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Capgemini aims for growth in digital marketing services

Building regional capabilities through acquisitions to disrupt the APAC market

In TBR’s most recent Digital Transformation: Digital Marketing Services Benchmark, my colleague Boz Hristov examined trends across different regions and wrote, “While regional nuances … compel vendors to build local resources to ensure they can tailor culturally aligned campaigns, the evolving nature of the DMS [digital marketing services] market is also creating country-specific openings. For example, the last three Olympic Games including PyeongChang (South Korea), Tokyo (Japan) and Beijing (China) have been driving investments and opportunities within Southeast Asia.” In covering Capgemini for more than a dozen years, I’ve seen how the company has been able to combine internal capabilities development and highly strategic acquisitions to stay on the leading edge of trends across the IT services space, including digital marketing services. At the same time, acquisitions enable Capgemini to diversify its geographic reach outside its home market of Europe, namely in North America and APAC.

 

Overall, APAC is becoming a region of acquisition focus as Capgemini strives to diversify global revenues and expand work with local clients in the region. APAC is a major global service delivery location, but activities with local clients are limited outside of Australia and New Zealand. Recent acquisitions in APAC that build on Capgemini’s local market reach include those of Empired in Australia, around digital and cloud; Acclimation in Australia, around SAP consulting and systems integration; Multibook’s SAP global services line in Japan; RXP Services in Australia, around digital, data and cloud; and WhiteSky Labs in Australia around MuleSoft consulting.

 

Capgemini’s innovation, design and transformation brand, Capgemini Invent, is rolling out its capabilities across APAC. Capgemini is establishing a new network around frog, the brand experience design consulting arm of Altran. During 2020 frog scaled from about 500 people in the U.S. and Europe to about 2,000 by absorbing Capgemini Invent’s customer experience team and employees from Capgemini’s acquisitions of global design studio Idean, innovation firm Fahrenheit 212, agency June 21 and customer engagement marketing firm LiquidHub. Frog initially had one studio in Shanghai but has expanded in APAC with studios in Singapore; Hong Kong; Sydney and Melbourne, Australia; and India. Frog’s APAC business emphasizes industrial and special design, tied with the new Capgemini Engineering brand experience and design-led transformation.

 

In some ways, this is a natural outcome of making related tuck-in acquisitions: Eventually, Capgemini creates scale to establish a new business unit or service line. Additionally, it is a way of retaining acquired talent by showing that employees will be part of a special group assembled from similar acquisitions.

Tuck-in acquisitions supported digital services establishment in North America, providing use cases and lessons learned

In 2016, 2017 and 2018, Capgemini made several acquisitions in North America to initially build out its digital services capabilities, some of which now reside in frog. Fahrenheit 212, which Capgemini acquired in February 2016, enhanced Capgemini’s business transformation consulting and digital customer experience solutions portfolio. Lyons Consulting Group, which Capgemini acquired in September 2017, strengthened the company’s position in digital commerce, specifically around integrating Salesforce Commerce Cloud solutions. Idean, which Capgemini acquired in February 2017, expanded Capgemini’s digital transformation consulting capabilities and added seven digital design studios worldwide.

 

The acquisition of LiquidHub in February 2018 further expanded Capgemini’s digital services, notably digital consulting capabilities in North America. With LiquidHub, Capgemini gained customer experience capabilities and improved its ability to capture digital opportunities with clients in the U.S. LiquidHub augmented Capgemini’s client base by adding logos, such as Wells Fargo, Chase, Godiva, Subaru, Microsoft and Amgen, and improved Capgemini’s relationships with clients’ CXOs.

APAC will become a larger revenue contributor in the long term

By making acquisitions, expanding its portfolio, keeping up with trends around digital marketing services, and even leaning on its core strengths around engineering services, Capgemini could become more disruptive in the APAC market in the very near term. The vendor’s combined revenue from APAC and LATAM accounted for 7.8% of total revenue in 2021 and increased 26.2% year-to-year as reported in euros, outpacing revenue growth in other regions.

