Good morning, ladies and gentlemen, and welcome to this conference call to report Sopra Steria's Q3 2023 revenue. I will now hand the floor to Cyril Malargé, our CEO. Over to you.
Thank you. Good morning, ladies and gentlemen. Welcome to this conference call on the publication of our 2022 Q3 revenue. I'd like to suggest we proceed as follows. Firstly, I will talk about the general context and the environment. I'll talk about the figures published for the third quarter, and then we will answer your questions with Etienne du Vignaux, the group CFO. What is this, the general situation in Q3? The market is buoyant in all countries. Against this backdrop, Sopra Steria has continued to grow at the same pace as in previous quarters.
Revenue was EUR 1,216.9 million, organic growth of 7.7% in Q3 compared with 8.1% in Q1 and 6.5% in Q1. Over the first nine months of the years, growth was 7.4%. At this stage, we haven't observed a noticeable downturn in our customers' demand. Growth on the market is driven by three investment engines. The cloud, automation of business processes using data and AI, and then obviously, cybersecurity challenges. It should be noted that consulting and HR are often advanced indicators, and for the time being, they are still on track. Against this backdrop, we're in a position where we can raise our annual revenue growth target to around 7%. As a reminder, previous target was between +5% and 6%.
You've understood that we've got momentum, but obviously, we're very attentive to the geopolitical and economic environment, and then obviously, very attentive to changes in the IT market. Against this backdrop, we're obviously very confident in our capacity to develop and adapt because of our profile. We have a revenue profile which is fairly recurrent, with 40% of our contracts which are multi-year, recurring contracts. 15 % of the group's revenue comes from business process outsourcing, and then 25% comes from maintenance, so application maintenance, software maintenance, and then infrastructure as well. In addition to our profile, we've got a good sectoral positioning. Our exposure to industry is quite low, with the exception to aeronautics, which represents 10% of the group's turnover. In this sector, we've got a well-established trends.
For our service business, we're strong in three markets, defense and security, about 10% of the group's revenue. This is a market which is going to be high growth in the long-term. Banking, 15% of the group's revenue, 23% if we include software. This is obviously a market which needs digital, and that's essential. We've got the public sector, which is a quarter of the group's revenue, which is a market which is less impacted by the market environment, so the conjunctural factors. We've also decided to reinforce our cost control policy. In particular, we've got a program to reduce our real estate footprint, and then we are also managing our energy consumption.
The last point, which I'd like to highlight, is that we're able to leverage the flexibility provided by use of subcontractors, and the rates, the subcontracting rates are back to pre-COVID levels. Now, I'd like to suggest we go over our reporting units with France. Turnover was EUR 477.9 million, so organic growth of 9.7%, so aligned with the first quarter, 9.6% growth. Second quarter, which was over 10.1%. Performance was driven by PLM activity, so over 20% growth here. Cyber security, 16% growth, and then consulting, which accelerated by 16% as well. The most buoyant vertical markets were aeronautics, defense, and then transport with double-digit growth.
Now, if we turn to the United Kingdom, revenue was EUR 228.9 million in this third quarter. Organic growth of 7.4%, which is good performance. This comes in addition to the 15% which was recorded for Q3. Organic growth of 7.4%, good rate. This entity has got a strong foothold in BPS contracts, so two-thirds of revenue here. These are long-term contracts which are recurring in the public sector. Then we've obviously got two joint ventures where the British government is a joint shareholder. They represented 49% of business in Q3 with a slight contraction, but that was because of a high basis for comparison in the same quarter of last year.
We've also seen good momentum in aeronautics, defense, security and the private sector, especially for the passport and visa renewal service. The private sector has returned to growth since the second quarter of this year. Quarter four, we're expecting the same level of growth as in Q3. Now, if we look at the rest of Europe, revenue was EUR 348.7 million, organic growth of 10%. Growth in this unit was driven by Scandinavia, which recorded double-digit organic growth. It was also sustained in Spain, Benelux and in Italy. In Germany, operational situation has come back to normal and organic growth was 5.4%. Finally, the joint venture SFT posted revenue similar to the first and second quarter, approximately EUR 40 million. Now we can move on to Sopra Banking Software.
