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

Good morning, ladies and gentlemen, and welcome to this conference call to report Sopra Steria's Q3 2023 (sic) [ 2022 ] revenue. I will now hand the floor to Cyril Malarge, CEO. Over to you.

Thank you. Good morning, ladies and gentlemen. Welcome to this conference call on the publication of our 2022 Q3 revenue. I'd like to suggest we proceed as follows. Firstly, I will talk about the general context and the environment, then I'll talk about the figures published for the third quarter, and then we will answer your questions with Etienne du Vignaux, the Group CFO. So what is the general situation in Q3? So the market is buoyant in all countries. Against this backdrop, Sopra Steria has continued to grow at the same pace as in previous quarters. Revenue was EUR 1,216.9 million, organic growth of 7.7% in Q3 compared with 8.1% in Q1 and 6.5% in Q1. So over the first 9 months of the year, growth was 7.4%. At this stage, we haven't observed a noticeable downturn in our customers' demand. Growth on the market is driven by three investment engines, so the cloud, automation of business processes using data and AI and then obviously, cybersecurity challenges. It should be noted that consulting an HR are often advanced indicators and for the time being, they are still on track. So against this backdrop, we're in a position where we can raise our annual revenue growth target to around 7%. As a reminder, previous target was between plus 5% and 6%. So you've understood that we've got momentum. But obviously, we're very attentive to the geopolitical and economic environment and then obviously, very attentive to changes in the IT market. Against this backdrop, we're obviously very confident in our capacity to develop and adapt. Because of our profile, we have a revenue profile, which is fairly recurrent with 40% of our contracts, which are multiyear recurring contracts. So 15% of the group's revenue comes from business process outsourcing and then 25% comes from maintenance, so application maintenance, software maintenance and then infrastructure as well. So in addition to our profile, we've got a good sectoral positioning. So our exposure to industry is quite low with the exception to aeronautics, which represents 10% of the group's turnover. But in this sector, we've got a well-established trend. And then for our service business, we're strong in three markets: defense and security, about 10% of the group's revenue. So this is a market which is going to be a high growth in the long term. And then banking, 15% of the group's revenue, 23% if we include software. So this is obviously a market which needs digital and that's essential. And then we've got the public sector, which is 1/4 of the group's revenue, which is a market which is less impacted by the market environment or the conventional factors. So we've also decided to reinforce our cost control policy. In particular, we've got a program to reduce our real estate footprint. And then we are also managing our energy consumption. And the last point, which I'd like to highlight is that we're able to leverage the flexibility provided by use of subcontractors and the rates -- subcontracting rates are back to pre-COVID levels. Now I'd like to suggest we go over our reporting units, with France. Turnover was EUR 477.9 million, so organic growth of 9.7%. So aligned with the first quarter, 9.6% growth; second quarter, which was over 10.1%. Performance was driven by PLM activity, so over 20% growth here. Cybersecurity, 16% growth; and then consulting, which accelerated by 16% as well. So the most buoyant vertical markets were aeronautics, defense and then transport with double-digit growth. Now if we turn to the United Kingdom. Revenue was EUR 228.9 million in the third quarter, organic growth of 7.4%, which is good performance. Because -- so this comes in addition to the 15% which was recorded for Q3. So organic growth of 7.4% is good rate. So this entity has got a strong foothold in BPS contracts and 2/3 of revenue here. So these are long-term contracts, which are recurring in the public sector, and then we've obviously got 2 joint ventures, where the British government is a joint shareholder. They represented 49% of business in Q3 with a slight contraction, but that was because of a high basis for comparison in the same quarter of last year. We've also seen good momentum in aeronautics, defense, security and the private sector, especially for the passport and visa renewal service. And the private sector has returned to growth since the second quarter of this year. And quarter 4, we're expecting the same level of growth as in Q3. Now if we look at the rest of Europe. Revenue was EUR 348.7 million, organic growth of 10%. So growth in this unit was driven by Scandinavia, which recorded double-digit organic growth. It was also sustained in Spain, Benelux and in Italy. In Germany, operational situation has come back to normal and organic growth was 5.4%. Finally, the joint venture, SFT posted revenue similar to the first and second quarter, so approximately EUR 40 million. Now we can move on to Sopra Banking Software. Revenue was EUR 98.5 million, negative organic growth of 6.5%, and this is mainly explained by a drop in license, in services and purchase and resale activity. So software turnover, which includes subscription, maintenance and licenses, this grew despite a slight up in licenses of EUR 0.9 million. So we are anticipating a more favorable sales seasonality in the fourth quarter. And based on the pipeline that we've got, which is well qualified, we're expecting a total license amount in 2022, which will be comparable to 2021, so approximately [ EUR 50 million ]. Now we can move on to other solutions. Revenue was EUR 63 million, organic growth of 6.5%. Human Resources Solutions, which represents 70% of this unit's revenue, grew by 7.9%, and we haven't seen any signs of a market slowdown. And then for real estate, these solutions grew by 3%. So if we look at the outlook for the end of the year, so the quarter 4, we're expecting organic growth of around 6%. So I'd say the situation is positive. But nonetheless, against the backdrop of uncertainty, obviously, we're very attentive to changes in trend, but even at this stage, we haven't observed any significant shift. We're also stepping up cost control measures. So offshore activity has obviously been ramped up 20% here. We've also reduced -- launched a program to reduce our real estate footprint. So a 4-year program across all our regions. And then we've also launched a program to reduce our energy consumption. With regards to our annual targets for 2022, we're raising our annual revenue growth target to around 7%. We're confirming our operating margin between 8.5% and 9%. And we're also confirming our free cash flow target at around EUR 250 million. Just to finish, I'd like to remind you that publication of annual 2022 results is planned on the 23rd February, 2023. So I finished for my presentation. So now we can have a Q&A session.

