Atos SE (OTCPK:AEXAF) Q1 2024 Earnings Conference Call April 25, 2024 2:00 AM ET
Corporate Participants
Paul Saleh – Chief Executive Officer
Carlo d’Asaro Biondo – Group Chief Operating Officer
Jacques-Fran̤ois de Prest РGroup Chief Financial Officer
Conference Call Participants
Nicolas David – ODDO BHF
Derric Marcon – Bernstein
Paul Saleh
Greetings, everyone. Before we get started, I’d like to draw your attention to the disclaimers on Slide 2. On the call with me today is Carlo d’Asaro Biondo, our Group COO; and Jacques-François de Prest, our Group CFO.
For the agenda today, I’ll share key messages related to our first quarter 2024 and some updates on the current discussions with our financial creditors for a refinancing plan. Carlo will cover in more details our performance in commercial activity for Eviden and Tech Foundations, and Jacques-François will go over the refinancing discussions, then we’ll take your questions.
So now let’s turn to key highlights for the first quarter of 2024. Group revenue for the first quarter of the year was €2.5 billion, down 2.6% organically year-over-year. The revenue decrease reflects a continued market softness in Americas and in the U.K. for Eviden. And we’re seeing also lower scope of work with certain clients in Americas and Central Europe for our Tech Foundations business.
Order entry was €1.6 billion for a book-to-bill of 64%. Eviden book-to-bill was 83% compared with 79% in the prior year driven by stronger demand in high-performance computing. Tech Foundation’s book-to-bill was 47% compared with 68% in the prior year as clients delay contract decisions.
Regarding the group profitability, operating margin was €48 million in the quarter, representing 1.9% of revenue.
Our cash position was €1 billion at the end of the first quarter, reflecting primarily a €1.3 billion reduction of working capital actions compared with the year-end December 2023. Our net debt position was €3.9 billion at the end of the quarter.
As was already communicated last month, we’ve opened an amicable conciliation procedure which is with the aim of reaching a refinancing plan with our financial creditors by July 2024. And that is done with the framework of a conciliation process, and discussions with our banks and bondholders are ongoing. And the implementation of a €450 million interim financing plan is in progress.
Now based on current market conditions and business trends, we’re working on updating our ’24 to ’27 business plan and that should lead to an increase of the parameter of cash needed to fund the business into a potential additional reduction in total debt. We will communicate any changes to that business plan and to the refinancing parameters to the market in the coming days.
As a result also of this work, we decided to extend that to May 3, the refinancing proposal deadline in order to allow all stakeholders time to incorporate new information. Again, that we’ll be sharing with the market in the coming days.
Our plan is to evaluate all the proposal that will be submitted on the 3rd of May under the aegis of the conciliator Maître Hélène Bourbouloux. And we’ll discuss them with our creditors and then we’ll decide on the best path forward.
Our objective remains to reach a refinancing agreement with our financial creditors by July 2024.
With that, I want to just turn now the call to Carlos, who will comment on our first quarter performance.
Carlo d’Asaro Biondo
Thank you, Paul, and good morning, everyone. I’d like to go now into more details about Q1 performance. Group revenue was €2.479 billion, down 2.6% organically compared with Q1 2023. Eviden revenue was €1.164 billion and decreased by 3.9% organically, reflecting continued softness in America and in the United Kingdom. Tech Foundation’s revenue was €1.314 billion and decreased by 1.5% organically, reflecting lower scope of work with certain clients in Americas and Central Europe.
Regarding the commercial activity. Order entry for the group was €1.586 billion for a book-to-bill of 64%, down from 73% in Q1 2023, reflecting delays in contract awards as clients await the final resolution of the group’s refinancing plan.
Eviden order entry was €966 million, leading to book-to-bill of 83% compared with 79% in prior year driven by improved commercial activity in high-performance computing.
Tech Foundations order entry was €620 million for a book-to-bill of 47% compared with 68% in prior year as client delay contract decision, particularly in public sector, as we said before.
