Atos Origin Sa

Good day and thank you for standing by. Welcome to the ATOS Q1 2022 revenue conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. Our speakers today are Rodolphe Belmer, Atos CEO, and Uwe Stelter, Atos CFO. I would now like to hand the conference over to your first speaker today, Rodolphe Belmer. Please go ahead.

Good morning, and thank you for attending Atos Q1 2022 conference call. I am Rodolphe Belmer, CEO, and I am joined on this call by Uwe Stelter, Group CFO. Over the last few months, Atos has been actively laying the foundations of its transformation with a swift rollout of our new organization while continuing to capitalize on our core expertise and be successful in our day-to-day business. Today, we are pleased to share with you an encouraging Q1. Looking into the key highlights of this first quarter. Revenue at constant currency was only slightly down, minus 0.6% at constant currency and minus 2.4% organically, which is a significant sequential improvement compared to Q4 last year, which was down 5.4% at constant currency and 6.9% organically if we exclude the impact of the large BPO contract reassessment. This sequential improvement is is clearly an encouraging sign that our revenue is moving in the right direction. It is also fully consistent with the quarterly sequence embedded in our 2022 guidance. We hired more than 8,000 new talents in Q1 on a highly competitive labor market. Most of them will reinforce our capabilities in digital and BDS, predominantly in marketing. offshore and near-shore locations. Together with an attrition rate that remained below industry standards, this is once again a strong testimony of our intact ability to attract and retain talents, which is key in our markets. Book-to-bill was 72%. This is an exceptionally low level that is not representative of future revenue trends. I will elaborate on that later. Lastly, we fully confirmed today our 2022 objectives. Turning now to commercial activity on the next slide. Order entry was 2 billion euros in Q1, which is a book-to-bill of 72%. While Q1 is traditionally low, this is a particularly low level, which is not representative of the revenue trend we expect for the coming quarters. And why is that? because first, we had a lot less renewals in Q1 this year, as significant renewals already took place in prior quarters, including in Q1 2021. Second, the average duration of contracts has decreased, reflecting a change in the contract mix, which is increasingly skewed towards shorter contracts. Excluding these two structural impacts, we would have been in the 90% range. While the shorter average duration is likely to remain going forward, we do expect a higher book to build in Q2. With that regard, our full qualified pipeline remained broadly stable compared to the end of last year at 6.9 billion euros. Our backlog at the end of March was at 23.3 billion euros, representing 2.1 years of revenue. I will highlight a few significant wins from the quarter. Cloud managed services and IT verticalization for a French engineering company, mobility as a service application development for a transportation company, critical system management for a French public agency, and lastly, will develop the Space Institutional Awareness System for the German Federal Armed Forces, which will allow to monitor satellite activity. As we are moving forward with our transformation, we continue to capitalize on our core expertise to be as successful as possible in our marketplace. In January, we finalized the strategic acquisition of Cloudreach, strengthening our multi-cloud capabilities. We welcomed over 600 highly skilled cloud professionals, adding new expertise to our Atos OneCloud practice. In February, we unveiled our new exascale class, Bull Sequana XH3000 supercomputer. It's an hybrid computing platform with unparalleled flexibility and performance. This is Atos' most efficient and powerful supercomputer and a key element, in securing today's and tomorrow's digital economy sovereignty. In March, we opened our next-gen security operation center, SOC, in Bulgaria. It is designed to rapidly identify and limit the impact of security incidents for large organizations globally with a 24-7 threat monitoring, detection, and targeted response supported by state-of-the-art technology. And very recently, Gartner ranked ATOS number one worldwide in managed security services. This means that today, we are the number one partner to support customers in protecting their data. We are proud to have reached this position, and we will continue to develop leading technologies and services to protect our clients against cyber threats. With this, I will hand over to Uwe, but before that, I would like to thank him utterly for his years of service and contributions at ATOS. Particularly, I want to thank him for his very strong involvement in the last phase and in securing a smooth transition with his successor. I'm very grateful, and we wish him the very best in his next endeavor.