Revenue was EUR 98.5 million. Negative organic growth of -6.5%. This is mainly explained by a drop in services and purchase and resale activity. Software turnover, which includes subscription, maintenance and licenses, grew despite a slight drop in licenses of EUR 0.9 million. We are anticipating a more favorable sales seasonality in the fourth quarter. Based on the pipeline that we've got, which is well qualified, we're expecting a total license amount in 2022, which will be comparable to 2021, so approximately EUR 50 million. Now we can move on to other solutions. Revenue was EUR 63 million. Organic growth of 6.5%.
Human resources solutions, which represent 70% of this unit's revenue, grew by 7.9%, and we haven't seen any signs of a market slowdown. For real estate, these solutions grew by 3%. If we look at the outlook for the end of the year. The quarter four, we're expecting organic growth of around 6%. I'd say the situation is positive, but nonetheless, against the backdrop of uncertainty, obviously we're very attentive to changes in trend. Even at this stage, we haven't observed any significant shifts. We're also stepping up cost control measures. Offshore activity has obviously been ramped up 20% here. We've also launched a program to reduce our real estate footprint, so a four-year program across all our regions.
We've also launched a program to reduce our energy consumption. With regards to our annual targets for 2022, we're raising our annual revenue growth target to around 7%. We're confirming our operating margin between 8.5% and 9%, and we're also confirming our free cash flow targets at around EUR 250 million. Just to finish, I'd like to remind you the publication of annual 2022 results is planned on the 23rd of February, 2023. I've finished for my presentation. Now we can have a Q&A session.
Thank you, ladies and gentlemen. If you'd like to ask a question, please press on star one one. Star one one on your telephone keypad if you'd like to ask a question. We have the first question now. First question is from Nicolas David from ODDO Securities. Over to you.
Good morning, Cyril. Good morning, Etienne. Congratulations on your results for Q3. I have three questions. The first is the situation in Germany, so it's back to normal. So is this since the beginning of Q3 or has it been normal for a while now? Are we expecting any impact, any exceptional impacts in the second half or are things totally normal? Is the situation back to normal? That's my first question. Now with regards to the savings plan, obviously for real estate and then for offshore, could you quantify the impact? So for real estate, in the four-year plan, is this mainly FCF? Are you gonna ramp up your use of offshore for IT and for what type of countries and customers?
Is that something that's going to accelerate in the coming quarters? Then my last question is for Etienne. In terms of cash, what is your visibility at the moment, bearing in mind that you've had increased growth, there might be payments that are coming late or, because we're in a crisis, or is there anything we can challenge here in this domain of cash?
I'll take your question. With regards to Germany, when we had the last publication, we mentioned that there were some difficulties here, and this is clearly behind us now. This was planned. We've signed an amicable agreement with the customer, which means that today we carry on working on this project. We're working in T&M mode.
Obviously, everyone has their share of responsibility and we shouldn't expect an impact in the second half. Obviously, I spoke about it is in July, but levels in Germany should come back to what we experienced last year. With regards to the savings plan, yes, we've launched this plan. It's a four-year plan. We're expecting 20-25% savings in terms of service, real estate service. Then in terms of P&L, we'll be reassessing this regularly, but those. We've made some assumptions here. With regards to offshore, we're increasing, regularly increasing, ramping up our resources here. This is not just one region or one entity that's using offshore. We're using offshore in France, U.K., Germany, Scandinavia for Sopra Banking Software.
This is something, we're expecting regular growth here, and this will continue in coming years. With regards to cash, yes. Obviously, the points that you've highlighted are there. We've anticipated an increase in interest rates. We've seen that customers want to optimize their cash. We've seen that the situation is becoming a little bit more tense, but this is something that we've anticipated. Teams are very much concentrated on this. Obviously, everything plays out at the end of the year. Nothing new here. This is something that was entirely integrated into our forecast and something we have planned.