Regarding profitability. Group operating margin in the fourth quarter of 2024 was €48 million representing 1.9% of revenue compared with 3.3% in prior year. Eviden operating margin was €22 million or 1.9%, down 330 basis points organically reflecting revenue shortfall and lower utilization of billable resources. Tech Foundations operating margin was €26 million or 2%, up 50 basis points organically, reflecting the continued execution of our transformation plan.
Let me now comment Eviden commercial activity. Eviden book-to-bill was 83% and improved by 4 points compared with the same quarter last year. Order rent was particularly strong at BDS, which recorded a book of bill of 104% with 3 large high-performance computers orders. I would like to focus on them.
First, we have signed a new contract with the Danish Centre for AI Innovation, owned by the Novo Nordisk Foundation and the Export and Investment Fund of Denmark, to construct a state-of-the-art AI supercomputer. The supercomputer is designed to cater to large-scale projects that utilize AI and prioritize the highest level of security to support Danish data sovereignty. The new HPC is expected to be one of the most powerful AI supercomputers in the world, and its goal is to accelerate research and innovation in various fields such as health care, life science and the green transition.
We have also been selected by several French public administrations to provide a major expansion to the capacity of the Jean Zay supercomputer. This announcement marks a new step towards sovereign AI in France and is funded by the France 2030 program, which was announced by the French President.
The third HPC contract signed during the Q1 concerns the capacity extension by 4x of the Santos Dumont Supercomputer securing the computer’s rank as the most powerful in Latin America for academic research. These significant wins illustrate the unique combination of our expertise in HPC, AI and cybersecurity, which offers unparalleled advantages with best-in-class pooling technologies, advisory on AI computing design, data science on use cases and expertise to design, build, deliver and operate.
On the side of digital deals, a contract with a Federal office in Germany by using Red Hat technology, the authority’s significant reaccelerating its digital transformation process. The products and services meet all applicable law requirements, in particular with regulations. A second contract, another one with the European Parliament to implement and maintain an SAP-based financial information system.
Let’s move to Tech Foundations commercial activity. For this quarter, Tech Foundation book-to-bill was 47%. Business was temporarily affected by a slowdown in the commercial activity as we faced softer market conditions. We also saw the impact of customers’ delay contract awards.
Regarding the contract’s wins, I would like to highlight these 3 deals. We extended a contract with an Asian bank to provide mainframe services. In Egypt, we won a contract with a government entity to support and implement smart campus network in order to facilitate seamless communication, high-speed connectivity and intelligent data management.
And finally, we signed a 6-year contract with Macomb County in North America to migrate the client from an on-premise system to a cloud-based Atos solution, providing infrastructure services for the Next Gen 911 call handling.
Quickly turning to our revenue performance by region. As you can see, our business has a well-balanced geographic mix with Northern Europe and APAC representing 30% of group revenue, Americas 22% and the Rest of Europe 45%.
Quickly, details on each regional business unit in the next slides. Southern Europe was up 0.7% organically. Eviden revenue grew mid-single digit reflecting strong activity in high-performance computing. Digital activity grew as well, benefiting from large contract ramp-up in Spain and with a major European utility company in France. Tech Foundation revenue declined low single digit following contract completion with banking and public sector customers as expected.
Americas revenue decreased by 7.5% on an organic basis reflecting the current general slowdown in market conditions. Digital services were down reflecting contract compression and volume decline in health care and insurance. BDS revenue declined on a tougher comparison with the prior year as the supercomputer was delivered in South America in Q1 2023. Revenue in Tech Foundation was down due to contract completion and scope reduction with select customers as expected.
Central Europe revenue was down 3.8% on an organic basis. Eviden revenue slightly declined as growth in digital activities in Germany and Austria offset lower activities in BDS. Tech Foundations revenue declined high single-digit, reflecting delays in public sector spending.
Northern Europe and Asia Pacific, revenue decreased by 3.2% on an organic basis. Eviden revenue declined high single-digit, reflecting a lower demand for public sector, health care and insurance customers. Revenue in Tech Foundations was slightly up with contribution from Asia and increased BPO activity in the U.K., offsetting some volume decline in the health care sector.
