NelsonHall Industry Insight: October 31, 2011

The following extracts are  commentary and insight from NelsonHall Industry Insight, NelsonHall analysts weekly views on key industry developments that impact your sourcing. Register to receive your copy weekly  This newsletter forms part of NelsonHall's Key Vendor Assessments service. For further details, contact Paul Connolly.

Aon Hewitt Announces Q3 2011 HR Solutions Revenues Up 246% to $1,112m

Oct 28, 2011 | Financial Results by Amy Gurchensky

Aon Hewitt has announced Q3 2011 HR Solutions revenues, for the period ending September 30, 2011, of $1,112m, up 246% year-over-year due to acquisitions, primarily Hewitt. Less acquisitions, organic revenues were down 2% for the quarter.

Q3 2011 revenues (and revenue growth) by service type were:

• Consulting $555m (+107%, -2% organic)
• Outsourcing $561m (+958%-2% organic).

Q3 2011 HR Solutions operating income increased 43% year-over-year to $77m with an operating margin of 6.9%, 11.2% adjusted, down 590 bps. The decline in operating margin is largely due to the inclusion of Hewitt's operating expenses, an increase in intangible asset amortization expense, and a decline in organic revenue.

Restructuring charges were $26m in Q3 2011, which was primarily related to workforce reduction and lease consolidation. In Q3, the company saved $37m, and $163m year-to-date, with total savings of $355m expected in 2013.

Analyst comments:

Organic revenue growth for Aon Hewitt's HR Solutions business has declined for the first time since the merger due primarily to reduced project-related revenue in outsourcing and weaker results in EMEA and consulting.

Organic revenue growth in its outsourcing segment was down -2%. There was positive growth from new client wins in benefits administration and HR BPO in Q3 that was offset by continued price compression in benefits administration. In addition, the quarter included a $4m one-time adjustment to revenue for Canada.

Despite this quarter's results, the HR Solutions pipeline is growing, and its HR BPO business is reporting positive margin. Outsourcing, in particular, had another solid quarter in terms of win rates, adding ~20 new mid and large market benefits administration clients and bringing the year's total to ~160 wins.

Areas of investment for the company's HR Solutions segment are focused on:

• Its public and corporate health care exchanges and more specifically, its Aon Hewitt Navigators business to address changes with health care legislation
• Its compensation consulting capabilities via its acquisition of Ward Financial Group in July
• Expanding its geographic footprint, particularly in Asia
• Expanding its HR BPO offering via point solutions such as dependent eligibility audits and absence management diagnostics.
• Orange Business Services Awarded UCC Services Contract by Gemalto

Oct 27, 2011 | Contracts by Dominique Raviart
industry: Hi-Tech & Electronics

Orange Business Services (OBS) has been awarded a UCC deployment contract by Gemalto.

OBS is to use Microsoft Lync technology (instant messaging, unified messaging, presence, audio and web conferencing, VoIP services).

The project is in pilot phase. It will eventually service 10,000 end-users across 148 sites in 45 countries.

OBS acquired in 2010 Alsy, a Microsoft technology integrator in France.

Gemalto is a smart card vendor with revenues of €1.9bn in 2010.

Analyst comments:

This contract with Orange Business Services is to be put in the context of Gemalto awarding in early 2011 a 5-year desktop management contract to T-Systems, covering 9,000 desktops.

Obviously, T-Systems does not have the local skills around Microsoft UCC technology to provide the integration work. It is however interesting to see a client separating the run service to a large MNC with historically a small presence in the country (revenues of under €250m) and the transformation to a different vendor.

Atos Announces Q3 2011 Revenues Down 0.3% Organic to €2,093m

Oct 26, 2011 | Financial Results by Rachael Stormonth

Atos has reported revenues for Q3 2011 of €2,093m, up 72.9% on reported Q3 2010 revenues of €1,210m, and down 0.3% at constant scope & currency.

Q3 2011 revenue (with YoY growth at constant scope & currency) by service line was:

• Managed Services €1,007m (+2.1%)
• Systems Integration (SI) €528m (-4.1%)
• High Tech Transactional Services (HTTS) and Specialized Businesses: €421m (+2.3%)
• Consulting and Technology services €136m (-9.2%)

Q3 2011 revenue (and growth at constant scope & currency) by region was:

• Germany €448m (-1.2%)
  - MS +1.5% with the start of the new contract with Siemens AG, SI -5.2%
• France €228m (-5.8%)
• U.K. €349m (+4.3%)
  - MS +4.4%, SI +6.1%, HTTS +6.7%, BPO +4.0%
• Benelux €242m (-7.0%)
• Atos Worldline €226m (+1.0%)
  - Payments +2.1%, e-Services +2.5%, financial markets (where the decline is planned) -13.1%
• Central & Eastern Europe €129m (-1.4%)
  - MS +16.2%, SI down
• North America €125m (+7.7%)
  - MS +9.1%
• North & South West Europe €108m (+6.8%), mainly driven by Switzerland
• Iberia €79m (+0.3%)
• Other BUs (includes Major Events) €158m (+0.1%, with Latin America up 15.8%.

