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

Good morning, ladies and gentlemen, and welcome to the Sopra Steria Q3 2023 Revenue Announcement. 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 for the Sopra Steria Q3, 2023 revenue announcement. I'll start with a few general comments on performance over the quarter; then I will detail the figures for our 5 reporting units; and then at the end of the session, we'll open a Q&A session, which I'll lead with Etienne du Vignaux, the Group's CFO. So what should we take away from this Q3? So Sopra Steria demonstrated good resilience against a backdrop of successive geopolitical crisis and European economy, which is slowing down. So despite an unfavorable calendar effect with 1 fewer working days, the Group posted organic growth of 4% with buoyant activity in defense, aerospace, public sector and transport. Aligned with previous trimesters, previous quarters, the Group's 5 reporting units all contributed positively to growth. Teams are very much focused on improving operational performance and transforming the Group, especially when it comes to its capacity to delivering greater technological value. And to illustrate this point, we've launched an internal program called [ rAIse ] on developing and deploying AI. First, deals, initial deals have been signed. And we have also formed a significant partnership with Thales and Google Cloud to build a first sovereign AI platform in the cloud for financial services and public sector organizations. With regards to acquisitions, as you know, we finalized the Ordina transaction, which will be consolidated, as of Q4, 2023. And we've also reached an agreement with the U.K. Cabinet Office to acquire the remaining 25% of SSCL shares for a total of EUR 82.3 million, and this operation will be immediately accretive. Now I'd like to suggest we go over all of our reporting units, and we'll start with France. Revenue for the quarter was EUR 567.9 million, with organic growth of 3.9%. Most buoyant vertical markets were transport, defense, aerospace and the public sector. So in alignment with the first half of the year, energy and telecommunications grew slightly, and bank insurance and retail contracted. Consulting remains on track and was driven by increasing -- significantly increasing sales prices. And then, our PLM activity posted sustained growth of over 9%. Now let's move to the U.K., revenue in Q3 was EUR 230.8 million with organic growth of 1.5%. Growth over the quarter was impacted by a very high basis for comparison for the passport renewal platforms, which in 2023 had very high volume. The 2 joint ventures, SSCL and NHS SBS specialized in BPS, they both posted growth of over 10%. Aerospace, defense & security also grew by 10%. The private sector contracted given conjunctional factors, but there is a good outlook for Q4. Q4, obviously, we're expecting comparable levels of growth, as in the second quarter. Now if we move to Other Europe, revenue in the third quarter was EUR 378.2 million, organic growth of 5.4%. Growth in this reporting unit was driven by Scandinavia and Spain, with organic growth close to or above 10%. The other countries also posted solid growth. Average organic growth in all the countries for the reporting unit was 6.9%. And then the revenue for SFF was comparable with that of the first quarter and second quarter. Now let's move to Sopra Banking Software, revenues for the quarter totaled EUR 102.3 million with organic growth of 4.3%. So Sopra Banking Software's new digital offers developed well with about 20 deals signed over the quarter, which generated an increase of 7.9% in subscription revenue for SBS. Software revenue grew by 1% and services grew by 10%. Now if we move to Other Solutions, revenues for the quarter totaled EUR 66.2 million, organic growth of 5%. The Human Resources Solutions didn't show any signs of a slowdown. We had dynamic growth of 4.4%, and Property Management Solutions also grew by 6.4%. In conclusion, we've observed, obviously, as planned, a slowdown in business over the third quarter. Organic growth of 4% in the quarter is aligned with the annual organic growth guidance, which we reviewed upwards in July, so at least 6%. This quarter was marked by 1 fewer calendar days and a very high basis for comparison in the U.K. The organic growth guidance, which was reviewed in July, obviously includes the growth of the first quarter at 8%. So this is included for the second half of 2023. We -- assuming that there isn't any major deterioration in the economy, we confirm our targets for the short and midterm. So we confirm our targets for 2023. As a reminder, organic growth in revenue of at least 6%, operating margin on business activity, slightly above 9% and then a free cash flow of at least EUR 300 million. So I'd now like to suggest that we open the Q&A session.

Thank you very much, Mr. Malarge. [Operator Instructions] Our first question is from Nicolas David from ODDO BHF.

Cyril, Etienne, I have 3 questions. The first is, could we speak a little bit about the timing, the slowdown in the quarter? We feel like perhaps it's slightly below what we might have imagined in previous conferences. Obviously, we've seen the slowdown that come in September. We've seen the banking sector, which has been impacted in France. I'm just wondering about the timing of the slowdown in the quarter. And then the next question regards recruitment, net recruitment over the quarter. What are you expecting for Q4? And then my last question regards the U.K. so -- on growth in Q4. Is this very much linked to a recovery in private sector. So obviously, given macroeconomic factors or is the growth more linked to the public sector?