Clear. With regards to real estate, this is not new in terms of external communication. Is this something that you had in mind when you announced your margin targets for future years, or is this on top of this?
This is obviously this program is aligned with new working methods. We've got office space, which is obviously more office space than what we actually need. We've launched this plan this year. It's not a surprise for us because obviously we're highly active in this domain. This is a mid-term program. When we talk about real estate, these decisions won't have an immediate impact, but we'll see the impact in coming years.
Thank you.
We can now move on to the next question. From Emmanuelle Parot, from Gilbert Dupont. Good morning.
Thank you for taking my questions. I've got three questions. The first, if we could come back to the drop in services and purchase resale activity at SBS. Could we have the weighting of these activities, and why has that declined over this quarter? That was my first question. Second, regards price salary ratio. Could you say a little bit more about this? Obviously, thinking about your sales prices with your customers and your salaries, have you got the right formula given your margin? Third question regards the banking sector. Have you seen any trends? We've seen warnings from your competitors, so on the software side of things. Those are my three questions.
I'll take your questions in the order. With regards to decline in services, this was something that we had anticipated. This is nothing new.
We've got some programs which have stopped, so some difficult programs, so specialized financing programs that have come to an end. This is actually good news for us. With purchase and resale activity. We've got obviously software, but then the services that come with it. Obviously we're selling third-party products that come with it. For example, Oracle. We're working with databases here. This comes with the software that we're selling. No key shift, but this was something that was anticipated. The salary price ratio, this is obviously a key matter. This is something that we look at every month. What I can say is that today, in continuity with the first half, it's under control. We take the example of France.
In Q3, our sales prices were up by 4%, and our salary went up by 3%. This is something that's steered very closely. Average salary, I could add that, this is the result. Obviously, we have to be able to increase our salaries to be able to retain our employees. But we've obviously got recruitment as well, and we have a recruitment strategy. 70% to 80% of recruits are young recruits, and this is what enables us to manage our average salary. Now we look at the banking sector. I haven't seen any notable shift at this point or downturn. We could note that the TCO, obviously that's important and it's in good shape.
We should bear in mind that we've had our summit, our software banking summit, with 6,000 participants, over 400 customers. It was interesting for two reasons, interactions with customers and interactions between banks and their customers at 85% are online. We're thinking about the percentage of interactions that actually happen in the bank. Another point after this summit was that 54% of banks consider that the cloud is obviously essential to their future model. We're seeing a trajectory for the future here, which obviously goes beyond TCO. I'm confident for the coming months and the coming quarters.
Thank you for this information.
We'll now move on to the next question. From Laurent Daure from Kepler Cheuvreux.
Thank you. Good morning, Cyril. Good morning, Étienne. Three questions. The first is for the U.K., obviously with regards to our expectations, obviously, this is a welcome, a domain that's performing well. Which activities are the best performing activities? With the private sector, the message quarter-on-quarter is more positive. Is there something specific to highlight here? A question on SBS. Obviously, we've spoken about the transition to cloud in Q4. Have you got some deals that you won't get in SaaS mode? Will this have a negative impact on your revenue for the end of the year? At what level of confidence do you have in your figures? What's the mix between SaaS and licenses? With SFT at the end of the quarter, where do we stand with regards to the migration of the seven banks?
Thank you. With regards to the U.K.. Momentum in the private sector, this is something we had announced when we launched the year. We expected a return to growth. This growth is now accelerating. We had our platforms obviously supporting this growth. Visa and passport renewal services, this was highly buoyant with significant revenue here. That was one point. Then the second point is that our aeronautic activity and financial services is starting to grow structurally. With regards to Q4 forecast, we can obviously confirm growth is expected. We're seeing the structural changes in the private sector. Now for banking, obviously, everything depends on the end of the year. We've got a significant license amount over EUR 20 million in Q4, but we've qualified the pipeline. Today, there is no more risk than in previous years.
