Spring is the season that European IT services companies traditionally report their second half results – months behind their US counterparts.
But for 2003, very few had anything other than lacklustre results to report, in contrast to the solid increases in revenues and profits posted by some of their US rivals, such as Accenture and CSC.
None were more disappointing than Cap Gemini Ernst &Young’s. It had begun the decade with an ambitious plan to challenge the US IT services elite when it bought consultancy Ernst &Young for $10.9 billion.
But it is still struggling to recover from that ill-conceived acquisition and following year-after-year of revenue falls and restructurings. In the final quarter of 2003, revenues fell by a further 17% to EU1.35 billion.
The company continues to blame the “unfavourable economic environment” for its plight, but its poor performance is only matched by long-troubled Getronics, which only narrowly avoided bankruptcy during 2003.
In particular, Cap Gemini attributes its ongoing problems to the continuing decline in demand for consulting services, which accounts for 21% of the company’s revenue.
At the same time, while the company’s activities in the telecoms and financial services sector showed tentative signs of recovery at the end of the year, only the public sector area of its business showed significantly increased sales during 2003.
This was partly reflected in the surprise EU4.7 billion Inland Revenue outsourcing contract win over equally troubled EDS, but this has yet to contribute to Cap Gemini’s bottom line, as it will only take over from EDS in June 2004.
It will nevertheless need to win many more outsourcing deals – and quickly – if it is not to lose its long-held crown as Europe’s largest IT services supplier in the very near future.
Indeed, the company saw bookings fall during the first three quarters of 2003, until the Inland Revenue deal in the fourth quarter put a more positive complexion on an otherwise difficult year.
Franco-Dutch rival Atos Origin is snapping at its heels and threatens to overtake Cap Gemini if it cannot arrest its decline and deliver the top line growth that it has promised for 2004.
Although Atos Origin’s fourth quarter revenues of EU775 million fell far short of Cap Gemini’s EU1.39 billion, the gap will be closed this year following the completion of its acquisition of SchlumbergerSema in January.
Combined, Atos Origin’s and SchlumbergerSema’s revenues in 2003 added up to EU5.41 billion, just EU340 million shy of Cap Gemini’s EU5.75 billion.
But it may be a case of which company declines the slowest. In the fourth quarter, Atos Origin posted revenues down by 6% to EU775 million. It suggested that although “sentiment” has improved in the market, “actual spending continues to be restrained”.
As a result, Atos Origin is forecasting flat revenues for 2004, while it prioritises the integration of SchlumbergerSema.
The company is planning to increase the pace of integration with the rationalisation of human resources, finance and IT functions, the shedding of 2,333 jobs, and the closure of 35 offices and nine datacentres at a cost of EU150 million during 2004.
Like Atos Origin, LogicaCMG reported a modest drop in revenues too, but it issued a more upbeat forecast and outlook. Revenues fell by 3% in the second half of 2003 to GBP852.3 million, despite the acclaim heaped on the company for its integration of CMG, acquired in November 2002.
According to CEO Martin Read, LogicaCMG’s fall in revenue can be largely attributed to a poor performance in Germany, yet in all areas “the market environment is gradually improving, but clients’ capital expenditure is still subject to tight constraints”.
Like Cap Gemini, LogicaCMG is pushing hard into the outsourcing market, which independent analysts such as Richard Holway suggest will be the fastest growing sector of the European IT services market for the foreseeable future.
On the surface, hardware distributor turned services supplier Computacenter looks as if it was the only European IT services supplier to have bucked the downward trend, after it reported second half revenues up by an impressive 29% to GBP1.227 billion.
Over the full year, revenues rose by 29% to GBP2.48 billion, despite a fall in hardware prices of between 15% and 25%.
But a closer examination reveals that there was no hidden magic at work at Computacenter. Rather, its apparently sparkling results in 2003 were driven by two major acquisitions, rather than organic growth.
If the contributions of Germany’s CC CompuNet and Austria’s GECITS are stripped out – both were snapped up in January 2003 – Computacenter would have reported a 6.7% fall in revenues during the year instead of an increase.
Nevertheless, both acquisitions have helped Computacenter to decrease its dependence on the UK market, which now accounts for 59% of revenues in 2003 compared to 83% the year before, as well as helping it to drive further into the broader services market.
Soon, perhaps, both Cap Gemini and Atos Origin will be looking over their shoulder for Computacenter.