After two years of forced marching, OVH lifts its foot
The French IT group has invested heavily for an insufficient growth of its activities. A vast refocusing plan is underway, with the payroll reduced by 300 employees.

Frozen investments, 300 job cuts, new R&D priorities… The skies have darkened somewhat for the French OVH cloud champion. The fault notably lies with the last fiscal year, ending August 31, 2018, with a 20% increase in turnover (all the same) instead of the 30% forecast. Above all, the gross margin did not live up to expectations. That’s what caused the problem, according to a former senior executive. Disappointing figures that led to the appointment in August of a new CEO, Michel Paulin (former CEO of SFR’s telecom business), to put the company back on track after several years of a hellish run.

Reminder of the facts. In 2016, OVH makes the decision to become a hyperscaler. The firm intends to compete with the US and Asian cloud giants by deploying in their respective zones. The group is giving itself the means to achieve its ambitions: after a syndicated loan of 140 million euros in 2013 and a financing (syndicated loan and bond issue) of 267 million euros in 2014, it is opening its capital for the first time in 2017: against a minority stake, 250 million euros are being raised from two American funds, KKR and TowerBrook Capital Partners. And that’s not all: in June of the same year, the company obtained a new line of credit from the banks, this time for 400 million euros.

The gross margin did not meet expectations. That’s what caused the problem

In the wake of this, OVH announces an investment of 1.5 billion euros over five years. The group is aiming for a turnover of 1 billion euros in 2020, then 5 billion in 2025. It is planning around 30 new data centers to reach 50 units in 10 years. Since then, alongside France and Canada, only seven have gone into production abroad, in Germany, Australia, the United States (in Virginia and Oregon), Poland, the United Kingdom and Singapore.

In early 2017, the acquisition of VMware’s public cloud (VCloudAir) consolidates this strategy, allowing OVH to strengthen its presence in North America. Approximately 1,500 VCloudAir customers have since been migrated to its data centers. OVH now boasts 1.3 million customers and 350,000 servers deployed in 28 data centers worldwide. Servers that he manufactures in-house in his brand new state-of-the-art plant in Croix near his fiefdom of Roubaix and in Beauharnois, Canada.

The staffing curve is also following a frantic pace: 1,500 people at the beginning of 2017, 2,500 in mid-2018, 15,000 targeted for 2025! At the time, recruitment was monitored weekly by the management committee. We were hiring in all areas: customer support technicians, architects, sales people, developers,” says a former comex member.

The US weighs on the margins

The problem is that the activity doesn’t keep pace. Despite the takeover of VCloudAir, the transatlantic zone is weighing on margins, and growth is not at the expected level. In the United States, OVH does not have the same aura as in Europe. Hence the installation of its founder Octave Klaba in Dallas in early 2019. A departure that is not definitive, according to the group’s terms, and which aims to consolidate its international ambition. A return to France would be imminent, they whisper in the corridors of OVH.

Second concern: the weight of the hosting activity on dedicated servers. The product line still accounts for the largest share of OVH’s revenue but, with increased competition from the major cloud providers, its growth has been steadily slowing down in recent years. Although OVH’s cloud services offerings are growing, they are far from making up for this slowdown.

As a result, investors are worried and heads are jumping. Exit Laurent Allard, recruited as CEO in 2015, arrives Michel Paulin. Short-term ambitions are being lowered. OVH is shifting its target of one billion euros in sales by one year to 2021 and, for its fiscal year 2019, expects to achieve a conservative +20% to 600 million euros in sales. With a constant growth rate, the group would drop one billion in 2022 and 1.5 billion in 2024. Far from the 5 billion expected for 2025, then.

It’s a classic growth crisis that many companies go through…

It is a classic growth crisis that many companies go through,” analyses a former executive. Hiring and investment in new data centres has been too high given the business development curve, especially in the cloud. OVH must now play on its margins and to do this, it is using all the levers: pressure on productivity is intensifying, the opening of data centers has been postponed (Spain, Italy, the Netherlands), certain non-strategic divisions have been scrapped, and others have seen their staff drastically reduced. Investment in very large accounts, which consume too many resources for long-term results, is being muted, and a repositioning on the middle market has begun.

In the end, 300 employees will leave the ship in 2018, but without a formal departure plan. There are various methods: unconfirmed probationary periods, contractual terminations, resignations of employees affected by reassignments or budget cuts. At the time of writing, the group has 2,200 employees and, according to a spokesperson, has resumed a good pace of recruitment, mainly abroad.

