Atos Origin, a leading international information technology services provider, today announced that unaudited revenues for the six months ended June 30th, 2006 amounted to EUR 2,696 million, showing 2.9% organic increase on a constant scope and exchange rate basis.
Due to delays in new business in the UK, the annual organic growth guidance for 2006 has been revised down to +3%. As a result, the consensus margin forecast is too high.
Analysis of Revenue Performance
Reported Group revenues for the first half ended June 30th, 2006 were EUR 2,696 million, compared with EUR 2,725 million for the equivalent period last year. After adjusting for disposals, mainly Nordic and Middle East activities, for EUR 119 million, and at constant exchange rates, the Group generated organic growth of +2.9%.
Revenues analysis for 1st half 2006
On an organic basis, growth in the first half reached 2.9%, with a slight acceleration in the second quarter to +3.2%, as expected. Nevertheless, the second quarter performance was lower than budget due to slower than expected new businesses in the UK. Despite a good pipe-line since the end of 2005, new business wins are behind schedule due to significant delays in decision-making by clients. As a result, part of the 2006 pipeline has been pushed back to 2007. In the second quarter, UK revenues were down 5% on an organic basis, better than in the first quarter (-11%), but under budget. In the rest of the world, revenue growth remains exactly in line with budget, up +6.0%.
By service line, Consulting was down -6.8%, weakening further in the second quarter due to a shortfall in new business in the UK. All other countries have achieved positive organic growth, with particular strength in France and Spain.
Systems Integration grew by 3.2% organically in the 1st half, with a strong Q1, up 6 %, offset by a limited +1% in Q2, resulting from a reduced number of working days in the quarter due to the later than usual Easter holidays. All countries, except the UK, performed in line with budget. In the UK, revenues were impacted by a few loss-making contracts. They impacted our capacity to transfer people to available new business and did not generate revenue. The new estimate of the costs to complete on these loss-making contracts will impact the operating margin in Systems Integration in the UK at the end of June by 25 million euros.
Managed operations organic growth is up +4.3% during the first half, boosted by Q2 organic growth of 8%. Strong performance was achieved in all countries, including a rebound in the UK, thanks to continued fertilization and penetration of existing clients combined with several medium-size contract wins, with new customers.
The operating margin for the first half of 2006 will be slightly above 5%, 1 point below our initial target, due to the new estimate of the costs to complete of a few loss-making contracts in the UK.
The book-to-bill ratio (excluding the long-term Business Process Outsourcing activities) declined to 96% in the first half due to the lack of any large wins during the period, and despite particularly active contract renewals and business fertilisation during the period.
Pipeline and backlog
The full qualified pipeline reached EUR 2.8 billion at the end of June, up +44% year on year and +9% since the beginning of the year. On the other hand, the full backlog at the end of June 2006 was over EUR 7.2 billion, representing 1.4 annual revenues, down slightly on March. Delays in the signatures of several large, long-term government contracts, particularly in the UK, explain these trends. We expect the order in-take to pick up in Q3, as several large deals are being negotiated and will contribute to revenues in 2007.
Action plan for Atos Origin UK
Atos Origin UK business has undergone a major change over the last few years, moving from a Consulting & Systems Integration organization to a fully-fledged "design, build and operate" organization. At the same time, it has established 4 service lines (Consulting, Systems Integration, Managed operations and BPO Medical services) capable of competing with the best. This dual positioning of "best-in-class" service line capability combined with an ability to aggregate the services into a "design, build and operate" proposition is key for the future.
The UK team has been focused on several large deals, resolving and closing the loss-making contracts and reorganising its sales organisation.
Several specific commercial actions are being implemented to strengthen the commercial effort to reflect Atos Origin's strong strategic position and operational capacity. This includes:
- Increasing the commercial capacity of the consulting operations with the recruitment of new Consulting partners by July 2007 to win new business and thereby improve the utilization rate
- Reorganizing the UK Systems Integration sales teams, by focusing on one hand on large account management for large, end-to-end contracts at the UK level, and, on the other, pushing the dedicated sales teams down in to the business units in order to bring them closer to the business for more reactivity and speed to market.
- Rebalancing the public/private sector mix and the mix of large to small-medium-sized deals.
Outlook for the remainder of 2006
The 1st half Operating margin will be slightly above 5%, 1 point below initial target, due to the new estimate of costs to complete of UK public sector legacy contracts, as mentioned above. The delay in the signature of several large contracts will have an effect on 2006 organic growth. While reducing our target, we still expect to see growth at around +3%. This revenue performance including the one-off impact of the new estimate for the loss-making contracts in the UK will have an impact of more than 1.5 point on fiscal year 2006 operating margin.
The cash flow from operating activities before working capital reached 7.1% of revenues in the first half 2006 compared with 5.8% in 1st half 2005. This performance is temporarily impacted by an increase in working capital of around 200 million euros in the period due to seasonal effects, as last year at the same period. After inclusion of other cash items, net debt at 30 June 2006 increased to 339 million euros versus 363 million euros at 30 June 2005.
We expect to generate a free cash flow of around 250 million euros in the second half, by the combination of a reduction in working capital and a higher cash flow from operations linked to the operating margin level in H2. Net debt is consequently expected to fall to below 100 million euros by year-end.
Outlook for 2007
In the UK, we are confident that the action plan will deliver the desired results and generate a pick-up in activity. As we go into the second half, the pipe-line is strong and under-performing contracts have been cut, our sales organizations are being reorganised to accelerate growth in new business and there are some good opportunities nearing completion.
In the rest of the Group, progress is being made in line with expectations.
In Europe, Atos Origin strategy is constant: the Group deploys a design, build and operate approach, with a balanced mix of consulting, systems integration and managed operations. The Group has strong client base with long-term relationships. We have also carved out some strong niche positions in Exchanges, Payments Systems and Medical BPO services that are all expected to generate higher growth as demand consolidates.
Based on these healthy fundamentals, the Group is confident in its capacity to grow profitably in its key markets. Decisions taken in 2006 will prepare the Group for a rebound in 2007.