Atos SE (ATO) Earnings Call Transcript & Summary

Good day, and thank you for standing by. Welcome to the Atos Third Quarter 2023 Revenue Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to Atos' management team.

Thank you very much. So good morning, everyone, and thanks for joining us this morning. So I'm joined today with Paul, who will talk -- will follow me and as well with Nourdine and Philippe that you all know, who will intervene during the Q&A session. So thanks for all of them to be here today. So I'm going to start to give you a brief introduction. I will hand over to Paul, as I said, to take through you through the group and business performance in the quarter. And then we'll open for the questions. So first of all, a bit some key takeaway. Well, as you know, I just joined recently after 30 years in the technology sector. And I've seen first in Atos technological capability but as well the highly talented team, the leadership and all team across the globe. So since I joined Atos earlier this month, I have been really impressed by the total commitment and dedication of everyone of Atos to deliver the plan every day with clients and their team. So what I did is that I spent time to better understand our operation. First, at Tech Foundations with all infrastructure, digital workplace and all the other strategic services that they do today. But also with Eviden across digital, cloud, digital security and advanced computing. So for me, it's extremely clear that the business has significant opportunity to capitalize on their strong position across many strategic area that are extremely differentiated and sometimes unique. So obviously, while focusing on the operation performance and commercial momentum. As we already communicated, we anticipate the shareholder meeting to take place early Q2 2024 with an Investor Day to occur slightly before. And finally, I want to insist that fully committed to an ongoing open dialogue with all of our shareholders, obviously, with all of you today. So now let me turn over to Paul and who will cover the Q3 financial results.

Thank you, Yves, and greetings, everyone. Let me start with revenues for the quarter and year-to-date. Group organic revenue was down 3% for the quarter, Eviden was up 2.3%, partially offsetting a decline of 7.2% in Tech Foundation. I'll cover the revenue performance and commercial activities of both Eviden and Tech Foundation later in the presentation. Year-to-date, group revenue was up 0.6% with a solid revenue growth in Eviden offsetting decline in Tech Foundations. And for the full year, we remain on track to meet our revenue growth target for the group of 0% to 2% as well as our guidance for both Eviden and Tech Foundations revenue growth. Turning to our revenue performance by region. Southern Europe was up 3% on solid contributions from HPC and digital security. Central Europe was relatively flat, Northern Europe and Americas were down 2.5% and 13%, respectively, and those reflect the impact of delays in contract awards. America was further impacted by lower volumes in cloud licensing in the U.S. and a tougher comparison with the prior year, which benefited from a large completion of an HPC contract, We expect Americas revenue to stabilize in the fourth quarter and be relatively flat compared with the prior year. Revenue breakdown by region is highlighted on the right side of the slide, showing a balanced revenue mix across the regions. Turning now to order entries in the Q3 for the group, and let me remind you that Q1 and Q3 are seasonally low quarters for us. Order entry in Q3 of 2023 was EUR 2.2 billion, up 10% over the prior year on a reported basis. Order entry growth would have been higher adjusted for the divestitures. The book-to-bill in the quarter was 84% compared with 71% in the prior year, and we expect a stronger book-to-bill in Q4. Total head count for the group was 105,000 roughly employees at the end of the quarter, which was down minus 2% compared with the end of H1. And our attrition rate was about 16% on a trailing 12-month basis, down compared to the end of H1. Let me turn now to our Q3 performance by business. For Eviden, revenue in the quarter was EUR 1.2 billion, up 2.3% organically reflecting strong growth in digital security and stronger performance in digital in Europe. The performance in Europe was driven by demand for application development and modernization. In the America, revenue was down, reflecting the impacts of delays in contract awards, lower volumes in cloud licensing, as mentioned earlier, and a tougher comparison with the prior year, which benefited from a large completion of an HPC contract. And as I already mentioned, we expect America's revenue to stabilize in the fourth quarter and be relatively flat on a year-over-year basis. Eviden year-to-date -- the year-to-date, excuse me, on a year-to-date basis, revenue was up 5.5% organically. Now Eviden book-to-bill was 80% in the quarter, in line with the prior year. And as a reminder, bookings are seasonally low in the third quarter and therefore, we expect a rebound in bookings activities in the fourth quarter. In the quarter, the Eviden business continues to make progress in gaining new logos across all 4 offerings. Some key wins are highlighted on the slide. They include an application integration contract with a government agency in digital and a large cloud transformation contract with a large luxury retailer. Eviden also signed a digital security deal with a major transformation company. And lastly, as we already mentioned, Eviden won a contract for the first exascale HPC, which is clearly a testimony of Eviden's leadership in advanced computing. Now let me turn to the Tech Foundations. Revenue in the quarter was EUR 1.373 billion, down 7.2% organically and minus [ 4% ] for core revenues. The business continues its portfolio rationalization with a reduction in its nonstrategic activities, including hardware and software resale and BPO. The company recently sold its UCC business, which was declining and impacting year-over-year growth comparisons. Year-to-date, revenue was down 3.5% organically and down 1.9% excluding nonstrategic activities. Book-to-bill for the Tech Foundations was 88% in the quarter compared with 58% in the prior year. Tech Foundations added a new logo in the quarter with the major telecom companies in the U.S.. The business will be helping that client modernize its mainframe environment. Other key wins in the quarter, including a contract with the European Commission to support their cloud transformation and automation plans. Tech Foundation also signed a contract with a large gas and electric company to manage the workplace environment for their 30,000-plus employees. So in closing, we are confirming our 2023 guidance for the group. We would expect growth organically to be 0% to 2%, operating margin of 4% to 5% and free cash flow for the full year of about EUR 1 billion and to be precise, EUR 969 million, which negative, which is really implies in H1 -- H2, excuse me, free cash flow of flat for the semester. At the business level, Eviden is targeted to report an acceleration in organic growth compared with the prior year and an improvement in its operating margin year-over-year. Tech Foundation is targeted to show core stabilization as the business continues to rationalize its portfolio and we expect Tech Foundation's operating margin to be targeted to be positive for the year. And with that, we will now open the line for our questions.

