Sopra Steria Group SA (SOP) Earnings Call Transcript & Summary

Ladies and gentlemen, good morning, and welcome to the Sopra Steria telephone conference for Sopra Steria's revenue announcement for Q1 2022. I will now hand the floor to Cyril Malarge, CEO. Over to you.

Yes. Good morning. Good morning, ladies and gentlemen. Welcome to the telephone conference to comment on Sopra Steria's revenue announcement for Q1 2022. For this conference, I will be joined by Etienne du Vignaux, Group CFO; and Olivier Psaume, Head of Investor Relations, who are both on-site at Sopra Steria's headquarters, whereas I, myself, I'm isolated at home having tested positive for COVID. May -- just to reassure you, I'm doing okay. I'd like to suggest we proceed as follows. I will talk about the overall situation, then I'll talk about the figures published for this first quarter 2022 in all of our reporting units. And then with Etienne, I'll answer your questions that you may ask during the Q&A session. So just as a little introduction with regards to our market, the IT market has been particularly dynamic despite the deteriorated overall macroeconomic environment. Obviously, I'm referring to the geopolitical situation. The start of the year was sustained. We saw a great deal of demand from customers. And against this backdrop, obviously, the challenge for customers in the digital sector like us was obviously to address HR challenges, recruitment and training our talent. So that's just a small introduction of our market and our challenges. Now if we come back to our performance. We had a good first quarter with organic growth in revenue of 6.5%, slightly above our initial expectations. We saw strong demand across all topics linked to digital transformation with 3 key drivers. So transition to the cloud, automation of digitalized processes and then cybersecurity. Demand was sustained across all verticals, and it was particularly strong in the aerospace and the defense sectors. Our sales prices were increased across all of our geographies. And we had a good quarter in terms of recruitment, [ 3,585 ] new employees joined us throughout the quarter. So this is 1/3 of our annual goal, which we've achieved a quarter of the way through the year. And then we had 700 subcontractors joined us in the first quarter when compared with 31st of December last year. So turnover at group level was EUR 1,267.7 million, with total growth of over 8.8% and organic growth of plus 6.5%. The currency impact was over EUR 13 million due to the increase in the pound sterling, and then changes in scope had an impact of just under EUR 12 million given consolidation of companies acquired. So EVA and EGGS, which were acquired last year. Now I'll review all of our reporting units, and I'll start with France. Revenue in the first quarter was EUR 513.2 million with organic growth of 9.6%. So it was a good start to the year for France. Our consulting activity was dynamic with organic growth close to 13%. Double-digit growth in the aerospace and the defense sectors, and then growth of approximately 10% in banking -- in the banking sector. So 2 sectors, pushing hard, aerospace and defense, and then banking as well. In France, we recruited 1,200 employees and an additional 300 subcontractors who are working for us in this scope in France. So the summary is that it's a good start to the year for this reporting unit. Now if we move to the U.K. Revenue in the U.K. was EUR 219 million with organic growth of plus 0.3%. And this was exactly what we planned for the start of the year. Turnover is stable. But obviously, we have to bear in mind the very high basis for comparison in 2021 because growth was above 16-plus percent. The 2 joint ventures, NHS SBS and SSCL, which had strong growth last year, have slightly contracted in revenue, so 1.6%. The rest of the public sector progressed by 0.6%. Aerospace and defense progressed by over 10%. And then the private sector continue to contract at a slower pace. So it was at 7%, and we expect to return to growth throughout the second half of the year. So that's all for the U.K. Now I will move on to the rest of Europe. Revenue for the rest of Europe was EUR 365 million, organic growth of 8.1%. Growth was very dynamic in most of the units, countries and then across all of our vertical markets. Performance was particularly strong in Scandinavia with progression above 20%. And it should be noted there was double-digit growth in the Benelux. Now Sopra Banking Software. Revenue for Sopra Banking Software was EUR 103.2 million, organic growth of 0.8%. So quite clearly, we are aligned with the plan we established. The first quarter is in continuity in keeping with previous quarters. Just as a reminder, we have 2 priorities. Number one is carry on investing in product development, so especially the digital layers, which represent part of today's growth and which will generate growth in the future. So that's obviously top priority. And then the second priority, as you know, is carrying on R&D transformation plan with the goal of making EUR 30 million savings over 5 years, so up until 2025. That's everything for Sopra Banking Software. Now I will move on to Other Solutions. Revenue in the first quarter was EUR 67.3 million with organic growth of plus 5.9%. So HR solutions grew by 9%. So a very good start for the year for this side of the business driven by 2 factors: one, the trend to outsource payroll management; and then two, ramp-up in value of our activities, so especially in consulting, in digital and in the -- in talent management. With regards to our real estate solutions, business was stable over the first quarter. Now if we look at our outlook. As I said in the introduction, obviously, the macroeconomic environment deteriorated over the first quarter given the geopolitical situation inflation. Obviously, we're remaining highly attentive to any changes. We've also seen that the start of the year saw strong demand. At this stage, we haven't seen any signs of changes. Q2 seems to be heading in the same direction as the first quarter. We would consider that the fundamentals in this sector are quite solid. So obviously, companies and administrations need to invest in their digital transformation. They have real needs, the restructuring, the requirement here. So obviously, we're seeing -- we'll see growth in the midterm. And then the second factor is Sopra Steria's fundamentals. I'd also consider that we have solid foundations here. So I'm talking about recurring revenue, HR flexibility, close relationship with our customers. So we confirm the guidance for the year. Just as a reminder, it was organic growth in revenue between 5% and 6%; operating margin between 8.5% and 9%; and finally, free cash flow of around EUR 250 million. There we go. I would like to suggest that we move on to the Q&A session now.