 

TBR’s most recent report on Capgemini was published on March 7 and provides a detailed analysis of the company’s performance and investments in 4Q21 and 2021. Recent deals such as with Volvo Cars to enable digital transformation of the client’s operations in the Asia-Pacific Economic Cooperation by implementing Salesforce solutions such as Sales Cloud, Service Cloud, Marketing Cloud, Experience Cloud and Configure Price Quote software exemplify Capgemini’s activities that are supported through investments in digital and cloud capabilities. APAC provides opportunities for Capgemini and might be even better suited to pave the way to growth now that the company’s home market of Europe might be disrupted by the war in Ukraine. The deal with Volvo Cars provides Capgemini with a good opportunity to expand into the emerging China market, as Volvo is a well-known European brand but is now managed out of China.

Two Back, Three Forward: All about consecutive quarters

In our new weekly blog series Two Back, Three Forward, we look at two numbers in TBR reports from the prior week as well as three numbers from our upcoming reports, highlighting the analysis TBR provides and the vast amount of data — the numbers — we’re working with every day. It’s all about the data and what that data means to you.

Two Back

$1.47B, Cognizant’s 4Q19 earnings from financial services clients: As noted in our full report, Cognizant’s Financial Services (FS) revenue increased last quarter, but at a slower pace than the company overall, partly due to softness from European banking clients, according to Cognizant. We’ve heard this complaint from other India-centric vendors and will be publishing a special report this month on what those companies have been doing to offset those pressures. To keep some context, FS remains Cognizant’s largest vertical, at 34.3%, but this trend bears watching.

3, consecutive quarters IBM’s healthcare IT services revenue has declined: 2019 was unquestionably an off year for IBM’s healthcare IT services (HITS), but our most recent analysis indicates the company will rebound in 2020 through new leadership, partnerships and technologies. Considering IBM’s long history of excelling in all three of those areas, we’re predicting a modest 2.2% expansion this year. See the full IBM HITS report for all the analysis.

Three Forward

71.2%, contribution of DXC Technology’s Cloud Professional Services segment to overall cloud revenue, per TBR estimates: Nothing surprising about cloud professional services earning the greatest share of revenue, but what stands out is the 9.6% growth rate of that service line within DXC’s overall cloud practice. Ahead of the other service lines and far better than the company as a whole (-3% over the same period). As we note in the upcoming full report, “DXC’s established relationships with major public cloud providers such as Microsoft and AWS [Amazon Web Services] enable the company to build out integrated solutions and maintain healthy growth in 2020 providing cloud management and migration services.” Further, the company continues investing in cloud-savvy professionals even as it bolsters its traditional IT services talent. DXC’s long-term strategy, including around cloud, appears solid.

More than 50%, Capgemini’s digital and cloud revenues as a percentage of total revenue: Like most IT services peers, Capgemini has strategically shifted resources and investments toward new opportunities in cloud and digital, in part through expanding capabilities alongside partners, developing solutions with partners like AWS, and acquiring talent and IP. Even if revenue growth slows from 5.3% year-to-year in constant currency in 2019 to something closer to 4% in 2020, as Capgemini expects, we don’t expect digital and cloud revenues will ever again dip below the 50% line, even if Capgemini joins market leaders in moving beyond the term digital.

3, consecutive quarters in which Perspecta elevated its FY20 guidance: Due to accelerated demand and strong bookings of net-new work, Perspecta is now guiding for annual revenue growth of between $4.45 billion and $4.5 billion, or 4.1% and 5.3%, over FY19. Even with healthy revenue growth, TBR projects the company’s full-year gross margin will erode 2020 (declining from 24.9% in 2019 to 23.6% in 2020) due to  accumulating costs from its acquisition of Knight Point Systems, the launch of new delivery facilities, and investment in Perspecta Labs. Perspecta’s 2020 operating margin should increase 10 points over 2019, from 6.2% to 6.3%, as unprofitable contracts are completed and Perspecta converts strong bookings of more lucrative and net-new contracts featuring the company’s expanding store of homegrown IP. In all, TBR sees steady growth as more important than financial guidance adjustments, given our concern for strategy and performance, not stock price.

Growing partnerships with key cloud vendors help sustain Capgemini’s success

As Senior Analyst Elitsa Bakalova notes this week, “Partners are key contributors to Capgemini’s technology-enabled transformations around next-generation technologies, such as digital and cloud. The expanded partnership with Amazon Web Services enhances Capgemini’s AWS business in North America and improves its ability to advance cloud adoption in a strategic region for Capgemini’s global expansion. Additionally, the integration of Altran continues, and as of Jan. 27, Capgemini holds 53.57% of Altran’s share capital and at least 53.41% of Altran’s voting rights. Altran will improve Capgemini’s ability to deliver digital transformation to the industrial sector and position as an intelligent industry vendor that can provide solutions around Engineering 4.0 and Industry 4.0.” Across the IT services spectrum, TBR has seen substantial changes in the way vendors partner with cloud and software companies, an area we will examine in greater detail throughout 2020.

