Atos SE (ATO) Earnings Call Transcript & Summary

Good day, and thank you for standing by. Welcome to the Atos Third Quarter 2022 Revenue Conference Call. [Operator Instructions] I would now like to hand the conference over to your speaker today, Nourdine Bihmane. Please go ahead.

Thank you, operator, and good morning, everyone, and thank you for joining us for the presentation of Atos Q3 revenue. I am Nourdine Bihmane, Group CEO and Co-CEO in charge of Tech Foundation. And for this presentation, I'm joined today with Diane Galbe, our Senior Executive Vice President in charge of Strategic Project and Support Function; and Philippe Oliva, the Co-CEO in charge of Evidian; and of course, Nathalie Senechault, our Group CFO. Now let's turn to the quarter's highlights; overall, in the past quarter, Atos continued to improve its business performance, as we pursue our in-depth transformation. In terms of revenue, we delivered positive revenue growth at constant currency, showing a strong sequential improvement compared to previous quarters and reflecting the steady improvement in operational performance. Q3 is a lower quarter in term of book-to-bill in our sector, but it did come out low at 71% book-to-bill at the Group level. We will get into detail by business later, but the pipeline is still strong and increasing. We should start seeing significant improvement before year-end, with more large deals, more new logos, as we are building sales capabilities and providing assurance from the execution of the separation. Book-to-bill is expected to recover strongly in Q4. On the peoples side, our attractiveness and our ability to retain talents are intact. Group headcount was stable in Q3, reflecting the selective hiring approach we implemented. Gross hiring at 8,400 associates, of which 64% in offshore and nearshore locations. In parallel, we have made significant progress with our separation project, putting us well on track to complete the operation in H2 2023. Diane will comment later on our progress. And lastly, based on our robust revenue performance in Q3, we are precise in our revenue growth objective for the full year. With that, I propose now to give you an update on Tech Foundations. So let me say, I'm really pleased with the momentum we have in Tech Foundation. As I said last time, this newly formed business line with a refocused strategy, combined with our decision to invest in this business has sent a powerful signal to all our employees and customers. Our current strategy is a stark contrast to our previous one, where part of the Tech Foundation business were going to be disposed and where the Group's focus has shifted away from our core infrastructure business. On the revenue side, the momentum is clearly visible. We stabilized our top line in Q3 at plus 0.3% at constant currency, which is a strong improvement coming from minus 11.4% last year and minus 2.6% in H1. The stabilization is happening earlier than anticipated, and these were a result of that renewed focus and effectiveness of our new team in charge. In particular, the decrease of our core infrastructure business is much more contained than last year, and our professional services business has been showing -- really growing evidences in the last months. On the commercial side, while we have still a long road ahead, we are making good progress. After a difficult year in 2021, we are gradually rebuilding our commercial pipeline, which takes some time due to the long sales cycles in our business, typically between 12 to 18 months as already mentioned. Q3 book-to-bill was 58% driven by a slippage of a key large deal, and increased focus on margin and cash profile of our deals. Despite being more selective, booking in Q3 represented 4 points improvement of our prior year booking. As you know, traditionally, Q3 is our lowest quarter in terms of booking, and we anticipate a significant improvement in Q4 as we have experienced historically. However, we see several signs of improvement in our core business. Specifically, our new logo bookings were 5 times higher compared to last year. An early indication of results from our ongoing investment in large deals, and increased focus on new logo acquisition. Our pipeline is also higher by more than EUR 3 billion versus last year at the same period. So we do expect the book-to-bill to improve in Q4, to pave the way for a successful 2023. While these results are encouraging, they do not yet reflect the full potential of our business and the change we have implemented in our commercial model, which will take 12 to 18 months to fully bear results. So to summarize, the positive momentum on the top line, still some work to do on the commercial front, but things have clearly started to move in the right direction and more rapidly than expected. So on this slide, you could see a few example of important contracts we signed this quarter. A contract with a major American manufacturer in the automotive industry for mainframe services, taking over the entire application support, and on top of it being responsible of their migration of their mainframe application to AWS. Next one, I will mention it, it's the SIX Group. It's a 5-year contract to provide same thing, a mainframe managed services to the entire SIX, Swiss Infrastructure and Exchange, to be their IT provider end-to-end. Other one, it's Paragon. It's a large contract to provide an end-to-end IT services solution to that global communication provider in order to develop the digital dynamic infrastructure to support their growth. And the last one, it's an outsourcing operation deal with energy, a German energy provider based in Nuremberg and this is their first generation of IT outsourcing and they have tools to trust us to make it happen. So the last 3 that I mentioned are new logo. And as I said, we significantly increased our order entry with new logo, which indicates encouraging success in rebuilding our commercial pipeline and second that our clients believe in Tech Foundation's, ability to deliver top-quality services in the long run. So with that, I will now hand over to Philippe to present Evidian performance.

