation of ERPs. That's where we first experienced the massive appetite for service-oriented architectures. So being present in the US gives us the advantage of feeling the trends that will hit Europe one year later. The second point is off-shoring started as an Anglo-Saxon trend. We are quite strong in the UK and in the US. And third we decided to go for distributed delivery, what we call 'Rightshore'. For example in France (but it would be applicable to Holland or Spain) we try to combine on-shore industrialized centres - in Nantes or Toulouse for example -, near-shore centers that can be located in Spain, and possibly tomorrow in Morocco, and then truly industrialized very off-shore centers. That's the menu. For the applications that are steady, well defined, where the specifications are available, off-shoring may be the answer. When you work on applications that are evolving where you need to be close to the end user, I would not recommend an off-shore treatment. In that case, you work close to your customer. Which is why we need that map of centers.
EBM: Looking ahead at 2006, what is your impression of the overall health of IT services sector ? What is your sense of clients' willingness to make new investments ?
PH: After the year 2000 there was a clear indigestion leading to a diet for several years. The customers resumed investing in the US at the end of 2003, the appetite came back to customers in Europe at the end of 2005, so it's always the 18 months of lag time between the two continents. Today, what is new with customers is that they are not only looking for cost-cutting and innovations that helped them reduce their cost base, but also for systems that supports growth ambitions. The market is more balanced between growth initiatives and cost-cutting projects. When you deal with growth, you need to develop business insight, because growth in the telecoms market is not growth in investment banking or in retail. So in this market the sectorial differentiation will come as a real differentiation and a positive advantage. That's quite different, that shows a different pattern of the demand. Having said that, I have read and I believe it's reasonable that IT expenditure will grow 3%-4%. Within IT service will grow a little faster, around 5%. And this year people expect projects to grow 5%-6% and there is a feeling that IT is less vibrant notably because of the end of these mega-deals. That may be the case. So we should expect the market in the mid-single digit range.
EBM: Finally, what are your comments on Capgemini's outlook and guidance for 2006 ?
PH: I try to be prudent, but if you don't say anything people will tend to think that you have lost the control of your operation. With the performance in the second half of 2005 we said that we were comfortable with the market consensus. Our CFO Nicolas Dufourcq rounded that with a margin in the range of 5% and a growth of 6% to 7%. So that gives us a standard. Of course that's subject to market conditions remaining the same and we will try to update that after our first quarter results.
EBM: Paul Hermelin, CEO of Capgemini, thank you vey much.
PH: Thank you