For the end of the year, we've got licenses plus subscription. I don't see there being a risk. I don't think there's going to be a shift in terms of the pipeline. For SFT, as a reminder, this is a long-term contract up to 2032, joint shareholder with the Sparda-Banks. We've got the run activity here. Since 2019, we've been running the banks, and then we've obviously got the digital transformation. At the end of 2021, we delivered Customer Engagement. This has been accepted, tested, rolled out on the pilot banks. As indicated at the end of July, obviously, I said it would take more time, but we're reassessing the transformation trajectory.
This will run up until 2032. The trajectory is already underway. We're reassessing things that were established four years ago. Obviously, we've got lots of customers, and we might need to adapt the way we operate with these banks. That's our approach. I think we need another couple of months just to agree on everything with the banks. The turnover should remain the same. Just for the U.K., there was a significant contract services contract which would start in 2022. Has it started? Is it Q3 or Q4? It's been moved to 2023.
Just like to repeat, ladies and gentlemen, if you have any questions, please press on star one one on your telephone keypad. Now we'll move on to the next question. Question from Gregory Ramirez from Bryan Garnier. Over to you.
Good morning. My question regards changing headcount. We've seen this. The interpreter can't hear the question, but it's on changes in headcount and where these changes come from. Are the changes linked to a specific event or is. What's the relationship with the attrition rate? How is this? Are changes in headcount linked to attrition or is it linked to changes in organization?
No. It's quite traditional. In France, in our sector, and then obviously the way we operate, we've. In Q3, we always have a drop, and then we hire interns. We have this classic cycle, just to reassure you. If we look from year to year, when compared with 30th of September 2021, the headcount was higher.
We'll have our next question. We've got a question from Anshuman Bober from HSBC.
Good morning. Thank you for taking my question. Thank you for your comments on the current market, no noticeable downturn. I just wanted to know what you think about 2023 and your vision of how a potential slowdown could come about next year. Are you still confident in terms of your growth for your mid-term targets? Second question on SBS. Could you give us an update on the way or the business plan that you have for the next three years for this entity?
Talk about your top line and margin. For 2023, it's a little bit soon to start making declarations, but what I have observed is that I'm seeing on the market, I'm not seeing a stop in growth. We'll probably have growth which will be less sustained in 2022, but there will still be growth because customers, our customers, administrations, the transformation is an essential need, and digital is there to help them restructure, deliver savings also. In this regard, I'm quite confident in the fact that in 2023 we should have positive growth, probably not at the same level as 2022. For me, the priority or our major focus is obviously we've seen inflation, which might last for quite some time. We've seen inflation in Europe. We're gonna have inflation of perhaps 4%-5%.
Our focus is to be able to increase our sales prices and focus on our operational margins. That's priority. For banking, we're aligned with our plans from last year, which are on track. We have two priorities. The first is developing our digital office to be able to generate growth in 10-18 months' time. The back office, but also front office, because this is what will make a difference for our customers. That's one aspect. We're aligned with the plan. The second aspect is transformation in R&D activity. We launched a five-year plan last year, which aims to deliver EUR 30 million of savings by 2025. We've already delivered EUR 4 million in 2021, and in 2022, we're aligned with this plan. We're on track and aligned with the plan.
Thank you. Now we have the next question. From Derric Marcon at Société Générale. Over to you.
Good morning. Thank you for taking my question. I have three. Two first questions are on SBS. Could we come back to decline in services and then Q3, Q4, and the visibility that you have over the next quarters? Obviously, I understand there are moving parts here, but could we have a little bit more of an idea of how things are going to evolve in the next half of the year? And then, if we take the 400 core banking customers that SBS have, does this include a significant share of neobanks, new stakeholders, or are we more focused on traditional banks?
