Atos 1Q09 results show the tide has turned

Atos has sensibly defined two key objectives for 2009: to improve its operating margin and boost cash flow. To achieve this it has put in place a number of measures that will help over the coming quarters.

To boost margins Atos has put in place a hiring freeze, while also reducing overheads in consulting, replacing subcontractors with staff on the bench, and boosting offshore in current and future contracts.

In addition, the TOP programme, which is focusing on removing non-personnel and non-productive costs, is being tasked with a further cost reduction of 15% on top of the 10% achieved already. This will be done by deploying Lean methodology in all helpdesk services, and through a stricter focus on real-estate costs.

Meanwhile, to boost cash flow Atos is aiming to reduce its receivables by half over the next three months. It will also continue to reduce capital expenditure by rolling out further standardisation of systems and investing only in customer requirements.

Managed operations and the UK holding strong

At a group level, discretionary project services spend continued to fall. Consulting was worst hit, down 15.2% (compared to -2.4% in 4Q08), and systems integration fell 6.2%. However, managed operations grew 5.5% to €721 million thanks to good growth in the UK and France, and within the Atos Worldline transaction processing division (+6.8%).

This focus on growing managed operations is clearly paying dividends.

For instance, it has helped Atos push its percentage of revenues from recurring operations to 70%, up from 68% in 1Q08. This momentum needs to continue, so Atos has been focusing on renewals as well as looking for future big wins. This has helped it secure some key deals in the UK, France, the Netherlands and Germany, with a UK insurance firm, SNCF, SFR, Belastingdienst and Deutsche Postbank.

At a regional level, the UK is performing far better than any other division, with revenues up 8% in the quarter. Compared to the other big markets for Atos, France only achieved 1.9% growth, while the Netherlands actually fell 8.5% due to pricing pressure and a slump in consulting demand.

The UK is holding up well thanks to a concerted effort to shift towards longer-term recurring revenue streams (managed services in the UK was up 11.2%), while also focusing on the public sector, where systems integration is still holding up with growth of 6.2%.

It\'s not all good news though, as consulting is still suffering - revenues fell 1%. Atos UK is also pinning its future hopes on winning a major public sector deal in the environment space. We suspect this refers to the potential £700 million IT outsourcing deal at the Environment Agency. Unsurprisingly, this deal has got lots of interest from suppliers such as Capgemini, so Atos is going to be in for a tough fight ahead.

Offshore on the up - or is it‾

Of Atos\' 20 key wins in the quarter, just one mentioned a significant offshore component (application development for a UK insurance firm) - so it is currently getting by without significant offshore utilisation.

 

Atos has plans to grow its offshore and near-shore capability to 5,500 people by the end of 2009 (approximately 10% of headcount), up from 4,500 in FY08.

However, we think it needs to be much more ambitious and aim for a 20% offshore ratio if it is to benefit in the medium to long term. For instance, rival Logica is now seeing a marked increase in demand in France for low-cost services driven by the recession, and is accelerating investment in Morocco as a delivery hub. It could therefore be very dangerous for Atos to ignore this emerging offshore demand in its key markets.

John O\'Brien, Analyst and Service Manager

Suggested Articles

Wireless operators can provide 5G services with spectrum bands both above and below 6 GHz—but that doesn't mean that all countries will let them.

Here are the stories we’re tracking today.

The 5G Mobile Network Architecture research project will implement two 5G use cases in real-world test beds.