Additional assessments publishing this week from our analyst teams

Tata Consultancy Services closed 2019 with continued revenue growth, which TBR attributes to ongoing investments in its solution suite and talent pool, alongside aggressive pricing. Strengthening its digital capabilities that enable technology-based transformation, at scale, for the company’s global clientele will drive further growth in 2020.”  — Kevin Collupy, Analyst

 “TBR expects T-Systems’ revenue growth will slightly accelerate in 4Q19 as the company benefits from an improved delivery network and a realigned portfolio that offers clients cloud, IoT and security capabilities that support growth initiatives. T-Systems leverages partnerships that enhance scale and help to embed emerging technologies within its core portfolio offerings and equip the company to drive revenue growth around these capabilities. As T-Systems infuses growth areas throughout its portfolio and realigns business segments to focus on these profitable avenues, including the establishment of an integrated telecommunications business that will house telecommunication services and classified ICT business, the company will be able to leverage more flexible delivery and innovation models to position as more customer-led and customer-centric.” — Kelly Lesiczka, Analyst

 “AsCisco integrates acquired assets to provide advanced security and intent-based networking solutions, we expect Cisco Customer Experience will benefit from pull-through support and maintenance opportunities, allowing it to sustain revenue growth in 4Q19. Additionally, portfolio growth to include hybrid IT and multicloud will also provide migration and management engagements, creating new areas of growth. Similarly, expanding its software and subscription portfolio provides consistent revenue streams, contributing to Cisco Customer Experience revenue growth through support and maintenance engagements. Leveraging its core strength areas, such as security, networking and SD-WAN, will help Cisco to maintain its existing engagements while also effectively combating competitive pressures from vendors pursuing opportunities in similar growth areas. Cisco’s technical expertise improves its ability to differentiate its professional services portfolio from that of its peers.”
Kelly Lesiczka

“The cloud solutions agreement with the National Association of State Procurement Officials through September 2026 is a milestone for Capgemini’s cloud services business in the U.S. as the simple contractual process will expand the company’s activities in the public sector, which TBR does not believe to be a leading industry in the country for Capgemini, unlike its business in financial services and manufacturing. Capgemini will provide joint offerings with Amazon Web Services, Microsoft, BMC, ServiceNow and Virtustream.” — Elitsa Bakalova

“TBR estimates HCL Technologies (HCLT) will sustain revenue growth of between 15% and 16.5% year-to-year through 2021, and will operate within its guided range of 16.5% to 17% in constant currency for FY20. Acquisitions provide HCLT with expanded market share and enhance portfolio offerings to appeal to dynamic client demand and propel revenue. Developing HCL Software and incorporating partner assets to support integration and management opportunities will create recurring and higher-profit revenue streams. We expect HCLT will leverage its software business to capture higher-value services engagements, but the company must be mindful of cannibalization within its traditional services streams, which comprise the majority of revenue. Additionally, deal size remains smaller than in previous years, with most clients in the $1-plus million category as HCLT benefits from an increase in software license and deployment deals. TBR believes most deals during the quarter were generated with new logos, as HCLT looks to drive recurring revenue streams tied to the HCL Software business unit, which will generate additional growth in the $1-plus million category from cross-selling and upselling other product and software offerings.” — Kelly Lesiczka  

IBM faced healthcare IT services (HITS) headwinds throughout 2019, plagued by media reports and customer dissatisfaction with emergent solutions leveraging AI, mainly Watson for Oncology. The newly appointed general manager of Watson Health, Paul Roma, will work to improve employee satisfaction in addition to building confidence among IBM investors and partners within the wider healthcare market. A more succinct portfolio and go-to-market strategy supported by recent internal restructuring efforts will be critical to returning IBM to growth in 2020, when TBR estimates the company’s annual HITS revenue growth will reach 2.2%. Further, IBM’s addition of Red Hat and background in emerging technology areas such as blockchain for insurance industries and AI — despite missteps in these areas in 2018 — will enhance the value of the company’s existing HITS suite and offer it differentiation in the market compared to peers.” — Kelly Lesiczka

