The CEO of Atos’ Tech Foundations business recently updated industry analysts on its transformation program.

We have commented about the turbulent period Atos Group is going through in splitting into two businesses (Tech Foundations and Eviden). The planned sale of Tech Foundations to Czech billionaire Daniel Kretinsky’s EP Equity Investment (EPEI) vehicle is going ahead, with completion now expected in early Q2 2024. Tech Foundations will retain the Atos brand name.

We were interested in portfolio developments at Tech Foundations and progress in its portfolio transformation and reducing the level of problematic (‘red’) contracts.

In terms of portfolio simplification, Tech Foundations is exiting its BPS activity in the U.K. And in October, it finally exited Unify, its UCC business, and divested to Mitel Networks. It has also significantly ramped down its VAR business to reduce its low-margin activities. The focus now is primarily on offerings such as digital workplace that it can provide in an industrialized manner, and on helping clients manage the complexity of hybrid multi-cloud.

There has also been some portfolio development in these areas; for example, digital workplace sustainability in office equipment: Tech Foundations is launching Atos Tech 4 Good Assistant, a dashboard to help end-users monitor their environmental performance and uninstall unused applications or switch off their laptops. It has also launched a dashboard, Sustainable Workplace, at the enterprise level.

Tech Foundations is also deploying its Technical Services unit in new geographies, primarily the U.S. and Spain. The unit has launched a consulting service targeting workplace and data center transformation and service integration. TS is its highest-growth unit and expands its position in build services rather than run services, which tend to have lower margins. Peers such as Kyndryl and DXC have similar initiatives.

In terms of red contracts, there has been substantial progress, often through exits rather than renegotiation. In 2021, these represented 13% of its contracts. That proportion reduced to 8% in 2022 and is now approaching 6%, much closer to the level of some major IT infrastructure service-centric peers. This continues, with some of the exits being major moves; e.g., the recent NEST exit in the U.K., a contract that was worth £1.5bn over 18 years.

There is a renewed focus on strengthening client intimacy, including a new client advisory group. The focus is driving conversations at the CXO level with priority clients in each region to understand and address critical client challenges through co-creation with Atos and its partner ecosystem.

Tech Foundations’ recovery is, of course, a multi-year journey. Recent financial results indicate some progress. In Q1-Q3 2023, its revenues were down 4.4% y/y in CC, impacted by the ramp-down in VAR and BPS activities. This performance lies between Kyndryl (-1.7%, NelsonHall estimate) and DCX GIS (we estimate -9.3%). For FY22-24, Tech Foundations is targeting 0% to 2% annual growth, with a rebound commencing in 2025.

Taking the Tech Foundations business private might be helpful. Its multi-year transformation will probably be more suited to an investor with a multi-year investment horizon than the quarterly mindset of many shareholders in public companies. We would expect EPEI to invest to help Atos expand its service portfolio. Security will be a priority even if the unit retains its security monitoring capabilities following the split. Application migration to the cloud is another potential acquisition area, complementing its expertise around infrastructure migration to the cloud.

The dust should settle for Tech Foundations (the new Atos) in H1 2024.