[Operator Instructions] And now we're going to take our first question, and it comes from Frederic Boulan from Bank of America.

Firstly, I know it's early days. I think you've been here for less than a month, but we would love to hear your thoughts on Eviden when you look at the growth prospects for the business in the medium term, specifically next year, we have some of [ PAs ], including Accenture guiding for 0% to 3% organic growth for next year. So I would love to hear how you think Eviden confirm that in that environment and in particular around the Cyber unit? And then secondly, if you could give us an update on your disposal plan. So [ both ] already announced EUR 700 million plan and the new plan in terms of cash impact, what we can expect this side of the year and next out of the year.

Well, I will thank you for the question. I will take it and ask Philippe to complement as we are working close together. Obviously, today, we are commenting the Q3, and I will not comment about any guidance for next year, which is not the scope of today's focus. I started to learn by meeting the team with Philippe on the 4 key offerings around cloud, digital, security and the -- all the high performance computing activities, which is not just about hardware, but as well all the services around. So -- and that has been the target to put all those added value services. And I think what I've seen in it is -- there are 2 things. One is there are differentiated capabilities in terms of their focus to the new technology, whether it's in cloud, focusing on the migration to the hyperscaler, but as well all the SaaS applications that are absolutely strategic in -- which is most of the scope that we have within digital, then security and HPC, which includes a lot of IP and assets and I think back to your questions, what I see extremely differentiated from what I know from the market is that some of these offerings are absolutely unique. If you just touch the HPC combined with the AI capability of the group with Eviden. This is unique in the market. If you want to set up an NLM environment for sovereign with suffering objective to secure your data, there is no other offer in the market. So this is one example that I think will help evident to keep being very differentiated for this, there is no competition that exists. So for that, I'm pretty confident that the needs our ability to push it and present it to every client. But all of them, all of those 4 offerings are extremely relevant, I believe. Then when it comes to the -- this investment, I think that was your second part of the question. I cannot be precise on that. Maybe Paul will comment back because I -- we are currently looking at it, and we will comment later on which activity we believe will be in scope. But maybe first with you, Philippe, about any additional comment and then Paul for the disinvestment?