Plus, this Wednesday, join TBR’s Chris Antlitz for his insights from TBR’s 2020 Telecom Predictions: “TBR’s research suggests 2020 will be a springboard year for the telecom industry’s development of the new architecture, with spend in the key markets of 5G, network virtualization and edge computing poised to ramp up significantly through the middle of the next decade. TBR also anticipates that systems integrators will play a much broader and key role in helping CSPs transform their businesses and networks and that webscales will increasingly encroach on CSP turf as they concurrently pursue new value created from the aforementioned technologies.”

Acquisitions and internal changes strengthen Capgemini in consulting

Every spring and fall, TBR releases a Management Consulting Benchmark with details on 13 leading vendors, including strategies, performance, positioning, and expectations for the next few years. For most of those consultancies, TBR also publishes individual profiles, providing additional details and analysis. The first of those profiles, on Capgemini, will be released this week, with the following assessment from  Senior Analyst Elitsa Bakalova: “Capgemini will continue to grow management consulting revenue in the next two years. A string of acquisitions in the digital segment enables Capgemini to expand into the digital design and consulting space, create a global network of design studios, and gain industry consulting expertise such as through KONEXUS Consulting in the energy and utilities sector. The announced acquisition of Altran will improve Capgemini’s ability to address clients’ IT and operational technology (OT) needs and pull through management consulting opportunities. Capgemini will position as an intelligent industry vendor that can provide solutions around Engineering 4.0 and Industry 4.0. Changes Capgemini made during the past several quarters to its portfolio, organizational structure and sales model enable the company to address demand from clients’ business side, not just in terms of their technology, and strengthen relationships with clients to expand wallet share.”

Additional assessment publishing this week from our analyst teams

Dell Technologies continues to navigate complex market dynamics. In TBR’s 2Q19 Dell Technologies report, TBR explores some of the vendor’s recent strategies to mitigate revenue declines in Infrastructure Solutions Group, including closer ties with VMware to promote a cloud-centric go-to-market message. On the PC side, performance was favorable and investments in ProManage, a new solution announced at VMworld, will be more deeply analyzed. Stephanie Long, Analyst

Also this week, TBR’s Cloud and Software team will offer insights and analysis during the Cloud pairs well with partners webinar on Wednesday at 1 p.m. EDT.  

Acquiring to expand in IoT: Capgemini, Altran and Engineering/Industry 4.0

The Altran acquisition will develop Capgemini’s OT capabilities and improve its ability to compete in segments such as IoT and edge computing

The acquisition of Altran, announced on June 24, will expand Capgemini’s engineering and R&D services capabilities and complement the company’s established consulting and IT capabilities. Capgemini is positioning as an “intelligent industry” vendor that can provide solutions around Engineering 4.0 and Industry 4.0. and expand in smart technology-driven segments such as IoT, AI, 5G, cloud, edge, data and cybersecurity. While Capgemini has well-established IT expertise and digital transformation (DT), design and innovation consulting capabilities, as evidenced in Capgemini Invent, the company will gain Altran’s operational technology (OT) capabilities, which are a key component in IoT models (see TBR’s special report IoT is trending toward smaller, easy-to-replicate projects that will generate increased data over time).

TBR notes that Capgemini is catching up to some of its peers in IoT. For example, Capgemini’s direct competitor Atos already has a history in OT due to its acquisition of Siemens’ IT Solutions and Services business and global strategic alliance with Siemens AG, giving it a head start in IoT. Atos increased its investment in ongoing joint efforts with Siemens in IoT, and in May Atos launched the BullSequana Edge server, which manages data at the edge and can be used securely for IoT environments. But in February Capgemini partnered with AR solutions provider Idemia to develop an IoT device management platform that strengthens the security and connectivity of devices and data. The platform will be based on Capgemini’s IoT device management platform X-IoT, which securely connects and manages cloud gateways and protocols, and on Idemia’s M-Trust solution.

The acquisition of Altran, which is expected to close at the end of 2019, will add 47,000 employees and provide Capgemini with access to key decision makers and technology budget holders around intelligent industry solutions. While Capgemini already has reach with IT and business leaders, Altran will grant access to leaders in manufacturing, supply chain and engineering R&D.

