Welcome everyone. I am Rodolphe Belmer, CEO of Atos, and I'm joined on this call by Uwe Stelter, Group CFO. I wish you all a Happy New Year. May 2022 keep you and your loved ones safe and healthy. As you've seen from the press release issued this morning, we have convened this call because the group failed to deliver on its 2021 objectives, both on revenue, margin, and also on free cash flow levels. Needless to say that I was not anticipating to be speaking to you this morning after only a few days into the CEO role since I joined last Monday. Frankly, I would have welcomed the opportunity to have more time before engaging with you. We had to disclose this information to the market and to you as soon as practicable.
Let me start by reiterating my personal commitment to full transparency in our dialogue with investors, who will be as transparent, factual, granular, and analytical as possible on this call, on the various building blocks underlying the miss, bearing in mind that we are still early in the year. By the same token, as I'm sure you would be able to appreciate, I will not be in a position to give forward-looking views or judgments on 2022 and beyond. It's just too early to do that. The final remark before I turn it over to Uwe, the numbers we are sharing with you today are provisional and have not been audited yet. Uwe, to you.
Thank you, Rodolphe, and good morning also from my side. Let me start to give you first the preliminary key figures for full- year 2021, and the next slides I will give you the detailed explanations and impacts. First, revenue growth at constant currency with circa -2.4% below the objective of stable. Second, operating margin on revenue reached circa 4% below the objective of circa 6%. Free cash flow reached circa -EUR 420 million compared to an objective of positive free cash flow. Let's move now to the next slide to explain to you the reasons for these large deviations caused in late December. On revenue growth, the variance came mainly from four effects.
First, for 70 basis points, an unexpected reassessment of the cost to go on transformation replatforming and operations of a financial services contract signed in 2018 for 15 years with a large U.K. financial institution, leading to a major revision of the completion rate on the project at the end of December 2021, and therefore translating into a negative revenue of 70 basis points in 2021. Second, for 90 basis points, hardware and software project slippages from end of 2021 to 2022 in Big Data, High Performance Computing, as well as Unified Communications and Collaboration due to supply chain challenges as well as to customer delays, mainly in public sector and defense in the Netherlands and in the U.K. Thirdly, for 30 basis points, delay to 2022 of final agreements with several large customers to get compensated for extra work performed in 2021.
These amendments, expected to be signed in December, would have led to additional revenue in 2021. Lastly, for 50 basis points, lower than expected level of hardware and software resale in December 2021. Most of those revenue impacts had also an impact on operating margin, which we see on the next slide. In detail, for 90 basis points, the reduction of the revenue as well as additional costs incurred in 2021 on the large financial services BPO contract in the U.K. I just mentioned when I explained to you the reasons for the revenue growth deviation. Additionally, the run phase of the BPO contract on the remaining next 10 years requires the provision of circa EUR 65 million for future losses, not in operating margin, but in other operating income and expenses.
For 30 basis points, the margin impact of the hardware and software project slippages from 2021 to 2022 in Big Data High Performance Computing as well as Unified Communications and Collaboration slippages. For 30 basis points, a delay to 2022 of final agreements to get compensated for the extra work performed in 2021. For 40 basis points, higher costs than anticipated in 2021 on settlements to close finally disputes with several customers at year-end. Let's move on to my last slide to free cash flow. The variance on free cash flow compared to the objective of positive free cash flow is mostly due to working capital variations. More specifically, the following four impacts.
First, circa EUR 30 million impact from the large BPO contract reassessment in the U.K. highlighted before on the revenue and margin pages. Second, circa EUR 200 million from accelerated supplier payments at the end of 2021 as a result of unforeseen pressure from critical suppliers and subcontractors in the final weeks of 2021. In particular, to secure the delivery to customers and strengthen the relationship with the subcontractors in a hot talent market. Third, like EUR 150 million of customer collections postponed from end of 2021 to 2022 due to the delay of customer decisions and late delivery and therefore late acceptance. Fourth, EUR 30 million related to further reduced advance payments from customers in addition to the EUR 200 million commented before for the first semester. Lastly, circa EUR 30 million from the lower level of sales of receivables, the factoring.
