2nd UPDATE: Atos Origin Keeps Goals; Government Spending Cuts Risk

IT services group Atos Origin (ATO.FR) Wednesday kept its full-year targets and said a steady recovery in its markets is likely to lead to a return to revenue growth next year, even as it said it would cut some jobs in the U.K. due to government spending cuts.

"Activities continue to improve progressively," Deputy Chief Executive Gilles Grapinet said in a conference call with reporters. Grapinet said that he expects the group's revenue to stabilize in the second half of the year and hopefully return to growth in early 2011.

For this year, Atos still expects organic revenue to decline slightly, largely due to the bankruptcy of German retailer Arcandor, one of its clients. Organic revenue declines should be slower than in 2009, the group said.

Along with rivals Capgemini (CAP.FR) and U.K.-based Logica PLC (LOG.LN), the company has faced tough market conditions since last year, as big customers delayed investment and purchasing plans amid the financial and economic crisis. But there have been signs of recovery since the start of the year, signalling that the crisis may have been shorter than expected for the IT services industry.

However, concerns have arisen in past weeks that Atos or peers like Capgemini could be hit by public spending cuts. Those concerns intensified after Cable & Wireless Worldwide PLC (CW.LN) last week issued a profit warning directly linked to the U.K. government's austerity budget.

"Will we be impacted by public sector spending cuts? Obviously, yes," Chief Financial Officer Michel Alain Proch said.

Proch said the bulk of Atos's public sector business comes from multi-year contracts that are unlikely to see major cancellations. Still, to prepare for the anticipated slowdown in public sector IT spending, Atos Origin said it plans to cut about 5% of its staff working in U.K. public sector activities.

The public sector accounts for about EUR1.1 billion of Atos's annual revenue, of which about 50% is generated in the U.K. and 25% in France, Proch said.

The financial sector, on the other hand, is recovering strongly and growth in the manufacturing sector is also strong, Proch said. He said the group's pipeline has been strong and it should land some major contracts in the second half.

Atos's closely-watched book-to-bill ratio was 114% in the first half compared with 112% in the same period last year.

The Paris-based company, which is managing the IT systems for the 2012 Olympic Games in London, confirmed it still expects to improve its earnings before interest and tax, or EBIT, margin by 50 to 100 basis points this year and that its plan to improve its EBIT margin by at least 250 basis points between 2008 and 2011 is on track.

The group has undergone a series of restructuring measures in the past two years, accelerated by Chief Executive Officer Thierry Breton when he took office at the end of 2008.

EBIT for the six months ended June 30 rose to EUR150.1 million from EUR119 million in the same period last year, above an average EUR134 million forecast by five analysts polled by Dow Jones Newswires. This gave the group an EBIT margin of 6%, an improvement of 110 basis points on the same period last year.

Net profit for the first half rose sharply to EUR60 million from EUR18 million last year while revenue fell to EUR2.49 billion from EUR2.59 billion last year, in line with analysts' forecasts.

On an organic basis, stripping out acquisitions, disposals and currency movements, revenue fell 4.6%.

At 0927 GMT, Atos shares were trading down 1% at EUR33.37, shedding earlier gains, while the French CAC-40 index was up 0.6%.

"Public sector cuts are a big risk," WestLB analyst Jonathan Crozier said, noting that the market doesn't yet seem to fully believe in a second-half improvement.

-By Ruth Bender, Dow Jones Newswires; [phone]; [e-mail]

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