Thank you, Rodolphe, for those kind words, and good morning to everybody. Let me give you some more details on our financial performance in Q1. Q1 revenue reached 2.75 billion, only slightly down at constant currency by minus 0.6%. This is the combination of minus 2.4 organic decrease, which is, as Rudolf mentioned, a significant sequential improvement compared to Q4 last year, where we were down 6.9% organically, excluding the large BPO contract reassessment. and the 1.7% growth from acquisitions, mainly CloudReach, which we started to consolidate in January, but also the acquisitions we made through 2021. Currency impact was positive, plus 2.7%, reflecting the appreciation of the American dollar and the pound sterling against the euro over that period. Now turning to revenue by regional business units on slide nine. These are our new RBUs, regional business units, with small adjustments compared to the previous ones. We have included a reconciliation in the appendix of our press release. Americas lead the way up 1.5%. Growth was driven by the contribution of recent acquisitions and the growth in digital activities, in particular with the ramp-up of a large contract in healthcare and life sciences. Northern Europe and APEC decreased by 2.3%. Strong business growth in manufacturing and healthcare and life sciences was offset by a decrease in telecomedia and technology from a volume reduction in its lab as a service activity and in financial services following the reassessment of the large BPO contract in Q4 2021. Central Europe decreased by 1.8%. Most industries delivered growth, in particular with the start of new contracts for a global food service retailer, and the leading logistic company, but we faced a decrease with two large telecom customers due to contracts ramped down. Southern Europe decreased by 1%. We recorded strong growth in healthcare and life sciences, digital activities, as well as in manufacturing. Conversely, revenue decreased in public sector and defense due to lower high-performance computing sales. also in financial services and insurance due to termination of a contract with a major Spanish bank, and finally in telecom media and technology due to lower hardware and software resale. Rest of the world, revenue grew strongly by 18.3%, was supported by business related to the Olympics, and a solid growth across most industries. Looking now at industries on page 10. Please note, this is the last time we comment on industries. as who will start reporting by business line instead starting next quarter. Manufacturing grew by 5.6% at constant currency, rebounding from a low Q1 in 2021. This trend was supported by the acquisition of Procescia in June 21 and by increased cloud volumes. Financial service and insurances decreased by minus 4.3% following the reassessment of the large BPO contract conducted in Q4 2021, and determination of a contract with the major Spanish bank, as mentioned previously. Public sector and defense decreased by minus 2.7% due to lower high-performance computing sales and the ramp down of digital workplace projects with the U.S. state agency. Telecom media and technology contracted by 10% due to volume reductions in the lab as a service activity, as well as contracts ramped down in telecoms. Resources and services grew by plus 1.6%, driven by solid growth in transport and logistics. And finally, healthcare and life sciences posted a strong 8.4% growth with solid growth across most regions. Turning to headcount now, as Rodolf mentioned, we continue to press ahead with large-scale recruitment in our growth activities and are well on track with more than 8,200 new hires in Q1. mainly in digital and BDS, and focused on offshore and nearshore locations. We also welcome 742 CloudReach employees, adding key expertise to our cloud capabilities. In an intense labor market, attracting and retaining talent is key to secure future growth, and in this context, our attractiveness has remained intact, as you see from the displayed numbers, and attrition rate is stable to Q4 and below industry standards. Before I pass the mic back to Rodolphe, I would like to thank all of you for the interactions and healthy dialogues over the last two and a half years and wish you all the best, most importantly, good health.