Embedding multicloud and software-driven services in portfolios helps vendors execute on strategy, expand addressable markets

Google Cloud revenue surpassed the $2 billion mark in 2Q19, doubling in size in six quarters. Under the guidance of CEO Thomas Kurian, Google Cloud is improving its enterprise appeal by launching its multicloud management tool set, Anthos; leveraging acquisitions to build out its migration, storage and analytics capabilities; and expanding its global sales and delivery capacity. Similarly, Salesforce complements internal innovation around solutions such as Customer 360 with ongoing acquisition activity and investment in its partner network. TBR estimates the vendor attained $3.95 billion in revenue as sales teams expanded single-product customer engagements, many of which are led by Service Cloud, into multiproduct deals.

Additional assessments publishing this week from our analyst teams

Capgemini continues to gain momentum in cloud services, with cloud revenue driven by offerings in the Capgemini Cloud Platform portfolio, which supports clients when building, migrating and managing applications and infrastructures in cloud environments. By delivering a cloud-first option, Capgemini enables enterprise and public sector clients to become agile through offerings related to data center modernization, cloud-native solutions, application modernization, intelligent applications, and emerging technologies such as IoT, blockchain and AI. Offering each client its entire portfolio enables Capgemini to provide holistic transformational solutions and effectively compete with peers. Elitsa Bakalova, Senior Analyst

TBR’s Public Sector IT Services Research practice will publish its 2Q19 ManTech report this week.  With top-line revenue expanding 9.4% year-to-year to $537 million, ManTech should be one of the top-performing vendors in 2Q19 in terms of sales growth. ManTech’s top-line expansion owes largely to accelerating spend among classified customers in the Department of Defense (DOD) and Intelligence Community that are increasingly engaging ManTech to enhance warfighting capabilities across all domains, but particularly in space and cyber. ManTech’s addressable market is set to expand and diversify into the civilian sector as the integration of Kforce Government Solutions (KGS) continues. KGS will add 500 employees with large-scale IT infrastructure modernization and transformation expertise, primarily with the Department of Veterans Affairs, to ManTech, while contributing roughly $100 million in revenue (based on revenue of $98 million reported by KGS in 2018). Inorganic sales will largely accrue in ManTech’s Mission Solutions and Services segment, where the core customer focus is the DOD, the Department of Homeland Security and federal health agencies. Look for TBR’s 2Q19 Perspecta report next week, as we examine how the company is leveraging its R&D-led approach to maintain its growth momentum as it begins its second full year as an independent, federal IT competitor. John Caucis, Senior Analyst

Weakness in Cognizant’s core industry segments overshadowed increased growth in digital in 2Q19. The company’s ability to rapidly scale its digital revenue will be key to offsetting this weakness, specifically in Financial Services and Healthcare. In the near term, Cognizant must emphasize cross-sales of acquired assets, such as Zenith Technologies, within its existing and acquired install bases. Kelly Lesiczka, Analyst

Acquisitions help European-heritage vendors Atos and Capgemini continue expanding in North America and globally

Atos is preparing to accommodate the explosion of data across enterprises by effectively managing, storing, securing and analyzing data. Revenue and cost synergies from the Syntel acquisition will enable Atos to achieve its financial goals in 2019. Newly established relationships with technology partners, the release of new product offerings that support edge and quantum computing, and the planned acquisition of IDnomic in cybersecurity will improve Atos’ ability to deliver business outcomes to clients through next-generation technologies and  sustain the company’s growth through 2020. Atos Europe-based rival Capgemini is reaping the rewards of its strategic expansion into next-generation and industry-specific solution areas, as evidenced by sustained midsingle-digit organic revenue growth over the past several quarters and an increase in digital and cloud revenue as a percentage of total revenue, from 45% in 1H18 to 50% in 1H19. The planned acquisitions of Altran and KONEXUS Consulting Group will solidify Capgemini’s ability to deliver digital transformation to industrial and energy & utilities clients and expand its reach across clients’ C-Suite, increasing its access to budget stakeholders. Portfolio expansion and bookings growth with technology partners such as Amazon Web Services and Microsoft will enable Capgemini to maintain its digital and cloud momentum and modernize its applications development and maintenance services portfolio to sustain growth in Application & Technology, which accounted for 71.1% of revenue in 2Q19. — Elitsa Bakalova, Senior Analyst

