NelsonHall recently attended an Atos analyst summit which provided a follow-up to the 2014-6 three-year plan first outlined last November (see our blog “Atos Unveils 2016 Financial Objectives”). As a reminder, the financial targets for IT services are:

• 2014-2016 CAGR of 5% with half of this growth to come from acquisition
• A 100 to 200 bps improvement in adjusted operating margin by 2016

The two days focused on the two global service lines that remain after Worldline has been floated: Consulting & Systems Integration (C&SI, also contains applications outsourcing activities) and Managed Services (MS). The event sought to convey what Atos is doing in MS and in C&SI in order to meet its financial targets for IT services for 2014-2016.

Managed Services

In MS, the financial targets for the next three years are a similar CAGR of 5%, with adjusted operating margin improvement of 30bps to 60bps. Acquisitions will contribute over half of the targeted topline growth. Atos has hinted at strengthening its presence in the U.S. and APAC, and, also around specialized services such as security. It is likely, given the high valuation of U.S. companies that are performing well, Atos will look at an India-centric vendors whose capabilities span both IT infrastructure and applications services.

This would also indicate an acceleration in organic revenue growth, from -1% in 2013 to a CAGR of around 2%. If achieved, this would make Atos MS one of the top performers in the IT IM market (where vendors have to intend with a typical 6% reduction in revenues each year from pricing concessons), above CSC, HP, IBM and Fujitsu. Atos MS has been impacted by the decline in loss-making contracts and the end of the carve out of the former SIS with respecting to building its IT infrastructure. Atos has previously hinted at slight organic growth in MS in 2014 followed by large deals driving growth thereafter.

Atos MS is looking at several ways of accelerating growth: development in North America is key, accompanying Europe-headquartered clients in the U.S. Atos’ German centricity (Germany is its largest market) will help. The company wants also to replicate its success with new wins such as McGraw-Hill and SIS legacy renewals (Morgan Stanley, Nike, Coca Cola Hellenic Bottling Company, Microsoft). Atos is also expanding its focus in the U.S. to the mid-market and also towards local authorities, (recent wins at City of San Diego and Minneapolis), signing several deals with a $20m-$50m LTV.

Atos is also looking to enhance its portfolio, in areas including:

• Standalone managed security services
• Offerings through the Canopy jv, e.g. big data based on Oracle appliances or video surveillance
• Development of vertical IM offerings
• SIAM
• A project services unit: a dedicated unit was launched in 2013. The aim is to grow this from 600 to 1.5k by end 2014, with most personnel transferring from run activities, where productivity improvements are freeing up resources.

The increased focus on managed security and verticalized offerings a sign that Atos is shifting its focus beyond cost cutting and efficiencies on expanding this offering. Atos highlighted its security credentials in its services provided to Olympic Games, e.g., managing 320m security alerts during 2 weeks in Sochi and 10 serious incidents per day. It is now looking to replicate these services to commercial sector organizations; we believe that inorganic growth will be involved.

Development of vertical IM offerings: two offerings are to be launched shortly: one is for maintaining and monitoring broadcasting equipment used by media companies (based on its experience at the BBC). Another is serving Siemens network infrastructure used in manufacturing plants and shop floors. Those networks are based on TCI IP protocols and management is not a service offered by Siemens. Both these capabilities come from legacy SIS. Atos MS claims to have a roadmap of other verticalized offerings, but these do not appear to be as well developed.

With a 9.0% adjusted operating margin in 2013, up from 5.8% in 2011 (on a pro-forma basis with SIS on a full-year basis), MS has demonstrated its expertise in managing costs and in turning around the IM business of SIS, reaching one of the best margins in IM in Europe. It has done this by improving productivity as well as by reducing G&A costs. The initiatives have included:

• Deployment of LEAN management (started in 2010) over 20k at end 2013. Atos is now expanding beyond LEAN initiatives within discrete towers to looking at end-to-end processes that span towers (e.g. provisioning)
• Expanding delivery from lower cost locations: has been increasing by around 5% a year since 2011, reaching 30% in 2013
• Aligning tools towards its Atos Technology Framework
• Datacenter consolidation.

There have also been significant improvements in CSAT scores during this time.

Where is MS with cloud? Canopy appears to be an early success (the initial target was €200m revenue and adjusted EBITDA margin of 15% in 2013 – we believe both were exceeded). Canopy is on track with IaaS and PaaS; the SaaS offerings today are primarily horizontal, and offered through partnerships.

Were we convinced that Atos MS will achieve its 2014-2016 targets? Certainly, there is a clear sense of direction and purpose of what needs to be done. The next challenge is clearly top line growth. Atos MS has been winning large deals with the likes of McGraw-Hill and NSN, also at Philips, where its track record had been spotty. In fact Philips provided a warm endorsement of Atos' approach to what is a ground-breaking outsourcing arrangement. Atos MS is of course benefiting from the fact that CSC and HP are under reinvention and needing to be selective in new opportunities and renewals. Nevertheless, competition has been intensifying in Continental Europe with Indian OSPs making significant inroads in the Nordics and Germany, and increasingly targeting France. Atos will need to accelerate its offshoring program, rather than use what it calls “lower cost regions”. The U.S. has in the past not proven to be an easy nut to crack for European headquartered organizations, and certainly not for IT infrastructure management services. Nevertheless, the performance by Atos in turning around SIS in the last three years has been impressive. But it is the decisions on acquisition that will provide a clearer sense of where the largest share of any future topline growth will come from.

Rachael Stormonth and Dominique Raviart

(NelsonHall will shortly be publishing an updated Key Vendor Assessment in Atos which covers in detail the various strands of its "Horizon 2016" program)