Thank you, Uwe. This encouraging Q1 clearly shows that our revenues is gradually moving in the right direction. This is fully embedded in our guidance, which we confirm today. Revenue growth at constant currency of minus 0.5% to plus 1.5%, operating margin of 3% to 5%, free cash flow between minus 150 million euros and plus 200 million euros. As explained before, ATO's performance is expected to improve gradually through the year, so H1 is expected below the low end of these ranges, while H2 will be significantly better with a return to positive revenue growth at constant currency and an uptick in operating margin. We are just at the beginning of our journey, but we are moving fast and we are moving in the right direction. I'm confident that we are taking the right steps to position ATOS on a long-term value creation path, and I know I can count on our talented people to see it through. This concludes our presentation, and we are now ready to take your questions.

Thank you. We will now begin the question and answer session. As a reminder, if you wish to ask a question, Please press star 1 on your telephone and wait for your name to be announced. And the first question comes from the line of Stacy Puller from JP Morgan. Please go ahead.

Oh, thank you for taking my question. First of all, you talked about, you know, of course, the previous business, the previous management was organizing the business around verticals. And you're obviously shifting back towards a business line approach. One is maybe what do you think wasn't working with that? Do you think you'll get better synergies by doing it by business line? Maybe talk about the synergies that you think you're getting between the divisions. And, of course, any color that you can give us on performance there, since I know you haven't officially started reporting it, but will be soon. And then second question, maybe just elaborate a little bit more on why you're very confident in orders improving in the second half. Okay.

Thank you for those questions. Starting with your second question on the order entry. As we said, the level of order entry in Q1 was low, but this result shouldn't be perceived, shouldn't be understood as indicating well, this kind of level of order entry into the rest of the year. As I said, there are some conjunctural elements, the most important being the very low level of renewals of large contracts in Q1, which is a purely calendar effect, which drove this figure at that level, this figure of book to bid, I mean. Into Q2, we already have a visibility of the pipeline development in Q2 and the maturity of our pipeline in Q2. And as I said in my presentation, to give you some color of that, our qualified pipeline, which is an important notion also, is stable quarter on quarter. At the end of Q1, it stood at 6.9 billion euros to be compared to 7 billion euros. broad stability compared to 7 billion euros in Q4 of last year, which means that our pipeline is filling up well, and that's why we're confident to have a far better Q2 in terms of order entry and in line with our standards. On the first question, on the structure of the restructuring, the reorganization of the group across business line, the reason why we did that is because we think, first of all, it will enable us to transcend, to stimulate better the operating performance of each of our business lines, which are actually based on business models and value creation drivers, which are quite different for each of our business lines. The infrastructure business is based on very long-term contracts that are quite substantial capex, and it's fixed-term contracts. The digital business line is about mostly application development, cloud migration. It's short-term contracts, much more profitable, and it's truly a talent-based business. BDS, most of it is hardware or product-like business. services that we do in this division, meaning that the name of the game is technological superiority marketing and sales. And what we think is that to better stimulate the performance of business lines which works on dynamics which are so different, they should be structured separately and monitored internally separately. We think also that structuring the business likewise into different divisions will help the market understand better the performance of the company and better make up their mind on the true valuation of our business, of our group as a whole. As you know, we will start communicating our figures differently from today after our Capital Market Day, which will be fixed on the 14th of June. And for the moment, we are not communicating this way. What I can give you in terms of color is that if you take the revenue evolution of Q1, the tech foundation division did a bit slightly better than in Q4, meaning that even though it stayed in negative territory, the revenue trajectory improved in Q1, while cyber remained in positive territory as well as digital. HPC remained under pressure due to the components shortage difficulty.

Just any quick thoughts on synergies between them, or is it?

There are synergies between the different business lines of the group, of course, which are mostly commercial. Commercial synergies, meaning that we do leverage our key account managers that we call CEPs to push the commercialization of our entire portfolio of products. That's the biggest area of synergy. and we continue to operate in that direction, meaning that even though we have structured our operations across three business lines, we continue to have mostly, not entirely, but mostly one common sales force for the entire group with key account managers managing the relationship with our key customers and pushing among those key customers the entire portfolio of our product, and that's where we do manage and stimulate the synergy.

That's great, thank you.

