It is a decade since Thierry Breton assumed the mantle of CEO and Chairman at Atos, his arrival marking the end of a troubled period for the company. In that time, the company has improved its profitability (when he arrived, its operating margin was just 4.8% and all service lines were experiencing a deterioration in profitability, so his ambition of a double-digit margin seemed ambitious). Also in that time, the company has grown in scale and geographic presence through a series of fairly significant acquisitions in both the Atos and Worldline businesses. These acquisitions have also led to some dramatic changes to its portfolio.

Atos recently posted its Q4 and full year 2018 results. These have been discussed in NelsonHall’s Quarterly Update on Atos, and a more comprehensive Key Vendor Assessment on the company will be published in the next few days.

But the real news had already happened two weeks before, at its Investor Day: this featured several major announcements, including the intended deconsolidation of Worldline, the next three-year plan for Atos, and also succession planning in place for Breton.

So why has Atos embarked on its next three-year plan one year before the current three-year plan is due to complete? In short, the time is right: two acquisitions, both completed in the last quarter, have provided heft and scale to both Atos and Worldline. With the additions of Syntel and SIX Payment Services, each business is now in a stronger position to pursue its own ambitions.

Five years after its carve out, Worldline becomes a standalone company

The first major announcement at the Investor Day was Atos’ intention to reduce its stake in Worldline from 50.8% to 27.4% through a proposed distribution of 23.4% of Worldline shares to Atos shareholders (who will receive 2 Worldline shares for every 5 Atos shares held), thereby deconsolidating Worldline from the Atos Group from early May 2019 (assuming approval at the AGM on April 30). Atos will remain the largest shareholder, followed by SIX Group with 26.9%.

We were not surprised to hear of this development, coming as it does five years after the 2014 IPO of Worldline and at a time of newly expanded scale: there are clear benefits to Atos shareholders, and to both companies, in becoming standalone. Both Atos and Worldlines’ board of directors have unanimously supported the proposal.

If we include a full year’s contribution from SIX Payment Services, which has expanded Worldline’s revenues from merchant services by 65%, and its geographic presence in the DACH region (primarily Switzerland), Worldline generated €2.2bn pro forma revenues in 2018. It is now a major player in Europe.

Worldline has been very clear about its ambition to become the dominant consolidator in the European payment processing market. And here it is succeeding, despite the disappointment of its failed attempt to acquire Gemalto: since its IPO, revenues have doubled, through a combination of inorganic and organic growth, and adjusted operating margin has expanded from 18.7% to 21.2% (again, pro forma, including SIX PS).

As a standalone company, Worldline will have an enlarged free float (45.7% post transaction, which we think might increase) with increased stock market visibility and be in a stronger position to use stock for acquiring: its ambitions as a payment processing consolidator are if anything even stronger, with the focus moving next to potential opportunities in some of the larger European economies. Separation from Atos might also be helpful in discussions with some banking consortia over potential new outsourcing opportunities; Worldline CEO Gilles Grapinet alluded to some large deals on the horizon.

Worldline shared its 3-year financial targets ambitions for 2019 to 2021. We believe the topline targets to be modest in ambition, given the M&A and large outsourcing deal aspirations.

Atos and Worldline will maintain commercial, industrial and GTM relationships via arm’s length contracts between the entities. This will include joint R&D programs and purchasing agreements.

ADVANCE 2021: the road ahead for Atos

So, what about Atos on a standalone basis?

Firstly, scale: including a 12-month contribution from Syntel, Atos generated €11.3bn pro forma revenue in 2018, with an adjusted operating margin of 10.0%. It remains a double-digit margin business without Worldline.

Secondly, profile: as we have discussed before, Syntel has changed the profile of Atos in terms of both geography and portfolio. With Syntel, Atos becomes less dependent on IT infrastructure services and becomes more balanced both at a global level and in its North America business. The reverse integration of much of Atos’ global B&PS business into Syntel continues in 2019. In its next three-year plan, entitled ‘ADVANCE 2021’, B&PS becomes a more important pillar of Atos’ growth plans for the next three years.

