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Capgemini SE
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Ladies and gentlemen, welcome to the Capgemini 2019 Q1 Revenue Conference Call. I now hand over to Mr. Paul Hermelin, Chairman and CEO. Sir, please go ahead.
Thank you, operator. Hello, everyone, and thank you for attending the presentation of our first quarter results. As usual, I will give you some highlights of our results; then Carole Ferrand, group Chief Financial Officer, will guide you through the details of our Q1 performance. I'm also with Aiman Ezzat and Thierry Delaporte, the 2 Chief Operating Officer that will participate to our Q&A session at the end of the presentation.Starting 2019 in line. We started the year in line with our objective. First, our revenue growth is 6.7% at constant currency. Our revenues amounted to EUR 3.441 billion this quarter and the growth momentum continued since many quarters. Our ability to grow in the particularly tough comparison basis, demonstrate the stronger growth profile of the group. I will tell you more about the geographies in a few minutes.Second, our bookings amounted to EUR 3.367 million (sic) [ billion ] this quarter, growing at 2.7% on a pretty demanding comparison basis, as our bookings had increased by 15.3% in Q1 last year.We continue to strengthen our leadership in Digital and Cloud, our main growth engines. Our activities in this field grew by 20% year-on-year. We continue to go up towards 50% of our revenue this year.A few highlights of the quarter. Among the drivers of our growth, we had 35% growth in Cloud. Cloud is a huge market, and we recently released our Capgemini cloud platform designed to support the crucial stages of every cloud journey, from build and migration to managing application and infrastructure services in the new cloud environment, supported by extensive automation.We also enjoyed a strong increase of 60% of our revenue in artificial intelligence. In this field, we launched in February Perform AI, our new suite of solution and service with around 100 use case to address the real opportunities and the critical challenges which company confront today.Markets of primary focus for Perform AI are manufacturing, financial services as well as the transversal customer experience domain.Last September, we launched Capgemini Invent, our new digital strategy and transformation global business line. This quarter, Invent posted a 30% growth, while triggering many business opportunities for the rest of the group.To strengthen our position in cybersecurity, 500 elite cybersecurity professionals joined the group, thanks to the closing of the acquisition of Leidos Cyber in February. We have an ambitious industrialization agenda and we deployed our automation solution in more than 180 client project over the quarter across our businesses.We have reached the worldwide leader status in many Gartner's 2019 Magic Quadrant such as data and analytics, CRM and customer experience.Moving to our partners. Microsoft, SAP and Adobe have embarked on joint effort to connect data and gather powerful insight fueled by AI. And we are proud to be part of the Partner Advisory Council set up to accelerate this initiative.Being recognized as a thoughtful leader is a must have in our industry, and I'm pleased that for the second consecutive time, our Capgemini Research Institute was ranked 1st by independent research firm, Source Global Research, beating 22 other leading consultancies and technology firms.I invite you to take a look to our most recent report, which takes an in-depth look on artificial intelligence for the automotive industry. Finally, you know attracting and retaining talented people is an industrial challenge today. We are working actively on enhancing our attractiveness as an employer of choice. We launched our continuous listening approach that now impacts 50,000 of our employees.Our new performance model with quarterly promotion allows us to recognize and accelerate our talents to retain them and win the talent war. Our goal is to impact all our 120,000 freshers and juniors this year.Some wins of this quarter. We are selling on 2 fronts simultaneously. First, the advanced Digital and Cloud deals that continue to expand. Our clients show insatiable appetite for Digital, which mean more business-side buyers and a need for deep sector expertise and sector-specific solution.Second, often combining digital technologies and core system service, the managed multi-year contact dynamic remains very important as a foundation of our IT service business. So let's look at some example of digital and cloud wins. At Panera, an American chain store for -- of bakery café, we have been chosen to deliver the next generation of their stores based on digital technology, building on our deep knowledge and experience in the restaurant sector.For Airbus, defense and space, we are developing a solution to manufacture components directly into the space. We are providing the robotics intelligence, allowing conception and production from material to final structure for 3D printing and robotics in space.While in Financial Service, for EnterCard, we are modernizing the company's IT landscapes with micro service-based architecture. Now moving to multi-year managed contract. For National Grid, one