Additional assessments publishing this week from our analyst teams

Utilizing partners and leveraging emerging technologies enabled Cisco Customer Experience to maintain profitability and generate growth in 1Q19. As the company continues to invest in its portfolio to offer a broader range of software-driven services, such as for security solutions, and leverage its partner network to support the development of emerging technologies and delivery, we expect revenue growth will improve in 2H19. — Kelly Lesiczka, Analyst

Fujitsu Services’ portfolio investments such as for cloud and hybrid IT are evolving, but an increased pace of restructuring and new branding initiative would further sustain growth. Fujitsu continues to update North America and Europe sales operations to drive productivity and adoption around new portfolio offerings, which will help the company offset challenges within its legacy business. — Kelly Lesiczka

AT&T is becoming a more profitable company despite market saturation, competitive challenges and shifting consumer trends limiting subscriber growth. AT&T’s Entertainment Group and Mobility EBITDA margins continue to improve as the company moves from promotional pricing and transitions customers to premium service plans to boost average revenue per user. Subscriber growth remains challenged, however, due to T-Mobile’s continued dominance in postpaid additions, Xfinity Mobile’s growing momentum and video customers moving to rival streaming platforms. — Steve Vachon, Analyst

T-Mobile’s strong financial and subscriber performance in 2Q19 highlights how the company’s long-term outlook remains favorable regardless of whether the proposed Sprint merger gains final approval. 600MHz network deployments are at the foundation of T-Mobile’s success as its expanded LTE coverage, which is now on par with that of Verizon and AT&T, contributed to reduced churn in 2Q19, enabling T-Mobile to increase postpaid and prepaid subscriber net additions year-to-year despite the maturing wireless market. —Steve Vachon

The federal IT earnings season concludes at TBR this week as Perspecta releases its 2Q19 fiscal results after the close of business on Wednesday, August 14. FY20 began for Perspecta in 2Q19, its second year as an independent federal IT contractor, and the company looks to build off a strong close to FY19, when it successfully defended its incumbency on several ongoing federal programs and accelerated bookings of net-new awards. TBR projects the company will realize year-to-year growth in 2Q19 of between 4% and 5% to reach revenue of between $1.08 billion and $1.09 billion, owing in part to $1.7 billion in new cybersecurity-related programs won during the quarter — much needed contract awards that will help offset the loss of the $2.9 billion NASA End-User Services and Technologies contract to Leidos in 1Q19. Federal budgets in IT and programs to support national defense priorities are expected to sustain growth into 2020. With this spending environment as a backdrop, Perspecta appears well positioned for improving growth and profitability in its FY20. — John Caucis, Senior Analyst

Apple faced another quarter of sluggish revenue as Western consumers hold out for the next generation of the iPhone. However, the company is growing its install base in China and emerging markets, which are paramount for its long-term services play, through discounting, reselling and financing iPhones and other Apple devices. — Daniel Callahan, Analyst

Lenovo has had a few stellar quarters in a row, as it consolidated premium PC market share, reaped higher ASPs as a result of the Intel silicon shortage and benefited from inorganic revenue compares from its Fujitsu PC business acquisition. As we move into 2Q19, inorganic growth will decrease (only one month will include inorganic revenue), the silicon shortage will begin to subside and PC consolidation opportunities will slow. TBR still expects Lenovo will see growth, but it will fall in the midsingle digits. Details on Lenovo’s mobile and data center business will be published this week in TBR’s 2Q19 initial response on the company. — Daniel Callahan

And this week join TBR for a webinar, “The Evolving Battleground for Winning Private Cloud Customers.”  

Investments in acquisitions and startups enrich Capgemini’s next-generation solutions portfolio and improve its competitive position

Capgemini has taken multiple steps to enhance its portfolio to drive transformations through next-generation technologies and create business value for clients. The acquisition of Altran to deliver digital transformation in the industrial sector, enhanced relationships with Microsoft around Microsoft Azure solutions and with SAP around certification of industry innovation accelerators in manufacturing and retail, and investment in startups and joint commercial activities exemplify Capgemini’s recent activities to advance its competitive position,” said Senior Analyst Elitsa Bakalova. “Offering deep industry expertise improves Capgemini’s ability to address clients’ business-specific challenges. The company will continue to experience momentum in cloud services, with cloud revenue driven by offerings in the Capgemini Cloud Platform portfolio that support clients when building, migrating and managing applications and infrastructures in cloud environments. Offering each client its entire portfolio of solutions enables Capgemini to provide holistic transformational solutions and effectively compete with peers. The expanded partnership with Microsoft around Microsoft Azure solutions will enable Capgemini to increase cloud professional services activities, especially around cloud application development and maintenance.”