[Operator Instructions] First question is from Nicolas David from ODDO Securities.

Congratulations on your results for Q3. I have three questions. The first is the situation in Germany. So it's back to normal. Could you -- so is this since the beginning of Q3? Or has it been low for a while now? Are we expecting any impact? Any exceptional impacts in the second half or are things totally normal or yes, is the situation back to normal? That's my first question. Now with regard to the savings plan, obviously, for real estate and then for offshore, could you quantify the impact? So for real estate, could you -- in the full year plan, is this mainly SBS? Or are you going to ramp up your use of offshore IT and for what type of countries and customers, is that something that's going to accelerate in the coming quarters? And then my last question is for Etienne. So in terms of cash, what is your visibility at the moment, bearing in mind that you had increased growth, there might be payments that are coming late or if you're in a crisis or is there anything that we can challenge here in this domain of cash?

So I'll take your question. So with regards to Germany, we have the last publication, we mentioned that there were some difficulties here. And this is clearly behind us now. And this was planned. We've signed an amicable agreement with the customer, which means that today, we carry on working on this project. And we're working in T&M mode. Obviously, everyone has their share of responsibility. And we shouldn't then expect an impact in the second half. Obviously, I spoke about it is in July, but levels in Germany should come back to what we experienced last year. With regard to the savings plan, so yes, we've launched this plan. It's a full year plan. We're expecting 20%, 25% savings in terms of service -- real estate service. And then in terms of P&L, we will be reassessing this regulator, but we've made some assumptions here. With regards to offshore, we are -- we're increasing -- regularly increasing ramping up our resources here. So this is not just one region or one entity that's using offshore. So we're using offshore in France, U.K., Germany, Scandinavia, for software, Sopra Banking Software. And this is something we're expecting regular growth here and this will continue in coming years.

With regards to cash, yes, obviously, the points that you've highlighted are there. We've anticipated increase in interest rates. We've seen that customers want to optimize their cash. We've seen that the situation is becoming a little bit more tense, but this is something that we've anticipated. So teams are very much concentrated on this. Obviously, everything plays out at the end of the year. Nothing new here. So this is something that was entirely integrated into our forecast and something we have planned.

And then with regards to real estate, this is not new in terms of external communication. Is this something that you had in mind when you announced your margin targets for future years? Or is this on top of that?

So this is -- obviously, this program is aligned with new working methods. We've got office space, which is obviously more of space than what we actually need. So we've launched this plan this year. It's not a surprise for us because, obviously, we're highly active in this domain, but this is a midterm program when we talk about real estate, these decisions will have an immediate impact. They will see the impact in coming years.

We can now move on to the next question from Emmanuel Parot from Gilbert Dupont.

I've got three questions. The first, if we could come back to the drop in services and purchase resale activity at SBS, can we have the weighting of these activities? And why is that declined over this quarter? That was my first question. Second, regards price, salary ratio. Could you say a little bit more about this? Obviously, thinking about your sales prices with your customers and your salaries, have you got the right formula given your margin? And then third question with regards the banking sector. Have you seen any trends? Are we seeing warnings from your competitors on the software side of things? So these are my three questions.