[Operator Instructions] So we have a first question from Nicolas David from ODDO Securities.

Two questions. So the first is on recruitment and growth in headcount. Obviously, well done for Q1 and for your recruitment because we're seeing that net recruitment is at the highest level since the end of 2019. And obviously, what is your attitude with regards to overall recruitment for the full year? Is the idea to carry on at this pace? Or are you going to slow things down because you're actually ahead? And then we look at the increase in your headcount. If we include subcontractors, we can see that the growth is accelerating at the end of Q1, so above 5% when you're at 3% last year. So does this mean that for Q2, obviously, these positive [ trends ], are we going to see a growth in activity given this growth in headcount? And then my second question is in the public sector in France. So I think defense went well. But outside of defense, did you see sort of a wait-and-see attitude given the elections context or perhaps the McKinsey affair? Are you seeing a wait-and-see attitude, people waiting for the end of elections to -- and then this might relax and things will get going again in this domain in the coming quarters?

Yes. Thank you. So for your first question with regards to headcount, we have got a good recruitment pace. At this stage, we haven't given out any instructions linked to the budget. Obviously, if we need to recruit more, we will recruit more. We will take decisions with quite an agile approach. So we've got the capacity to accelerate recruitment, but we can also adjust according to our environment. But at this stage, we will carry on recruitment in Q2 in alignment with what we've done in Q1. The link to growth, obviously, I said this in the presentation. Growth in Q2 will have the same momentum as Q1. Obviously, we're quite cautious with the macroeconomic environment. But in any case, in Q2, I can't see any signs of change. With regards to the public sector in France, yes, I've seen what we could call this wait-and-see phenomena that we've had for a couple of months now, mainly due to the election deadlines, not necessarily McKinsey, though. We're not in the same position. So I think it's more linked to the election deadlines, which have taken place and which will take place. And this confirms that things will get going again quite quickly. Obviously, there's action that's going to be launched by the new teams in charge at the government. So I'm quite confident in this regard.

Very clear. Perhaps on recruitment, just a follow-up. Obviously, you mentioned offshore. Is this something -- does this apply to IT services outside of SBS? Obviously, we know what SBS' plan is in India, but this is also applied to IT services. And if yes, could we qualify -- is this something that's qualified as a long-term trend? Or have we seen a change in IT services? Are customers adopting offshore in your geographies?

Yes. So growth in offshore is obviously driven by Sopra Banking Software's R&D transformation, but also by our services business. We've seen this. We've seen the acceleration -- quite significant acceleration in the first quarter, and this is something that we're pushing with regards to our offers. We can see that our customers have got a certain degree of appetite. We've seen the growth momentum here. And this is nothing new. This is something which is established quarter-on-quarter. And for the rest of the year, we'll be carrying on heading in this direction.

[Operator Instructions] Next question from Laurent Daure from Kepler Cheuvreux.

I've got 3 points. First of which is, could we have some information on cyber? So if the latest acquisitions have addressed your expectations in terms of growth. And then the second point regards subcontracting and the increase at the end of March. Could you just remind us where you stand with regards to 2019? And then my last question is on the U.K. With regards to the breakdown in turnover, so with the drop -- slight drop in the joint ventures, which are very profitable, is this calling into question changes in margin in the U.K. in the short term?