As a reminder, the estimated -EUR 420 million free cash flow for 2021 also comprises of the impact of the German turnaround plan, EUR 480 million, and the reduction of advanced payments from customers in the first semester for EUR 200 million, as already communicated on July 12th, 2021. The net debt at the end of December 2021 under IFRS is expected to be circa -EUR 1.2 billion, leading to a net debt on OMDA ratio under IFRS of circa 1.1. Taking into account the Worldline shares covering the optional exchangeable bond, net debt on OMDA ratio is estimated at circa 0.8. Back to you, Rodolphe.
Thank you, Uwe. Thank you all for your attention. We are going to now take your questions.
Thank you. We will now begin the question and answer session. As a reminder, if you wish to ask a question, please press star one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press the hash key. Once again, please press star one if you wish to ask a question. The first question comes from the line of Neil Steer from Redburn. Please go ahead.
Morning. Can you hear me okay?
Yes, we can.
I just have a couple of quick ones, if I could. First of all, on the one you mentioned at the end, your debt OMDA ratio. Could you let us know whether you have any banking covenants and what those ratios are set at?
Yes. Hey, morning, Neil. Yeah, the banking covenant is 2.5 x the OMDA. That's on our RCF.
Okay. Thank you. I know it is difficult to make forward-looking commentary, but are you expecting to be free cash flow positive in 2022 at this stage?
Yeah, Neil, of course, we will not give guidance, but yes, that's of course the plan and the target and also supported by, as you saw, a lot of the working capital movements, which are one-time or delays into 2022.
Okay, thank you. Finally,
We'll give, of course, more guidance, Neil, and everybody. I will, of course, give more guidance on the 28th when we talk about the full- year numbers.
Okay, thank you. It looks as though from the figures that you have given that when you last commented on Unified Communications that business was making operating profits. Clearly, based upon the numbers that you've given us this morning, it looks as though that's probably break even, possibly running at a small loss. Can you just give us an update on where you are with disposal plans specifically for that and any other units?
On the first, Neil, on the profitability of that business, no change to that one. We commented last time, it's about 6%. That's what I also expect in that neighborhood for 2021. No change to that Unified Communication business. To the disposal plans, perhaps, Rodolphe?
Well, the disposal plan on UCC is ongoing, and hopefully we're going to be able to give more information in the future, but no real piece of news to comment on today.
Okay.
The process is underway.
Okay, thank you. Sorry, Uwe, just clarification. In this slide, you suggest that the operating margin was impacted specifically because of Big Data/UCC project delays. If you're reiterating the margin on UCC, as you've said in the past, presumably Unified Communications was not part of the reason that the margin was worse than expected then.
The most part was on the BDS part and the smaller part on the UCC. When you talked about the previous 6% going to break even, that's of course not the case. The revenue is roughly around EUR 600 million we communicated, and the margin is in the range of the 6%, 5%-6%, but not slipped down to break even, also like you indicated.
Okay. Very clear. Thank you very much.
Thank you. Once again, if you wish to ask a question, please press star one on your telephone. Okay, next question comes from the line of Frederic Boulan from BofA. Please go ahead.
Hi, good morning, Rodolphe. Good morning, Uwe. Just a quick question around the free cash flow impact that you flagged for 2021. Slide six, you show that the EUR 150 million customer collection is delayed, so we should expect this to be a positive in 2022. Can you spend a bit more time on the accelerated supplier payment demand of EUR 200 million? To a degree, that's a one-time effect. We already had, I think, a similar EUR 200 million impact in H1. That's about EUR 400 million of working cap.
Can you just run through what's going on here specifically and to what degree that's something that's one time and will not normalize or unwind in the future?
Yeah. No, good question. On the supplier side, as you know from our previous publications, we were at about 80, 76-80 DPO on days payable outstanding, meaning we are paid in average after 80 days our suppliers. Combined with the, let's say, dependency we have right now, especially on our Big Data and Cybersecurity business, but also UCC. Of course, the pressure from suppliers to get paid either in advance or early to deliver components, to deliver products has of course increased, as well as our dependency on subcontractors, which are critical for delivering our digital services. Therefore, we had at the late December the effect that we had to pay and are paying, we're paying more than in the past.