Total order entry in Q32011 was €2,014m, a book to bill ratio of 96%.

Book to bill by service line was:

• Consulting & SI 103%
• Managed Operations 93%

Full backlog at end September 2011 was €14bn, representing 1.6 year of revenue.

Net debt at end September 2011 was €234m. Net debt at end December 2011 is expected to be €183m, compared with €139m at end December 2010.

Headcount at end September 2011 was 74,088, with 26,571 staff having joined from SIS in July. Headcount in emerging regions was ~15,000, or 20% of the workforce, with 70% of these based in Asia.

AtoS has confirmed prior guidance for full year 2011 (includes 12 months of AtoS and 6 months of SIS) of:

• Revenue of ~€6.8bn
• An operating margin of 6.2%
• FCF of ~€170m.

Analyst comments:

Atos has now had eleven straight quarters of negative organic revenue growth, but the revenue perform

 

ance this quarter, the first since its acquisition of SIS, is perhaps better than expected given the declining revenue and pipeline of SIS in the period immediately prior to the acquisition.

In spite of a disappointing order book in outsourcing, a return to positive organic growth is to be expected in Q1 2012. Some of this is to be attributed to delays in contract renewal signings in the public sector, and there are some major commercial sector new ITO signings due to occur in Q4, for example the previously announced contract with BASF.

The U.K.'s revenue growth is impressive given its heavy dependence on the public sector. France continues to underperform: a new country manager has been in place since the beginning of the month. For Atos Worldline, the most profitable part of Atos, and usually its growth engine, this has been the quietest quarter of topline growth for some time.

(NelsonHall is attending an Atos analyst and advisor meeting this week and will publish an updated Key Vendor Assessment on the company, which looks at the newly integrated Atos Origin and SIS organizations, in November).

GFI In Exclusive Negotiations to Acquire Business Solutions Unit from Thales

Oct 26, 2011 | Mergers and Acquisitions by Dominique Raviart

GFI Informatique has entered exclusive negotiations to acquire the Business Solutions unit from Thales Services, a security and IT services unit of defense group Thales.

Business Solutions has annual revenues of ~€75m of which €35m for Thales. Its headcount is 600. It provides systems integration services, including PLM services.

Analyst comments:

GFI Informatique has indicated its intention to grow by acquisitions in its domestic French market. The acquisition of Thales Business Solutions is meaningful for GFI and will increase its revenues by 11% to a pro-forma (based on 2010 revenues) of €733m.

Thales Business Solutions has a low operating profitability, of ~2.6%. The acquisition will therefore likely put further pressure on the management of GFI, which achieved a 4.3% operating margin in H1 2011. Given the softness in systems integration spending that is expected in 2012, the acquisition may be ill-timed.

This acquisition brings back memories of 2002, when GFI was close to acquiring the full former Thales IS, which would have doubled the revenues of the combined entity to €1bn. The deal fell through after the collapse in stock market valuation and the retrieval from its financing banks.

Serco Awarded £100m Strategic Partnership Contract by Peterborough City Council

Oct 26, 2011 | Contracts by Sarah Burnett
industry: Government

Serco has been selected as preferred bidder for a partnership contract with Peterborough City Council. The contract, valued at £100m over a 10-year period, is intended to improve the quality of local public services while delivering savings of £25m to the council over this period.

Under the terms of the contract Peterborough City Council's existing shared services center will transfer to Serco, probably at the end of November, and around 450 council employees are expected to transfer to Serco.

Council services for which Serco is to take on responsibility include customer services, finance, revenues & benefits administration and property services. Internal processes are to be re-engineered to improve efficiency and external-facing processes streamlined to improve the customer experience.

The terms of the contract include an agreement to add supplementary services and the option to extend the term for two further five-year periods. Serco previously won an 11-year £44m IT contract with the council in 2009.

Analyst comments:

This is a significant boost to Serco's local government business bringing the total value of contracts awarded to it to by the local government sector this year to date (excluding smaller school improvement services contracts) to £165.5m. Across the overall U.K. public sector (including central government), the contract takes Serco past the £1bn mark for the total value of contracts awarded so far this year.

Serco won a similar deal with Hertfordshire in 2010. Since the start of the budget cuts, councils have had to implement big ticket cuts to staff numbers and services. They are also looking to shared services partnerships such as this to achieve efficiencies through major process re-engineering.

Serco won the contract beat over bids from Balfour Beatty Workplace, Capita and Mouchel. The council based 60% of its decision on price, and 40% on quality.

LPS Announces Q3 2011 Revenues Down 13.8% to $532m

Oct 25, 2011 | Financial Results by Andy Efstathiou

LPS has announced Q3 2011 revenues, for the period ending September 30, 2011, of $532.1m, down 13.8% year-over-year.