Okay, good.

Thank you. Next question comes from the line of Nicolas David from AutoBHF. Please go ahead.

Yes, hi, good morning. Thank you for taking my question. My first question is regarding Q1 organic growth. Did you benefit from a catch-up of some projects or contracts who were delayed in Q4, as you were mentioning, at the beginning of the year? Or is it this minus 2.4, a really underlying trend that we can take in order to build our next quarters? Or is it exceptionally strong, I would say, thanks to this catch-up? And my second question is... Regarding the host management changes you have done, could you share with us the main criteria that have led to choose this new team to surround you for this new project, knowing that most of them come from outside the company? And also, what I should ask is, do you expect maybe some negative impact? from the short term on your commercial activity, and maybe already in Q1, from all those management changes that may disturb a bit the organization, and also the change of organization you have put in place. Do you think that it also explains a bit the slightly weak bookings in Q1, and what you expect in Q2 regarding that? Thank you.

Thank you, Nicolas. On the underlying organic growth in Q1, it was also relatively, I would say, encouraging. That's the way we see it, and in improvement when compared to the previous quarter. Actually, our Q1 figures include some catch-up of project slippage from Q4, and As you remember well, when we commented on our Q4 results, we said that around 130 million euros of project had slipped over from Q4 and should be landing in the first semester of this fiscal year 2022. Actually, in Q1, we caught up one-third, one-fourth of that amount of slippage, which means that the Q1 figures have been slightly improved by this figure, but still the underlying trend remains very robust because the catch-up of slippage is relatively low if you make up the math. On the team, well, I don't know what you mean by team, but presumably you are alluding to the executive board of the group. We have decided to change the organizational design of the group. As we said before, the core three business line on four RBUs to make sure that we would reignite the commercial momentum of the company and at the same time stimulate the operating performance of each of the business lines of the group. Second element, in order to accelerate decision-taking and accelerate the sense of ownership and the leadership of this company, we decided to streamline the size of the governing bodies of this company, starting with the executive board. When I came in, the so-called GMC was made of around 25 persons, which I found was too large a group of people to actually manage effectively the company, and I decided to streamline it down to 12 persons. Among those 12 persons which I've selected for their competency, of course, their talent and their ability to drive companies the fast-paced turnaround of this company and put the company's performance into attention. Most of people are coming from within. The four regional business units leaders, which are the driving commercial force of this group, come from within and have been selected among the top commercial talents, which are leaders of the group. On the group function, There are four people, three come from the outside, and one, well, from within, if I may say so, but he stayed on his position. That's our group HR, chief HR officer, Paul Peterson. And we reported three people coming from the outside. One person is a job creation. chief commercial officer with a very solid background in the IT industry with 25 something years at IBM, a very strong commercial force which will enable, and it's a job creation because we want to make sure that we really step change the sales motion of this company and duplicate quite effectively the good practice across the group and step change, as I said, the commercial performance. For the two other functions, group general secretary and group finance, group finance, we had to find a successor to Uwe. We decided to change his career path, if I may say so. He decided to take a new trajectory for himself. And we... I've appointed a CFO coming from the outside but with a very seasoned experience in managing the finance groups of international companies with large contracts in the technological sectors and confronted also with turnaround situations. That's Stéphane Lepiteau who is joining us officially even though he's sort of a shadowing Uwe at the moment, but he's joining officially and will be in charge as of next Monday. And we also changed the general secretary of the group and appointed Diane Gelb, who is coming from Suez, very seasoned experience also in the turnaround of company and also of the of a company with a track record of having a ring-fenced division to improve their operational performance. And I think at the end of the day, it makes very balanced, very concentrated teams with leaders in charge of large business, 60 to 70% coming from within, one large third coming from the outside, and I think it's the right balance to really make sure that we take advantage of the experience of the group while trying to bring new blood to reignite the performance of the company. Booking Q1, well, how was it affected by the changes that we had? One new CEO, new organization, new leadership might be an explanation for the soft booking into Q1. even though it's quite difficult to quantify. And when we try to have an analytical approach to that gap in our bookings in Q1, as I said, we see two fact-based elements, which is less renewals and shorter contract duration. Our pipeline keeps very healthy, as I said. But it might well be the case that at the beginning of the quarter, there was some defocus of the organization due to all these changes. But now it's behind us. And as we can see from our perspective in Q2, if this – if this negative occurred in Q1, it's behind us. But it's unproven. I'm not disputing the analysis, but it's unproven for the moment.