Thank you, Laurent. So I'll cover your questions in the order they were asked. So cybersecurity, we have got double-digit growth so -- which is aligned with what we're seeing on the market, a lot of customer demand. We have obviously acquired EvaBssi at the end of last year. So we're integrating -- we're in the integration phase, and it's going well, and it's obviously bringing in value to the company's cybersecurity offer. So this activity is very dynamic in itself, but also linked to the other business lines. So we're seeing standalone momentum, but also momentum in coordination to consulting, systems integration and cloud. That's the first point. Second, with regards to subcontracting, just providing -- Etienne agrees with me. I think the subcontracting figure was 10% at group level for Q1 2022, is that right? Yes. So progression of 10% when compared with last year. Laurent's question was regarding 2019, and we've come back to approximately the same levels with a slightly higher proportion in France, as you know. So this is an important lever for us because it enables us to ramp up, but it also means that if we need to adjust our headcount in 6 months' time, it is a lever that we can activate. So it is obviously important. Third question on the U.K. Today, we would consider that profitability in the U.K. is quite structural. We have a model -- a platform model, which is mature. So it's reached maturity. And today, obviously, we saw a slight contraction in revenues. This does not call into question the model. So this target of 10% in the U.K., obviously, we're confirming.

And now for subcontracting. So does this mean that from now onwards, you've got like a center and the idea is that you'll consolidate your recruitment? Obviously, that's how you're recruiting more in this domain or...

Yes. So no, we're not questioning whether we're going to have like a center or not have a center. We wanted to establish positions that we consider to be important for the long term. So obviously, we've done this with internal resources and then, obviously, with subcontractors as well and then offshore capacity as well. We've increased our offshore capacity. What I can see in the next 2, 3 months is quite possibly, we'll carry on ramping up subcontracting, but we're not issuing any directives in this regard. We really adjust things according to our business.

The next question is from Derric Marcon from SocGen.

I have 3 questions. The first of which regards the attrition rate, so 20% in Q1. Could you say what you're expecting for the next -- for the following quarters? And then the next question regards prices. So prices already started going up in the second half of 2021. Could we just focus on what happened in Q1 and the outlook for the coming quarters? And then my last question is on pipeline in the U.K. -- business pipeline. Today, we can see that you have this capacity to win large-sized deals in -- what do you see in the pipeline for the U.K. for 2022? Do you see this kind of deal? Do you see this type of deal arriving in 2022, and this can potentially have an impact on the trajectory for the rest of the year?

Yes. So thank you for the 3 questions. So the attrition rate, yes, in Q1 is about 20%. So just a few comments. Obviously, we're coming back to attrition rates that we've experienced in 2019 before the pandemic, not above. It's a rate that's below market rates, but it is increasing when compared with last year. So we are paying attention to this. Obviously, we carry on working on gaining our employees' loyalty. Our strategy is as follows. Obviously, the most effective recruitment we can make is to retain existing employees. So we're working hard on our capacity to retain our employees in the long term and then our capacity to recruit new employees as well. In the first quarter in our business, obviously, this is quite -- it is what it is. It's not necessarily -- this is not necessarily a starting point, which will then increase afterwards. I'm not worried about acquisition. It's under control. It's -- obviously, it's not at the rates that we were at before the pandemic. So this is something that we obviously monitor closely. We pay very much -- very close attention to retaining our employees, but we're not worried about it at this stage. Now for our sales prices. We mentioned this 2 months ago. It's really important for us -- for our sales prices to go up more than our average salary. So that is important with regards to the company's performance. This is something we've observed in the first quarter. Are we going to be able to uphold this in the coming quarters for the time being? I don't see any signs suggesting otherwise, but it is what it is. I don't think there's anything -- we don't know what the impact of inflation is in the long term. But today, just to give you just some information in one geography. Right. Well, actually, each geography is different. So if we look at France, for example, in the first quarter, our sales prices went up by 2% to 3% when -- and this wasn't the same rate as increase in average salaries.

So could you talk to -- say more about the previous trend that we saw in 2021?

So it's aligned with the previous trends. And actually, the increase in average salary is obviously regards our capacity to increase salaries of employees that are already working for the company. And then the second matter obviously impacts our recruitment policy because 70% to 80% of young employees that join us have got less than 2 years' experience. So it enables us to uphold our HR pyramid. Now for the U.K. pipeline, for your last question, the U.K. business pipeline is quite significant. I can't tell you more than that. But very clearly, we've got some good deals in the pipeline, deals that are underway in the last several years. In any case, this enables us to envisage growth in the future.

Could I just ask a follow-up question, a fourth question? For services, in -- well, in the first quarter, you said you were above expectations. But at the same time, it's aligned -- well, it's above expectations but aligned with guidance. So does this mean that in your budget, you're going to have organic growth which will be stable for the next 3 quarters? So there's -- we're not expecting major changes from 1 quarter to another. Is that right?

Yes. Today, we've built our budget with this approach. We're just confirming this approach. When we look at the second quarter, obviously -- it's difficult to look towards the second half of the year, but when we look at the second quarter, yes, we've got the same momentum. This is how we've built our budget. So we are confirming it.