Thank you, Nourdine, and hello to everyone. So on the Evidian side, so we continue to grow in Q3 at 2.1% at constant currency. This is in line with our H1 trends and ongoing business, and overall, let's say, our market dynamic. The solid growth in digital, where the market remains strong, particularly in our digital application transformation and sovereignty requirements and also with the contribution of our recent acquisitions, especially related to the positioning that we have and that we want to reinforce in cloud services and sovereignty requirements. Also, solid growth in cybersecurity, where we are benefiting from our market leadership position, as you know, and very strong customer demands, reinforcing the requirements on data sovereignty and cyber protection related to the attacks that they are facing on the market. On the other end, let's say, lesser lower level on the HPC revenue that has mitigated our growth. So we expect that business to start ramping up in Q4, and this is related to the very strong book-to-bill that we had in Q2. I would remind that we signed a very large HPC on the Barcelona Supercomputing Center in Spain, as well as some other ones that we're currently procuring on the international basis, and that we're expecting to materialize in Q4. In addition, we had a book-to-bill in Q3, standing at 85%. This is a result of a low quarter in HPC business, following a stellar Q2. You remember that we had, let's say, a very strong book-to-bill on the HPC side in the second quarter, and due to the cyclicality of that business, that's the reason why we are expecting, let's say, to get back on track in terms of strong growth on the HPC side, especially in the quarter 4 to recover the situation and the lower order entry that we had in Q3. All in all, we are making great progress. We still need to continue improving to our -- reach our potential and our mid-term target of 7% organic growth, on average of about 2022 to 2026. So how do we go from 2% to 7%? So to begin, we need to better capitalize on Evidian's truly unique assets. So we need to continue focusing on optimizing and bringing our assets to the market in a much more efficient way. As we mentioned during our Capital Markets Day, we have very strong offering synergies between cybersecurity and the requirement of public cloud, especially to embrace the sovereignty requirements. This will translate into very powerful differentiator and we're currently engaging with all the hyperscalers to bring that capability to the market. What I also want to insist on is that in certain key attractive segments, such as military and defense, energy and utilities, manufacturing, financial services, which at the moment, are not getting, let's say, the commercial traction that we could expect. But what I want to expose is that we are currently delivering very strong pipeline growth on those core segment activities that we're expecting also to benefit from, especially in terms of order entry in the fourth quarter. So we have a clear roadmap to unleash our potential, and at the same time, we are focusing on execution. I want to also share that our billable utilization rate is continuously growing, especially in Q3 and going forward, we expect to start seeing some first positive results, starting with an acceleration of our revenue growth in the fourth quarter. And as a strong indication of our progress, let's now look at the core, let's say, references that we had in the fourth quarter. First, an instruments company in the U.S., we signed a very significant deal that is, let's say, bringing a brand new go-to-market model, an information system for the salesforce of our clients, leveraging all our artificial intelligence and machine learning solution design and capabilities. On the other end, we are capitalizing on the strong forces that we have on SAP implementation and managed services, where we have been awarded by a Dutch public administration for an end-to-end public cloud migration on the SAP information system. Then the last one that matters a lot, especially related to the current environment, it's related to energy and utilities, where we built a very strong application providing predictive and preventive maintenance, one more time leveraging our BDS capability and artificial intelligence requirements for wind farm management and system reliability for end-to-end solution for this energy and utility company. And lastly, we extended a strategic partnership with an Italian Internet service provider for cloud migration, data centers management and workplace transformation, tied with cybersecurity requirements. If we now look on the next slide, that is related to our talents. So we all know that we're operating let's say, in the labor-based environment. And regarding talents, our headcount remained broadly stable over the quarter. We hired close to 8,400 people, of which 64 coming from offshore and nearshore locations. Specifically, most of our hirings work on the Evidian scope, where we need our talents to nurture our contract and especially to continuously deliver the revenue growth that we're expecting. Attrition levels remain stable around 20%, which is in line with the industry average, but I have to say, that it's even below the industry average in terms of attrition level. Lastly in September, for the first time, Atos was listed by Great Place to Work as one of the Europe Best Workplace In The World in the 2022 annual list. So clearly, we are still a hotspot for talents. I have to say that the strategy that we explain, the convictions related to the differentiation that we have in terms of portfolio are protecting, let's say, the attractiveness of the company and that's something that I'm really proud of. I will now hand it over to Diane to update you on the progress of the separation project.

