Atos has unveiled its Ambitions 2016 plan in whch it has detailed how two of its key service lines (Managed Services and Systems Integration) will evolve over the next three years.

Managed Services

Managed Services (MS) is planning to grow at a 5% 2013-2016 CAGR with a slight organic growth. The unit has stabilized (organic growth 2011: +1.7% ; 2012; +2.4%; 2013 Q1-Q3 -0.6%) in spite of having absorbed SIS' MS unit, whose revenues were declining due to SIS reducing revenues from loss-making contracts. The legacy Atos Origin MS itself was a relatively flat growth business line.

MS is still being impacted from its decision to exit or renegotiate loss-making former SIS contracts.  Those contracts represent ~€450m in revenues currently and should stabilize from 2014 to ~€250m. Atos is therefore expecting  a 1% organic growth for MS in 2014 and then an acceleration in its business in 2015 and 2006, driven by large wins.

MS is aiming to increase its adjusted operating margin by 30-60 bps by 2016, from 2013 (H1 2013 8.1%). MS intends to continue its effort on productivity (aiming to gain efficiencies in the 15%-30% range), global delivery (from 35% to 50% of headcount between 2013 and 2016) mostly in India, Poland and Philippines, driving its delivery center personnel to be servicing multiple clients as opposed to being client-dedicated. Meanwhile, MS is consolidating of 2/3 of its datacenter estate, closing 14 of those and opening 5 new ones. The unit is planing to have all datacenters be tier 3 by 2016.

The unit is launching a new effort on further improving its service quality, based on the understanding that further quality will help driving down incidents and effort, and increase client satisfaction. Specifically, Atos MS is working on a zero incident program on its top 100 accounts to reduce incidents by 15% in the next 12 months.

MS is also adjusting its portfolio by focusing on several offerings including service integration, security, vertical offerings, project services (expand from NL and U.S. from datacenter consolidation, US and desktop virtualization) and cloud computing (largely though Canopy). Examples of recent service integration contracts include NSN where Atos MS is coordinating 44 suppliers and the U.K. Post Office. Examples of verticalized MS offerings including for the manufacturing sector Siemens MES applications and the underlying IT infrastructure.

In addition:

• Managed Services assets that its recent midsized to large deals are not dilutive to its operating margin.
• Is is wining against competitors including IOSPs systematically
• Its specificity is to offset by 100% of datacenter carbon foot print.

Systems Integration

Systems Integration (SI) has the ambition to

• Growth by 3.7% (2013-2016 CAGR)
• Improve its margin by 120bps-240bps by 2016 (H1 2013: 4.9%). SI has potential for further operating margin improvement is the most important, especially since the service line has suffered specifically in two geographies: France and the Netherlands.

The service line is focused on several initiatives

• Continued development of near/offshore presence with currently 8k personnel offshore (representing 30% of SI headcount) and the intention to reach  50% by 2016
• Launch of its META program, focusing on
  - Account management (focus on top 30 accounts in addition to delivery and project managers)
  - Pursuing large deals
  - Expanding in North American, where Atos has appointed a form Cognizant, focusing on ERP, CRM and MES systems
• Portfolio aligned around
  - Mobility
  - Testing
  - Service integration (doing work for MS)
  - BI and big data
  - Security
  - Verticalization of offerings
  - Application management.

Atos is putting a renewed focus on its AM business, which represents one third of revenues of SI. AM has resumed growth in its business, gaining its first non-Siemens AM mega-deal (~$1bn, by NelsonHall's estimate) with a large network equipment manufacturer. It is also interested in small to midsized AM opportunities where there is the possibility to grow the account.

Meanwhile, AM is refreshing its service portfolio with a three-tier offering: core application maintenance and support, focused on cost reduction; business transformation of applications embedded in multi-year contracts; and IT modernization and cloudification in cooperating with Canopy/

AM is also introducing vertical-specific run-build-run offerings. Examples include:

• Energy production: nuclear power command and control plants; smart metering and grid management
• Manufacturing: design-build-run PLM, MES and ERP applications, integration of SAP and MES and PLM applications through its digital plant solution. The company services 5 automotive OEMs with this offering
• Financial services
• Telecoms.

AM continues its push towards global delivery with the intent of reaching by 2016 65% of personnel in low-cost countries (up from 50% in 2013).

Together with its effort in MS and SI, Atos continues its Sales Strategic Engagement (SSE) activity, focusing

• Continental Europe, where the company is targeting first generation ITO contracts with TCVs of €40m to €100m
• Expanding its offering to service integration
• Be opened to personnel and assets transfer. SSE has developed its M&A expertise to accommodate captive purchases.

Atos has provided some information on how its two main IT services unit Managed Services and Systems Integration will grow in the coming years. To some degree, Atos is moving to a financial model similar to CGI, where margins are relatively high. The comparison with CGI ends here: margins of Atos MS in particular may reach ~9%, at the upper range of the traditional industry margin range.

Systems Integration, traditionally higher margin than MS, will continue under-performing MS in 2016. This is unusual and signals Atos being conservative in its guidance, or acknowledging the impact of Indian vendors on prices or a long-lasting reinvention of its SI business. Atos highlights that by 2016 around 50% of its headcount will be located in low-cost countries. Unlike Accenture or Capgemini, Atos is more centric around non-Indian countries. Unlike CGI, Atos SI has not developed a large ISV business (which Atos has put into Worldline). AM is where Atos may find most success within SI: the company has now two AM mega-deal references (with Siemens and a large network equipment manufacturer). Atos' focus on large deals, traditionally in IT infrastructure management, may also pay off in AM: it has recently won two deals against competition from both IOSPs and global SIs. In the AM business, Atos has strong industry credentials in manufacturing and in nuclear energy, but there is work to be done in developing vertical offerings in financial services sectors, in retail banking somewhat surprisingly, given the heritage of Atos.

Finally, Atos, again net cash positive, is turning back to its former business model, of relying on acquisitions to fuel revenue growth.