of the world's largest privately owned utilities, we have been appointed as a strategic partner to provide development and maintenance of all their IT system and technologies over the next 5 years.In Manufacturing, BAE Systems Maritime and Capgemini begin a new partnership to transform the submarines business IT delivery. This will allow the company to take advantage of innovative digital technologies for better user experience, high service availability and to reduce the cost.Let's now look at geography. The group demonstrate the benefits from balanced growth engine across its geographies and sectors. Overall, in Europe, given our pipeline and discussion with client, we are very pleased with the level of demand. We see investment continuing and we are confident. You see the detailed figures of our good performance in Europe this quarter on the slide.In France, we are now moving from a market leader to a market shaper. We are notably leader in manufacturing and it boosted our growth this quarter. In the United Kingdom, I'm satisfied to see growth in both private and public sector. North America growth of 7% primarily reflects a very demanding comparison basis. NA was growing 14.8% last year. However, it's a little bit slower than I would like, and I expect North America to improve in the second half, thanks to an easier comparison basis and an acceleration in manufacturing and consumer goods.We continue to grow in Latin America, and we see good traction in Asia Pacific. To conclude, we deliver a good start of the year, in line with our road map for 2019 and we confirm our outlook. Our revenue growth at constant currency between 5.5% and 8% with an M&A contribution of 1 to 2 points.The lower end of our constant currency outlook assuming around 1 point of M&A, an operating margin between 12.3% and 12.6%, an organic free cash flow for the year in excess of EUR 1.1 billion.And now I hand over to Carole who will guide you through the details.
Thank you, Paul, and good morning or good afternoon, everyone. I'm pleased to say that it is a solid start for the year. With revenues of EUR 3.441 billion, our constant currency growth reached 6.7% in Q1. It has shown by -- a 5% organic growth and it includes 1.7 point from M&A.Unlike in the past quarters, FX has become a tailwind this quarter with 2.5 points of positive impact, which can be fully attributed to the strengthening of the U.S. dollar against the euro. On a full year basis, let me remind you that we expect a 1 to 2 points contribution from M&A, with almost 1 point secured as of today with Leidos Cyber.At this stage, we continue to anticipate around 1 point of positive impact from currency. Looking now at our constant currency growth by regions. North America grew by 7%, which remains good performance considering the high comparison basis plus 14.8% growth in Q1 last year.TMT and Services sectors proved quite dynamic in last quarter as well as Financial Services and Energy & Utilities to a lesser extent. We are pleased with our 6.4% growth in the U.K. and Ireland, especially given the persisting uncertainty around the Brexit scenario.We achieved growth both in the public and in the private sectors. In the private sector, this was primarily driven by the Energy & Utilities and Financial Services sectors. Continuing the positive trend observed in last quarters, the demand remains robust in the public sector.France remains well oriented with a 4.8% growth, with strong growth in the Manufacturing sector. Demand for Digital cloud remained strong and drive applications and technology business in high single digits. The rest of Europe posted another quarter of robust growth at 6.3%. This performance remains pretty broad-based in terms of sector, led by Energy & Utilities and public sectors. And also in terms of geography with solid performance in Germany and the Nordics, and another quarter of positive good growth in the Benelux.Finally, Asia Pacific and Latin America returns to a double-digit growth rate with a 13.7% increase, mainly driven by Financial Services, Manufacturing and Services.Moving on to our constant currency growth by business lines. First, let me remind you that we have adopted a new taxonomy for our business lines since January 1 as announced with our 2018 results. These changes are described in more details in the appendix section. So it's just a quick recap.Strategy and transformation include all strategy and transformation consulting services and corresponds to the Capgemini Invent scope. Application and Technology comprises all activities formally reported under Application Services and the related activities.Operation and Engineering is made of Business Services, including BPO and platforms, infrastructure services as well as digital engineering and manufacturing services.Back now to our performance in Q1 with some comments on the evolution of the activity level by business line. This activity level is measured by constant currency and growth of the total revenue generated by each business line. So before the elimination of internal dealing between business lines.Strategy and transformation, which represents 7% of group revenues, posted another quarter of strong growth of its total revenues, plus 29.7%. This performance was not only supported by our acquisitions, but also by