Thank you, Philippe, and good morning, everyone. So I am very pleased to share with you today, the significant progress we achieved in Q3, with regards to our separation project, which is on track to be completed in H2 next year. Starting with the Group's financing. On July 29, we signed a new EUR 2.7 billion bank debt package replacing our former revolving credit facilities, composed of EUR 1.5 billion unsecured term loan with a maturity of 18 months and 2 6-months extensions at the Group's option. A EUR 0.9 billion RCF maturing in 2025 and EUR 0.3 billion unsecured bridge to disposals, with a maturity of 12 months and one 6 month extension at the Group's option. The syndication of this new debt package was successful, as the term loan was largely oversubscribed and showing strong support from our banking partner. In addition, pricing conditions were very good, as margins are 160 basis points for the term loan and the bridge, and 80 basis points for the RCF. We also reset the covenant, which is now 3.75 times net debt to OMDA, tested once per year in December. With that, the Group is fully financed for the interim period until spin-off, and our liquidity is ensured. Moving to the next slide; in Q3, we achieved significant progress in our separation project. On September 7, we launched the information and consultation process of Atos European Works Council, what we call the SEC. This process is currently ongoing and at the same time, we initiated social dialogue at country-level. This is a very important milestone. We believe that social dialogue is essential, as employees are its #1asset, and the key driver of value creation. Secondly, all separation work streams are mobilized and currently progressing according to plan. We are talking about no less than 20 different workstreams, involving more than 500 executives across the Group and covering all separation topics; go-to-market and commercial continuity, carve-out operations, operating model and support functions setup, as well as program coordination. Lastly, as you already know, we launched a disposal program back in June with EUR 700 million expected proceeds, of which EUR 220 million have already been secured with the sale of our stake in Worldline. This program is on track. We currently have several processes ongoing, involving business of various sizes and including 2 small-sized transactions which are already signed. This progress shows that there is interest for what we are selling, and our ability to execute rapidly, only 4 months after the program was announced back in June. Looking now at the next steps on the next slide. So following the completion of the SEC process, we would have a clear path to complete all carve-out workstreams, so that we would be internally 100% ready in Q2 2023 and [ provide ] evidence prospectus and convene shareholders meeting thereafter, so that we would be in a position to distribute and list the shares of Evidian in H2 2023. We are, as of today, fully on track with these objectives. And I would like to reiterate that we are mobilized and committed to the successful execution of this project, and we are convinced that it will maximize value creation for all the Group's stakeholders. Turning now to CSR on the next slide, which is a key aspect of Atos' overall strategy. In the middle of this in-depth transformation, we have remained deeply focused on our CSR performance, where we are best in class. As a result of our commitment, this year, again, Atos has been awarded the highest recognition by world-renowned ESG rating agency. For the third year in a row, Atos received EcoVadis Platinum Award with our highest score to date at 84 points out of 100, confirming Atos' top 1% position in its sector. Additionally, in October, we were upgraded by MSCI ESG to the highest rating available at AAA, and we are now ranked in the top 7% of our sector. And MSCI highlighted Atos' leadership in clean technology initiatives, as well as our strengthened governance. On the governance topic, let's turn to the next slide. So, over the past month, Atos has significantly strengthened its governance by renewing more than a third of its Board of Directors, with 4 new independent directors, Elizabeth Tinkham, Astrid Stange, René Proglio and Caroline Ruellan; and Katie Hopkins will represent the employee shareholders. Together, they are bringing a wealth of expertise in digital, finance, human resources and corporate governance. In addition, 3 of the new independent members have now been appointed as Chairs in various committees. Elizabeth Tinkham for the Nomination and Governance Committee; Astrid Stange for the Remuneration Committee; and René Proglio for the Audit Committee. The Board also created another Committee in charge of overseeing the study and implementation of the separation project, which is composed of the majority of independent directors, and chaired by René Proglio. To conclude, we see Atos transformation is in motion and the whole group with its management team and Board of Directors is fully mobilized, committed to success in the best interest of all our stakeholders. With that, I will now hand over to Nathalie for our Q3 financial performance.

