Sopra Steria announced recently its 2015 results (click here for more information on the recent results). The results contained a number of surprises. Our key take-aways from the results are discussed below.

Strong Financial Performance in French Operations in Spite of Merger

Credit is due to Sopra Steria’s management in managing the rapid turnaround of Steria France in spite of its larger size (Steria France had 2014 revenues of €538m vs. €877m for Sopra). Sopra has absorbed the C&SI bench of Steria and reignited growth in the combined entities to a very respectable growth rate. Sopra Steria led larger vendors with constant currency/perimeter (organic) revenue growth in its domestic market in 2015 of 1.7%, ahead of Atos (+0.6%) and Capgemini (+1.2%).

Moreover, Sopra Steria managed this performance in spite of the ongoing restructuring of its IT infrastructure management business (-6.8% organic), and its realignment to more profitable contracts and integration with other C&SI and software product offerings. The company is denying any attempt to sell this loss-making business. We suspect that Sopra Steria will only consider its sale once it is profitable.

U.K: Flattish Year in spite of SSCL Contract Extensions

The U.K. had flat growth in spite of continued SSCL contract extensions on the back of its £500m win on the ISSSCE/SSCL JV ten-year contract awarded by the Cabinet Office in 2013. Sopra Steria also won several extensions at the MoJ and Home Office and at the Metropolitan Police Service (a significant TCV of £216m). These awards resulted in growth in public sector revenues.

However, in the commercial sector Sopra Steria U.K. suffered from slower than expected diversification. Banking and financial services are the immediate priority. This delayed commercial sector momentum had a significant 180 bps impact on the U.K.’s adjusted operating margin. Looking ahead, organic growth in the U.K. should accelerate to ~2% in 2016 thanks to large contracts and sales of software product sales.

Rest of Europe: Solid Growth but Continued Low Profitability

Sopra Steria has two main geographies in Rest of Europe, both in the €220m revenue range: solid-growth Scandinavia (mostly Norway) and Germany, a business under stress after its failed transformation from C&SI towards a more resilient business with recurring revenues, impacted also by declining revenues from Airbus in Northern Germany.

Financial performance in Rest of Europe saw perhaps unexpected continued solid growth (+6.3%):

• Scandinavia is still growing (together with Italy and Spain), while we were expecting Sopra Steria management to focus on profitability
• Germany was flat in 2015, but reached operational break-even point
• Margins improved by 170 bps compared to 2014 but remain very low (adjusted profit margin was 2.7%).

Software Products Remain Priority: Planning to Double Banking Product Revenues in Four Years

Sopra Steria continues to drive its software product strategy, now representing 14% of overall 2015 revenues, at €481m. A key priority within its portfolio of banking, real estate and HR products is its Sopra Banking Software (SBS) subsidiary: Sopra is looking to double SBS revenues from its current €258m by 2019. Some of this will be through acquisition: SBS has resumed acquisitions in 2016 after a two year pause. The new Sopra family entrant, Cassiopae, brings functionality in specialized banking (e.g. real estate credit) and bridges capabilities with Sopra’s real estate application business. Meanwhile, a priority is to expand SBS sales from the U.K., in the form of software license and platform-based BPS.

Still No Mention of BPS and Indian Offshoring Leverage Outside of the U.K.

Sopra Steria continues to roll out its Sopra-legacy strategy but there is little clarity as to how it will make use of two main assets brought in by Steria’s U.K.: its BPS business (a sizable business representing in 2015 revenues of €538m) and its India delivery capabilities.

Sopra Steria appears to consider its acquired BPS business as a U.K. public sector-centric specificity and is not strategically looking at expanding the scope of this business outside of the country.

India is the second of Sopra Steria’s underleveraged assets. If we go back nearly a decade to 2007, Xansa had 5,038 personnel in India. At end 2015, Sopra Steria had 6,493 personnel based in offshore and nearshore countries (India, also Poland, Morocco, and Spain), a number that went down by 4% in 2015, representing 16% of its global headcount. This is much lower than the European-headquartered majors Atos (27%) and Capgemini (54%). Sopra Steria is missing on the growing Indian offshoring adoption in Nordics, Germany and the Netherlands. Also, the company will have to finance its workforce restructuring eventually and such restructuring comes expensive.

Sopra Steria continues to favor software products with its high margins over the restructuring of its workforce towards the Indian model. Software products are a great business and often come with high margins, yet, they are more cyclical than IT services. We reiterate comment from last year: sooner or later, we would like Sopra Steria to show a clear roadmap, in particular its intentions regarding BPS and Indian offshoring.