Atos SE (ATO) Earnings Call Transcript & Summary

Good day, and thank you for standing by. Welcome to the Atos Q1 2022 Revenue Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] Our speakers today are Rodolphe Belmer, Atos CEO; and Uwe Stelter, Atos CFO. I would now like to hand the conference over to your first speaker today, Rodolphe Belmer. Please go ahead.

Good morning and thank you for attending Atos Q1 2022 Conference Call. I am Rodolphe Belmer, CEO. And I am joined on this call by Uwe Stelter, Group CFO. Over the last few months, Atos has been actively laying the foundations of its transformation with a swift rollout of our new organization, while continuing to capitalize on our core expertise and be successful in our day-to-day business. Today, we are pleased to share with you an encouraging Q1. Looking into the key highlights of this first quarter. Revenue at constant currency was only slightly down minus 0.6% at constant currency and minus 2.4% organically, which is a significant sequential improvement compared to Q4 last year, which was down 5.4% at constant currency and 6.9% organically if we exclude the impact of the large BPO contract reassessment. This sequential improvement is clearly an encouraging sign that our revenue is moving in the right direction. It is also fully consistent with the quarterly guidance -- with the quarterly sequence sorry, embedded in our 2022 guidance. We hired more than 8,000 new talents in Q1 on a highly competitive labor market; most of them will reinforce our capabilities in digital and BDS, predominantly in offshore and nearshore locations. Together with an attrition rate that remained below industry standards, this is once again a strong testimony of our intact ability to attract and retain talents, which is key in our markets. Book-to-bill was 72%. This is an exceptionally low level that is not representative of future revenue trends. I will elaborate on that later. Lastly, we fully confirm today our 2022 objectives. Turning now to commercial activity on the next slide. Order entry was EUR 2 billion in Q1, which is a book-to-bill of 72%. While Q1 is traditionally low, this is a particularly low level, which is not representative of the revenue trend we expect for the coming quarters. And why is that? Because, first, we had a lot less renewals in Q1 this year as significant renewals already took place in prior quarters, including in Q1 2021. Second, the average duration of contracts has decreased, reflecting a change in the contract mix, which is increasingly skewed towards shorter contracts. Excluding these 2 structural impacts, we would have been in the 90% range. While the shorter average duration is likely to remain going forward, we do expect a higher book-to-bill in Q2. With that regards, our full qualified pipeline remained broadly stable compared to the end of last year at EUR 6.9 billion. Our backlog at the end of March was at EUR 23.3 billion, representing 2.1 years of revenue. I will highlight a few significant wins from the quarter: cloud managed services and IT verticalization for a French engineering company, mobility-as-a-service application development for a transportation company, critical system management for a French public agency, and lastly, we'll develop a space situational awareness system for the German Federal Armed Forces, which will allow to monitor satellite activity. As we are moving forward with our transformation, we continue to capitalize on our core expertise to be as successful as possible in our marketplace. In January, we finalized the strategic acquisition of Cloudreach, strengthening our multi-cloud capabilities. We welcomed over 600 highly skilled cloud professionals, adding new expertise to our Atos OneCloud practice. In February, we unveiled our new exascale-class BullSequana XH3000 supercomputer. It's an hybrid computing platform with unparalleled flexibility and performance. This is Atos' most efficient and powerful supercomputer and a key element in securing today's and tomorrow's digital economy sovereignty. In March, we opened our next-gen Security Operations Center, SOC, in Bulgaria. It is designed to rapidly identify and limit the impact of security incidents for large organizations globally with 24/7 threat monitoring detection and targeted response supported by state-of-the-art technology. And very recently, Gartner ranked Atos #1 worldwide in Managed Security Services. This means that today we are the #1 partner to support customers in protecting their data. We are proud to have reached this position, and we will continue to develop leading technologies and services to protect our clients against cyber threats. With this, I will hand over to Uwe. But before that, I would like to thank him heartedly for his years of service and contributions at Atos. Particularly, I want to thank him for his very strong involvement in the last phase and in securing the smooth transition with his successor. I'm very grateful, and we wish him the very best in his next endeavor.