Thank you, Diane. Good morning, everyone. I will now go through the Group revenue performance for the third quarter. Atos recorded revenue of EUR 2.8 billion in Q3, up by plus 5.7% compared to Q3 last year. Growth at constant currency turned positive in the quarter, at plus 1.1%, coming from minus 0.6% in H1. So, quite an improvement driven by the stabilization of organic growth at minus 0.1%. I will come back to that. Scope impact was plus 1.2%, primarily reflecting the contribution of cloud, which is consolidated in our accounts since January this year, as well as other acquisitions that were made in 2021. ForEx impact was quite significantly positive, plus 4.6% or EUR 122 million and is primarily due to our exposure to the U.S. dollar. Let's take now a closer look at organic growth. Organic growth has significantly improved quarter-over-quarter, coming from a very low Q4 2021, at minus 8.9% which was impacted by the reassessment of a large BPO contract in the U.K. as we said previously. Excluding this impact, Q4 2021 was still down by minus 6.1%, then minus 2.4% in Q1 this year, minus 1.9% in Q2, and finally stabilized in Q3 at minus 0.1%. As mentioned earlier by Nourdine and Philippe, this improvement is the result of an earlier than expected stabilization at Tech Foundations. While on Evidian side, growth in digital and cyber security was still mitigated by lower HPC revenue, indicated a potential for acceleration, when HPC starts ramping up. We are clearly confident that this momentum will continue and that organic growth will turn positive in Q4, thanks to first, an acceleration at Evidian, as Philippe mentioned, and second, the continuation of positive trends observed at Tech Foundations. This is not contradictory with the level of order entry we had in Q3, as our contract mix has shifted to contracts that have more short-term revenue yields. So a good -- very good momentum in organic growth, that will continue into Q4, and which is reflected in the slight improvements we are making, to our revenue guidance. Nourdine will give you more details on this later on. Next, now let's have a look at our performance by regional business unit. As you can see on the slide, the performance is a little contrasted across business -- those business lines with growth in Americas and Northern Europe and APAC, helped by acquisition as well as good trends in digital activities, as well as an improvement in Tech Foundations in Northern Europe. Conversely, Central Europe and Southern Europe recorded slight contractions, minus 1.2% for Central Europe, primarily driven by the UCC business, and minus 2.2% in Southern Europe, due to a low HPC revenue coming from a very high level in 2021. With that, I will hand back to Nourdine for the full year objectives.