That's very helpful. And maybe a quick follow-up on those catch-up of revenue. Could you confirm if you are still confident to catch up the rest of the 130 million by the end of the semester, or do you think it will be more spread across the year?

Maybe a bit more spread across the year. Probably it will spread across the three first quarters of the fiscal year due to persistent difficulties in the supply chain in the HPC segment, notably. The full amount of slippage we mentioned for Q4 probably should, well, we should find them back and staggered across the first quarter of this fiscal year.

Thank you. Thank you, Rodolphe. And all the best for your new career plans. Thank you. Thank you, Nicolas.

Thank you. Next question comes from the line of Neil Steer from Redburn. Please go ahead.

Morning. Thanks for taking the question. It's really, sorry to go back to the issue of the order intake. Obviously, you've announced that there's no update on your ambitions to exit or partner and reduce your exposure to some of the more commoditized areas of the market. I'm just wondering to what extent that has hampered your ability to sign orders in your sort of tech foundation businesses. I mean, clearly, customers would be somewhat reserved, one would have thought. in signing contracts with a supplier or a service provider who is probably not going to be the owner of those activities in the future. And just drilling down on that, can we assume that in those sort of tech foundation businesses, the book-to-bill ratio was significantly below 72%, or has the book-to-bill been broadly at that level across all of the different sort of activity areas? Thank you.

On this question, as I said, the revenue of the tech foundation part of our business were better than expected in Q1, mostly coming from fertilization, which means that we have been able, despite the elements of background that you quote and which are quite right. Actually, we have been able to re-motivate, re-mobilize our teams. And we think that when we look ahead at the trajectory of that business, even though it will remain under pressure because the underlying market in which Tech Foundation is operating is marked with declining forces, We think that while tech foundation will do better than last year, meaning that we have been able, because we have put in place a management focusing on that business with specific KPIs, which are adapted to the situation, which is more about defending the business, we think we are getting some improvement in the operational performance. The order intake of this part of the business, tech foundation in Q1, was not good. Mostly, and that's where this question of low level of renewal really took place. That's because we had far less renewals of large outsourcing contracts in Q1 than traditionally. It's a calendar effect, nothing which is in our control, no consequence that should be drawn of that fact, of that element. But it's true that order intake was a bit lower. But it doesn't at all mean that order entry will remain at that low level for the rest of the year. It will not. With the visibility we have at the moment already in our figures, with the qualified pipeline we have, we truly believe that the order entry will come back to our standards in Q2 and after in the year, including in the tech foundation part of the business. And I insist, one of the reasons why we took the decision so rapidly in to change the operational structure of the company and to create business lines that's mostly to make sure that we reignite the sales motion in the tech foundation part of the business. We thought that this part of the business, because it's in a very particular situation, needs to be managed accordingly.

Okay, just that comes on to my sort of second question actually, which is that Has there been stability in the senior sales staff across the business? Obviously, over the course of the last two to three years, there's been quite some significant changes, several fold in terms of the function of the sales operations of Atos. And I'm just wondering to what extent you may have suffered a little bit in terms of attrition of senior salespeople within the business.

Well, we have nothing specific to mention or to highlight on that subject. We have an attrition rate on average, which is, we said that in our figures presentation, which is around 22%. Our sales group doesn't differ a lot on that metric. And for the senior salespeople, we have nothing specific to report.