As part of ADVANCE 2021, Atos has introduced a new initiative, RACE (Road to Agile Competitiveness & Excellence), essentially the successor to various TOP plans, with a stronger focus on reducing direct costs, rather than optimizing G&A, to achieve further margin expansion. RACE has 12 pillars. We feel that some of these, such as the Global Optimization through Automation & Lean (GOAL) initiative (which started in H2 2018 and includes leveraging Syntel IP, increasing near/offshore delivery, and setting up shared service centers for indirect functions), indicate Atos is in catch-up compared to some of its peers. In terms of divisional margin targets, the division targeting the greatest expansion is B&PS, primarily from leveraging Syntel to achieve a 60% off/nearshore rate by 2021.

The three-year plan includes just 1-2% targeted organic growth in 2019, while North America and Germany (its two largest regions) recover.

IDM will remain a flat business for the next three years

With its Information & Data Management (IDM) division, a key priority is to get back to growth following declines in 2018 in Germany and North America (primarily the U.S.), where, under its new management, the outlook for 2019 appears much better than it was a year ago.

At a global level, IDM is now back under the leadership of Eric Grall, who is also Atos’ COO. The focus over the next three years will be on hybrid cloud orchestration, and IoT/edge computing, these areas balancing revenue stagnation in other units and the ramp-down of its traditional data center service business.

IDM has more growth ambitions for its U.K. BPO unit and wants to expand its financial services BPO business into Europe. Again, we feel the targeted growth over the next three years, which we estimate at around 8% CAGR, is a modest ambition given the healthy growth in many areas of BPO.

Overall, IDM is set to remain stable at around €6.3bn.

B&PS to benefit from market momentum in digital

The Business & Platform Solutions (B&PS) division enjoyed an improved performance in 2018, benefiting from repositioning around Digital Factory offerings. Syntel brings a business growing at ~10% (NelsonHall estimate), provides vertical expertise in the U.S. banking and healthcare industry, and will help capture project and digital transformation services growth in the U.S. There is (at last, we feel), an increasing focus on developing industry-specific propositions in each of its seven targeted verticals, potentially also pulling through IDM in some opportunities. This will be an important element in the next stage of Atos’ evolution. We will be looking with interest at how Atos will harness the industry-specific capabilities it has gained in different regions and develop a stronger cross-regional industry play. Strengthening the GTM approach is a key part of this, but on its own will not suffice.

Overall, B&PS is targeting a 5% CAGR for 2019 to 2021, which, assuming no major changes in the macro-economic conditions, is in line with our predictions for overall market growth in these services.

Atos looking to replicate the growth model of Worldline at BDS

Perhaps one surprise at the Investor Day came from Breton’s comments as to possible intentions regarding the BDS unit. BDS comprises a range of businesses, e.g. security products and services, HPC and high-end servers, mission-critical systems for the defense industry, and secure communication devices and software. The positioned commonality across these different activities is security, AI, and big data/analytics. The division continues to enjoy double-digit organic growth (12.0% organic in 2018) and is nicely profitable (divisional operating margin was 15.4% in 2018). But Atos is unusual as an IT services company in having businesses like these.

It appears that Atos may look to replicate what it has done with Worldline at BDS. Breton alluded to the need for BDS to be listed if it is to be a consolidator in the cybersecurity market and afford the high valuation multiples currently used in security M&As. He did not indicate a time line; however, we would not be surprised to see a listing before end 2020. Again, this would make obvious sense.

Atos has been an active acquirer in the last decade; significant M&A activity appears to be over for a while at least, with Atos focusing primarily on organic growth. Atos in 2021 may not be a significantly larger business, but we think it will have evolved in its profile and positioning.

By Dominique Raviart and Rachael Stormonth

Details of Atos Q4 and full-year results and financial targets in the new ‘ADVANCE 2021’ three-year program are provided in NelsonHall’s Tracking Service, Quarterly Update and Key Vendor Assessment programs. To find out more, contact Guy Saunders.