Capgemini said it would be management’s priority to turn around the North American business during 2005, to get the operation to an operating breakeven in the second half of the year. It also aims to achieve revenue growth of 10% in 2005, which would mean growing to E6.92 billion, and to generate a marked improvement on its operating margin of 2.35% in the second half of 2004. Capgemini’s North American operation reported an operating loss of E32 million in the second half of 2005, equivalent to the first half.
Despite the optimistic outlook, Capgemini’s financial performance worsened in 2004. For the 12 months ended December 31, the net loss widened 82% to E359 million, on revenue that grew 2.7% at constant rates to E6.29 billion. Bookings were down at the end of the year to E10.45 billion, from E11.5 billion in 2003. Capgemini’s operating margin for the year also declined to 0.9% from 2.7% in 2003.
On a positive note, the company’s cash position improved during the year, ending the period with E402 million in net cash, compared to E266 million in 2003.
Capgemini has failed to keep pace with larger rivals such as CSC and Accenture, due partly to its lack of scale in outsourcing services. However, during 2004, the company began to rapidly expand its offering, and this now accounts for 33% of total revenue, up from 21% in the previous year. It has signed recent multi-billion-dollar outsourcing projects with the UK Inland Revenue, and Schneider Electric, as well as a landmark $3.5 billion business process outsourcing contract with TXU. At the end of 2004, the company grew its backlog of work by 40% to E14 billion.
In a statement commenting on the 2004 results, Capgemini said: 2004 was a year of transition and does not yet reflect the full-year effects of either the stabilization in pricing or the improvement in the utilization rates since September, or the drastic measures taken to improve the cost base.
Bearing this in mind, the E359 million loss for the year included a E127 million charge taken for staff severance, and a reduction in office space. Despite the unspecified headcount reduction however, Capgemini ended the year with 59,324 people, up from 55,576 in 2003. This would almost entirely be as a result of its recent expansion in outsourcing.
However, there remains uncertainty over how quickly Capgemini will improve its operating performance. In January 2005, credit ratings agency Standard & Poor’s cut its rating on the company from BBB-, the lowest investment grade, to BB+, which is considered the first rung down into junk territory. The company said the outlook is negative because it does not expect its margins to rise quickly enough to sustain the previous rating. S&P expects Capgemini’s operating margin to be more than 3% in 2005.
