Capgemini On The Prowl For M&A As Energy Industry Woes Drag Down Sales

Capgemini plans to beef up its digital and cloud capabilities in North America through acquisitions that could add as much as $780 million to the company's top line over the next several years.

The Paris-based company, No. 6 on the CRN Solution Provider 500, said sales fell 0.6 percent to $3.29 billion in the third quarter ended Sept. 30, down from $3.31 billion in the same quarter last year, due in part to declines in utilities projects and the shale gas business in North America. The energy sector declined from 20 percent of Capgemini's North American revenue in the first quarter of 2014 to just 10 percent today, the company said.

"We continue to execute on all our strategic priorities, reinforcing our presence in digital and cloud, bringing sectoral knowledge and strengthening our industrial offering," said Paul Hermelin, Capgemini's chairman and CEO, during an earnings call Wednesday. "We're investing in automation, resource supply chain and overall operational efficiency."

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Capgemini's stock fell 7.3 percent percent in trading Wednesday to $83.52 per share. Results were announced before the Euronext stock exchange opened.

The consulting giant said it plans to use targeted acquisitions to boost its capabilities in North America around consumer products, retail and distribution, where its digital muscle still lags behind the manufacturing and financial services vertical markets. Capgemini said its acquisition strategy could result in up to $260 million of additional revenue per year for the next two to three years.

Capgemini also expects to take a big hit from re-insourcing efforts by HMRC, a U.K.-based client for Capgemini's application project and digital transformation services. The company plans to reduce its business with Capgemini by $218 million by mid-2017, creating a 1.2 percent revenue headwind for the company next year.

The company's Latin American resale business remains volatile, particularly in Brazil, where Capgemini sustained a 0.6 percent negative impact in the most recent quarter. Capgemini's services business, though, has been stable in 2016, and the resale business is expected to be less volatile in the next two quarters.

Capgemini's North American revenue grew by 0.2 percent to $1.02 billion as all sectors outside of energy and utilities reported 3.7 percent year-over-year combined growth, led by growth in financial services and steady traction in manufacturing.

Sales from the United Kingdom and Ireland plummeted by 16 percent from $600.6 million last year to $504.7 million this year due to a weakening of the pound and the anticipated negative impact on the public sector of the U.K.'s Brexit from the European Union.

Capgemini's French revenue grew by 4.3 percent from $625.7 million last year to $652.9 million this year. Revenue from the rest of Europe climbed by 4.8 percent from $803.3 million last year to $841.5 million this year, thanks to a strong performance in the manufacturing and automotive sector, particularly in Scandinavia, Central Europe and Italy.

Sales in Asia-Pacific and Latin America climbed by 3.8 percent from $258.3 million last year to $268.1 million this year as double-digit growth in the Asia-Pacific region outweighed a drop in equipment resale revenue in Latin America.

Application services revenue – which represents 61 percent of Capgemini's business – grew by 4.4 percent after factoring out changes in foreign currency exchange rates, thanks to demand for innovative offerings in France, Central Europe and Scandinavia. Capgemini said it signed a large application services contract with a major U.S. medical technology firm in the most recent quarter.

Revenue from other managed services – which represents 20 percent of Capgemini's business – fell by 3.3 percent on a constant currency basis as declines in infrastructure activities in the United Kingdom and Latin America were greater than gains in business services.

Technology and engineering services sales – which represent 15 percent of Capgemini's business – increased by 1.3 percent on a constant currency basis due to strength in the North America and the rest of Europe regions. And consulting services – which make up 4 percent of Capgemini's business – grew by 3.1 percent on a constant currency basis, excluding digital consulting missions from other business units.

Digital and cloud sales – which represented 29 percent of Capgemini's business across all units during the first nine months of 2016 – grew by 25 percent in the quarter on a constant currency basis thanks to a cross-business approach that leverages Capgemini's management consulting practice. The company said it has also recruited 20 senior digital executives in North America to boost its go-to-market capabilities.

For all of 2016, Capgemini said it expects sales to grow by 7.5 percent to 9.5 percent on a constant currency basis.