And this i s this what's driving current revenues and revenues in the future? My last question is on the U.K.. Could you just focus on the joint ventures and the visibility that you have today with regards to the business that you'll be generating with the joint ventures in 2023? Is it more predictable than the rest of the business? Or do you currently have a vision of what will happen in 2023?
With regards to Sopra Banking, with regards to the end of the year, how we see Q4, we should have around similar levels. There should be growth in the fourth quarter, but then flat growth with regards to 2021, that.
Since the start of the year, obviously, thinking about software licenses, I was wondering about services, which is obviously a significant part of revenue. Sometimes we're seeing there might be some bumps in the road. I was just wondering about trends at the start of the year for services at SBS and what we can expect in the next quarters. Services, that's approximately 40% of banking revenues, so it is significant. Services are linked to integration projects, so it will follow the same trend as products. When we look at distribution of services between H1 and H2, there's a slight decline, but obviously, this is linked to Cassiopae, but I can't see a noticeable shift. There's no structural trend that we can conclude with regards to services.
Next, with regards to your second question on core banking, is this driving the business? Yes, we've got traditional customers, but in Europe, but also in Africa, we've got a lot of business, increasing amount of activity in Africa. We're present in the region. This is some of the Sopra Banking Software's traditional customers with a pipeline which is well-distributed, quite standardized. In Europe, we've got a good level of business in France, but then also in the U.K. with good pipeline. Obviously, the pipeline is looking good for next year as well. With regards to joint venture for 2023, what I can say is that we've reached a certain level of maturity, which means that we've got good visibility with regards to 2023.
I won't be going into any more details, but we're seeing momentum which is aligned with what we've observed up until now. If we could come back to new stakeholders, neobanks, embedded finance. Is this something that's driving, could this drive growth at SBS? Yes, of course. Today this isn't a significant volume, but obviously working with people like N26 or Fintech. Yes, this is obviously starting to pay off.
Could you quantify the share, its share, or is it too marginal?
If we look at the percentage of growth, then yes, it'll be significant.
Thank you.
We have got no more questions on the French line, so now we'll switch to the English line for questions.
Ladies and gentlemen, we now begin the question and answer session. We got the first question, so please stand by. The question from Aditya Buddhavarapu from Bank of America. Please go ahead.
Hey, good morning. Thanks for taking my question. This is Aditya Buddhavarapu from Bank of America. I have one question mainly on the margins. You've raised the full year guidance on organic growth from 5%-6% to 7%. The margin guidance has stayed where it is. Could you maybe just give us some color on what you're seeing there, given your comments on pricing in France, you know, you're doing sort of 4%. Do you think you can sort of maybe get to sort of the high end of that margin target, given everything you've said?
Second, how should we think about maybe the margin evolution in 2023, given, again, comments on, you know, the sort of recurring nature of revenue and also some of the cost programs you have in place? Thank you.
I know that there's a translation up and running, so I'll be answering in French. With regards to margin and at the end of the year, we should be within the guidance that we've shared. I haven't got much more to share apart from that, apart from the fact that we're very confident we can deliver this level of margin. Before the real estate program. Obviously, for 2024, we announced guidance of 10%, so we're confirming this. 2023 should be the next step, which will enable us to achieve our 2024 guidance. That's what I can say about margin. Now back to real estate, obviously, a four-year program, a 25% reduction. Obviously, this is working together to do so.
That's what we should take away from this, but it's a four-year plan, and we'll have time to come back to that in more detail later.
Yes, thank you.
Thank you for your question. There are no further questions on the English line. We're going back on the French conference. Thank you.
We have no more questions on the French line also, so I'll hand the floor back to Cyril Malargé to conclude the conference. Thank you. Thank you very much for taking part in this conference. As indicated, annual results publication is planned on Thursday, twenty-third of February, 2023. That'll be our next checkpoint. Thank you for listening, and have a good day. Goodbye. Ladies and gentlemen, this conference has finished. Thank you for taking part. You may now hang up.