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| Ovum on: Atos 3Q08 Upbeat, but Dark Clouds Are on the Horizon by John O' Brien, senior analyst at Ovum Atos Origin's solid third-quarter results show that it is not yet suffering from the slide in economic confidence that we have seen over recent months. For the three months ended 30 September 2008, Atos reported organic revenue growth of 5.3% to Ђ1,329 million (which excluded the divestments of its Italian and AEMS Exchange businesses), and 6.3% growth in the year to date. It also maintained guidance of 5%+ growth for FY08. This is good news, but with an increasingly bleak economic outlook Atos is going to find life a lot harder in 4Q08 and FY09. We spoke to Keith Wilman, CEO of Atos Origin UK, to get a deeper understanding of Atos's challenges ahead. To its credit, Atos has already taken pre-emptive moves to prepare for the worsening economic conditions. Accelerating growth offshore, reducing capital expenditure and exiting non-core or underperforming operations are at the fore of Atos's game plan. Battening down the hatches The first of these initiatives is the disposal of its underperforming Turkey and Thailand operations, which account for Ђ249 million in revenues. Atos is also looking at other disposals outside of Europe in the coming months, of operations in the region of Ђ250–500 million. Second is an acceleration of its offshore plans – to aim for 20% of group headcount in low-cost locations by the end of 2009, up from around 8% currently. It is not before time that Atos has decided to take its offshore ambitions seriously, and the opening of a 3,000-seat centre in Pune, India in early 2009 should go some way to making a start. However, Atos is some way behind rivals such as Capgemini, IBM and Accenture, which now have far higher percentages of staff in low-cost territories, so even a 20% target falls short of the mark. In addition, at an operational level there's going to be a freeze on new indirect hiring, "extreme caution" on direct hires, a reduction in subcontractors, as well as cuts to training and travel. Atos said it expects to take a Ђ30 million charge in FY08 to cover what it calls the "optimisation of resource management". Growth looks increasingly at risk Both Wilman and CE Philippe Germond are predicting growth in FY09, but visibility is quite sketchy on where it will achieve this. However, there are areas in which we expect Atos to come under significant pressure. Consulting, while the best performer at a group level, with an 11.2% growth in revenues in 3Q08, is likely to be one of the first to be hit as clients freeze their discretionary spend – consulting in the UK could suffer particularly badly since it is already in negative growth territory. Likewise, there is real potential for short-term systems integration projects to come under pressure. Interestingly, despite SAP's warning on its own business recently, Wilman sees Atos's SAP services holding up well due to the long-term nature of existing programmes. There are some opportunities for stability, however – notably where Atos has established specialist focus areas. This is something that Atos is keen to achieve in consulting and SI, where the potential for slippage is greatest. It will form new partnerships in consulting to boost existing platform capabilities such as with SAP, and focus on local markets for infrastructure, mainframe and server management as a means to differentiate its SI offering. Meanwhile Atos Worldline, Atos's transaction processing division, is being charged with building scale rapidly over the next three years, to become a Ђ1.5 billion business with a 15% operating margin. Acquisitions will have to form a key part of this strategy since Worldline's existing business is heavily geared to financial services and retail verticals, and is likely to face significant pressure on demand. Execution will be the key As a major outsourcing and managed services provider, Atos has the benefit of having 68% of its business coming from recurring revenues. This should give it some added buoyancy in 2009, although that leaves the remaining 32% of its business open to uncertainty. Nonetheless, with a healthy pipeline of business – slightly up on 2007 at Ђ2.6 billion – it is certainly not impossible that Atos could manage modest growth in 2009. However, turning this pipeline into new business will likely become an increasingly difficult task as clients delay decisions on their IT investments. The acid test for Atos will be how successful it is at turning these opportunities into real business over the next few quarters. Only then will we have a clearer view on its real prospects for 2009. write your comments about the article :: © 2008 Computing News :: home page |