Thank you, Rodolphe, for those kind words, and good morning to everybody. Let me give you some more details on our financial performance in Q1. Q1 revenue reached EUR 2.75 billion, only slightly down at constant currency by minus 0.6%. This is the combination of minus 2.4% organic decrease, which is, as Rodolphe mentioned, a significant sequential improvement compared to Q4 last year, where we were down 6.9% organically excluding the large BPO contract reassessment. And the 1.7% growth from acquisitions, mainly Cloudreach, which we started to consolidate in January, but also the acquisitions we made through 2021. Currency impact was positive, plus 2.7%, reflecting the appreciation of the American dollar and the pound sterling against the euro over that period. Now turning to revenue by regional business unit on Slide 9. These are our new RBOs, regional business units, with small adjustments compared to the previous ones. We have included a reconciliation in the appendix of our press release. Americas lead the way, up 1.5%. Growth was driven by the contribution of recent acquisitions and the growth in digital activities, in particular, with the ramp-up of a large contract in Healthcare & Life Sciences. Northern Europe and APAC decreased by 2.3%. Strong business growth in Manufacturing and Healthcare & Life Sciences was offset by a decrease in Telecom, Media & Technology from a volume reduction in its Lab as a Service activity and in Financial Services following the reassessment of the large BPO contract in Q4 2021. Central Europe decreased by 1.8%. Most industries delivered growth, in particular with the start of contracts for global food service retailer and a leading logistic company, but we faced a decrease with 2 large telecom customers due to contracts ramped down. Southern Europe decreased by 1%. We recorded strong growth in Healthcare & Life Sciences, digital activities as well as in Manufacturing. Conversely, revenue decreased in Public Sector & Defense due to lower high-performance computing sales, also in Financial Services & Insurance due to termination of a contract with a major Spanish bank, and finally, in Telecom, Media & Technology due to lower hardware and software resale. Rest of the World, revenue grew strongly by 18.3%, and was supported by business related to the Olympics and to solid growth across most industries. Looking now at industries on Page 10. Please note, this is the last time we comment on industries, as we will start reporting by business line instead starting next quarter. Manufacturing grew by 5.6% at constant currency, rebounding from a lower Q1 in 2021. This trend was supported by the acquisition of Processia in June '21 and by increased cloud volumes. Financial Services & Insurance decreased by minus 4.3% following the reassessment of the large BPO contract conducted in Q4 2021 and the termination of a contract with the major Spanish bank, as mentioned previously. Public Sector & Defense decreased by minus 2.7% due to lower high-performance computing sales and the ramp-down of digital workplace projects with a U.S. state agency. Telecom, Media & Technology contracted by 10% due to volume reductions in the Lab as a Service activity as well as contracts ramp downs in telecoms. Resources & Services grew by plus 1.6% driven by solid growth in transport and logistics. And finally, Healthcare & Life Sciences posted a strong 8.4% growth with solid growth across most regions. Turning to head count now. As Rodolphe mentioned, we continue to press ahead with large scale recruitment in our growth activities and are well on track with more than 8,200 new hires in Q1, mainly in Digital and BDS and focused on offshore and nearshore locations. We also welcomed 742 Cloudreach employees, adding key expertise to our cloud capabilities. In an intense labor market, attracting and retaining talent is key to secure future growth. And in this context, our attractiveness has remained intact, as you see from the displayed numbers and attrition rate is stable to Q4 and below industry standards. Before I pass the mic back to Rodolphe, I would like to thank all of you for the interactions and healthy dialogues over the last 2.5 years and wish you all the best, most importantly, good health.

