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Capgemini: Strong End to 2014, Enters 2015 with Momentum; Looking for Inorganic Growth in U.S.

Capgemini’s CEO Paul Hermelin describes himself as “very encouraged” by 2014 results; the group has exceeded guidance for:

  • Topline growth: guided on 2-4% organic, delivered 3.4%, accelerating to 5.5% in Q4
  • Net margin, guided on 0.3 to 0.5 pts improvement, delivered 0.7 pts to 9.2%. Capgemini should read 10% margin by early 2016
  • Organic FCF: guided at above €550m, delivered €668m.


  • Bookings were up 13% with a large number of large deals (over €50m).
  • The number of offshore employees continued to increase, growing nearly 20% in India, and represented 47% of the Group headcount at the end of December.

Capgemini thus goes into 2015 with a sense of momentum.

With a lot of attention in recent years on driving the industrialization agenda and India delivery, Capgemini is now looking to position more strongly on its ‘innovation’ capabilities, e.g. the recent launch of a new global service line for Cybersecurity. Management highlights that in 2014, SMAC related revenues were up 25% to account for 14% of total revenues, so ~€1.48bn.

In Europe, Capgemini is seeing activity in Germany and the Nordics. It describes the general market situation in France as “still unclear”. In the U.K. the redesign of the Aspire contract will have a clear impact on topline in 2015. Previously pass-through revenues will now billed by the client directly to Fujitsu and Accenture. NelsonHall expects the impact in contract governance could be as much as 2.5% of revenue of Capgemini's revenues in 2015. The contract with HRMC is expiring in 2017 and in all likelihood, the client will move to a multi-tower contract governance. The Aspire contract will remain a revenue growth inhibitor for several years.

North America saw a good year in 2014, with 8.5% like-for-like growth and the highest profitability in the Group (12.6%). In North America, Capgemini is currently ranked #20 in terms of revenue. Emulating Atos, whose acquisition of Xerox ITO services business will increase its competitiveness in the country, Capgemini is openly looking to acquire in the U.S. this year, being interested in both domain and also volume expansion.

Capgemini has achieved a huge amount in recent years: it has completed its offshore transformation and has made substantial progress in its portfolio management initiatives: Strategic Global Offers are now a major contribution to both topline and margin. But, as we have written before, question marks remain about two of its service lines: Sogeti and Capgemini Consulting (CC), which also are its most cyclical activities:

  • Sogeti is looking to accelerate its transitioning from a staff augmentation business to a specialized business, with testing, and to a lesser extent security, as key drivers. It is working on a new business plan to accelerate its focus on several key offerings
  • Resuming growth at Capgemini Consulting will probably take some time: CC has been aligning around digital transformation and SMAC, mirroring similar activities in its Apps businesses. But so far this has not helped CC resume growth. Maybe acquisition in the U.S. could boost CC (with Capgemini very much wiser than it was back in 2000 when it acquired Ernst & Young).

Capgemini remains the only large Europe-headquarterd IT services vendor (and one of the few in the world, along with Accenture and IBM), which has achieved the transition to an India-centric model. Capgemini's execution on its execution demands acknowledgement - and financial markets are doing so: Capgemini's market cap is ~€11.3bn, representing a 2014 PER of 19.5.

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