So I'll take your questions in the order. With regards to a decline in services, this was something that we had anticipated. This is nothing new. We've got some programs, which have stopped. So some difficult programs, especially financing programs that have come to an end. So this is actually good news for us. And then with purchase and resale activity, we've got obviously software, but then the services that come with it. So obviously, we're selling third-party products that come with it. So for example, Oracle, so we're working with databases here. So this comes with the software that we're selling. So no key shift but this was something that was anticipated. So the salary price ratio, this is obviously a key matter. This is something that we look at every month. And what I can say is that today, in continuity with the first half, it's under control. We take the example of France. So in Q3, our sales prices were up by 4%, and our salary went up by 3%. So this is something that stays very closely. Average salary, I could add -- this is the result. Obviously, we have to be able to increase our salaries to be able to retain our employees but we've obviously got recruitment as well, and we have a recruitment strategy. So 70% to 80% of recruits are young recruits and this is what enables us to manage our average salary. Now with regards to the banking sector. I haven't seen any notable shift at this point or downturn. We could note the TCO, obviously, that's important, and it's in good shape. We should bear in mind that we've had our summit, our Sopra Banking Summit, with 6,000 participants, over 400 customers. And it was interesting for two reasons, interactions with customers and -- so interactions with new banks and their customers at 85% of online. So we're thinking about the percentage of interactions that actually happened in the bank. And then, another point after this summit was that 54% of banks considered that the cloud is obviously essential to their future model. So we're seeing a trajectory for the future here, which obviously goes beyond TCO. So I'm confident for the coming months and the coming quarters.

We'll now move on to the next question from Laurent Daure from Kepler Cheuvreux.

Three questions. First is for the U.K. So obviously, with regards to our expectations, obviously, this is a welcome domain that's performing well. So which activities are the best-performing activities? And then with the private sector, the message quarter-on-quarter is more positive. Is there something specific highlight here? And then a question on SBS. Obviously, we're talking about the transition to cloud. In Q4, have you gotten deals that you want to get in SaaS mode? And will this have a negative impact on revenue for the end of the year? So at what level of confidence you have in your figures, what's the mix between SaaS and licenses? And then with SSP at the end of the quarter, where do we stand with regards to the migration of the 7 banks?

So with regards to the U.K., some momentum in the private sector. This is something we had announced when we launched the year. We expected a return to growth. So this growth is now accelerating. We had our platform obviously supporting for this growth. Visa and passport renewal services, this was highly buoyant with significant revenue here. That was one point. And then the second point is that our aeronautic activity and financial services is starting to grow structurally. So with regards to Q4 forecast, we can obviously confirm growth is expected, where we're seeing the structural changes in the private sector. Now for banking, obviously, I think it depends on the end of the year, we've got a significant license amount over EUR 20 million in Q4, but we've qualified the pipeline. And today, there is no more risk than in previous years. And then for the end of the year, we've got license sales plus subscription. So I don't see there being a risk. I don't see -- I don't think there's going to be a shift in terms of the pipeline. Now for SSP, as a reminder, this is a long-term contract to up to 2032, a joint shareholder with the Sparda Bank. So we've got the run activity here. So since 2019, we've been running the bank. And then we've obviously got the digital transformation. So at the end of 2021, we delivered customer engagement. So this has been accepted test that rolled out on the pilot bank. And then, as indicated at the end of July, obviously, I said it would take more time, but we're reassessing the transformation trajectory. So this will run up until 2032. So the trajectory is already underway, but we're reassessing things that were established 4 years ago. Obviously, we've got lots of customers, and we might need to adapt the way we operate with these banks. So that's our approach. I think we need another couple of months just to agree on everything with the banks, but the turnover should remain the same.

Just for the U.K., there was a significant contract -- services contract, which would start in 2022. Has it started? Is it Q3 or Q4?

So it's been moved to 2023.

[Operator Instructions] Question from Gregory Ramirez from Bryan Garnier.

So change -- my question regards changing headcount. We've seen this -- the interpreter can't hear the question, but it's on changes in headcount and where these changes come from? Are the changes linked to a specific event or what's the relationship with the attrition rate? How is this changes in headcount linked to attrition or linked to changes in organization?