Thank you, Uwe. This encouraging Q1 clearly shows that our revenue is gradually moving in the right direction. This is fully embedded in our guidance, which we confirm today: revenue growth at constant currency of minus 0.5% to plus 1.5%; operating margin of 3% to 5%; free cash flow between minus EUR 150 million and plus EUR 200 million. As explained before, Atos' performance is expected to improve gradually through the year. So H1 is expected below the low end of these ranges, while H2 would be significantly better, with a return to positive revenue growth at constant currency and an uptick in operating margin. We are just at the beginning of our journey, but we are moving fast and we are moving in the right direction. I'm confident that we are taking the right steps to position Atos on a long-term value creation path. And I know I can count on our talented people to see it through. This concludes our presentation, and we are now ready to take your questions.

[Operator Instructions] And the first question comes from the line of Stacy Pollard from JPMorgan.

First of all, you talked about, of course, the previous business -- the previous management was organizing the business around verticals. And you're obviously shifting back towards a business line approach. One is maybe what do you think wasn't working with that? Do you think you'll get better synergies by doing it by business line? Maybe talk about the synergies that you think you're getting between the divisions. And of course, any color that you can give us on performance there, since I know you haven't officially started reporting it but will be soon. And then second question, maybe just elaborate a little bit more on why you're very confident in orders improving in the second half?

Well, thank you for those questions. Well, starting with your second question on the order entry. As we said, the level of order entry in Q1 was low, but this result shouldn't be perceived -- shouldn't be understood as indicating, well, this kind of level of order entry into the rest of the year. As I said, there are some conjunctural elements, the most important being the very low level of renewals of large contracts in Q1, which is a purely calendar effect, which drove this figure at that level -- this figure of book-to-bill, I mean. Into Q2, we already have a visibility of the pipeline development in Q2 and the maturity of our pipeline in Q2. And as I said in my presentation to give you some color on that, our qualified pipeline, which is an important notion also, is stable quarter-on-quarter. At the end of Q1, it stood at EUR 6.9 billion to be compared to EUR 7 billion, which means broad stability compared to EUR 7 billion in Q4 of last year, which means that our pipeline is filling up well. And that's why we are confident to have a far better Q2 in terms of order entry and well in line with our standards. On the first question on the structure of the -- the restructuring, the reorganization of the group across business line, the reason why we did that is because we think, first of all, it will enable us to strengthen, to stimulate better, the operating performance of each of our business lines, which are actually based on business models and value creation drivers, which are quite different for each of our business lines. The infrastructure business is based on very long-term contracts. They are quite substantial CapEx and it's fixed terms contracts. The Digital business line is about mostly application development, cloud migration. It's short-term contracts, much more profitable. And it's truly a talent-based business. BDS, most of it is hardware or products like services that we do in this division, meaning that the name of the game is technological superiority, marketing and sales. And what we think is that to better stimulate the performance of business lines, which works on dynamics which are so different, it should be structured separately and monitored internally separately. We think also that will -- that structuring the business likewise into different divisions will help the market understand better the performance of the company and better make up their mind on the true valuation of our business, of our group as a whole. As you know, we will start communicating our figures differently from today after our Capital Market Day, which will be fixed on the 14th of June. And for the moment, we are not communicating this way. What I can give you in terms of color is that if you take the revenue evolution of Q1, the Tech Foundations division did a bit slightly better than in Q4, meaning that even though it's still in negative territory, the revenue trajectory improved in Q1, while cyber remained in positive territory as well as Digital. HPC remained under pressure due to the components shortage difficulty.

Just any quick thoughts on synergies between them? Or is it...

Synergies between the different -- there are synergies between the different business lines of the group, of course, which are mostly commercial, commercial synergies, which meaning that we do leverage our key account managers, that we call CEPs, to push the commercialization of our entire portfolio of products. That's the -- that's the biggest area of synergy. And we continue to operate in that direction, meaning that even though we are -- we have structured our operations across 3 business lines, we continue to have mostly -- not entirely, but mostly one common sales force for the entire group with key account managers managing the relationship with our key customers and pushing among those key customers the entire portfolio of our product. And that's where we do -- manage and stimulate the synergy.

