2005 Financial Report - Capgemini

40 ANNUAL
MANAGEMENT REPORT
Capgemini
to the fact that headcount reductions were particularly
prevalent in North America, a high labor-cost region, while
the bulk of new hires were in India where salaries are
much lower. It should also be noted that travel expenses,
which remained stable in absolute terms, have represented
a constantly diminishing share of revenues for the last five
years (from 7.1% in 2001, they are only 4.4% in 2005).
• a 25.8% jump in “Purchases and sub-contracting” due
mainly to the fact that by commissioning partners in
our major Outsourcing contracts, we are able to offer a
comprehensive service to our clients; but as the main
contractor, we recognize all the revenue even though we
only carry out a portion of the related services and correspondingly
assume all of the costs related to these
services.
• a 16.3% reduction in the rental costs for our offices around
the world reflecting the major efforts undertaken over
the recent years to streamline the Group’s property portfolio.
The analytical breakdown confirms what was mentioned
earlier, i.e. that the improvement in operating margin essentially
stems from the major cut in selling, general and
administrative expenses, which still accounts for 19.5% of
revenue but represented 24.8% in 2004 (and 31.1% in
2002!).
The cost of services rendered – corresponding to the costs
incurred during the execution by the Group of client projects
– outstripped revenue growth to end the year at 77.3%
of revenue in 2005, compared with 75.6% in 2004. This
development is the direct result of commissioning partners
or sub-contractors to help execute major Outsourcing
contracts. This is particularly true in the case of HMRC (formerly
the Inland Revenue) where the portion attributable
to our partners Fujitsu and BT amounts to a total of onethird
of the revenue from the client in 2005. Based on an
analysis of this item excluding the major Outsourcing
contracts (HMRC, TXU, Schneider), the service cost
increased slightly compared to the previous year (from 73.4%
to 73.6%), although this is largely explained by the fact
that 2004 costs were reduced by the very modest level of
variable compensation actually paid, with the variance
from the normal level representing about 1% of revenues.
The Group therefore recorded modest but genuine progress
in output cost control.
Operating margin came in at €225 million compared with
a negative €24 million in 2004 (a margin of 3.2% in 2005
versus -0.4% in 2004), with profitability accelerating through
the year from 1.8% in the first half to 4.7% in the second
REPORT 2005 Capgemini
half. Performance across the geographical regions remains
very uneven, since despite Sogeti’s strong performance,
North America still posted a small loss for the year while
on the other side of the Atlantic, Benelux turned in the
Group’s best performance with a margin of 10.6%. With
regard to North America, the margin notably turned positive
again (2.8%) in the second half. This near five percentage
point improvement in operating margin from one
half of the year to the other is to the credit of the new team
in place since last autumn and suggests a long-term return
to solid profitability in the future.
Other operating income and expense was still negative by
€11 million in 2005, although this had amounted to €257
million in 2004. The dramatic improvement essentially
reflects:
• restructuring costs of €164 million compared to €240 million
in 2004. Half of these costs are related to headcount
reductions mostly in North America, France and the Nordic
countries; the other half concerns the cost of streamlining
the property portfolio in North America.
• €166 million in gains realized by the Group during 2005
from the sale of (i) its Healthcare activity in North America
to Accenture (€123 million), (ii) 95% of its interest
in the subsidiary Capgemini Japan to NTT Data Corporation
(€28 million), and (iii) its 25.22% stake in Germany-based
IS Energy to E.ON (€15 million);
• €5 million in income on the disposal of the Group’s lease
financing contract on its property at Behoust, which
housed the Group University until the opening of the new
Fontaines site at Gouvieux near Chantilly in 2003;
• conversely, a €12 million expense relating to the granting
of shares and stock options and a €6 million expense in
connection with goodwill impairment in the Netherlands
and the UK.
Operating profit stood at €214 million in 2005 compared
to a loss of €281 million in 2004, a turnaround totaling
nearly €500 million.
The Company still had net financial expense of €38 million
in 2005 compared to €27 million in 2004 despite the
spectacular improvement in net cash and cash equivalents,
whose effects are only reflected in “finance costs, net”. This
item shows a slight improvement from a negative €28 million
in 2004 to a negative €24 million in 2005, due to the fact
that the carrying cost of €5 million related to the convertible
bond issued in June 2005 (i.e. the variance between the interest
expense recorded in the income statement and the
investment income from the funds raised by the bond issuance)