Next question from [ Gilbert Dupont ].

So my question -- I actually have a few points. I'd like to come back to salaries and inflation. I'm not talking about average salary, but could we have an idea of inflation with regards to salaries and the junior profiles that you've mentioned? So over the year, can we see an acceleration or not? And then the next question, could we have some comments on the commercial pipeline that you have for banking? Obviously, I understand that the priority is necessarily top line, but could we have some information with regards to the pipeline in the coming quarters?

Yes. So with regards to salary inflation for young profiles, it's at market level, not above, not below. So this is something that we're working on. Obviously, good performance in terms of recruitment in this domain. In terms of the pipeline for banking, our pipeline is decent, well qualified. And this gives us an outlook for the future. Obviously, I'll just come back to banking's priorities. Priority isn't -- our priority isn't to generate strong growth. We want to focus on developing digital projects, which will generate part of today's growth, but above all growth in the future. And then our second priority is to transform our R&D. So our pipeline is basically identical to 2021. It's perhaps better qualified, but it's not above or below. It is as planned when we planned the year 2022. So we are aligned with our operational plan that we've established for banking.

And just a point on M&A. We -- are you seeing more deals on the sell side?

Yes. Obviously, there's deals that come in regularly. We examine them. Our M&A strategy is something that we're continuing. We're making small to midsize acquisitions that reinforce either skills or expertise in a specific domain or sector. So we're making acquisitions with an agile approach, and that's something that we'll continue. And then in 18 to 24 months, if we could have bigger acquisitions, as indicated, then we're looking at this very closely. But yes, the M&A pipeline is there. And yes, we -- it is something we are studying.

We have a new question from Derric Marcon from SocGen again.

Sorry to come back with another question. But with SBS, in the press release, you no longer include information on services performance. Could we have a breakdown? So we're seeing plus [ 0.8% ] for Q1 2022. Can we have a breakdown? Obviously, we've understood that the priority isn't growth, but how do you think things will proceed?

So just as a reminder for banking, we've got about EUR 50 million of licenses. That's the figure we've got for 2022. It's aligned with 2021. Growth will come from subscription, EUR 60 million of subscription in 2021. So we'll be focusing on this in 2022. And then we've got maintenance activity as well. Obviously, we like to group together software business. So both licenses, subscription and maintenance, and the software business in Q1 grew by 1%.

So services -- how did services behave? So it should be about the same rate if I add it up? How do you see 2022 for services with regards to 2021?

So services are aligned in keeping with performance for 2021. If we can generate some growth, then we will, but that's not necessarily our strategy to push in this domain. So we're expecting the same behavior with regards to services as in 2021. Growth will be stable in banking, and we're very much focused on transforming our profitability. That's our big focus.

[Operator Instructions] The next question from Gregory Ramirez, Bryan Garnier.

I have a question on Germany because, obviously, this is a company -- a country that hasn't been mentioned. Where does growth stand outside of Sparda? I imagine that the Sparda contract is contracting in accordance with the plan during the transition phase?

Yes. So for Germany, we've got Germany with services, and then we've got the Sparda contract. So the Sparda contract is underway. It's signed up until 2032. We've got 2 activities here. We've got running the bank activity, and then we've got the build activity, so digital transformation underway with the 7 Sparda-Bank. And that's what we're working on. And then this year and then next year, it will be a dilutive contract. This confirms what we said last year. From the start, we said we have an investment phase. With regards to Germany, growth in revenue is slightly positive in the first quarter, with recovery in the banking sector, which is quite interesting, compensated with a [ slight drop ] elsewhere in industry. That's what we can say about Germany.

Obviously, with -- growth is quite weak here. Other things that need to be improved in Germany? Because, obviously, given the context, it's not a country with the strongest growth when compared to your competition. We've seen there are some players that are capable of generating strong growth in Germany. There are some sectors where it's difficult, Airbus and then automotive manufacturers. But in other sectors like banking or public services, given that there's not been very strong impact from the lockdown 2021, we saw this very strong recovery in 2021. So from this point of view, how are you positioned? Other things you want to improve?

So I can confirm one thing, that is Germany is a country that's increasingly strategic for the group. So I'm confirming what you are saying, and we intend to ensure that we have the resources to ramp up our activity in Germany. It's obviously important with regard to the company's strategic business plan.

Thank you. We have no other questions. [Operator Instructions] Mr. Malarge, we have no other questions over the phone.

Very well. So thank you. Thank you for attending this conference, and see you for the results publication and results announcement for the first half of the year, which will take place on the 28th of July. And I wish you a very good day. Goodbye.

Ladies and gentlemen, the conference has now finished. Thank you for taking part. You can now hang up. [Statements in English on this transcript were spoken by an interpreter present on the live call.]