Okay, thanks very much. And can I offer, obviously, best of luck, Yves, for the future for yourself.

Thanks, Neil. I appreciate it. All the best.

Thank you. As a reminder, if you wish to ask a question, please press star 1 on your telephone. And the next question comes from the line of Laurent Doré from Kepler-Servais. Please go ahead.

Yes, thank you. Good morning, gentlemen. I have a couple of questions as well on my side. To come back on the first one on the bookings side, on the tech foundation, What would be an average split in a given year between renewals and new contracts? I'm just trying to see how much of the weak figures came from that. The second question is on the staff addition. I understand most are coming offshore. So if you could update us where you stand at the moment and where you're heading on the offshoreization penetration a couple of years ago. You may come back at the CMD, I guess, on that as well. And my final question is coming back to Nicolas' question. I understand that you're going to have a positive impact from the slippage of last year in Q2 as well. Is there any reason to have the second quarter trending much differently from the first one? Any other one-off that could have helped during the first quarter? Thank you.

Well, Q2 trend probably similar as it was slightly improving. If we compare with Q1, as I said, we are fully in line with our guidance that we have reiterated today, being that you can imagine by yourself how the trajectory of revenues will develop, but while Q2 should be in the same kind of vein, as Q1 in that respect, and we'll have a slippage of Q4 falling into Q2. As I said, we expect around 30 million euros of slippage, but it's sort of an order of magnitude, of course, falling into Q2. We have 130 million slippage coming from Q4, and as I said, it will be divided. in three blocks, well, not divided, but that's the way it's materializing. Ultimately, we will recover those slippage in the three first quarters of this fiscal year with the same kind of impact for every quarter. And that's what we did in Q1, 30 million. Probably we have another 30 million in Q2, which is quite low. quite low push in our Q2 figures as it were for our Q1 figures. Offshore ratio, it's one of the weak part of our business model, the offshoreization ratio which is far too low and which will be one of the elements on which we are working to improve and streamline the cost base of our companies. We have two elements which are negatively impacting our cost base and which are creating a gap with our competitors, which is significant in our cost of delivery. Well, you know that better than I do, probably. It's around 10% of the point of cost, which is quite a lot. And with two major elements, which are the actualization rate and the edge structure of our company, the so-called generalization rate. We are working on those elements, and they will be part of the underpinning decisions or strategy or actions we are taking in our turnaround program to really step change the operating performance of this company at the cost line level. Of course, we try to improve all the lines of performance of the company, but it will be part of the cost-based program. improvements. The first question on bookings, how much is renewal, how much is new, or maybe who is taking this one?

Yeah, so, Laurent, and of course, that can fluctuate very much. So, I mean, it can be in low quarters like now, about 20% of the tech foundation, but it could go up to 40%, right? So, between 20% and 40%, depending on if there are some large Deals coming for renewals, as we are right now in a low season, it's more to the lower end. The average, I would say, is about 30% of the tech foundation order entry being generated by renewals.

Thank you, Rich. And for the other unit, I guess it's much, much less. It's very small now. For digital and cyber. Yes.

It's lower because the average contract duration is lower on doors, of course, depending a bit on cyber. It's also, let's say, three, four years contract duration, whereas in digital, of course, it's lower.

Thank you, and all the best for the future as well from my side. Thank you, Laurent.

All right, I think that's the end of our Q&A session. It was the To the last questions, some words of conclusion from my side. Q1 revenues, we see them as very encouraging. Booking low, but we think it's not, well, it doesn't mean that it will continue for the rest of the year or into Q2, which would be far better in that respect. reorganization of the company underway, sales motion reignited, and we have announced today the date of our capital market day, which would be set on June the 14th. And lastly, importantly, we do confirm our guidance for the fiscal year 2022 for all the KPIs. Thank you very much. Have a good day.

That does conclude our conference for today. Thank you for participating. You may all disconnect.