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Atos CEO Vows ‘Swift Turnaround’ After Issuing New Profit Warning

Investors sent the French solution provider’s stock down 16.82 percent Monday to close at 32.10 euros per share.

New CEO Rodolphe Belmer has vowed a quick turnaround for Atos after a new profit warning from the French solutions provider — issued just a week after he took the helm of the company — sent its stock to its lowest level since 2012.

The profit warning indicates that Atos is getting hit from all sides, resulting in a “severe gap” in the company’s year-end 2021 financial results – including revenue, operating margin, free cash flow and net debt – compared to its forecast in July, when the company had issued another warning and reduced its expectations.

Atos cited unexpected higher costs tied to a business process outsourcing (BPO) contract with a large UK financial institution, project “slippages” due to supply chain challenges and customer postponements, delays in expected payments from large customers and a drop in low-margin hardware and software sales.

In a statement, Belmer pledged to turn around the Bezons, France-based company under a reorganization in “swift” fashion, noting many of the underlying problems were “non-recurring.” Belmer — whose appointment was announced in October following the resignation of former CEO Elie Girard after a troubled tenure — was hired to accelerate the company’s focus on digital, cloud computing, security and decarbonization. He previously served as CEO of Paris-based satellite operator Eutelsat Communications after leading French premium television channel Canal+. He formally joined Atos last week, when financial figures were being collected, he said.

“The current state of financial insight leads us to the obligation to issue a profit warning today due to the significant variance in the financial KPIs (key performance indicators),” Belmer said in the statement. “However, most of the items underlying this severe gap are non-recurring. In particular, the large gap in free cash flow mostly stems from working capital.”

Atos’ 2021 revenue reached approximately $12.22 billion (10.8 billion euros), according to preliminary financial results, a decrease of about 2.4 percent from the company’s full-year objective of “stable” revenue. Atos expects to end the year with net debt of $1.36 billion (1.2 billion euros). Its preliminary free cash flow was estimated at approximately -$476 million (-420 million euros) at the end of 2021, compared to its positive cash flow goal. Atos’ full-year 2021 results are expected Feb. 28.

Belmer said he is “convinced” that Atos has the “necessary assets and all the talents to operate a swift turnaround.”

“In this context, I will present at the end of February a new organization to the Board of Directors and, in Q2, a plan that will demonstrate the drivers of this turnaround and the focus on profitable growth and value creation,” Belmer said.

Atos’ stock fell to a 52-week low of 31.26 euros per share today in early trading, down almost 19 percent from its previous close of 38.59 euros per share. The stock closed Monday at 32.10 euros per share, down 16.82 percent.

Atos said an unexpected reassessment of the outstanding costs for the transformation, replatforming and operations of the financial services BPO contract led to a “major” revision of the project’s completion rate, additional costs and a reduction of revenue booked for 2021. Atos signed the 15-year contract with the unnamed UK financial institution in 2018. It now expects an approximately $34 million hit to its free cash flow from the project and approximately $65 million in future losses for the run phase of the contract’s remaining 12 years.

Atos’ 2021 revenue also was impacted by big data/high-performance computing and unified communications and collaboration project “slippages” from the end of 2021 to this year due to supply chain challenges and customer postponements in the public and defense sectors in the Netherlands and United Kingdom. Final agreements with several large customers for extra work performed by Atos in 2021 also were delayed to this year, according to the company.

Atos’ preliminary operating margin accounted for about 4 percent of revenue in 2021, compared to the company’s goal of 6 percent, due to higher-than-anticipated costs of “settlements to close disputes with several customers at year-end” in addition to the BPO project, other project slippages and the customer agreement delays.

Atos attributed its cash flow problems in part to accelerated supplier payments due to “unforeseen pressure from critical suppliers and subcontractors in the final weeks of 2021” in addition to the postponed customer collections and BPO project, a reduction in advanced payments from customers and its German division turnaround plan.

Belmer’s Challenge

Belmer now is in charge of a company that saw its stock fall more than 40 percent last year under Girard, who’s tenure was marred by last year’s failed bid to acquire Tysons, Va., solutions provider DXC Technology and a disclosure that auditors had discovered accounting errors in Atos‘ North American division.

Atos reportedly offered $10 billion for DXC, which would have made it the company’s largest acquisition to date amid a buying spree of more than a dozen companies under Girard, who had been named CEO in November of 2019.

The accounting errors disclosure last April were tied to the U.S.-based Atos IT Solutions and Services and Atos IT Outsourcing Services, which represented 11 percent of Atos’ 2020 revenue and 9 percent of its operating margin. It sparked a more than 20 percent drop in the company’s per-share price that day. In May, Atos hired Avanade and IBM veteran Dave Seybold as its new North America CEO – the third in just less than a year for the division. By August, Atos said that a full accounting review of the two U.S. entities did not reveal any “material misstatement” for Atos’ consolidated financial results.

Atos had launched a five-year, $2.4 billion Atos OneCloud initiative in November 2020 aimed at proactively accelerating its customers’ migrations to the cloud, increasing cloud technical certification for its employees, research and development, hybrid cloud investments and acquisitions.

But the CEO for a large system integrator, who did not want to be identified, said Atos still is an old-school IT outsourcing provider that has failed to adequately make the transition to the cloud era.

“The traditional, long-term, IT-outsourced model is over,” the CEO told CRN. “That model is no longer profitable for the large organizations that once entered into these deals. Companies like Atos are dinosaurs. The old IT outsourcing model is dead. These are companies that are trying to hold on to the past. They need to reinvigorate themselves, but it is very difficult to do when you have so many old-school horses in your stable.”

Another IT outsourcing provider facing challenges as its moves to compete in the cloud computing era is DXC, which last February discontinued merger discussions with Atos. In the most recent quarter ended Sept. 30, 2021, DXC reported a net loss of $187 million on an 11.6 percent drop in sales to $4.03 billion.

Atos confirmed last January that it was considering “a potential friendly transaction” with DXC in “order to create a digital services leader benefiting from global scale, talent and innovation.”

Another sign of the times: IBM’s decision to spin off its $19.3 billion, 90,000-employee, managed infrastructure business as Kyndryl, which does not expect to see “positive revenue growth” until 2025. That business had a pro forma $2.01 billion net loss in 2020.

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