Therefore, also our DPO, that number of 80, will considerably decline towards more the 60 range. That I would see definitely as one of, because it is more normalizing our payment pattern towards the suppliers. I think that's also a sustainable level because when you look at our peers at the benchmarks, then you are somewhere between 50, 55 or so should be probably a normalized DPO. We are coming closer to that. To answer your question, yes, this is one time because we don't believe there is a need to further reduce that one. It's prompted at the end of December really by the pressure also to make sure that our suppliers and subcontractors are paid early or in time.
Thank you, Uwe. Maybe if I can ask a follow-up, basically the same as the previous question you commented on Unify. I know it's very early, Rudolf, but any early thoughts around the strategy on data center hosting, and if it's still the kind of plan to exit that business and any visibility you can provide us on how we're going there?
Well, thank you, Frederic. Of course, it's a bit early for me to communicate on the turnaround plan of this company I want to put in place, even though I'm actually planning to communicate on this plan no later than Q2. Of course, I've started working on that in the background, I would say during the last two months. I'm totally convinced that there is a very solid turnaround avenue for this company. Commenting on the strategy, we have some businesses which are growing very nicely and in which the group is well positioned.
We need to find ways to continue to accelerate and to produce capacity to invest in those businesses. In that sense, there will now be a U-turn in the strategy of the group, which was communicated back in July and decided by the board in respect of the divestment policy starting, as we said already with UCC. I'm not going to comment more on that, but what you can expect is that the plan I'm going to make up will be made of four different axes. One axis will be portfolio. Second axis will be commercial. How do we stimulate our commercial performance? Third will be cost.
How do we get to a cost base which is comparable to the industry average? Fourth, organization. How do we simplify our organization to be more nimble and more commercially aggressive? That's the key principles and the four legs in which I will be working.
Perfect. Thank you very much.
Thank you. Next question comes from the line of Michael Briest from UBS. Please go ahead.
Good morning. Apologies if these have been asked. I missed the beginning of the call. Rodolphe, just in terms of your view of the quality of the business and how it's run, obviously there's mention here of higher costs on some contracts where there's customer disputes, you know, the provisioning around the BPO contract. Have you done, and I appreciate you started on January 3rd, so I suspect the answer is not, is there a chance that you will, in the next three, six months, whatever, go through the contract book in a lot more detail and find more issues which need to be provided for? Or do you think the company's on a level footing in the light of these provisions you've made today?
Just coming back, Uwe, on your comments around increased use of subcontractors. I know you provided some extra cash for recruitment and retention earlier in the year. Can you say something about the attrition rates, how those have trended since Q3, and whether that's something we should be mindful of this year, that, you know, either salary increases or higher attrition are gonna be headwinds for the business? Thank you.
Well, thank you, Michael. Of course, as you said, well, it's very early days for me, but as far as I can understand from the early work I've been able to do, the internal control of the company seems to be robust and processed. The process to manage the contracts with risks, well, is in place. There is a robust process, maybe Uwe can elaborate a bit more on that.
Third point, there is no real sign that large contracts should, well, that additional large contracts are having difficulties of the kind of the contract we are commenting today, and which has driven us into, well, partially into this severe profit warning. Meaning that for me, process seems in place, and second, no signal that other contracts are affected likewise. Of course, I cannot promise anything, and be sure that if there is something that's coming up, I will communicate it immediately to the markets. Uwe, do you want to tell more on that?
Yeah, perhaps, Michael, good morning. Perhaps to add to that, I mean, first of all, there is a process in place, starting with you know the assessment before we sign actually a contract and the deal, what is the risk that's been categorized, it's being put into a risk monitoring afterwards if it's something which is risky by nature. Of course, in a portfolio you always have you know contracts which are done before, many times before, and some which are more the first time, so they need monitoring. We have about 50 contracts always in the monitoring of those you know indicators of risk. And this is continuously monitored, that's how we also actually got to the problems in this contract.
To comment perhaps why did it happen anyway, even if we have robust process, I think it's important to mention that this BPO contract, it's pretty unique, as it is 15 years. It is very complex, first time also to re-platform a pension system in the U.K. It's also very large due to its nature. Now, in the first few years of the contract, that was the pieces where we took over the work, we took over people, we operated, customer very satisfied, cost in line. When we hit the problem is when now the transformation phase starts, where it's really a massive re-platforming of the overall landscape.
