MCN Direct Newswire

Vol. 2 No. 29, 28 July 2003

This issue is sponsored by:

IBM and The UK Consulting Industry 2002/3

This issue news

1. EDS profits drop 56%
2. Diagonal suffers double whammy
3. SchlumbergerSema shows strong second quarter
4. Capita up at halfway stage
5. CGEY changes chief in North America
6. Further information - feedback/forward to a colleague/unsubscribe

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1. EDS PROFITS DROP 56%

EDS has reported second-quarter net profit down 56% at $138 million, on revenues up 2% at $5.5 billion. The results are in line with previous forecasts, confirming CEO Mike Jordan's recently announced strategic recovery plan has yet to kick in (MCN Direct 2-24).

EDS made asset write-downs of $36 million in the quarter to 30 June and took a restructuring charge of $7 million related to the unseating of former chief executive Dick Brown.

Its operating margin in the quarter was 5% - with contract signings of $3.4 billion way down on last year's comparable period when EDS claimed $6.2 billion in new business. First-half 2003 signings were $6.4 billion, against $13.4 billion a year ago, reflecting what EDS described as "a tepid IT spending environment".

Jordan commented: "The results highlight continuing issues in our sales and operating efficiency. We are taking aggressive steps through our ongoing transformational process to improve our cost structure, productivity and competitiveness. We also fortified our balance sheet with a significant infusion of capital - now we must translate our improved competitive position into greater marketplace success."

EDS Operations Solutions - including IT and business process outsourcing - increased its revenues 3% to $3.7 billion, with modest growth in outsourcing offset by a 16% fall to $555 million in revenue from former parent GM.

Solutions Consulting was down 13% at $1.3 billion, with AT Kearney falling 27% to $212 million and PLM Solutions dropping 10% to $205 million.

Looking forward, EDS said it is maintaining its current revenue and earnings guidance for the second half of 2003, with revenue pitched at around $11 billion and earnings per share of 70-80 cents.

2. DIAGONAL SUFFERS DOUBLE WHAMMY

SAP specialist consultancy Diagonal has suffered a double blow with the loss of its top executives and an interim financial report that shows the company languishing in the red.

Chief executive Graham Creswick and finance director Steve Fleming resigned abruptly after Diagonal terminated discussions with them about a management buyout of part of the group.

Creswick was immediately replaced by Colin Burnside, a founder of the company who left to work for SAP but returned to Diagonal as an executive director in January. Fleming's responsibilities will be taken on by the group financial controller in the short term.

While Diagonal would not detail the parts of the business involved in the aborted buyout, it confirmed its strategy of focusing operations around its core SAP consulting business, saying: "It remains the board's intention to secure the disposal of the secure networks division at an appropriate price and time."

Reporting interim results for the six months to 30 May, Diagonal showed a net loss of $1.4 million, against a net profit of $251,000 in last year's comparable period. Group turnover fell 10% to $49.2 million, with consulting contributing $32 million, secure networks $10.1 and the acquired consultancy Partners for Change $7.1 million.

Diagonal chairman Mark Samuels claimed a "robust performance" for consultancy operations in the first half, as well as performance ahead of expectations in North America, adding: "We are on track for the first half, despite continuing difficult market conditions. I believe there will be major benefits in concentrating on our core competencies."

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3. SCHLUMBERGERSEMA SHOWS STRONG SECOND QUARTER

SchlumbergerSema has reported second-quarter pre-tax operating profits of $24 million, up from $4 million in last year's comparable three months. Revenue in the quarter to 30 June rose 16% to $840 million.

The IT services subsidiary of oilfield services giant Schlumberger attributed the gain predominantly to the strengthening of European currencies against the US dollar, which created a positive impact of $94 million in the quarter. It also noted growth in SchlumbergerSema's presence in the UK public sector market, where it is working with organisations including the Department of the Environment, the Department of Work and Pensions, Consignia and the Association of Train Operating Companies.

