Atos CEO’s Profit Warning Shocker: Five Things To Know

New Atos CEO Rodolphe Belmer issued a profit warning Monday that led to a 16.8 percent drop in the company’s per-share price to 32.10. 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. Here are five things you need to know about the profit slide that was an unwelcome surprise for the new CEO.

New “Financial Insight”

Atos CEO Rodolphe Belmer – who was appointed last October to lead a transformation of the company- says the fiscal issues that led to a profit warning this week came to light last week as the latest financial figures were being collected and consolidated for the IT outsourcing provider .

“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),” said Belmer in a prepared statement that sent the company’s shares plummeting 16.8 percent.

Among the myriad of issues that led the IT outsourcing behemoth to report a 2.4 percent decrease to 10.8 billion euros ($12.2 billion) in revenue for 2021: a major revision in the completion of a business process outsourcing contract for a large United Kingdom financial institution; project slippages for big data/high performance computing and unified communications collaboration projects; supply chain challenges; reduced low margin hardware and software resale; and delays in finalizing agreements with several large customers.

Belmer, who was tapped as the new CEO of Atos last October but did not start the job until last week, is promising a “swift turnaround” with a plan that he will present to the company’s board of directors in February. Here are four things you need to know about the IT outsourcing provider’s financial shortfall and stock slide.

A Long Term Outsourcing Agreement With A United Kingdom Financial Institution Hits A Snag

An “unexpected reassessment” of a business process outsourcing (BPO) agreement with a large United Kingdom financial institution will result in a 70 basis point hit in full-year revenue.

Atos said the deal with the UK financial institution, which was originally signed in 2018 for 15 years, had undergone a cost reassessment in December that has led to a “major revision” of the completion date for the project.

Atos said the reduction of revenue booked for 2021 for the UK financial institution deal along with additional costs would result in a 90 basis point hit to operating margins.

As a result of the cost reassessment, Atos said the “run phase” of the BPO contract for the remaining 12 years requires the provision of 65 million euros for “future losses” under what it called “other operating income and expenses.”

The CEO for a large system integrator, who did not want to be identified, said Atos is one of the old-school IT outsourcing providers that has failed to make the transition to the cloud computing era.

“The traditional long-term, IT-outsourced model is over,” said the CEO. “That model is no longer profitable for the large organizations that once entered into these deals. Companies like Atos are dinasouars. 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.”

The CEO predicted that old-school IT outsourcers like Atos are going to be forced to restructure as they move to provide more IT services under the pay-per-use cloud computing model.

Supply Chain Challenges, Project Slippages

Atos said it will suffer a 30 basis point loss in full-year revenue as a result of “project slippages” from 2021 to 2022 due to supply chain challenges.

The project slippages for big data/high performance compute and unified communications and collaboration projects resulted in customer postponements in the public sector and defense industries in the United Kingdom and the Netherlands.

The project slippages come with widespread supply chain challenges for many of the largest and most respected computing providers as a result of semiconductor shortages.

IBM CEO Arvind Krishna told CRN’s Best of Breed (BoB Conference) attendees last year that he doesn’t expect there will be a resolution of the semiconductor shortage until 2023 or 2024.

“I actually think that they’re being optimistic to think it will be solved by the end of ‘22,” Krishna said. “By the end of ‘22, [it will be solved] only if the demand falls.”

Ultimately, Krishna said that the problems could persist even past the 2023 timeframe that Intel CEO Pat Gelsinger has previously pointed to as the likely end to the crises.

Delay To 2022 Final Agreements With Several Large Customers

Delays to final agreements with several large customers to get compensated for extra work performed in 2021 will result in a 30 basis point hit to full year revenue, said Atos.

The delays to those final agreements also resulted in a 30 basis point hit to operating margins, said Atos.

Higher than anticipated costs to “close disputes” with several customers at year’s end resulted in a 40 basis point hit to operating margins.

Many of the global IT outsourcing providers bite off more than they can chew with long-term outsourcing contracts and then find themselves scrambling to meet the terms of the contract, said the CEO for a system integrator who did not want to identified.

“They make aggressive bids to get these contracts, and then when they don’t perform, they are charged penalties from their customers,” he said.

The Atos profit warning comes just six months after Atos pointed to 2021 as a “year of transition” for the company and its 104,808 employees, with a pledge to focus significantly on digital, cloud, security and decarbonization.

Last July, the company said it had added 1,037 employees from acquired companies and 9,391 employees of its own. What’s more, the company said in the first half of last year it had a 16.6 percent attrition rate with 8,665 employees leaving the business.

Its stepped-up transformation comes after Atos launched in November 2020 a five-year, $2.4 billion Atos OneCloud initiative 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.

Just last week, Atos completed the acquisition of Cloudreach, a 600-employee, UK multicloud services company specializing in public cloud application development and cloud migration.

Reduced Level of Low Margin Hardware-Software Resale

A reduced level of low-margin hardware and software resale in December 2021 resulted in a 50 basis point hit to full-year revenue, said Atos.

That pressure on hardware and software margins comes as the company battles for digital transformation projects against born-in-the-cloud providers.

Many of the old-school IT outsourcing providers have failed to make the transition to a cloud computing model where the old IT outsourcing model is no longer applicable.

Bob Venero, CEO of Holbrook, N.Y.-based solution provider Future Tech Enterprise, No. 100 on the 2021 CRN Solution Provider 500, said large enterprise customers are no longer willing to completely outsource their IT operations to global providers.

“Enterprise customers are looking to outsource pieces of their business that make sense but do it in a specific way that is very strategic and specific to the skill sets being provided to them,” said Venero. “We see enterprise customers outsourcing pieces of their business to best-of-breed providers.”

The problem with many of the global IT outsouring giants, said Venero, is they are “jack of all trades, masters of none.”

Future Tech, for its part, has focused on best-of-breed logistics, depot operations and procurement processes and procedures for customers.

“If you want a gallbladder operation, you don’t go to a general practioner,” Venero said. “The large outsourcing providers are general practitioners. That is a challenging market right now for everybody.”

New CEO Predicts A Swift Turnaround

Belmer, previously the CEO of of Paris -based satellite operator Eutelsat and leader of French premium TV channel Canal+, has predicted a “swift turnaround” of the struggling IT outsourcing provider.

“I am convinced that the company has the necessary assets and all the talents to operate a swift turnaround,” he said in a prepared statement. “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’s rough start comes after former CEO Elie Girard unexpectedly resigned last October after two years in the top job.

Girard’s departure came six months after Atos disclosed that auditors had discovered accounting errors in its two US subsidiaries. At that time, Atos had also cuts its 2021 revenue goals due to the COVID-19 pandemic.

When Belmer was appointed CEO, Bertrand Meunier, chairman of Atos’ board of directors, said the seasoned French executive was chosen for his “strategic acumen” and proven “leadership and operational efficiency,” as well as his ability to “successfully lead complex transformations.”