Additional assessments publishing this week from our analyst teams

Apple continues to pursue both service and hardware initiatives to maintain growth. The company is leveraging services and its wide install base to grow continuous revenue streams as device refresh activity wanes amid lengthening device life cycles and slowing hardware advances. While services are growing as a cornerstone strategy for Apple, the company also remains focused on maintaining its market perception as the most advanced smartphone producer. TBR expects the iPhone 11, which is slated to be released later in 2019, to have steady sales, but Apple will likely not see breakout sales like that of the iPhone X until the release of the 2020 model, which will deliver larger hardware upgrades such as 5G enablement. — Dan Callahan, Analyst

Google doubled its revenue over the past six quarters, surpassing $2 billion in 2Q19 as the vendor migrates customers to Google Cloud Platform (GCP) and attains particularly strong revenue growth from selling analytics. Google’s PaaS business will continue to drive revenue growth as enterprises integrate their hybrid environment with Anthos and leverage Google’s analytics, AI and machine learning offerings. In addition, Google supplements growth with G Suite as the company’s growing sales base brings industry-specific versions of the collaboration suite to market and cross-sells G Suite into GCP-oriented customer engagements. — Jack McElwee, Research Analyst

Cognizant has reworked its corporate strategy to emphasize the criticality of digital technologies to its growth plans. Pursuing acquisitions, such as that of Meritsoft, enables Cognizant to diversify its revenue mix, fostering new sources of digital revenues within key verticals. We expect Cognizant will maintain steady revenue growth year-to-year, largely led by demand around its digital operations capabilities.    — Kelly Lesiczka, Analyst

An integrated sales structure, paired with investments in price-competitive AI solutions and on-site presence, will help Infosys transform its brand identity. At the same time as Infosys builds a healthy pipeline, the company may need to calibrate stakeholders’ expectations around margins to sustain trust. — Boz Hristov, Senior Analyst

Reinforcing Verizon’s reputation as a premium wireless service provider will be essential for the operator to sustain revenue growth in the 5G era, as competitive pressures from T-Mobile will intensify, especially given the pending Sprint merger. Though Verizon will continue to trail T-Mobile in postpaid phone net additions over the next several years, Verizon will be able to sustain revenue growth by attracting customers willing to pay a higher price for the operator’s network coverage and premium unlimited data plans. Steve Vachon, Analyst

Sprint continues to undercut its rivals as the operator remains reliant on competitive pricing to attract subscribers given its subpar network coverage, though the company is moving away from more aggressive promotions, such as its previous Cut Your Bill in Half offer, to improve average revenue per user (ARPU). Sprint will continue to struggle to balance ARPU and subscriber growth, however, as many customers are unwilling to pay higher prices for the company’s network quality and Sprint is experiencing high churn rates from customers rolling off promotional pricing offers. — Steve Vachon

Public sector IT services spotlight: The U.S. federal earnings season continues the week of July 29 with three services-led defense contractors — Booz Allen Hamilton (BAH), Leidos and ManTech — releasing their fiscal results for the second calendar quarter of 2019.

As reported on Monday, July 29, Booz Allen Hamilton delivered 10.8% year-to-year growth during 2Q19, the first quarter of its fiscal 2020, and 100% of BAH’s growth was organic as the company continues to eschew acquisitions. BAH’s strong performance in 2Q19 reflects how ideally positioned the company is to serve its federal clientele, as well as a growing number of commercial entities, with a high-value, differentiated solutions suite spanning the strategy, mission and critical IT needs of public and private sector clients alike. As a result of its strong 2Q19 year-to-year growth, BAH is also likely to be the top-performing organic growth vendor in TBR’s upcoming 2Q19 Public Sector IT Services Benchmark (publishing in early October). BAH’s growth and margin performance (operating margin of 9.8%) in 2Q19 mostly outstripped that of the trio of federal competitors that released 2Q19 earnings and fiscal performance last week: Raytheon (YTY growth of 5.3%; operating margin of 9.1%); General Dynamics Information Technology (YTY contraction of 11.6%; operating margin of 7.1%); and Northrop Grumman Technology Services (YTY contraction of 0.4%; operating margin of 10.8%). We believe BAH’s performance relates directly to its solution set, which sits at the juncture of federal agency IT and mission objectives with a differentiating blend of consulting, technology and emerging solutions.           John Caucis, Senior Analyst  