Of course, here unfortunately the topics were found where we need more work, more efforts to do the transformation, and also at higher costs for the next 10 years. That's why it's also everything is extrapolated, if you want, by 10 years. If it would be a three year contract, of course the losses would also be much lower. What I want to say with that's a pretty unique contract. We don't have any comparable like that in the group from a size, complexity and nature. Nevertheless, there is always, you know, risk, smaller risks, medium risk which we need to digest and we need to manage against, of course. To your second part, Michael, on the attrition and on the cost of recruitment and so on.
Absolutely, yeah, and we are also in line with the investments we needed to do on retention, but also on hiring. That's fully in plan with what we said in July and also works because we also have again a headcount increase in Q4, net headcount increase of nearly 2,000 people from the 1,500 in Q3. We continue to add headcount. We now of course working on speeding that even more up, that's in line. The effect, why, and you mentioned it in connection with the suppliers. Of course on the supplier side, because we are not always delivering everything with our own employees, we are also using subcontractors.
It is just like employees in a bit, so it's not the part of the business where you pay only after 60 or 80 days, but much earlier, and the pressure actually increased towards the end of the year.
Thank you. Can I just ask on the deal slippage in Big Data and Unify and also the sort of agreeing final compensation terms with customers, is that expected to close in Q1 or certainly the first half of the year, should those businesses or that business come back in the first half of this year?
First, it's really, and when we publish also the numbers for, especially for Big Data & Cybersecurity, you will see that Q4 is exceptionally low. I would say probably around flatish, which as you know is normally double-digit 15% +. For the year, it will still be double-digit in Big Data & Cybersecurity, especially on the High Performance Computing, there were slippages into 2022. We will see BDS coming back to double-digit growth. It is a movement. Will it be Q1, Q2? It will be, you know, over the next four to six months.
It's really a swing between Q4 on Big Data & Cybersecurity into the first half of 2022, mainly on the High Performance Computing side.
Okay. The same for the customer contracts?
Yeah, those indeed. For the customer contracts, here it's more settlements where for, you know, some of them really there were some, especially with the government, there were in the U.K. some specific, I would say hold up on the customer side, which moved for, you know, into a Q1 resolution. This will be movements also into H1. Nothing of those are lost, but really postponements into the new year.
Okay. Thanks very much.
Thank you. Next question comes from the line of Mohammed Moawalla from Goldman Sachs. Please go ahead.
Yes. Thank you. Good morning, Rodolphe and Uwe. I had a couple of questions. Firstly, I mean, in light of some of your comments, you know, how should we think about sort of further restructuring for the group? I know that when you had laid out a plan in the summer, you had sort of said that, you know, restructuring would be kind of at sort of the normalized rates. Should we think about that charge perhaps being more elevated over the medium term? Secondly, just coming back on sort of Big Data & Cybersecurity, just wanna confirm. I think you had said that that business was flattish in Q4.
How should we think of the sort of trajectory or any of the sort of structural drivers in this business? You know, have they changed, or this is just a sort of temporary blip? Lastly, just again, when we think about the margin, obviously the industry is also seeing a lot of sort of, you know, increased attrition and hiring pressure. You've talked about one of the kind of strategic elements being improving the commercial and the portfolio. What level of sort of additional reinvestment should we sort of think about that needs to be put back in the business? My last point is just on contracts.
Are there any specific contracts we should be mindful of that are up for renewal in 2022 of any meaningful significance that we should think about as we think about the top line growth? Thank you.
Well, thank you, Mohammed, for this large set of questions, actually, which relate a lot to the relaunch and turnaround plan of the company that will be developed and communicated later on into the year and no later than Q2, as I said in my introduction. While it's true for all the elements that will be underpinning our return to growth. As I said, we intend to, in terms of cost base of the company, come up in line with industry average.
As you know very well, I'm not going to comment more on that today, but we lag substantially behind in terms of operating margin if you compare ourselves to the industry norm, and we need to come back at least at industry average level. There are many levers to pull to reach to that number, but which could encompass some elements like restructuring, but not only. While it's true also for the other aspects like commercial development and accelerating the growth in the key areas with potential of spectacular growth in our portfolio of activity, notably in digital, cyber and big data, which are marked with very, very substantial growth and with very solid growth prospects for the future.