OVH is also changing its structure. From an organization based on expertise (technical, marketing, finance, etc.), it will be redeployed in mid-2018 around 6 business units: BU Commerce EMEA, BU Commerce US, BU Corporate, BU Industry, BU Operations and BU Product. We have moved to a society with much more procedures, a more present hierarchy, and therefore a slightly more pyramidal mode. The culture of internal entrepreneurship has been mechanically pushed back,” said one former employee.

The culture of internal entrepreneurship has been mechanically set back

At the same time,” says another former employee, “you can sense that Octave Klaba, chairman of the board of directors, has difficulty delegating. It retains a highly centralized, start-up-oriented management structure. As for procedures, they are not nearly as square as one might think. Illustration, which dates from before the reorganization, with the new Parisian premises, future international showcase of the group: the fiber is not installed when the site opens in April 2018, it will be necessary to wait until the following September to benefit from an Internet connection worthy of the name. In the meantime, ADSL boxes have done the trick. The Bordeaux and Nantes plants have experienced the same misadventure. This is a real treat for a group that claims to be a telecom operator at the enterprise level (and , which also has a fibre offer, editor’s note:), mocks a former employee.

On the marketing side, the product lines are evolving. Until now classified by technologies (cloud, dedicated server, shared server, domain name hosting, telecom…), they are grouped into 4 universes of use. Objective: to simplify the positioning of OVH… which is still present on some forty product lines. This is much more than AWS, which is not present on telecoms, let alone hosting. How do you want to impose yourself in the cloud by spreading yourself so thinly? asks an ex-member of the codir.

Nevertheless, the group maintains its ambition to become a hyperscaler. It is still considering potential new data center deployments in India, Asia-Pacific and Latin America. Projects mentioned in its strategic plan 2021-2026. In the meantime, the company continues to invest in its flagship product. It has just launched Rise, a new range of dedicated servers that can be activated in 120 seconds. It is also investing heavily in the Kubernetes infrastructure to equip its hosting servers and cloud services with an overlayer that facilitates the switching of applications from the former to the latter. In line of sight: facilitate the transition to its cloud offers.

Several scenarios to bounce back

OVH must also find new levers. In particular, it will be able to assert its character as a sovereign European cloud. Until now, the major French public clients, both ministries and local authorities, have remained rather reluctant to use OVH to nail down their applications. As well as vital interest operators or companies attached to the State Holdings Agency. Yet they have every interest in seeing the emergence of a giant of the French cloud. Knowing that it is a French company that keeps its R&D in France, designs and builds its servers in France, and works with the local economic fabric, recalls a former employee.

OVH believes in it. The group has set up a development and public affairs department to attract public partners and its efforts are starting to pay off: it will host the EU platform dedicated to AI. 79 public and private partners from 21 of the 28 member countries have been selected to participate in this project coordinated by Thales.

The idea would be to create around OVH the equivalent of an Airbus from the cloud in Europe capable of confronting the Americans.

It’s a first step. But the idea would be to go much further by creating the equivalent of an Airbus from the cloud in Europe, capable of achieving the 30% to 40% growth needed to start catching up with American clouds, argues a former group vice-president. Each European cloud player could specialize in one area: public cloud, private cloud, VPS, machine learning, large accounts…. For France, we could put around the table OVH, Outscale, Qwant and Scaleway. An industry consortium that would rely on common open source building blocks to ensure interoperability between platforms and facilitate the porting of client applications from one platform to another. A philosophy partly designed by OVH through the creation of the Open Cloud Foundation at the end of 2017. A project that’s since been shelved.

Second track: external growth. Compared to American and Asian providers, the European cloud market is fragmented and only needs to consolidate. On this point, it is easy to imagine a rapprochement between OVH and Scaleway, the cloud of the Iliad group. His boss, Xavier Niel, has already made several foot calls to OVH. In October 2017, on BFM Business, he called Octave Klaba a genius […], a French hero. And he did not hesitate to join the board of directors of the powerful American fund KKR, a shareholder of OVH, in March 2018.

Finally, going public is an option. Michel Paulin is an expert on the subject: before working on the merger of SFR and Neuf Cegetel in 2008, he orchestrated the latter’s IPO. The provision of funds would enable OVH to strengthen its investment capacities and to resume its conquest. Fast forward.

When asked, OVH did not wish to deliver its forecasts for the development of its dedicated server and cloud services activities. Concerning a possible IPO, the company recalls that the investment for the period 2016-2020 is assured and states that the next stage of growth can be achieved through several financing scenarios, none of which is preferred at this stage. On Twitter, the group also states that 180 positions are currently open.

Following the publication of this article, Octave Klaba, Chairman of the Board of Directors of OVH, posted a post on the group’s official blog.

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