Thank you, Nathalie, and thank you, team. So based on our Q3, we are fulfilling our full-year objectives, and refining our revenue growth target, while operating margin and free cash flow target are unchanged. So for the full year, the Group expects revenue growth at constant currency in the upper half, of the minus 0.5% to 1.5% range that we indicated previously. Q3 was robust and we expect growth to continue and accelerate in Q4. Operating margin at the lower end of the 3% to 5% range. We have a solid set of improvement measures in place which we presented in July and the whole organization is mobilized toward these objectives. And lastly, free cash flow is expected at the lower end of the minus EUR 150 million to EUR 200 million range, excluding additional impact from our transformation plan. In addition, the cash impact from this plan are expected at around EUR 250 million at this stage, in line with what we said at our Capital Markets Day in June. So to summarize, in Q3, we showed tangible improvements with revenue growth turning positive at constant currency, especially with an earlier than anticipated stabilization of Tech Foundations topline. While we still have some work to do on the commercial side, the momentum that we carry shows that we are going in the right direction. On the separation project, we are making tangible progress, and we are fully on track to complete within our timeframe. The entire Atos employees, Atos team is engaged and committed to successfully deliver our transformation. Through this transformation, we are better positioning our 2 businesses for long-term success and unlocking the value for all our stakeholders. So with that, we will now take your questions. Thank you and back to you, operator.

[Operator Instructions] And the first question comes from the line of Amit Harchandani from Citi.

Amit Harchandani from Citi. 2 if I may. As a first question, could you kindly give some more insight on the growth of the Evidian business, if you could help us understand the moving parts? The growth seems a bit slower than I would have anticipated. So how do you think about the growth going into Q4 and beyond? And in particular, if you could talk about the digital and the cybersecurity segment within the Evidian business? And as a second question if I may, given the interest rate environment and given the fact that you have an element of floating debt, you have used factoring in the past, could you give us a sense for what are some of the pressures you see in terms of cash flows, given the debt position, given the use of factoring, given potentially other changes in the macro environment, that could add additional challenges in terms of financing as you go through the next 12 to 18 months?

So Philippe will take your first question for Evidian, and Nathalie will take the second one.

Yes. So what I want to say in there -- especially, in terms of growth, so, we mentioned that the dynamic is quite strong on the digital front, relative to revenue growth. It's pretty close to the line, let's say with the target that we had and that we announced at the Capital Markets Day. But as you know, we have, let's say, an impact related to the cyclicality of the HPC business that's following, let's say, a very strong Q2 that we had in terms of order entry, where we're going to start materializing the revenue growth in Q4. So we are really expecting to deliver a stronger [Technical Difficulty] Q4 in terms of revenue growth. We don't disclose at this stage, let's say the breakdown between BDS and Digital, but clearly, this year, BDS is affected by a low level of HPC revenue where we are, as I said, going to get back on track, especially in terms of revenue trend in Q4 on the advanced computing parts, including HPC that will out let's say, showing the overall improvement that we have for the Evidian scope.

So on your second question, we still have a large part of our gross debt at fixed rate on -- respect to our bonds. On the bank debt, and as Diane mentioned it, we have refinanced -- successfully refinanced in July, our bank financing. And as we mentioned, the cost is variable, but will ultimately depend on the amount we would draw down from these facilities. And as an indication for this year, we expect the net cost of debt between EUR 30 million and EUR 40 million. And on the factoring side, we would remain at the same level as last year.

Please standby. And the next question comes from the line of Laurent Daure from Kepler Cheuvreux.

