EuroBusiness Media (EBM): Steria, one of Europe's leading IT services companies has just reported profit for the first half. François Enaud, welcome!
François Enaud (FE): Good morning and welcome to our headquarters!
EBM: You are the Chairman and CEO of Steria. What are your comments on the company performance in the first half, and are you on target to reach 7% operating margin by year end?
FE: Yes, we are quite happy to announce such a good results. With a significant improvement on our key financial indicators: a 30% growth of our operating margin, a 35% increase of our net result and 33% for the earnings per share. We can say that these good results are fully on track with our full year target, which is to achieve 7% of operating margin. And this good result is certainly the direct consequence of our sales dynamics, first, with a significant increase of our order book and pipeline, but it is also the result of the transformation programme we engaged 2 years ago, and with the restructuring in order to align all our other businesses with our strategy.
EBM: What is your comment on the company's performance, region by region, in each of your main countries, namely France, UK, Spain and Germany?
FE: I'm very satisfied to see how all the geographies, all our countries, have contributed to this good result. In France, our volume growth has been above 9%, with an operating margin at 9% as well. In the UK, growth was 6%, with operating margin at 8%. In Germany, the good performance has been regarding the orders with more than 25% increase in our order entries. And in the other countries, particularly in Spain, where the recovery has been very impressive in the first half, delivering a profit in the first half compared with a loss last year.
EBM: Industry experts are concerned about a possible slowdown in demand in the IT services sector in the coming month. In your view, is demand slowing and what does the pipeline for new large contracts look like?
FE: We don't feel such a potential slowdown in the IT market. Not at all. On the contrary, we have the benefit of a good exposure on the market. There are clearly structural needs on two main particular markets: public sector and finance. And these two markets together represent more than 60% of our total sales. The second point is the fact that, in the demand of our customers, you're right to mention that this demand is evolving a bit, particularly in public sector, where the mega-deals are declining progressively, due to the facts that these mega-deals did not deliver the results expected. And the customers are coming more and more to structure their deals a bit differently, splitting these mega-deals into different big deals, or medium-sized deals. It is particularly positive for us, because in fact, if you take into account the size and the profile of Steria, we are much more adapted to win these big deals than we were to win the mega-deals.
EBM: There has been talk about wage inflation in your sector, with salaries increasing faster than selling prices leading to a possible scissor effect on margins. What are your comments on this phenomenon in particular, and the recruitment situation in general?
François Enaud (FE): First, I would like to mention the fact that we are selling solutions much more than resources. It means that our selling prices are more based on the value created to our customers than on the cost of our resources. That's why we are a bit less exposed to that kind of issue than pure 'professional services' companies. Secondly, we are recruiting significantly. And just to give you an idea, this year we are recruiting roughly 2,000 people. And by the way, we don't meet real difficulties recruiting these people, which proves the attractiveness of Steria on the market today. And thanks to this strong dynamics of recruitment, we are maintaining our [average] unit salary cost at the same level than it was in January this year, despite the salary increases managed all throughout the year to keep the key resources on board.
EBM: What is your outlook for business in 2007?
FE: For 2007, our objectives are rather the same as they were before. First with a very strong organic growth, higher than the average of the market, in order to consolidate our position within the top ten, meaning gaining market share progressively, growing faster than our direct competitors; and the second objective is to continue to improve our profitability. And we still have existing levers to manage this improvement. First the improvement of our profitability on the integration system business, which is not yet at the level of the management services business in terms of profitability; secondly the improvement of our profitability in smaller areas within the group, which are in Scandinavia, Spain, Belux, Switzerland, where the profitability can improve again. And the third lever is obviously the volume. We are increasing progressively and more and more the volumes thanks to the growth posted every year. And this volume is contributing to the improvement of our profitability.
EBM: Because you have a strong balance sheet, the market expects you to seize opportunities to grow through acquisitions. What are your comments on your acquisitions strategy?
FE: Acquisitions strategy is clearly a component of our corporate strategy. But I would like to insist on the fact that the organic growth is absolutely key. We cannot rely only on external growth to achieve our strategic objectives. The main objective for us is to consolidate our position within the top ten. And we cannot ignore that this top ten is gaining market share year after year. It means Steria has to grow faster than the overall market if we want to consolidate our position within this top ten. For that, we have to find new levers for growing faster, first organically, and that's why we are thinking about partnerships or joint-ventures with customers, in order to develop a long lasting relation generating more volume with them. And in addition to that, we also have in our plan some well-targeted acquisitions in order to accelerate a bit more this reinforcement within the top ten. And for these acquisitions, our main priorities for the short term are still the same: the UK, and France as well.
EBM: You are seen mainly as an outsourcing and systems integration player. Do you have any plans to develop the pure consulting business inside the company?
FE: Clients don't buy separate services any longer, such as consulting on one side, system-integration and management services on the other side. They are looking for global solutions, with a global approach. And they are more and more selective when choosing their partners. And they are considering their IT partner relevant only if they have this global capability. That's why Steria is more and more focusing on a business transformation services on one side, and business operation services on the other side. And these two offers, I would say, are mixing together these consulting capabilities, implementation capabilities, and operating capabilities.
EBM: And finally offshoring is a hot-button topic in your industry. What is your position and strategy in the ongoing debate about offshore versus onshore and added-value products?
FE: I don't support the idea to oppose onshore and offshore. I consider offshore as a booster for the employment in the local market, and particularly in our European countries. That being said, I would like to insist on the fact that we absolutely need to develop more and more an efficient global delivery model in order to maintain our competitiveness on the local market. That's why we have decided to reinforce this global delivery model with a direct access to Indian resources, Indian capabilities. Up to now, we were managing these offshore capabilities for partnership with an Indian company. We have decided now to foster a bit these capabilities by a direct access to Indian resources. And that's why in the next six months, we will be in a position to have our own infrastructure in India. With the objective in mind to achieve 10% of our productive staff in these offshore countries.
EBM: François Enaud, Chairman and CEO of Steria, thank you very much indeed.
FE: You're welcome.