an unfading demand from clients to support their digital transformation.Application and Technology, our main business lines, with 72% of group revenues remained [ strong ] by clients' demand for Digital and Cloud across all regions, with total revenues up by 7.1%.Finally, operation and engineering, which accounts for 21% of group revenues, record a slight positive growth with total revenues up by 2.1%. More specifically, infrastructure services and business services activities are confirming the stabilization, while digital engineering and manufacturing services continue to grow nicely.Let's have a look now at our constant currency growth by sector. Financial Services reported a good 6.3% growth, primarily fueled by the dynamism of the insurance sector. With a 10.7% growth, Energy & Utilities achieved a strong quarter, most notably in North America, U.K. and Ireland and APAC and LATAM.Manufacturing remains well oriented with a growth of 6% and a particularly strong performance in France this quarter. Consumer Goods and Retail is reporting the lowest sectorial growth this quarter, just below 4% on the back of a high comparison basis in Q1 2018, which was 18.9%.Public sector recorded a 4.6% growth, mainly supported by rest of Europe and the U.K. The TMT sector is showing some sign of improvement with a robust 9.1% growth in Q1 after a muted performance in 2018.And last but not least, Services achieved a strong quarter with an 11.7% growth. This new denomination actually regroups the remaining sectors of the service industry such as transportation, hospitality, health care or professional services.A few words now on our bookings. Bookings for the quarter stand close to EUR 3.4 billion. Given the outstanding comparison basis, Q1 2018 was up 15.3%, reflecting a marked seasonality last year. This represents a 2.7% growth at constant currency. This is broadly in line with our expectations since we didn't sign very large deals this quarter as expected.Moving on finally to our headcount data. Group total headcount grew 4.6% year-on-year to reach close to 213,000 employees at the end of March. With this, our revenue per employee continues to trend up. The offshore growth was 5.3%, while onshore growth was close to 4% driven by our digital and cloud activities.As a result, our offshore leverage remains essentially stable at 57%, up a couple of [ 10 ] basis points year-on-year and down by the same amount on December 2018 levels.Attrition in Q1 at 20.1% is in line with full year 2018 average and sequentially down versus Q4. Also starting January 1, we have updated our methodology to track attrition in order to homogenize across our geographies how certain cases of separations are accounted for and to be closer to industry practices.Under this new treatment, attrition for the quarter is at 19.1%, which would be the basis of comparison for the quarters to come. So overall, a solid performance for this quarter 2019. And as Paul mentioned, we confirm all aspect of our full year guidance.We are now ready to take your questions. Operator, can you please open the door for questions?
[Operator Instructions] We have our first question from Pollard, Stacy from JPMorgan.
Yes, Stacy Pollard here. Two quick questions, hopefully. One, North America looked a little bit weak. I thought there would be more inorganic contribution from LiquidHub and Leidos. I probably got that wrong, so maybe can you help set us straight on what that was, and just overall organic growth rate by geography, of course, especially North America? And then my second question, kind of speaking of inorganic, can you discuss the current environment for M&A for you? Are there reasonable targets, either desired skill sets or by valuation? Curious on your thoughts there. And then what are your thoughts on the digital marketing environment, let's say versus Accenture's more aggressive moves in this sector?
Just -- sorry, Stacy, but we do not report organic growth by region. North America, as I said, I would think it was a little bit softer than expected. But in terms of inorganic contribution, I remind you that LiquidHub was closed mid-March last year. So we had 2.5 months. And Leidos Cyber, mid-February, so you have half a quarter.On the M&A landscape, I would say we find targets. Today, the question is more not to distract current operation, which are quite buoyant, but we have -- at least we have regular acquisition review board and we find valuation to be more reasonable than a year ago. So today we have some pursuits going on. Your question on digital marketing, I would just say, we as Capgemini is more an IT company than a consulting company to start with. So we have started on customer experience with mastering well the technology ingredients of digital marketing, and we are doing extremely well. Our growth in customer experience matches our 20% overall growth in Digital and Cloud. So we are doing well. We probably need to acquire more consulting in marketing that we talk directly to the Chief Marketing Officer. So it's -- we are not hungry for data or for creative people, we must reinforce our consulting Invent to enter into a direct dialogue with Chief Marketing Officers. And today, we are seen as a provider more of technology for digital marketing that are digital marketing consulting experts.