Next question comes from the line of Nicolas David from ODDO BHF.

My first one is -- first question is regarding Q1 organic growth. Did you benefit from a catch-up of some projects or contracts were delayed in Q4 as you were mentioning at the beginning of the year, or is it, this minus 2.4%, really underlying trend that we can take in order to build our next quarters? Or is it exceptionally strong, I would say, since this catch-up? And my second question is regarding the old management changes you have done and could you share with us the main criteria that have led to choose this new team to serve you for this new project, knowing that most of them come from the -- from outside the company? And also as to that is do you expect some -- maybe some negative impact from the short term on your commercial activity, and maybe already in Q1, from all those management changes that may disturb the organization? And also the change of organization you have put in place, do you think that it also explains -- it's also explaining a bit the slightly weak bookings in Q1 since you -- and what you expect in Q2 regarding that?

Thank you, Nicolas, on the underlying organic growth in Q1, it was also, well, relatively, I would say, encouraging. That's the way we see it, and an improvement when compared to the previous quarter. Actually, our Q1 figures include some catch-up of project slippage from Q4. As you remember well, when we commented on our Q4 results, we said that around EUR 130 million of project had slipped over from Q4 and should be landing in the first semester of this fiscal year 2022. Actually, in Q1, we caught up 1/3, 1/4 of that amount of slippage, which means that the Q1 figures have been slightly improved by this figure. But still, well, the underlying trend remains very robust because the catch-up of slippage is relatively low if you make up the math. On the team, well, I don't know what you mean by team, but probably you -- presumably, you are alluding to the Executive Board of the group. We have decided to change the organizational design of the group, as we said before, the core 3 business lines and 4 RBUs, to make sure that we would reignite the commercial momentum of the company and at the same time stimulate the operating performance of each of the business lines of the group. Second element, in order to accelerate decision taking and accelerate the sense of ownership and the leadership of this company, we decided to streamline the size of the governing bodies of this company, starting with the Executive Board. When I came in, the so-called GMC was made of around 25 persons, which I found was too large group of people to actually manage effectively the company. And I decided to streamlining down to 12 persons. Among those 12 persons, which I've selected for their competency, of course, their talent and their ability to drive the fast-pace turnaround of this company and put the company's performance into attention, most of people are coming from within. The 4 regional business unit leaders, which are the driving commercial force of this group, come from within and have been selected among the top commercial talents, I would say, or leaders of the group. On the group function there are 4 people, 3 come from the outside and 1 was from inside, if I may say so -- well, he stayed on his position, that's the -- our Group HR -- Chief HR Officer, Paul Peterson. And we appointed 3 people coming from outside. One person is a job creation, Chief Commercial Officer, with a very solid background in the IT industry with 25-something years at IBM, a very strong commercial force, which will enable -- and it's a job creation, because we want to make sure that we really step change the sales motion of this company and duplicate quite effectively the good practice across the group and step change, as I said, the commercial performance. For the 2 other functions, Group General Secretary and Group Finance, Group Finance, we had to find a successor to Uwe, who decided to change his career path, if I may say so, decided to take a new trajectory for himself. And we have appointed a CFO coming from the outside, but with a very seasoned experience in managing the finance groups of international companies with large contracts in the technological sectors and confronted also with turnaround situations. That's Stéphane Lhopiteau, who's joining us officially even though he's sort of shadowing Uwe at the moment, but he's joining officially and will be in charge as of next Monday. And we also changed the General Secretary of the group and appointed Diane Galbe, who is coming from Suez, very seasoned experience also in the turnaround of company and also of the -- of a company with a track record of having ring-fenced division to improve their personal performance. And I think at the end of the day, it makes very balanced, very concentrated teams, with leaders in charge of large business, 60% to 70% coming from within, 1/3 -- one large third coming from the outside. And I think it's the right balance to really make sure that we take advantage of the experience of the group while trying to bring new blood to reignite the performance of the company. Booking Q1, well, how was it affected by the changes that we had, [ our ] new CEO, we are a new organization, new leadership, might be an explanation for the softer booking into Q1, even though it's quite difficult to quantify. And when we have -- when we try to have an analytical approach to that to the gap in our bookings in Q1, as I said, we see 2 fact-based elements, which is less renewals and shorter contract duration. Our pipeline keeps very -- keeps very healthy, as I said, that might well be the case that -- while at the beginning of the quarter, there was some defocus of the organization due to all these changes, but now it's behind us. And as we can see from our perspective in Q2, well, if this negative occurred in Q1, it's behind us. But it's improving. I'm not disputing the analysis, but it's improving for the moment.