Nicolas, right. With regards to the trajectory or the slowdown that we've seen in Q3, no, this is something that we had anticipating, and this is starting to happen, but we haven't seen like a major stop. So this is -- it's a progressive slowdown. We have revised our guidance upwards in July. And this, obviously, this guidance takes into account with the balance of Q3 and Q4, we've taken this into account, and we're expecting a Q4 of at least 4%. The financial services, when we look at the situation, we've got negative growth in France. When we look at Group level, obviously, we've got the revenue in France and all the other countries, and software revenue, we are generating growth, 3% in Q3. And the vision that we have today, obviously, something is happening at the moment, but we should remain -- we should generate growth. Now the question on recruitment actually we've had the summer period. This is always difficult to assess, both in terms of candidates and on the employer side. We had attrition, which has obviously gone down a lot. So we've reduced recruitment to make sure that we're aligned with our growth levels. And at this stage, I don't see any major issues in terms of recruitment in the fourth quarter. We should maintain the same momentum. For the U.K., there's 2 matters at hand. We've got the private sector, which will make a positive contribution, so especially in terms of financial services that will make a positive contribution to Q4. We should see growth here when compared with Q3. So this is a structural growth, long-term growth, not just one impact from one quarter to another. And then, we've also got the basis for comparison, which -- with Q3, which was unfavorable and Q4, which will be favorable. So we're talking about 100,000 Ukrainians, you're right in the U.K. We're not going to see the same thing this year, and then we've got the exit of the COVID pandemic. All these things have had an impact and that changes the basis for comparison.

So for U.K., so in terms of weighting, is it 50-50? Or -- what -- we're just -- what's having the greatest impact, so private sector, public sector.

So private sector is obviously a lot weaker than the public sector. So in general, the Group, this is going to have a greater weighting. But in terms of percentage, private sector should do well in the fourth quarter. Overall weighting, obviously, given the weighting of the public sector, then this basis for comparison is a lot more favorable.

Is there a recovery in the banking sector? Are you -- are you worried about the budget at the end of the year in the banking sector?

So we're not talking about discretionary spending. In the U.K., we work on major operations. So the contracts that we've signed are long term contracts that run over several years. We are not dependent on discretionary spending in the financial services sector, which can obviously be impacted at the end of the year.

Okay, clear. And then for recruitment, so obviously, I understand your growth recruitment numbers, but I'm a little bit surprised by this reduction in headcount. Have we seen a slowdown -- or so did you miss your recruitment targets for September or -- are we seeing a drop in headcount or is headcount lowering towards the end of the year, obviously, taking into account the growth that you're planning for the end of the year, what's the impact here? I'm struggling to reconcile both.

So obviously, we're expecting about 4% growth. Okay. So bear in mind that it's difficult to correlate organic growth with recruitment. It's a little bit more complicated than that. We've got an approach, where we're ramping up value in Q3. We're confirming in France that our sales prices are continuing to increase by over 6% when compared with last year. So that's one factor to take into account. And then, we've got a significant amount of subcontractors that obviously is a factor that has an impact in France. And then, you've got recruitment and attrition. So there's not a direct relationship between growth and recruitment. It's more complicated than that. But with regards to the momentum that we have, obviously, we carry on -- we're carrying on recruiting, and we're preparing for 2024.

The next question is from Laura Metayer from Morgan Stanley.

3 questions. The first of which can we have some more details on the Thales and the Google partnership? What pushed you to do this? Was it the customer demand? Or are there other factors, which have triggered the partnership? Next question is on Q4 growth. So if I've understood it should be above Q3 to hit the 6% for the full year. So obviously, what's the impact of EU growth with regards to Q3? What about the other regions? Are there any other factors that are going to impact growth? And then you talked about an increase in sales prices of 6%. Is this with your existing portfolio? Or is this for new customers?