Next question from King, John from Bank of America Merrill Lynch.
It is John King from Bank of America. So 3 questions, please.
You're not King John?
Yes, not yet. So the first question was on the pipeline for larger deals. Obviously, you did a lot of work, I think, in integrating the business a lot more last year. So just wondering whether that's had an impact on the large deals that you see in the pipeline? The second one is related to that, I think a follow-up on Stacy's question. So Invent is 7% of revenue. How big should that be in your mind's eye. Could that be something that could be 20% of revenues if you did the right -- if you found the right target? How, I guess, it feels a bit small, but how much bigger would you like it to be? And the third question was just on North America. I guess, most players out there are not seeing weakness in North America. So I'm wondering if you see that as being some execution-related issues, or what specifically do you think has been the problem for you in that region in the first quarter?
So just to -- I'll start with your second question on Invent target size, and I will leave to Aiman to answer on large deal and if you want to add something on what he sees of the NA demand. Invent today is well-equipped in Europe. We still find in spite of the LiquidHub acquisition a little shy in the U.S. And we most probably reinforce our experience in digital marketing. So my view would be 7% is certainly not the target. 20% is not in reach, and we don't want to get there, but I would just say 10% to 12%. So Aiman, on large deal and consequence for better focus and potentially some words on NA demand.
Yes, I mean, on the large deal, we see that we have seen the pipeline of large deal increasing, which is true. I mean, we always have large deal, but I think here more -- it's more in the number of large deals that we see. And the fact that we see more of the larger one that have disappeared from the pipeline, I'd say for the last 3, 4 years. So that for us is positive news. Come with it, of course, with large deal is -- becomes a timing of the decisions, et cetera and things like that. But we're still quite positive about the fact that we'll be able to close some of them to fuel some of the H2 growth that we expect. So I'm quite positive on that. I remain quite positive about -- with our new operating model, our ability to be able to shape more large deals by combining our different business line capabilities. And that I really see a difference in traction compared to 1 year ago, John. Now we have to convert them and that's what we're in the process of doing.When I come to North America, I mean, Paul stated, Carole stated, it's a tad slower than what we'd like. The underlying comparison basis is -- was pretty tough. We talked about 18 months ago, the fact that we are in Christmas scenario and everything was going, so we're coming to more, say, a normality from that basis. I'm quite confident of us getting back where we expected to be in the second half, right? So some acceleration in the underlying growth rates in North America, definitely expecting in the second half and we're quite confident with that. So there is no surprise from that perspective, John.
Next question from Briest, Michael from UBS.
Just following up on North America. When you're talking about an acceleration, are you talking about an acceleration as reported or at constant currency, but including the benefit of Leidos for a full quarter? And then I've got a question on talent, but just if you could address that.
Oh, we were -- Aiman?
Yes. In North America, I'm talking about underlying. When we talk underlying, it's the organic. As you know very well with -- the acquisition can have more or less impact. But today we basically probably have less impact in Q2 and moving forward unless we make another acquisition in North America. So basically when I say basically getting to where we would like to be is more on the underlying organic growth that we'd expect in North America, Michael.
Okay. And if I said that North America looks organically to be in somewhere between 3% and 4%, does that seem crazy to you or reasonable?
Not crazy...
I said, we do not intend to report, so you make your math...
No, I'd say not crazy, but just I'm not confirming [ what you said ] but basically if within 1 point of range, you're more or less correct.
Okay. And then just on the organizational changes. I mean, obviously, there's a rebranding element to this, but Sogeti as an organization is no longer sort of visible. What changes have you made in operational level that seems to be now split across the application services and the other division, operations and engineering?
Paul, you want to take that or you want me to take it?