Hello to everyone. This is Philippe. So just -- you remember that as our Yves is mentioning, we have decided to heavily capitalize on what is making us different and what is setting us apart from the competition to first, reposition the company, extracting more operating margin and also, you remember what I was saying that is always we stopped running after everything that is active in the market. We are now ring-fencing our focus around the key areas. I think the perfect illustration and Paul started to capture that in the reference that you -- and deals that we signed, we are starting to make terrific progress on the -- our ability to embrace the Generative AI growth. And I know that many, let's say, core services providers on the market are all, let's say, focusing the report and repositioning their resources on Generative AI. But there's one item that is very, very strategic is that we are now the sole unique progress that can build up Generative AI for very large corporates that believe that it matters to protect their intellectual capital and their knowledge-based model by structuring those Generative AI capability in a protected environment. And when I say protected, that means not only relying on the core servers that we have on the advanced computing part, but also making sure that we are protecting the 3 main pillars that are -- who is getting access to what, that's the identity management software portfolio that we have, how to encrypt and protect the data, that's everything that we're doing with the level of encryption that we have on the Cyber-security side and also managing the threats and cyber attacks through the managed action to response. So we are coming together in terms of integrated capability to make sure that our clients are understanding the integrated value prop that we have. And now with the rise of exascale requirement for deep learning capability and fiscal year not only relying on scientific calculation, but starting to build, let's say, learning machine model. That's what is setting us support. It's a great momentum. We have a very strong pipeline, as I mentioned before, especially around our new dedication of high-performance computers for Generative AI and we are really starting to see the momentum growing up.

So -- and this is to your question, one example that was referring that Philippe has detailed. And that's where I think to be even more differentiated when we refer to all those 4 capabilities, we need to more systematically bundle those offerings together as the example of Generative AI, which will help to respond to clients' needs. So that's a focus we have together with it. Maybe Paul, on this investment?

Yes. On the divestitures, there were 2 programs, as you recall, Frederic, The first one is the EUR 700 million plan of asset disposal was announced last year, and this one -- this program is completed. And so that would be part of what we had turned. We would do this half a year. I think we said EUR 250 million to EUR 300 million was remaining of both EUR 700 million program as well as the new program. The new program is EUR 400 million asset disposal. So let me go back. EUR 700 million from last year. This program is going to be now completed this semester. The EUR 400 million program, we have 2 deals, one closed and will be part of our EUR 250 million to EUR 300 million this semester. The other one is signed. We haven't collected yet the money, and we're still ongoing discussions on other asset that make up the EUR 400 million program, and most of that will be happening next year.

If I may clarify, Paul. I think on the EUR 700 million, there was something like EUR 500 million remaining. You already catching EUR 200 million unless I'm missing something.

No, no. I think you're wrong. It was -- we had done EUR 500-plus million, close to EUR 500 million, there was remaining a couple of hundred to hundreds of million, and that's what really is being completed. .

[Operator Instructions]. And now we're going to take our next question and it comes from Nicolas David from ODDO BHF.

I have a few of them. The first one is when we look at the deterioration of growth of digital in Americas, could you share some color about the trends during the quarter. I mean this deterioration was seen during all the quarter? Or was it more an acceleration in September and what do you see for the specific area digital services in Americas for Q4? My second question is what makes you confident to reach even the lower end of your growth guidance when you are actually at 0.6% organic growth after 9 months. And I remember that comps in Q4 overall are pretty tough. And you are except -- I mean, I understand on the Big Data side that you may have some rebound. But excluding the Big Data, it looks like you're embedding some decline for Q4. So what -- especially if we exclude Big Data, what make you confidence that you have stabilized the situation and reach the lower end of your growth guidance? And my last question is -- do you think you need given this kind of a weak Q3 and maybe Q4, even if you are at the guidance, maybe would be a bit lower than what you were expecting initially, given the macro environment. Would you need some cost-cutting measure additionally to what you are already doing obviously with the restructuring plan in order to preserve the margin guidance?

What I would suggest is to start with Philippe and Nourdine to give us their view on the Americas market. And then, Paul, covering the guidance and your comment on Q3 with cost cutting and then I will complement after Paul, if needed.

Yes. So for the Eviden business because you mentioned digital, but it's not only digital. And you know that we are not breaking down, let's say, by region, let's say the revenue numbers between digital and BDS. But there's one point that I want to mention, I think, Paul touched base on this topic is that on the dividend side, we were let's say, suffering from a very difficult compare because we had a massive transaction last year. That was an HPC delivery in South America. That was quite a heavy one and that's penalized, say, the comparison in terms of organic growth year-over-year. One of the key point is that -- and I prefer to be very transparent and honest, yes, we are seeing a slowdown in terms of decision-making process in the U.S.. So that didn't impact heavily the run rate that we're seeing, especially for Q4. But you remember that in the dividend profile like what we did last year, we mentioned and I mentioned specifically last year where we delivered 11% revenue growth in the fourth quarter that this year, the same kind of profiling. That means we are back-end loaded especially on transactional sales, not only on the BDS part, but same thing on the digital one some strong delivery milestone that will trigger, let's say, large invoicing in terms of top line for the first quarter. But one of the key points is that there is that, yes, in the U.S., we are seeing a slowdown in decision-making process, as you mentioned, like what the entire ecosystem is currently absorbing on the U.S. ground.

