Release Date: July 26, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Capgemini SE (CAPMF, Financial) reported a stable operating margin of 12.4% year-on-year, demonstrating resilience in a soft demand environment.
- The company saw an improvement in revenue growth rates in Q2 across almost all businesses, sectors, and regions.
- Bookings totaled EUR11,793 million in H1, leading to a book-to-bill ratio of 1.06, indicating robust commercial momentum.
- Organic free cash flow generation improved significantly, amounting to EUR163 million in H1, up EUR216 million year-on-year.
- Capgemini SE (CAPMF) has increased its investment in go-to-market strategies and is well-positioned to capture the upturn in demand, particularly in generative AI projects.
Negative Points
- Revenues in H1 2024 were down 2.6% at constant exchange rates, reflecting a challenging demand environment.
- The company revised its growth outlook for the full year to a constant currency growth of minus 0.5% to minus 1.5%, down from the initial 0% to 3% guidance.
- The aerospace and automotive sectors experienced abrupt slowdowns, impacting overall growth expectations.
- The recovery in financial services is slower than anticipated, particularly affecting some of Capgemini SE (CAPMF)'s largest clients.
- The company faces ongoing price pressure in a competitive market, which could impact margins if not managed effectively.
Q & A Highlights
Q: Can you share more color on the deterioration of the outlook in the automotive and aerospace sector? Do you see it as a sustained deterioration or a knee-jerk reaction to increased uncertainty?
A: The aerospace sector is facing short-term challenges due to supply chain issues, but the mid to long-term perspective remains strong. The automotive sector, particularly in Europe, is experiencing a slowdown, especially in the EV segment. These are short-term adjustments rather than long-term trends. (Aiman Ezzat, CEO)
Q: What is driving the sustained strong cash conversion in an uncertain environment?
A: The H1 cash tax rate is not representative of the full year. We continue to focus on DSO improvement and working capital management. We reiterate our guidance of around EUR1.9 billion for FY 2024. (Nivedita Krishnamurthy Bhagat, CFO)
Q: How does the shift in the outlook affect seasonality in the second half, particularly from Q2 to Q3?
A: The recovery is there, but slower than expected due to abrupt changes in the aerospace and auto sectors. We expect to be back to low single-digit growth by Q4, which puts us in a good trajectory for 2025. (Aiman Ezzat, CEO)
Q: Can you comment on the visibility over the second half in terms of growth and factors that could bring you to the high or low end of the guidance?
A: We do not expect any return of discretionary spend this year and have built some cushion into our guidance to account for variability in the environment. (Aiman Ezzat, CEO)
Q: What is the assumption for North America into the second half, particularly given the presence of US elections?
A: We see a positive trend in North America and expect continued improvement in Q3 and Q4. The recovery in financial services is slower than expected, but we expect North America to be back to positive territory by the end of the year. (Aiman Ezzat, CEO)
Q: How sustainable is the positive financial result seen in H1?
A: While H1 showed positive financial results, we expect some more expenses in H2. However, we believe overall financial performance will remain strong. (Nivedita Krishnamurthy Bhagat, CFO)
Q: What is driving the improvement in the strategy and transformation business?
A: The growth in strategy and transformation is driven by client demand for strategic consulting in their transition towards a digital and sustainable model, supplemented by the growing interest in exploring Gen-AI opportunities. (Aiman Ezzat, CEO)
Q: How do you see the headcount evolving, and what is a healthy attrition rate in this environment?
A: We expect headcount growth to resume as growth starts to pick up. The attrition rate is stable and even below our operating environment, so a slight increase would not be a concern. (Aiman Ezzat, CEO)
Q: Can you elaborate on the challenges in the US banking sector and your win ratio on mega deals?
A: The recovery in the US banking sector is slower due to the mix of clients. Our pipeline for mega deals is strong, and we have closed some significant deals in H1 that will fuel growth in the coming quarters. (Aiman Ezzat, CEO; Olivier Sevillia, COO)
Q: How much further improvement can you achieve in gross margin by pushing the mix further?
A: The improvement in gross margin is driven by a shift towards more innovative and value-added services. We expect this trend to continue as we provide more value-added offerings to our clients. (Nivedita Krishnamurthy Bhagat, CFO)
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
