Capgemini CAP reported first-quarter results that were largely in line with our expectations, and we are maintaining our EUR 39 fair value estimate and narrow moat rating for the company.

Capgemini’s first-quarter revenue fell 1.7% to EUR 2.5 billion as the company’s cyclical businesses reported weak numbers amid sluggish economic conditions in Europe. The company’s results would have been worse if not for a stable performance from its outsourcing business. Revenue from the company’s cyclical businesses (consulting, technology, and local professional services), which account for about 60% of its total revenue, went down by 3% as European firms continue to keep a tight control over their discretionary spending.

Among the three cyclical services, consulting fared the worst with a 10% year-over-year decline in revenue. On the other hand, outsourcing witnessed steady demand with growth remaining essentially flat compared to the last year. Outsourcing has been a steady performer for Capgemini over the trailing 12 months and its contribution increased to 39.3% of total revenue in the first quarter, up from 37.7% in the year-ago period. With Europe gradually embracing offshore outsourcing and the company’s aggressive push toward strengthening its global delivery centers, we expect outsourcing to continue to be the primary growth driver in the near term. Most of the new employee additions during the quarter (and over the last 12 months) were at the company’s global delivery centers, largely in line with its outsourcing focused strategy.

During the quarter, Capgemini generated new bookings of EUR 2.2 billion, down 2% from the same period last year. New bookings included EUR 1.6 billion in discretionary services and EUR 547 million in outsourcing. The discretionary book-to-bill ratio stood at 1.07 times, pointing to modest growth prospects in the near term. Given the continued difficult operating environment in Europe, we think this is a decent performance.