Yes, I'll take it, even if it is reporting to Aiman. We have carefully protected the Sogeti entity, but we have put them in countries or in sectors so that if we need a final arbitration on an account relationship, it can be done without an escalation to the top. But all Sogeti operations have been kept intact with the existing perimeter in all geographies. But they no longer report a globally view because then any conflict, any arbitration had to be taken at Aiman level. So now, I take an example, Sogeti France it is in a pretty healthy situation, reporting to the Head of France. And if we have some tactics for an account, it is well-designed. So we want the organization to be client-centric, which mean the Head of France can organize. I take an example of large account, Airbus, we have significant Sogeti service delivered to Airbus. We have massive service delivered by apps and infra. And Jérôme Siméon is in a position to coordinate that, but the Sogeti perimeter has been strictly maintained and we track the performance of Sogeti.
And just to clarify finally, was this a change that you introduced middle of last year when you went to the vertical model or is this more January 1?
No, no, it was organized last July. You had a question on attrition or people, you -- talent you said?
Sorry. Yes, I mean, I'm taking up a lot of the time. But looks like offshore headcount was broadly flat quarter-on-quarter. And I know you talked about some retention initiatives. Can you talk about the hiring environment, salary pressures and things like that?
Thierry here. No, the offshore headcount is actually growing. It continued to grow. We've seen a nice growth over the last 3 quarters in India, and it will continue. What we see for the quarters to come shows that actually there will be possibly a slight acceleration of the growth. So we continue to grow. We grow onshore, but we grow offshore. So that's what is not changing dramatically is the mix. The leverage stay more or less where it is, which reflects also the evolution of our portfolio. More needs for resources onshore and nice traction on the offshore side on the larger deals.
And let me just remind you what Carole told you. Offshore growth headcount was 5.3%, while onshore growth was 4%. The big difference is now onshore grows again, but 5.3% was higher than onshore headcount growth.
I was talking about Q4, but it's fine. That's great.
[Operator Instructions] We have one more question from Daure, Laurent from Kepler Cheuvreux.
In fact I have 2 questions. The first is on the Asia PAC and LATAM performance, I think it's been a while since you published such a great quarter. So I was wondering if there was a specific large deal that is ramping up for the coming quarters? How sustainable this performance could be? And my second question is -- sorry, I'd like to go back on the U.S. again. You talked about an improvement later in the year. So I was wondering if in terms of organic growth, you expect -- do you wish to be still dilutive to the group overall organic growth or not? And if your confidence in the improvement is backed on deals that you already signed or if you need to sign deals during the second quarter. So a little bit more granularity on that would be really helpful.
So Aiman on APAC, and if you want to start on NA.
So on APAC, no, it is not linked to a deal. First, we have growth in LATAM and we continue to have growth in LATAM, so that's good, both in Mexico and Brazil, which are the 2 largest geographies. So I think we have done the turnaround in LATAM and we feel pretty confident about continue to grow now. And in APAC, to be frank, we have pretty good growth in many countries. So we have, I think, out of 6, we have probably 4 countries that are double-digit plus, and one of them is at 25%. So overall, we have traction across with a very good pipeline of deals and expected good growth in Q2 and for the rest of the year.On North America, to be frank, the message is basically we see it bit softer with acceleration in H2, Laurent, so we consider it will not be dilutive to group as we go to Q3 and Q4.
But do you need to sign specific deals or is it just a matter of comps?
You always have to sign some deals. If you don't sign anything in the services the top line goes down. So are we dependent on some very large deals that -- basically, is it -- are we dependent on some very large deal, and if we don't sign them, this result will crumble? Absolutely not. Okay? We have a good strong underlying business. What we need is some acceleration. And yes, some larger deal we'll have to accelerate more. But overall, we are quite confident of being able to achieve it, Laurent.
Next question's from [ David Nicola. ]
The first one is regarding infra management and BPO. You mentioned that it was stabilizing. I understand that they are stabilizing in terms of decline, but should we expect them to put them out in the coming quarter or to still stabilize at current level? And my second question is regarding other Europe. You posted a decent growth in Q1 compared to, I mean, a weaker performance in Q4 last year. I also remember that you mentioned some concern regarding several sectors ahead of '19 and apparently you're doing very well. So what drove that growth? And what should we expect? Did you have something particularly exceptional driving Q1 growth there or should we expect it to continue the same?
Thierry, on infra and business services.
