The H1 results from the European majors Atos, Capgemini, Sopra, all France-headquartered, are now in - also those of Sopra, about to merge with Steria. So what does this tell us, about the progress of these firms and the state of the European market and what should we expect in H2 2014?

The average constant currency revenue growth experienced by these firms in H1 2014 was 1.4% with Steria and Sopra outperfoming Atos and Capgemini in terms of revenue growth?

Revenue Performance

First, let’s take a look at the headline revenue figures:

So Steria comes out top in terms of CC revenue growth, at 7.2%. But what is remarkable about Steria’s results is the extent to which the company’s overall growth is based on a single contract: its SSCL back office shared services JV in the U.K. with the Cabinet Office (see here: http://research.nelson-hall.com/search/?avpage-views=article&searchid=30290&id=203423&fv=2). This contract also explains Steria’s 51% growth in BPO and its 21% growth in the public sector globally.

Overall, the public sector remains a relatively safe haven for all four vendors. In contrast, they are all seeing declining revenues in the manufacturing sectors, where (and this is no surprise) Indian oriented services vendors are generally increasing their wallet share. Indian-only vendor short lists in ITO and BPO in the manufacturing sector are not an uncommon phenomenon.

Looking at their performance in three major regions in Western Europe:

U.K./Ireland

The U.K., averaging 4.5% revenue growth across Atos, Capgemini, and Steria, was once again one of the strongest growth geos for these firms, all of whom are very dependent in the U.K. on the English public sector. In spite of noise still coming out of the Cabinet Office about reducing U.K. government expenditure with large suppliers, they continue to be awarded new business:

• Steria achieved 19.6% CS/CC (organic growth) to €424.7m in the U.K., with the bulk of this growth coming from the SSCL contract. As well as SSCL, Steria also saw growth in its smaller defense and homeland security business
• Atos (1.9% CS/CC growth to €812m) benefited in H1 from increased managed services activity in the Department of Health and higher volumes at NS&I, and also saw growth in its U.K. public sector consulting business (it has a particularly well established presence at the Department for International Development, DFID).

Capgemini (3.3% CS/CC growth in the U.K. to €994m) was the exception with its primary source of growth appearing to have been the private sector, especially financial services, rather than the public sector. Its challenge is to find new government sector outsourcing opportunities to plug the gap when the ‘Aspire’ contract expires (the next generation will be in towers).

France:

France remains a challenge for Atos and Steria with declining revenues and low profitability. Less so, in terms of topline growth, for Capgemini: the company is well established in the French government sector and its Sogeti business in France has been relatively resilient for insourced IT infrastructure management services; France is also an early target market for Capgemini’s newly launched Global Engineering Services (GES) service line.

In contrast, Sopra has been outperforming its large European peers in its domestic territory.

Germany

Of these four vendors, only Atos and Steria report separately for Germany (in spite of its size, Capgemini does not have a significant presence in Germany).

• Atos: revenues down 3.1% to €784m. Atos is dependent on Siemens AG, where it is contending with committed price decreases, and the loss of some business. Atos incurred €82m in expenses in Q2 which relates to a restructuring plan in Germany for employees located in AIT Frankfurt following the termination of several local contracts
• Steria: revenues down 8.4% to €109m; adjusted margin down 2.5 pts to 4.1%. Steria Mummert never managed to be successful in cross-selling AM or BPO. A new management team appointed in 2013 to evolve the historic business model generated the departure of some consultants in H1. Cost-cutting measures are being introduced, and the country remains a work in progress.

Operating Margins

Turning our attention to margins and the picture is generally more rosy:

For Atos, the EBIT margin decline was primarily due to an increase in staff reorganization costs.

For Sopra, much of the EBIT margin decline results from two effects:

• Costs in H1 2014 of €4.6m related to the imminent acquisition of Steria
• In H1 2013, Sopra had a negative goodwill related to the acquisition of HR Access. Excluding this impact, Sopra’s H1 2013 EBIT margin would have been 6.3%.

Capgemini is ahead of its European peers in Indian offshoring and in pulling other cost levers - but for all European centric vendors, a 10% operating margin remains a distant nirvana. For full year 2014, Capgemini is guiding on an operating margin rate of between 8.8% and 9.0%.

Looking at H2, what should we expect?

Atos’ acquisition of Bull (is it a consolation substitute for Steria?) will impact margins in the short to mid-term, even though Atos is predicting cost synergies of €80m, of which €30m is coming from the accelerated “One Bull” program (which it plans to execute in 24 months, rather than the 30 months planned by Bull), €30m from a reduction in G&A expenses and €20m in hardware procurement and real estate savings. Atos has become very dependent on a few large outsourcing contracts. Bull may help its penetration of the mid-market. And of course, Bull will add more beef to Canopy.

The acquisition of Steria will help Sopra in its international business, which does not reflect the quality of its domestic business. Steria will fix Sopra U.K.'s issues of lack of breadth of portfolio and topline growth. It will also open up a new geography in Norway. Germany will remain problematic, though fluctuations in Germany, Spain, Italy and other Continental European countries will be less important as they represent a small proportion of the overall revenue of the forthcoming Sopra Steria Group (SSG). In its domestic market of France, SSG will inherit with Steria an operation that has been struggling for over five years. Without doubt, SSG will make sure Steria adopts its Sopra model quickly. There is no magic in it: Sopra will, in all likeliness, emphasize traditional KPIs such as utilization of personnel, make niche divestments, be selective in its IT IM business and continue to grow its proprietary software product business. But the merger will, again, impact margins in the short term.

Capgemini will be the only vendor in this group to deliver y/y EBIT margin improvement in H2. Capgemini has been working systematically to improve its competitiveness, both in portfolio  development and reducing cost to serve), and its outsourcing business is now being much more successful in winning new business than it was a few years ago. Apart from its consulting business, Capgemini is doing very well for a European-centric vendor (yes, 20% of its revenues comes from North America, and 45% of its global headcount is based offshore, but it remains European-centric).

But the wolf is at the door, and it is Indian: the only substantial growth in Continental Europe in the next few years will be by the Indian oriented service providers, who will continue to acquire.