Yes. 2 from me as well if I may. Nourdine, my first question is on the infra business going into next year. I mean, basically, you're doing better than expected in 2022. What will be the moving parts for 2023? You have some contracts that are ending that could be a headwind. What about the book-to-bill that has been weak this year? Any impact? Basically, I'm trying to see if the resilience you're seeing right now, can be extended into the next 12 to 18 months? And I have a follow-up after.

Okay. In fact, maybe to put it in perspective, while you may judge whether book-to-bill has been low, it has been better than last year on every quarter this year. So Q1 book-to-bill of Tech Foundations was better than last year Q1, same for Q2 and same for Q3. So we are in the recovery mode in book-to-bill. So looking at next year, I mean a better position in January 2023, than in January 2022, in that particular business. But coming a little bit more in your underneath question behind it. The amount of renewal that we are having, I don't have -- so we don't have so many large renewal upcoming. As I already mentioned, our average rate of -- average duration of contract is 3.5 to 4 years contract. So when I look at the distribution of the renewal amount between this year and next year, it's almost the same. So I'm not expecting a big renewal year, next year. What I see, however, is in the current contracts that we have, we are capturing more and more add-ons. So I will say the change request, which was not the case in the previous years, yes. So I think the main topic which is also driving that stabilization of the top line is now the team are mobilized to capture more change requests, more what we called in our world, fertilization or upselling on top of our base contract, which is generating some additional activity and translated into external revenue.

Nourdine, and when you talk about add-ons, are you talking about 5% to 10% business that you've been able to sign? And don't you think that with the macro getting tougher and maybe a bit more complex to have the same amount in 2023, on those more discrete spending?

It's a fair ask. In fact and I have seen that behavior speaking with several customers in this summer, while in H1 -- and I will say in the last almost 18 months, the only discussion we had with the customer is, give me the services as fast as you could. And that was about speed and velocity of helping them transforming, coming out of COVID. What I have seen with the macro environment, started happening or started taking place in my dialogue with the various CEOs and CIOs of our customer, is a cost containment looking forward. And when we enter those kind of dialog, the outsourcing world of the managed services world. has that value prop of reducing or helping customers fixing the cost on the IT side, and especially looking at how you could help them optimize it even more to be able to invest on the change. So, I will say, to the opposite of our business, what I'm saying, with the macro deteriorating a little bit, is the managed services model is coming back on the table and the cost containment. is an argument for that business model that we are pushing with Tech Foundations.

And my second question is for Philippe on Evidian. I mean, you did not give us a lot of detail, in terms of breakdown. I'd like to come back on the HPC and business impact. First, what is the underlying trend? Do you see any improvement in business ex-HPC? And if I remember well, I think the HPC was only 10% of your sales. So even if it was double-digit, I mean it's not probably the only explanation why you're not growing at 7% organic right now and basically in Q4, what kind of actions have you taken for this business?

Yes, sure. I can understand the frustration related to it, let's say, but you can do some quick math also, because I gave an information related to the fact that digital is pretty close to the growth that we are -- let's say, are expecting, especially related to the 5 years plan figures that we mentioned at the Capital Markets Day. And even though you're right on, let's say, the global contribution of the HPC business, but you know that HPC, the average, let's say, transaction is oscillating between let's say EUR 50 million and more than EUR 100 million, especially for the largest one. And we're currently having in the pipe, opportunities that are even below EUR 250 million on the HPC side, that can drastically move the needle, especially in terms of short-term revenue generation, because that those transactions are generally generating revenue between, let's say, a range of 6 to 18 months maximum. So that's the trend that we have. We mentioned in Q2, that we had a very significant book-to-bill, with a transaction that was above EUR 100 million that we disclosed to the market. And related to the manufacturing, let's say, cycle and then the fine-tuning of the HPC environment, that we are expecting to start or let's say ramping up our revenue on the HPC in Q4. So to -- without giving you let's say more details, that the HPC is going to get back to a significant growth in Q4, and that will protect, let's say, the trend that we have mentioned, with the level of confidence on growing at the pace of the Capital Markets Day assumptions in Q4.