Atos: Cause for Optimism, Despite the Headlines

The storm clouds have been gathering over Atos for several months.

The resignation of the company’s new CEO after only three months and the decision to sell its BDS business to Airbus, has led many journalists and analysts (especially in France where we love to talk our companies down!) to paint a very negative picture of its current situation.

It is certainly a shame that Yves Bernaert’s tenure was so short and the company’s financial position is clearly a tough one, as it works to secure its debt repayment plan. But behind the headlines and despite the challenging economic environment, Atos continues to perform relatively well.

Nourdine Bihmane did an excellent job at Tech Foundations, stabilizing the revenue (at least on an organic basis - while disposing some non-strategic activities) and substantially improving profitability.

Eviden reported satisfactory growth (+7% in H1, +2.3% in Q3, very similar to France's IT services champion Capgemini) and also managed to increase its profitability.

Atos' overall profitability has a lot of room for improvement, (target 2023: 4-5%; compared with Capgemini: 13+%) but it continues to progress.

The real issue is the debt situation, which has been made more difficult by the rise in interest rates. Where does the debt come from? Atos has made quite a few acquisitions over the last 15 years. In particular, Thierry Breton's plan to develop not only a global services supplier but also a French technology champion with cutting edge products and technologies in selected areas (security, high performance computing, sovereign) justified several major moves.

Today, Atos is a €10bn+ company with three businesses:

• Tech Foundations, roughly 50% of total revenue, focusing on infrastructure services – a positioning similar to Kyndryl;
• Digital (within Eviden), roughly 35% of total revenue, focusing on application services, competing with vendors such as Accenture, Capgemini, CGI or Sopra Steria;
• BDS (within Eviden), roughly 15% of total revenue, focusing on cybersecurity (with a strong products business, security services and mission critical systems) and high-performance computing (up to quantum; also addressing the Edge and Sovereign Cloud markets).

Regarding Tech Foundations, Atos has been in discussions with Daniel Kretensky for several quarters and the negotiations have been challenging. However, Tech Foundations is not only improving its competitiveness, but the market environment is also improving as customers aim to better balance their workloads between public cloud/ hyperscalers and "traditional" environments (increasingly private cloud). This is the consequence of the massive rise in cloud computing cost - resulting from the combination of the explosion in consumption and a substantial price increases.

It seems the valuation of Tech Foundations will be relatively low. On the other hand we see a strong synergy potential between the Tech Foundations and the Digital businesses, as decision makers increasingly look for an end-to-end transformation partner, managing both the applications and underlying infrastructure.

Moreover not all vendors follow the IBM/ Kyndryl split model: NTT decided for the opposite approach, bringing its NTT Ltd business (including, ao, the former Dimension Data) in its NTT Data organization. This is definitely a promising move!

By comparison, BDS enjoys a high valuation, which reflects its status as a product-centric business. The disposal may be seen as a hard cut for Atos, as this business has been presented as a strong differentiator. However, the synergies with the Digital business are limited. Moreover, the product and the services business follow different rules and very few vendors have managed to develop successfully in both areas. Even IBM struggled to strike a balance between the two areas, and lost huge market share both in its products and its services businesses over the last 15 years.

Transferring BDS from a French-headquartered (though global acting), primarily IT services provider to a "European by construction", product-driven company generates the real chance to create a regional champion in cyber security and above all in high-performance computing. It is also well-placed to address the growing opportunities in quantum and above all sovereign.

Our feedback from the market is that most are seeing past the headlines. Atos’ client and employee retention levels remain strong in the first quarter of 2024, and we hope that the company manages to ease past its current challenges to emerge in stronger shape.