To conclude on the overall revenue evolution. I would like to illustrate that waterfall, starting by the €2.806 billion revenue reported last year for Q1. That revenue was restated by €16 million. This is due to the review of the accounting treatment of certain software resale transactions following the decision published by ESMA in October 2023, as we explained already during our financial year 2023 results publication.
Organic revenue evolution was minus 2.6%. That is €67 million. Scope effect was negative by €239 million, reflecting the divestiture of our Italian operations of our UCC business, of EcoAct and of the share in the joint venture with the State Street in Americas.
Currency effects negatively impacted revenue by €4 million. They mostly came from the depreciation of the American dollar, the Argentinian peso and the Turkish lira not compensated by the appreciation of the British pound. Group revenue was therefore €2.479 billion in Q1.
Let’s move to the Group profitability. Group operating margin in the first quarter of 2024 was €48 million representing as said 1.9% of revenue compared to 3.3% in prior year.
Eviden operating margin was €22 million or 1.9%, down 330 basis points organically, reflecting the revenue decline, lower utilization of billable resources and investment in advanced computing.
Tech Foundations operating margin was €26 million or 2%, up 50 basis points organically, reflecting the continued execution of its additional transformation plan.
Finally, we are adjusting our 2024-2027 business plan and I will be communicating any decision in the coming days based on our current market conditions and business performance for the first quarter of the year, as Paul said.
Let me very quickly talk about headcount evolution. The total headcount was 93,632 at the end of March 2024, decreasing by 1.6% compared with 95,140 at the end of December 2023. This means that during the first quarter, the group hired 3,079 staff, of which 94.7% were direct employees. While attrition rate in the first quarter of 2024 was the lowest Q1 over 3 years at 13% versus 15.3% in 2023.
Thank you. I will now turn the call to Jacques-François, who will provide an update on our refinancing solutions.
Jacques-François de Prest
Thank you, Carlo, and good morning, everyone.
I would like now to focus on the refinancing discussions. As a reminder, we have entered into an amicable conciliation procedure at the end of March in order to frame discussions with our financial creditors. This is to facilitate the emergence of a global agreement regarding the restructuring of our financial debt within a short and limited time frame of 4 months, which could be further extended by 1 month if needed.
On April 9, we have also announced the implementation of an interim financing of €450 million with groups of banks and bondholders and with the French state. The implementation of this interim financing is in progress. We also presented the key parameters of our refinancing framework based on our business plan. However, based on current market conditions and business performance for the first quarter of the year, we will adjust our business plan for the whole year 2024 and onwards. This should lead to an increase of the parameter for cash needed to fund the business and to a potential additional debt reduction. We will communicate on that in the coming days.
Consequently, we decided to extend to May 3 the refinancing proposal deadline in order to allow all stakeholders time to incorporate new information. We will evaluate all proposals under the aegis of the conciliator Maître Hélène Bourbouloux in the best corporate interest of the company, including its employees, clients, suppliers, shareholders and other stakeholders while maintaining an attractive business mix.
We will also take into consideration the sovereign imperatives of the French state. We are confirming targeting to reach a refinancing agreement by July 2024.
At the end of March 2024, cash and cash equivalents and short-term financial assets was €1 billion, and net debt was €3.9 billion, reflecting primarily a €1.3 billion reduction of working capital action compared with December 2023.
Thank you for your attention. Paul, I think you can now launch the Q&A session.
Paul Saleh
Thank you, Carlo. Thank you, Jacques-François. Sharon, can you just really now move to the question session, please?
Question-and-Answer Session
Operator
[Operator Instructions] We will now go to our first question. And your first question comes from the line of Nicolas David from ODDO BHF. Please go ahead.
Nicolas David
I have just a very quick one. I’m not sure. Would you be able to provide a lot of color about that. But when you mentioned a change in performance and market condition, what do you mean by that? Is more on the really operational side because Q1 was pretty in line, I think, now in terms of organic growth. So I suspect that may be more on the bottom-line and free cash flow or is it also a market condition in terms of financing and appetite from potential investors? Could you be a bit more precise about that? Thank you.
