Capgemini News

The Board of Directors of Cap Gemini S.A., which met under the Chairmanship of Serge Kampf in Paris on February 25, 2004, reviewed the 2003 final and audited consolidated financial statements of the Cap Gemini Ernst & Young Group.

(*) 454 million euros before Transiciel consolidation

As at December 31, 2003, the Transiciel financial statements were consolidated into CGE&Y, as the Group acquired a 93.32% interest in Transiciel as of December 18. Effects of this consolidation are only limited to the Group’s balance sheet and cash position and do not affect the income statement for the period.

• 2003 consolidated revenue for the Group is 5,754 million euros showing a 12.5% decrease at constant exchange rates and perimeter compared to 2002 and a 18.3% decrease at current exchange rates and perimeter.
• Operating income is 155 million euros, a 36% increase versus 2002 level of 114 million euros; thus operating margin is 2.7% in 2003 against 1.6% in 2002.
• The Group’s net income is -197 million euros, taking into account namely 251 million euros expenses mainly related to restructuring charges (141 million euros resulting from headcount reduction and 70 million euros from the ongoing office space rationalization program launched in 2002), a net financial expense of 14 million euros, an income tax charge of 47 million euros and a goodwill depreciation charge of 38 million euros.
• Before the consolidation of Transiciel balance sheet, the Group’s net cash position amounts to 454 million euros at December 31, 2003, which is comparable to the 465 million euros at December 31, 2002. This was achieved despite the 297 million euros of cash outflow related to restructuring. Transiciel financial debt of 188 million euros brings the Group’s net cash position down to 266 million euros as at December 31, 2003.

Overview of 2003

For the third consecutive year, the IT services industry suffered the effects of an unfavourable economic environment: despite some encouraging signs in the U.S., the general economic conditions did not elicit a clear recovery in IT investments, which had collapsed following the end of the “Internet bubble”. Even if we were able to observe a slight pick-up in demand at the end of the year from telecoms operators and the financial services sector, it was only the public sector that significantly increased its IT spending in 2003.

In this challenging context, Group’s activity has not stabilized during 2003 as management had initially anticipated, and revenue for the second half-year was down 8.3% versus the first half-year at constant rate and perimeter. However, the seasonality effect, which traditionally benefits the fourth quarter over the third quarter, was stronger in 2003 (+5.8%) than in 2002 (+4.7%).

Analysis of bookings shows that half of the 2003 order intake (11.7 billion euros including 4.7 billion euros for the “Aspire” contract signed with Inland Revenue in December) relates to outsourcing. Even if this will improve the visibility of the Group business over the next years, these contracts hardly impacted 2003 sales as most of these were signed at the end of the year. Outsourcing revenue represent 30% of Group’s 2003 consolidated revenue versus 27% in 2002. On the other hand, the Project & Consulting business continued to decline in a market which has failed to show any of the signs of recovery which were expected at the beginning of the year. Project & Consulting accounts for 62% of Group’s consolidated revenue in 2003 versus 67% in 2002.

Operating margin improved to 2.7% in 2003 from 1.6% in 2002 despite a significant decline in the top line. This improvement was made possible thanks to additional capacity adjustments and ongoing efforts to reduce cost structure as reflected by the lower level of indirect expenses (28.9% of consolidated revenue in 2003 against 31.1% in 2002). The geographic breakdown of the business shows a significant improvement of operating performance in the United Kingdom, in Central Europe and in the Benelux countries, while Nordic countries and Asia-Pacific operations have been stabilizing during the year. Conversely, performance of North American and French operations deteriorated in 2003 : drastic actions have been taken mid-year relating to management, organisation and cost structure streamlining, the impacts of which will be felt progressively in 2004.

Even if Group’s performance improves at a lower pace than expected, significant progress has been made in executing the strategy, as illustrated by:

• the acquisition of Transiciel - the Group currently holds 96.71% of the share capital (95.13% of the voting rights). This acquisition doubles the size of Local Professional Services business, Sogeti, a subsidiary created at the end of 2001. The acquisition confirms the Group’s leadership in Europe in a segment representing 20% of the global IT services market;
• the signature of the Aspire outsourcing contract. This outstanding 10-year contract worth 4.7 billion euros demonstrates the Group’s ability to successfully compete against the global leaders in a business where client references are key for future wins.

Outlook

Outsourcing should be the key growth driver for the market as well as for the Group, however this should not help improving profitability. Indeed, increasing exposure to this business requires significant commercial efforts; in addition, full effects of outsourcing contracts are generally not delivered during their initial phase.

Local Professional Services business should keep growing; the first half-year priority will be to successfully integrate Transiciel business.

The first signs of firming demand in Consulting could be an early indicator that our clients will resume investing. However, it is too early to anticipate the extent into which this will benefit to our Project & Consulting business.

The management has set itself the priority of growing the top line during 2004. The business at the beginning of this year is still feeling the effect of the low level of at the end of 2003. This is why the savings generated in 2004 as a result of the ongoing efforts to streamline the cost structure will be reinvested into sales development. The improvement in operating margin will thus be dependent upon the pace at which the Group succeeds in delivering organic top line growth.