Akka: good financial performance in 2018 and a bold US strategy
Akka performed well in full-year 2018: revenues were up 9.5% at CC/CS to EUR 1,505m. The company demonstrates, quarter after quarter, its ability to grow quickly in geographies, large or small:
- In France, its largest geography, Akka grew by 11.5% at CC/CS, and is now a EUR 615m business. Growth was driven recruitment (+880 net hires in 2018) and by client demand for digital
- Akka is growing rapidly in countries where it has a fragmented presence: its international operations (everything but France and Germany) was up 13.2% at CC/CS. Quite counter-intuitively, Akka is profitable in its international business unit, and in fact, international is its most profitable unit, with a 9.9% adjusted operating margin (France: 8.3%, and Germany 9.0%)
- Finally, Germany was up 5.1% at CC/CS in 2018 and is now a EUR 551m business. Akka continues to diversify its client base away from Daimler to Volkswagen, BMW, and Airbus as well as Continental and Bombardier. Akka now has full control over MBtech, having bought the remaining stake of Daimler, and this should accelerate its client diversification.
On the negative side, Akka is not as profitable as its peers and has an adjusted operating margin of 7.8% (Altran: 12.1%, Alten: 9.4%, Expleo:9.5%).
Akka has provided its guidance for 2019 and expects an adjusted operating margin of 8.0%, which reflects the impact of PDS Tech on a full year (Akka consolidated PDS Tech during two months in 2018). PDS Tech is margin dilutive to Akka had in these two months adjusted operating margin we estimate to 3.0%.
Akka’s challenge for 2019 will be around PDS Tech. The challenge is financial, looking at increasing PDS’ profitability. It is also about initial cross-selling opportunities. Finally, we think Akka still has to demonstrate its decision to buy PDS Tech was right. There is no doubt that the US market offers more growth opportunities than France or Germany. The question is whether a staffing vendor is a right vehicle for this. We reiterate that:
- Margins are low in the US staffing market. Akka suggested in the past that PDS Tech had low profitability, largely because it had invested to accompany large orders
- PDS Tech is solely focusing on the aerospace industry and it increases the risk profile of Akka that is dependent on two main sectors: automotive and aerospace
- Finally, Akka would have been better off targeting the US technology market, with a delivery engine in India.
To be fair, financial markets and investors do not seem to share our concerns about Akka. The stock of Akka trades close to its all-time high and the company is valued ~EUR 1.2bn or about half of Altran.