In this case, we have a notion of what's going to be our portfolio strategy and what's going to be our capital allocation decisions. We need to focus on the areas which are due to grow very substantially. I think that's all what I can say. In the BDS part of our business, cybersecurity and big data, Uwe said, well, that will be last quarter was a bit flattish. That's the remark that you make. Well, does it really change our view on the growth prospect of this business? The answer is clearly no. Maybe you want to comment more, Uwe, on that.
Yeah, no, Mohammed, indeed. Good morning. Indeed, it's the BDS. When you look at the deals, we actually won a lot of deals in the Big Data and High Performance Computing area. But many of them will deliver only in 2022 because of late
Late signature, late award of the customers, and also component shortage, which didn't help, of course, to start on the delivery. It's really a swing between Q4 and H1. We also see a strong pipeline, especially when you think about all the high-performance computing initiatives by the public sector, by the European Union. There's a lot of commercial activity visible for 2022 and also 2023. Plus, we also see more and more going into the commercial space in terms of Big Data solutions which are used for our private sector customers. Lastly, on your question around the commercial order contracts for 2022. We have also a pretty healthy pipeline which contains a lot of large contracts.
Good news is, as we commented before, there's not much up for renewal. That is all done. There's only midsize or smaller customers up for renewal in 2022.
Okay. Thank you very much.
Thank you. Next question comes from the line of Laurent Daure from Kepler Cheuvreux. Please go ahead.
Yes. Thank you. Good morning, gentlemen. Three questions on my side as well. The first is on the HPC business and the supply chain constraint. Have you already secured enough components for 2022? Is it still a risk? And do you still see this business as a comfortable double-digit margin business? The second question is on the M&A strategy. Given that your balance sheet is a little bit more stretched than you anticipated, do you believe you have to be a little bit more cautious in the speed of adding M&A? And my final question, maybe you will comment more in next February, but in your plan, do you would you reconsider possibly listing the Big Data and Cybersecurity business? Thank you.
Thank you, Laurent. I was on mute, sorry. Well, starting with your last question, you will understand that I'm not going to give any indication of what's going to be my recommendation on the strategy of the group that I will present, as I said a few times already during the course of this conversation, only in Q2. As I said, portfolio will be a key component of the turnaround strategy of the group, because we want to make sure that we manage for ourself resources to invest in the growth area of this company, which are very, very solid and exciting. That's all what I can say for the moment, as you will understand well.
In the meantime, M&A, as you know, we have adopted a sort of bolt-on M&A strategy with an envelope of around EUR 400 million in investments that we're making every year and with the cash flow production of the group. Currently, the run rate cash flow production of the group, if we exclude the one-offs which are driving us into the profit warning of today. If you exclude that, the run rate cash flow production of the group is strong enough for us to continue to afford an envelope of that kind and we're going to continue on this kind of pace and cadence. The other question on HPC, maybe Uwe, you can answer because I'm not really sure I have the details in mind.
Yeah. Morning, Laurent. On the components, of course, I mean, clearly we said as well that for Q4 we have secured components and we are now slipping a bit. Sure, in hindsight, we had, you know, some misses in terms of the component securing. I would say for 2022 overall, I think this is, we think we have the pieces in play. We have the relationships with the suppliers. I don't see any risk for 2022. You know, might it be between Q1, Q2, and so on, there might be some movement, of course, in that regard.
Margin-wise, Laurent, so yes, that business is clearly a double-digit profitability, also into the future, given its I would say unique positioning, especially in Cybersecurity, but also on the forefront of the High Performance Computing.
Okay, great. Thank you.
There are no more questions at this time. Please continue.
Well, I understand, as you said, that there is no more questions. As a matter of conclusion, I would like to reiterate that I truly believe that Atos has a fantastic avenue to perform rebound through a spectacular turnaround, and I'm impatient to present you my plan for the company in the, well, immediately in the next few months, I mean. I hope this call today was helpful, and I would like to thank you all for your participation and for the open dialogue. Our next milestone of importance on financial communication will be on February the 28th with our annual results communication. Thank you for your attention and talk to you very, very soon.