Just on the TF side. The business is still holding, I will say. You saw the book-to-bill and especially in the U.S. where the team did a fantastic job in signing multiyear contract transformation of the mainframe activities of a major telco, which is a contract of more than EUR 100 million plus. So yes, it's true that H2 is the weak point. But if you remember, we were mentioning that we really need 12 months to recover the sales engine in the U.S. on the TF side. So I'm pretty positive about next year evolution of the TF market.

Thank you, Nourdine. So your next question is what makes us confident that we're going to be meeting the 0% to 2%, given that we're at 0.6% year-to-date. I think what, again, you heard from both Philippe and Nourdine, we expect the fourth quarter to show solid growth in both sides of the business even compared to the prior year on an organic basis. As far as the margin guidance that we have given a number of initiatives we're clearly underway not only at the beginning of this semester, but throughout the year that gives us confidence that we will hit our guidance on the operating margin.

And maybe to follow up on Philippe's comments, it was really helpful, but -- so if I understand well, so you see some longer decision taking from clients, which is not really impacting the business right now even not really in Q4 because you are executing your contract. But if I understand well, it will rather be a problem for next year, if it continues like that in Q4 and if the demand is not better, right?

The point is that we have a strong pipeline in Q4. And so far, when we are projecting, let's say, the pipeline also for the H1 2024. We remain really confident in our liability to extract the book-to-bill that is required to execute on the trajectory that we had but same kind of comment. You remember that we have a big part of the revenue that is especially on the BDS that is coming from productional sales that is less, let's say, working through a percentage of completion revenue recognition scheme. So and we have the same story than what we've seen last year, many transactions, especially on the BDS part are in decision-making in the fourth quarter.

[Operator Instructions] Now we're going to take -- my apologies, there are no further questions at this moment. We'll just give a moment to generate more questions. And now we have the next question come through. And the next question comes from the line of Laurent Daure from Kepler Cheuvreux.

Couple of questions from me as well. The first one is I'd like to come back on the divestment. But on the cash inflow, more precisely, not closing the deal, but when the cash gets in, can you give us some details on what you expect for H2 this year? And what is the remaining for 2024, hopefully in the first part of the year. From your comments I heard about -- if I got it right, EUR 250 million to EUR 300 million already booked. But I have not seen any press release on this. So could you detail a bit more. So that's the first point. The second one is more generally there's a lot of bad press are not on the balance sheet or maybe the spinoff. How do you deal the client relationships? Do you -- does it really impact the business, but closing new deals? So any comments around that would be useful. Third point is on the new contract that you won. You had some major issues in the past in the pricing. Some of the contracts you went from competitors and no competitors were not making a huge margin on the contract you won and thinking about Framatome. So how did you manage to get this contract on high profitability? And my final question is on the slowing growth at Eviden. Just wanted to make sure it won't have an impact on trajectory on margin you were expecting a few months back. Thank you. That would be all for me.

Would you start on the...

Yes, I'll take one and 3 since they are financial, and I'll turn it over to Philippe. On the divestiture side, I think we said EUR 250 million to EUR 300 million of proceeds this quarter -- sorry, this half. We 2 deals -- to these that related still to the EUR 700 million original plan have already closed, and you have not -- as we mentioned, one of them already, which will UCC sale that has already occurred and it's just occurred past the quarter end, right? The other one also will be coming in any time now. And so that -- those are 2 contracts that will close out the EUR 700 million original divestiture. Out of the 400 new program, I mentioned that one of them has signed and closed and another one has just signed. So if you take those 3 -- 2 from the EUR 700 million, one from the additional program that would represent EUR 250 million to EUR 300 million this semester. They'll be happening in the fourth quarter actually. We'll be reporting on those at the end of the year results, very, very consistent with what we told you back at the beginning of August. On terms of the evident trajectory, we are on track to deliver on the margin expectation for the business for the second half as well as for the full year.