Yes. We'll go over the questions in the order that they can. Yes. The partnership -- this is a nice partnership, a good partnership that we've signed recently. The idea behind this is to combine technological skills, innovation capacity and a sovereign platform to be able to offer new AI services to major operators, in particular, in financial services but also in the public domain. We think this is a partnership, which is quite unique with regards to the others on the market. That's how we designed it with Thales and Cloud. So I think it was this week, we announced this partnership, and this is something that's going to start to come to life, as of 2024. We are a software provider with Sopra Banking Software. So it is capacity to offer these solutions, these skills in the banking domain to address issues like regulations, and then obviously combining this with sovereign capacities and innovation. So yes, we have big expectations for this partnership. I think lead you as well. There's real demand, real need on the market, so big expectations for this partnership. Q4 now, yes, we're aiming for at least 4%. That's the figure that we should keep in mind. So what can I say in terms of qualitative comments. So there's no impact of negative number of working days. If we talk about the basis for comparison in the U.K., I've already mentioned that we're expecting to go back to growth levels of the second quarter. We're expecting growth, which will be not quite as strong in France, that's integrated into the overall equation, so down in France, but solid growth in Continental Europe clearly. And then, we're expecting growth in the software division. So with regards to our major vertical market, so aerospace, we also -- we all know that Airbus is managing its end of the year. As most players in supply chain, they're managing the end of the year. So we've seen a slight slowdown, but there is growth. Defense, public sector are very robust. And then the banking sector, yes, we're slightly down in France, but at Group level, we're still generating growth, and we should see growth over the fourth quarter, obviously, if there are no major changes in the macro environment. And then, we should keep in mind another important indicator is our consulting business, which delivered 10% growth in Q3, so slightly lower level of growth in Q4, it should be between 5% and 10%, but still at good levels. Third question, now 6% increase in sales prices. This is quite specific to the French market. We've got various businesses, which aren't dependent on sales prices, so software, BPS or infrastructure. But broadly speaking, you can consider that in other European countries, we've got this momentum for increasing prices, but the 6% really just regards to France.

[Operator Instructions] Our next question is from Gregory Ramirez from Bryan Garnier.

So I've got a few questions. The first, can we have an idea of growth rate and the companies recently acquired, where do we stand with CS Group and Tobania. So obviously, these acquisitions have been made very recently, so we have an idea. What's been -- what happened since the start of October and start of integration as well? And then 2 other questions. So on the partnership -- so for cloud certification in 2024, we spoke about positioning for banking and there's other certifications in this domain. But could we just have -- just have some more information on this partnership, see how that's ramping up.

Yes. Great. So to take your questions now, for CS, we've got growth, which is above -- which is above Group levels in Q3. There was CS. Obviously, it's driven by multi-annual contracts that last over several years. Obviously, they were signed, but there's also recent deals being signed. So that's what we're working on. With regard to the integration, CS has been integrated since the 1st of March. And then, we're starting to see business synergies to -- should roll out CS' offers, thanks to Sopra Steria's footprint. So that's where we stand with regards to CS. And then with regards to the Ordina integration, we finalized the acquisition, perhaps, Etienne, you could say a couple of words about that.

So yes, with Ordina, we now have over 98% of the company's shares. The company is integrated into the Group starting from the date, which is obviously when we took control of the company at the end of the public offering. So Ordina today and the Benelux market is -- this is a market, which is growing slightly. Ordina with regards to Group averages is about 3% in Q3. So those are the figures that we can give you for this business.

And then with regards to the integration, obviously, we're rolling out the usual integration processes, which are well oiled and very robust. So we've got the new organization in place, so with CS and with the others. This is quite a standard process, which we roll out now. Obviously, we have the opportunity to do so now that we finalized the acquisition. Now with regards to [indiscernible], we're building the future. We haven't, at this stage, we haven't established the offers, use cases, et cetera. So this is something that's going to be -- that we'll work on in the future with the idea of being able to offer all of this halfway through 2024. So we'll have new proposals. We're going to obviously build our offerings according to our customers' needs. Obviously, we understand our customers' needs, and then we're bringing software capacity and then innovation as well the platform and obviously the certifications that you've mentioned. So this is a long-term partnership. It's not just a partnership for the next few months. So this is something that we're building over the long term.

And then one last question, just to come back to prices -- prices and salaries. With regards to 2024, I don't know if you've mentioned previously, what you're considering in terms of salary increases with regard how does this compare to 2023?

So in Q3, the ratio prices and salary ratio, so if we take the example of France because this is basically the reference for our Group, I announced that sales prices had increased by 6%, in line with the first half. So salary is at 4%, 4% increase. So we've got basically the same ratio, which comes from increases -- increases throughout 2023, and then our recruitment strategy as well. We have a strategy to recruit young profiles. The salary increase cycle for the next year, obviously, we've just started the review process. So it's a little bit early. But one factor to take into account is obviously the market, the situation on the market, that's something that we take into account, and we align ourselves with that.

Now we have a question from Emmanuel Parot from Gilbert Dupont.