That's very helpful. And maybe a quick follow-up on this catch-up of revenue. Could you confirm if you are still confident to catch up the rest of the EUR 130 million by the end of the semester or do you see it will be more spread across the year?

Maybe a bit more spread across the year, probably, it will spread across the 3 first quarters of the fiscal year due to persistent difficulties in the supply chain in the HPC segment, notably. The full amount of slippage, we mentioned at the -- for Q4 probably should, well -- we should find them back, well, staggered across the 3 first quarters of this fiscal year.

Next question comes from the line of Neil Steer from Redburn.

It's really sort of to go back to the order intake. Obviously, you've announced that there's no update on your ambition to exit or partner and reduce your exposure to some of the more commoditized areas of the market. I'm just wondering to what extent that has hampered your ability to sign orders in your sort of Tech Foundations businesses. I mean, clearly, customers would be somewhat reserved, one would have thought, in signing contracts with a supplier or a service provider who is probably not going to be the owner of those activities in the future. And just drilling down on that, can we assume that in those sort of Tech Foundation businesses the book-to-bill ratio was significantly below that 72%, or has the book-to-bill been broadly at that level across all of the different sort of activity areas?

On this question, as I said, the revenue of the Tech Foundation part of our business were better than expected in Q1, mostly coming from [ verticalization ], which means that we have been able, despite the elements of background that you quote and which are quite right, actually, we have been able to remotivate, remobilize our teams. And we think that we -- when we look ahead at the trajectory of that business, even though it will remain under pressure because the underlying market in which Tech Foundation is operating is marked with declining forces, we think that, well, Tech Foundation will do better than last year, meaning that we have been able, because we have put in place of management focusing on that business with specific KPIs, which are adapted to their -- to the situation, which is more about defending the business, we think we are getting some improvement in the operational performance. The order intake of this part of the business, Tech Foundation, in Q1 was not good, mostly, and that's where this question of low level of renewal was really -- really took place. That's because we are -- we had far less renewals of large outsourcing contracts in Q1 than traditionally. It's a calendar effect, nothing which is in our control, no consequence that should be drawn of that fact, of that element. But it's true that order intake was a bit lower. But it doesn't at all mean that the -- that order entry will remain at that low level for the rest of the year. It will not. With the visibility we have at the moment already in our figures, with the qualified pipeline we have, we truly believe that the order entry will come back to our standards in Q2 and after -- in the year, including in the -- the Tech Foundation part of the business. And I insist one of the reason why we took the decision so rapidly to change the organizational structure of the company and to create business lines, that's mostly to make sure that we reignite the sales motion in the Tech Foundation part of the business. We saw that this part of the business, because it's in a very particular situation, needs to be managed accordingly.

Okay. Just that comes on to my sort of second question actually, which is that -- has there been -- or has there been stability in the senior sales staff across the business? Obviously, over the course of the last 2 to 3 years there's been quite some significant changes, severalfold, in terms of the function of the sales operations of Atos. And I'm just wondering to what extent you may have suffered a little bit in terms of attrition of senior salespeople within the business?

