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Atos Strategy Update: Bull and Xerox Acquisitions Examined, Indian Offshoring Still Work in Progress

NelsonHall recently met with the management of Atos to discuss the acquisitions of Bull and Xerox ITO and the progress being made by Atos in adopting Indian offshoring. Note that this meeting took place before Atos' Consulting & Systems Integration analyst day.

Bull: Is An Expanded Portfolio Relevant?

With its acquisition of Bull, Atos has acquired an IT firm with a significant level of hardware and software that expanded the traditional, more IT services-centric portfolio of Atos. Bull’s portfolio ranged from X86 severs to HPC, from hardened phones to its Evidian line of security software products, and its line of GCOS mainframes.

Key questions since the acquisition are whether Atos will benefit from this extended portfolio, how relevant it is, and how much R&D effort it requires from Atos.

We gathered from our discussions:

  • Revenues from hardware represent ~2.5% of Atos revenues. Within hardware products, Atos will continue in most offerings with alignment around the broad themes of big data and security, e.g. HPC and appliances (bullion servers), which represent a NelsonHall estimated €150m to €175m in revenues. Atos will continue to support other product lines without pushing hard on its commercial development
  • Within the area of security, Atos has aligned its legacy security portfolio with that of Bull and wants to continue investing in it
  • Atos is confident it can maintain its existing level of R&D investment, which it estimates at 2% (~€200m) of its revenues. Excluding Worldline, we estimate Atos will spend ~€50m to €70m in R&D around Bull hardware and software products (Bull as a standalone firm spent 6% of revenues on R&D). Excluding the Worldline business, this represents less than 1% of Atos revenues.

Can Atos compete effectively against IBM, HP, Fujitsu and Dell in terms of client reach and R&D investment? Atos is counting on its salesforce to grow revenues of the former Bull products (e.g. HPC and bullion appliances) primarily in Europe and also in French-speaking Africa (where Bull has a client base), as well as address engineering departments of its manufacturing clients (especially around HPC and in-memory appliances, for product design and simulation). Time will tell whether this strategy works but Atos highlights that the combined line of Bull products were profitable.

Xerox ITO Strengthens Presence in the U.S.

While the Bull acquisition was perhaps a surprise, the planned one of Xerox ITO was more self-explanatory:

  • Atos had in 2014 highlighted its priority to grow in the U.S., and Xerox ITO with its $1.5bn in revenues (of which 93% from North America) has filled this objective. The company considers Xerox ITO as a reverse take-over and a base for organic growth: cross-selling of project services (C&SI) to Xerox ITO clients will be a priority. Over time, Atos wants to develop a partnership approach similar to the one it formed following the 2011 acquisition of SIS from Siemens; details are unclear at this point but this will include joint investments in IPs and joint go-to-market
  • IT infrastructure management (the Managed Services business unit of Atos) has been a priority: with the acquisition of SIS, Managed Services became the company’s largest unit (51% of revenues in 2014) and is also more profitable than C&SI, despite some dilution coming from Bull’s own IT IM business. Xerox ITO will strengthen Managed Services (and also Canopy) while also driving its profitability up.

Presence in Low-Cost Countries: A Work in Progress

Finally, Atos shed some light on its offshore and nearshore presence. Growth in low-cost countries remains a priority for both C&SI and Managed Services. The company announced in its Q4 2014 results that a (relatively low) percentage, 21%, of its headcount (~18k) is now based in nearshore and offshore countries. NelsonHall estimates growth in nearshore/offshore activity in 2014 to be +56%, very high indeed. We suspect this also includes activities in emerging and fast-growth countries to service local markets (Bull in Africa and Poland, for example).

C&SI represents the largest share of this offshore/nearshore presence (38% of C&SI headcount; NelsonHall estimate: 13k). We estimate that Managed Services has a much lower low-cost country ratio (~15%) but Atos highlighted that it has accelerated its transition to low-cost countries during 2014.

Atos highlights its offshore presence and capability in India, but key questions regarding Atos’ presence in India remain:

  • Offshoring is about more than pure headcount in India. It also implies the centralization of service offerings and IPs, relatively free flow of personnel across countries, approaches such as continuous improvement and expertise in contract transitioning, as well training. We think Atos has adopted or is currently adopting this centralized approach
  • When will Atos reach the inflexion point where adoption of offshore will stop driving revenue down and actually increase revenues? The answer is not clear at this point.

What is clear is that Atos takes presence in low-cost countries seriously. However, unlike Capgemini which has adopted Indian offshoring fully, Atos is trying to find the balance between its onshore presence, further specializing its in-country personnel, and its offshore presence, where cost is the number one client requirement.

We emerged reassured from our meetings with Atos. With a net cash balance that is going to remain positive after the acquisition of Xerox ITO, Atos still has financial freedom to continue its external growth strategy and invest in offerings to fuel organic growth.

NelsonHall will shortly publish commentary on Atos' Consulting & Systems Integration analyst day.

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