Paul Saleh
Thank you so much for your question. So Nicolas, I would say a couple of things that are a little bit different. One is now we’re not seeing the rebound in the market that we would have expected to start in for Q2. We realized that in the first quarter that it was a carry-on softness that we had seen in some markets in the Americas and the U.K. for Eviden. And as we had indicated some softness also for the Tech Foundations in areas like Central Europe or with certain type of industries or customer segments.
So we are expecting some turnaround, and we’re not seeing that. And that softness seems to be persisting. So that’s the first thing, so it’s a market environment.
The second one is certainly something that we’re seeing also, which is delays in some contract awards as customers await the outcome of some of the refinancing discussions in some cases. In some other cases, they’re just really delaying their contract award for other reasons. And that is also impacting a little bit more our outlook for the full year.
So we’re trying to incorporate those 2 points in our projections to make sure that we have the appropriate amount of understanding of their impact on the cash need for the business for the ’24 and the ’25 time frame, in particular. And then be able to just really make sure that we reflect that properly in our key parameters. And as we indicated, we’ll give that information to the market in the coming days.
Nicolas David
Right. That’s clear. And just a follow-up on that, yes, because of the book-to-bill of the condition, obviously, is low. Is it something which is supposed to have an impact in the very short term, or given the very recurring profile of this business, it’s more something, which can affect the business more at the end of the year in terms of revenue?
Paul Saleh
Yes. I can give it to Carlo in a second, but I think generally speaking, the Tech Foundations is a little bit more lumpy, except that we were expecting 2 large contracts to be signed by now. And again, this is one of those circumstances where it’s been pushed out a little bit. The decision has been pushed out due to, again, the client awaiting a little bit more understanding on the outcome of our refinancing.
These are decisions where clients want to do work with us and just really waiting to see how this is going to be playing out, but they don’t have impact. From the Tech Foundations, things will not have impact near term, but much more potentially on ’25. But I’ll leave it. Carlo, anything you want to add?
Carlo d’Asaro Biondo
No. I would add clients are delaying some decisions also and in particular, because they love the quality of the service, and they want to stay with us. So Tech Foundations is a business of long-term contracts. So the impact for this year will be actually very limited. And what we believe is that as soon as the situation clarifies, we’ll be able to rebuild the pipe. But there will be some impact if there will be some impact in 2025 for this, not in 2024.
Paul Saleh
That’s on the Tech Foundations side.
Operator
[Operator Instructions] We will now go to our next question. And your next question comes from the line of Derric Marcon from Bernstein. Please go ahead.
Derric Marcon
Two questions for me, if I can. The first one on TFCo. So first quarter performance seems very good versus what you expect for the year. So can you help us to understand what would be the momentum of TFCo business in Q2 and H2 to reconcile the minus 1.5 in Q1 and the minus 6 that you target for the year? That’s my first question.
And the second question is on the bookings of dividend. Do you have the share of short-term bookings within the €966 million that you posted recorded in Q1? I think it’s a KPI you gave in the past that is really helpful for us to understand what would be the dynamics of your revenue for coming quarters? And also in this €966 million bookings for Eviden, can you split that between BDS and Digital?
Paul Saleh
All right. You said 2 questions but it’s the 3 components of it. On the TFCo side, I think it’s a good start in a sense it has a little bit more. The business is carrying on with a good backlog coming into the year. So I do believe the first half seems to be pretty steady.
I think we’re just really being cautious in the plan that we had originally given on the financial trajectory of the business to make sure that the second half of the year will be more impacted by any potential, as I mentioned, a delay of new contracts or scope of work with clients until our refinancing solution is done. So I think a good start. Hard to tell a bit beyond, again, the first half of the year.
The second question had to do with more detail behind some KPIs. I think I’ll have to get back to you. I don’t have that information in front of me. The other thing you asked is the breakdown in the book-to-bill, you said. Is that what it is for the BDS?
Derric Marcon
Between BDS and Digital.
Paul Saleh
BDS and Digital. I would say, book-to-bill, we said that the Digital was 75% and the BDS was 104%.
Operator
Thank you. There are currently no further questions. I will now hand the call back for closing remarks.
Paul Saleh
All right. Again, thank you so much. We will be updating as we mentioned some of these parameters in the coming days. And we look forward to be on our call with you at that time. Thank you.