Leidos will release its earnings on Tuesday, July 30, and is expected to post top-line, year-to-year growth of between 5% and 7% to reach about $2.7 billion in 2Q19 revenue. Growth will derive from Leidos’ continued strong pace of new awards, net increases in volume across several high-profile programs, and improving win rates, which are accelerating the conversion of pipeline opportunities into bookings and revenue. Leidos should also be able to offset the wind-down of existing programs and some limited currency headwinds from unfavorable swings in the U.S. dollar. The company has guided for 2019 revenue of between $10.5 billion and $10.9 billion, implying a median 5% growth rate, and record backlog levels achieved in prior quarters positions Leidos well to achieve its projections. — John Caucis  

Finally, ManTech will release its 2Q19 fiscal performance and earnings after business hours on Wednesday, July 31. ManTech’s latest strategic acquisition (Kforce Government Solutions, or KGS) will add roughly $100 million in new revenue and expand ManTech’s opportunity set in the federal civilian segment, augmenting robust Department of Defense (DOD) and intelligence growth while inorganically boosting ManTech’s top-line growth (projected to be between 6% and 8% in 2Q19). ManTech’s top-line growth in 2Q19 should be significantly augmented by the KGS acquisition, as the purchase closed in April and immediately began to contribute inorganic revenue to ManTech’s top line. On an organic basis, classified customers continue to accelerate spend with ManTech, while spending on behalf of ManTech’s principal DOD and Intelligence Community clients continues trending upward. Prior to the KGS acquisition, ManTech tendered a 2019 outlook for full-year 2019 revenue of between $2.05 billion and $2.15 billion, implying growth of between 4.7% and 9.8% over FY18 revenue of $1.96 billion. KGS is expected to contribute between $60 million and $80 million in inorganic revenue during the latter nine months of FY19; this compelled ManTech to elevate its prior guidance for FY19 revenue to instead reach between $2.13 billion and $2.21 billion, implying growth of between 8.8% and 12.8% over FY18. — John Caucis  

Understanding an acquisition: Capgemini snaps up Germany’s energy-centric KONEXUS

Capgemini’s acquisition of KONEXUS, a 30-person Germany-based energy strategy and management consultancy, triggered a reaction at TBR, as earlier this year we had looked at consulting for the energy sector and had been surprised at the relatively small number of acquisitions across the firms we track. Thirty management consultants will be a fractional addition to a company of Capgemini’s size with headcount of roughly 215,000, and the revenue increase will likely be marginal, but the decision speaks to Capgemini’s strategy to build capacity in both emerging areas and areas where the firm has established strengths. Perhaps Germany’s politically charged Energiewende will limit the impact of KONEXUS on Capgemini as a whole, as the strategic advice for companies working in Germany’s energy sector may not easily translate to other countries and regions. More likely, though, energy companies globally will face ever-increasing political pressures to reform and will seek strategic guidance — maybe ever-increasingly from Capgemini.

In our May 2019 full report on Capgemini, we noted that the company’s Energy, Utilities, and Chemicals practice earned the smallest share of revenue by industry (11.3%, but was leading in growth compared to other verticals) and predicted the company would seek acquisitions that will “bolster its services expertise around digital and cloud, such as in automation, analytics, cloud, digital services, AI and IoT, in addition to expanding its onshore presence.” With that context, acquiring KONEXUS appears to be a small move tangential to the company’s broader strategy. Folding KONEXUS into Capgemini Invent could be a way to use experienced management consultants to guide innovation and transformation engagements with a broader set of clients. Some of Capgemini’s peers have similarly made acquisitions expected to provide traditional benefits — enhanced offerings, new clients, additive revenue — while also changing go-to-market strategies, operational approaches to engagements, and overall brand. That may be too much to expect from KONEXUS, but this may indicate where Capgemini is headed.

Look for our initial assessment of Capgemini’s earnings this week.