Well, nothing specific to mention or to highlight on that subject. We have an attrition rate on average, which is -- we said that in our figures presentation, which is around 22%. Our sales group doesn't differ a lot on that metric. And for the senior salespeople, we have nothing specific to report.

And can I offer, obviously, best of luck, Uwe, for the future for yourself.

Thanks, Neil. Appreciate it. All the best.

[Operator Instructions] And the next question comes from the line of Laurent Daure from Kepler Cheuvreux.

I have a couple of questions as well on my side. To come back on the first one on the bookings side. On the Tech Foundation, what would be an average split in a given year between renewals and new contracts? I'm just trying to try to see how much of the weak figures came from that. The second question is on the staff addition -- understand most are offshore. So if you could update us where you stand at the moment, and where you're heading on the offshorization penetration a couple of years ago -- you may come back at the CMD, I guess, on that as well? And my final question is coming back to Nicolas David's question. I understand that you're going to have positive impact from the slippage of last year in Q2 as well. Is there any reason to have the second quarter trending much differently from the first one? Any other one-off that could have helped during the first quarter?

Well, Q2 trend, probably similar as -- or slightly improving if we compare with Q1. As I said, we are fully in line with our guidance that we -- I have reiterated today, I mean that you can imagine by yourself that will -- how the trajectory of revenues will develop, but Q2 should -- well, should be in the same kind of vein as Q1 in that respect. And we'll have a slippage of Q4 falling into Q2. As I said, we expect around EUR 30 million of slippage, but it's a sort of an order of magnitude, of course, falling into Q2. We had EUR 130 million slippage coming from Q4. And as I said, it will be divided in 3 blocks -- well, not divided, but that's the way it's materializing. Ultimately, we will recover the slippage in the 3 first quarters of this fiscal year, with the same kind of impact for every quarter. And that's what we did in Q1, EUR 30 million. Probably, we have another EUR 30 million in Q2, which is quite low push in our Q2 figures as it were for our Q1 figures. Offshore ratio, it's one of the weak part of our business model, the offshorization ratio, which is far too low, and which will be one of the elements on which we are working to improve and streamline the cost base of our companies. We have 2 elements which are negatively impacting our cost base and which are creating a gap with our competitors, which is significant in our cost of delivery. And well, you know that better than I do probably, it's around 10 percentage point of cost, which is quite a lot. And with 2 major elements, which are the offshorization rate and the hedge structure of our company, the so-called [ generalization ] Rate. We are working on those elements, and there will be part of the underpinning decisions or strategy or actions we are taking in our turnaround program to really step change the operating performance of this company at the cost line level. Of course, we'll try to improve all the lines of performance of the company, but it will be part of the cost base improvement. The first question on bookings, how much is renewal, how much is new? Well maybe Uwe is taking this one.

Yes. So Laurent, and of course, that can fluctuate very much, so I mean it can be, in low quarters like now, about 20% of the Tech Foundation, but it could go up to 40%, right? So between 20% and 40%, depending on if there are some large deals coming from renewals as we are right now in the low season. It's more to the lower end. The average, I would say, is about 30% of the Tech Foundation order entry being generated by renewals.

And for the other units, I guess, it's much, much less. It's very small now for Digital and cyber.

It's lower because the average contract duration is lower on [ doors ]. Of course, depending a bit cyber is also, let's say, 3, 4 years contract duration, whereas in digital is, of course, it's lower.

All right. I think that's the -- it ends our Q&A session. It was the last questions. Some s of conclusion from my side. Q1 revenues we see them as very encouraging. Booking low, but we think it's not -- well, it doesn't mean that it will continue for the rest of the year or into Q2, which should be far better in that respect. Reorganization of the company underway, sales motion reignited. And we have announced today the date of our Capital Market Day, which would be set on June the 14th. And lastly, importantly, we do confirm our guidance for the fiscal year 2022 for all the KPIs. Thank you very much. Have a good day.

That does conclude our conference for today. Thank you for participating. You may all disconnect.