The results were announced against a backdrop of rumoured talks between Schlumberger and CSC about the sale of selected SchlumbergerSema businesses, but the financial report made no mention of any such intentions or negotiations (MCN Direct 2-28).

The second-quarter results do, however, confirm Schlumberger's IT services interest in the energy sector, as SchlumbergerSema notched up 4% sequential growth in energy sector revenues to $197 million.

Its consulting and systems integration revenues rose 16% against last year's comparable quarter, while network information solutions increased 22%, mainly due to the strength of the euro and a new contract with the UK Department of Work and Pensions.

Avoiding comment on the potential sale of any SchlumbergerSema business units, Schlumberger chairman and CEO Andrew Gould said: "SchlumbergerSema had a solid quarter helped by continued cost cutting in what remains a lacklustre market for IT services in Europe. Good progress was made in booking orders in line with our objective of achieving double-digit growth in energy IT services."

4. CAPITA UP AT HALFWAY STAGE

Capita has maintained its financial form through the first half of 2003, reporting pre-tax profits up 27% at $82.7 million, on turnover rising 36% to $860.9 million. The company attributed 29% of the gain in turnover to organic growth, with 7% coming from acquisitions.

Its operating margins slipped from 11.3% to 10.6% in the six months to 30 June. Capita attributed the drop to one-off costs incurred during the go-live phase of Transport for London's congestion charging scheme - a $453 million, five-year contract that required IT investment of $80 million - and costs from restructuring its insurance loss adjusting business to close 22 offices and lay off 300 staff.

Despite the half-year decline in operating margins, Capita claimed it would achieve a full-year margin ahead of the 12% it recorded in 2002, partly through reduced capital spending on new contracts. The company has won contracts worth $463 million in the first seven months of 2003 and says it is pursuing live bids totalling $4.5 billion, with deal values ranging from $24 million to over $800 million.

As the leader of the UK business process outsourcing market with a 24% share, Capita announced plans to establish a facility in India that will deliver administration services and offer a wider range of cost-efficient options to new and existing clients in the UK.

Commenting on the results, Capita executive chairman Rod Aldridge said: "Our marketplace is substantial, active and capable of supporting long-term growth. The group's performance continues to display strong growth, increasing profits and buoyant cashflow. We remain confident that turnover for the year as a whole will exceed $1.7 billion and we already have high visibility of revenues for 2004."

Aldridge's upbeat statement was marred only by the loss of a contract with Norfolk County Council. The council said it was not dissatisfied with Capita's performance in supplying exchequer, payroll and operational IT and communications services, but that a new policy for e-government development could not include the contract. Signed in 1999, the deal had a further six years to run, for which Capita will be compensated.

5. CGEY CHANGES CHIEF IN NORTH AMERICA

Cap Gemini Ernst & Young (CGEY) has named John McCain as CEO of its North American business. He replaces Mark Hauser who is leaving to pursue professional and personal interests outside the group.

McCain joined CGEY from EDS in October 2002, shortly after CGEY launched its Leap transformation programme. At EDS, he had been president of the chief information officer services unit and president in charge of global solutions consulting.

He joined as CGEY deputy group chief operating officer in charge of global sectors and accounts, sales, disciplines and alliances. He also became a member of CGEY's management committee.

In his new role, McCain will take charge of strengthening the company's US operations, particularly its efforts in outsourcing and technology services.

Hauser leaves CGEY after more than a decade, first with Ernst & Young consulting and then with the merged firm. He became North American CEO in June 2002, replacing former Ernst & Young US leader Terry Ozan, who moved on to a global role within the group.

Hauser helped CGEY build its market position in supply chain, customer relationship management and technology consulting following his work to transform and integrate CGEY's service lines after the Ernst & Young and Cap Gemini merger in May 2000.

* MCN Direct is now taking a summer break. Our next issue will appear on 26 August.

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