Q3 2011 revenues (and revenue increase) by activity were:

• Technology, data, and analytics: $193.7m (+3.1%)
• Loan transaction services: $340.2m (-21.1%)
• Corporate and other: $1.8m (n.m.).

Analyst comments:

Loan transaction services revenues continued to decline due to lower industry volumes and fewer loans outstanding.

To overcome what is likely to be a multiyear mortgage industry downturn, LPS will need to focus on its transaction processing services, which are not tied to labor input and therefore can show increased margin as transactions drop (if LPS manages costs well). Also, there is a growing demand for analytics, which LPS supplies from its transaction processing unit.

Tieto Announces Q3 2011 Revenue Up 7.1% to €415m

Oct 25, 2011 | Financial Results by Jamie Snowdon

Tieto has announced Q3 2011 revenues of €414.5m, up 7.1%, up 6% in constant currency.

Q3 2011 revenue by geography (and YoY revenue growth as reported and in local currency) is:

• Finland and the Baltics €169m (+3% driven by growth in Industry and Enterprise Solutions groups particularly in manufacturing, healthcare and retail sectors)
• Scandinavia €120 (+14%, +12% CC, thanks to finance, energy and healthcare sectors)
• CE/Russia €31m (+3%, growth mainly from Germany)
• Global accounts (~20 accounts) €162m (+0.6%)

The biggest global accounts are Ericsson, IF Insurance, Nokia, Nokia Siemens Networks, Nordea, tora Enso and TeliaSonera. Telia's top 10 accounts represent 37% of sales.

Revenue breakdown by activity is:

• Industry Solutions 32% (€131m)
• Enterprise Solutions 14% (€59m)
• Managed Services 36% (€149m)
• Product Engineering Services 18% (€75m).

Q3 2011 operating margin is 7.1%, down from 7.2% in Q3 2010. This includes €5.3m in one-off costs. EBIT excluding one-off costs is 8.3% (Q3 2010: 7.4%).

Q3 2011 operating margin by geography is:

• Finland and the Baltics 10.4% (Q3 2010: 10.7%)
• Scandinavia 5.0% (Q3 2010: 4.9%)
• CE/Russia -12.9% (Q3 2010: -11.5%)
• Global accounts (~20 accounts) 7.4% (Q3 2010: 10.4%).

Net cash flow from operations amounted to €40.7m (Q3 201tiet0: €15.1m).

Order backlog is €1,608m (Q3 2010: €1,465m).

Headcount at end Q3 2011 is 18 145, of which 7,150 (39.4%) is in lower cost locations. The target is for end 2011 is 40% offshore-based locations.

Tieto has provided guidance for full year 2011 of:

• Revenue growth of 2-4%, in line with the Western European IT services market
• EBIT excluding one-off items greater than the €110m achieved in 2010.

Analyst comments:

Tieto's growth of 6% CC revenue growth is double that of its Norwegian rival EDB Ergogroup, although this is mainly due to slower rebound experienced by the Norwegian market compared to the rest of the region. Tieto's growth continues to be driven by demand for all outsourcing services, and project work that enhances customer services and managing sales channels. Tieto management have yet to see worsening macroeconomic conditions impact IT services spending, but are bracing themselves for a potential issue at the end of the year or early in 2012. Price pressure on services has been restricted to commodity services, pricing for complex high value services remain stable or are slightly rising.

Tieto has experienced falling margin over the last 3 quarters and has managed to reverse the trend bringing the EBIT back to similar levels of a year ago. This has largely been achieved through a programme of efficiency savings and restructuring which included a reduction in staff in Finland (~60), Sweden (~30), Denmark (~60) and Germany (~100). Tieto has also been reducing its cost base by hiring in low cost locations; it is expected to reach its target of 40% offshore staff by the end of the year.

TSYS Announces Q3 2011 Revenues Up 6.1% to $460m

Oct 25, 2011 | Financial Results by Andy Efstathiou

TSYS has announced Q3 2011 revenues, for the period ending September 30, 2011, of $459.7m, up 6.1% year-over-year. Revenues excluding reimbursables were $390.2m.

Q3 2011 revenues (and revenue change) by activity, excluding reimbursables, were:

• North America: $243.9m (+5.4%)
• International: $99.9m (+17.3%)
• Merchant services: $93.2m (-25.6%).

Analyst comments:

TSYS' international business is its growth engine. TSYS will need to continue to grow its international business by increasing market penetration in countries where it has established a presence over the past few years.

The U.S. market grew revenues for the first time in several quarters. This was accomplished by a large increase (12.9%) in card transactions and some new account acquisitions.

TSYS' merchant business shrank this quarter, for the first time in several quarters, due to deconversions (loss of processing contracts). This is not good news where the merchant business has been so strong for so many of its competitors