By Stephen Phillips Cap Gemini SA’s shares plummeted 11.69% yesterday after Europe’s biggest IT services firm warned analysts that third-quarter sales in the US and UK were worse than expected. Cap’s shares dropped by 20.1 Euros ($21.47) to 151.9 Euros ($161.58) on the Paris Stock Exchange, at one point, triggering an automatic 15-minute suspension of […]
By Stephen Phillips
Cap Gemini SA’s shares plummeted 11.69% yesterday after Europe’s biggest IT services firm warned analysts that third-quarter sales in the US and UK were worse than expected. Cap’s shares dropped by 20.1 Euros ($21.47) to 151.9 Euros ($161.58) on the Paris Stock Exchange, at one point, triggering an automatic 15-minute suspension of trading in the stock. The firm has used a series of secret briefings with analysts in the last two weeks to pre- announce disappointing US and UK sales for the three-month period. Cap could not be contacted before ComputerWire went to press last night to offer further details.
Frederic Sauvegain, head of trading at Parisian investment bank, Oddo & Cie, told financial news service, Bloomberg, that Cap has downgraded full-year sales expectations for 1999 from between 4.5bn and 4.6bn euros ($4.81bn to $4.9bn) to between 4.4bn and 4.5bn euros ($4.7bn to $4.81bn). The revised projections would represent between an 11.1% and 13.6% gain on last-year’s sales of 3.96bn Euros ($4.23bn) – considerably under the 20% growth forecast in January, though nearer to the revised 16% forecast put out by Cap in July.
The UK is Cap’s equal-largest market, alongside its domestic French business – accounting for 24% of sales. In fiscal 1998 UK operations added the most staff across the whole group and the British head count now stands at 8,500.
The firm’s lackluster performance in the US is a long-standing anomaly, though, for a company it would not otherwise be over- stretching the point to describe as a European success story. Cap grew its revenue organically by 28.6% in 1998 to reach FFr25.94bn ($4.04bn) – its highest level since 1993. And its operating margin last year put on 2.2 points to 10.3% – figures virtually unrivalled among its similar-sized rivals.
In June the firm carried away the prestigious accolade of European Company of the Year, voted for by journalists in the European Business Press Federation from a list of 5,500 contenders. Cap impressed on five performance yardsticks: return on equity; operating profit; profit per head,; average change in net profit per head over three years; and changing employee numbers.
In the US though, the largest national IT services market accounting for 40% of demand, Cap ranks among the also-rans. Earlier this year it placed itself between 12th and 15th place in a revenue league table of player in the US market. The company reputedly prizes America as its next great bounty but the prize has repeatedly eluded its grasp. In its financial results for the first half of 1999, Cap Gemini America, the privately-held US subsidiary of the Cap Gemini Group based in New York City, posted a 6% revenue fall – a conspicuous black mark in an otherwise rosy sales ledger. Across the group, net income was up 59.4% at $1236.1m and revenue rose 16.1% to $2.2bn.
Yesterday’s news had analysts puzzled. Dean Davison, a specialist in IT outsourcing at market watcher Meta Group left Cap’s US headquarters after an internal briefing impressed by the unit’s ambition. The firm had instigated a corporate overhaul in December 1998, redeploying staff on a regional basis and configuring departments around vertical industry sectors to galvanize sales. Since then though, Davison said, the firm has dropped off the radar screen in the 50 or more outsourcing contracts he has scrutinized – though he points out that outsourcing makes up less than 30% of Cap’s US business. He has not looked at recent systems integration contracts in which Cap might have been in contention.
Apart from picking up New Jersey telecommunications service firm, Beechwood Inc in April, Cap has been conspicuously quiet on the acquisitions front in the US. Cap needs to go on an acquisition spree to build visibility and sales in the US, Davison said. Organic growth in the US market is something no-one has ever done successfully, he added.
Cap Gemini America’s 1998 revenue stood at $623m for 1998 – up 33.5% on the previous year. Operating profit for 1998 was $66.3m showing a 10.8% increase on 1997, the largest year-by-year increase in four years.