Yes. So indeed, regarding the infrastructure business, we had engaged on a transformation of our business, rotating the portfolio towards the cloud and cybersecurity. We knew it would drive some adjustment of the revenue growth and decline, in fact, in 2018. We stopped the decline in '18, and we are in this phase of stabilization trending towards small growth. Same thing with Business Services, also in transformation. In 2018, we were declining. We are now back to growth and we'll continue to grow in the next quarters.
So clearly, it's not stabilization of the decline, it is stabilization of the revenue adding progressively to regain growth. Okay?
So just -- sorry, an add-on on that because I was surprised to see that the constant currency growth of operation and engineering was only 2%. If it's not declining, I mean -- [indiscernible] digital manufacturing supposed to grow fast, I would say?
Yes, but it's so -- it's very small compared to the size of the addition of 2.
Exactly.
And on other Europe, you have a mixed situation per country. We had some improvement in southern Europe, some less growth in some other, but overall the demand is strong. We are quite pleased with Europe. As you know, we were monitoring the auto situation. And notably, because of the end of last year, the first quarter was not alarming at all, we had good bookings in auto, still to be monitored. It's a sector we will monitor all year long, but the first quarter was quite reassuring.
Next question from Adam Wood from Morgan Stanley.
I've got 2 if I could. Just as to [indiscernible] on the organic growth in Q1 were 5%, which is towards the lower end of the implied organic guide for the full year. Could you maybe just give us a little bit more insight in terms of you've got a good pipeline, a strong pipeline with some larger deals in there as well. In terms of what's been signed Q2 to date, what needs to be signed? Where the confidence is now being at the top or lower end of that full year organic guidance, that would helpful. And then just secondly, maybe following up on Michael's questions about talent. Given the need to hire more onshore, is the strength of digital still enough that you can pass those -- the kind of wage inflation that you're going to suffer on that on to clients. How much have you got? Can you manage to starting to move some of the more mature digital offerings offshore. Again, I think if you could just help us understand how you're managing that and what that battle looks like that would be helpful.
So Adam, 2 remarks. We will try probably to help you with the guidance in July, but really I would not start to guide you within the range at the end of the first quarter. It's too early. And second point on talent. First, you're right. High level of recruitment in Europe and in U.S., but we find the talent and we close our remuneration adjustment cycle. And it was not -- it was a little higher than last year, but with -- at a level where it can be absorbed by the pyramid rejuvenation. So we had no concern. We recruit people. There were a few bottlenecks in a couple of countries on some growth, but today I do not hear that. We are growing and we find the people.
So to paraphrase you, Paul, on that first question. I mean, in terms of what your expectations were for the first quarter, there's nothing here that would lead you to one end or the other of the range for the full year. Everything is still open?
Nothing strong enough to have us guiding you within the range at the end of the first quarter.
Next question from Alex Tout from Deutsche Bank.
Firstly on North America. Is it very much the second half acceleration that you're expecting there? Or should we see it already in the second quarter? And then secondly, if we just cut the growth by another way and look at the sectors, which sectors are you looking at to drive acceleration into the second quarter, into the second half? And which sectors do you see maybe more at the top and more at risk of slowing down?
So the first point, just to say on -- and I keep repeating, first point you should have in mind on Q2, it was the highest comparison base of last year. So the -- we said 14.8% in Q1. I think we are at 19% growth in Q2 last year. So the comparison base is even more demanding, which is why we are prudent on Q2 growth. Frankly, the second quarter last year was so strong, it will be a difficult level of comparison. So quite more confident on H2, which will compare to more normal level of activity. We mentioned insurance as doing pretty well. And we have said Retail and Manufacturing in the U.S. So at the end, it's a significant share of our portfolio -- U.S. portfolio. Okay. Do we have a last one, operator?
We don't have anymore questions. Back to you for the conclusion.
Okay. Thank you. So thank you, guys. Thank you for attending this call. We -- Carole will start the roadshow activity in France, Thierry in London. You will meet with us in several tech conference and we'll probably see some of you at the general assembly. So thank you very much indeed, and have a good evening. Thank you.
Thank you.
Ladies and gentlemen, thank you for your participation. This concludes this conference call. You may now disconnect.