Capgemini reported a 2.1% decline in revenues for Q3, exceeding analyst expectations amidst a challenging economic backdrop. With total revenues at 5.377 billion euros, the company faced a significant downturn, especially in the manufacturing sector. Consequently, Capgemini has revised its 2024 revenue outlook downward, anticipating a 2% to 2.4% decline. Despite hopes for recovery in 2025, the latest results led to an 8% drop in share value, reflecting disappointment in market performance.
(BFM Bourse) – The digital services firm reported a 2.1% decline in revenue on a like-for-like basis for the third quarter, exceeding analysts’ expectations. Consequently, the company has adjusted its growth and operating margin forecasts for the year.
The overall economic downturn in the third quarter led market analysts to predict a decline for Capgemini, but the reality was more severe than anticipated.
For the period between July and September, Capgemini recorded revenues of 5.377 billion euros, reflecting a 1.6% decrease when excluding currency fluctuations and a 2.1% drop on an organic basis (setting aside currency and scope effects). Analysts had hoped for revenues of 5.4 billion euros with an anticipated organic sales decline of just 1.5%, according to a consensus reported by Stifel.
‘We experienced a slight improvement in growth in the third quarter compared to the second quarter, despite facing a more challenging environment in certain sectors, particularly in Industry. However, we are seeing a recovery in Financial Services, and the trends in Telecommunications and Technology sectors are slowly gaining traction,’ stated CEO Aiman Ezzat in a press release.
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Significant Decline in Manufacturing Sector
Breaking down the numbers, Capgemini’s primary sector, manufacturing, faced a significant setback, with revenues decreasing by 3.4% at constant exchange rates in the third quarter, worsening from the prior quarter’s decline of 1.1%.
Regionally, North America experienced a 3.9% decline in revenues at constant exchange rates, compared to 3.7% in the previous quarter. Stifel noted that much of this downturn originated from the consumer goods and retail sectors, as well as energy and utilities, along with the public sector.
In France, the situation was similar, with revenues declining by 2.5%, only slightly better than the 2.7% drop in the previous quarter. During a conference call, Aiman Ezzat mentioned that the prevailing ‘political environment’ was affecting business performance.
Due to the pronounced downturn in manufacturing, Capgemini now expects sales variations in the fourth quarter to mirror those experienced in the third quarter, excluding currency effects.
Revised 2024 Projections
As a result of these trends, the company has further revised its revenue projections for 2024, having already done so last July. Capgemini now foresees a revenue decline of 2% to 2.4%, excluding currency impacts, which is a downgrade from the previously expected drop of 0.5% to 1.5%.
This translates to an organic decline of between 2.8% and 2.4%. Additionally, Capgemini has adjusted its operating margin forecast for 2024 to a range of 13.3% to 13.4%, down from the earlier expectation of 13.3% to 13.6%. The company, however, maintains its cash flow target of approximately 1.9 billion euros.
Aiman Ezzat indicated that the company anticipates a return to growth by 2025, noting that ‘the bad news has stabilized.’ He explained that some clients in the manufacturing sector are taking ‘short-term’ measures to safeguard year-end outcomes, which would eventually necessitate a return to investment.
Nevertheless, the CEO acknowledged that Capgemini would likely fall short of achieving the 14% operating margin target set at the 2021 investor day. ‘However, we do expect to see margin improvements next year compared to 2024,’ he added.
Following the release of these updates, Capgemini’s shares fell sharply on the Paris Bourse, dropping by 8% around 11:20 AM, marking the most significant decline on the CAC 40.
‘This is a disappointing report from Capgemini. While the challenges were anticipated due to negative trends in the automotive and aerospace sectors, alongside disappointing results from several competitors (IBM, Alten, TietoEVRY), the severity was beyond our initial concerns, particularly with a surprisingly weak U.S. performance,’ noted Oddo BHF in a pre-market report.
‘Furthermore, the lack of anticipated growth improvement in the fourth quarter implies that the group will enter 2025 with negative integrated growth. This is likely to result in downward adjustments to consensus estimates for next year, potentially adjusting growth projections to a meager 0-1% at constant exchange rates, compared to around 3% currently