Shares in IT services group Atos Origin (ATO.FR) fell Wednesday after the company said it would cut some jobs in the U.K. due to government spending cuts, highlighting the risk IT services companies face as governments are pressured to reduce their public deficits.

At 1114 GMT, shares in Atos were down 3.3% to EUR32.4, underperforming a 0.2% rise in the CAC-40 index, after the group said it plans to cut about 250 staff, or 5% of its workforce in U.K. public sector activities to prepare for the anticipated slowdown in public sector spending.

Despite recent signs of recovery in the IT services industry, concerns have arisen in past weeks that Atos and peers like Capgemini (CAP.FR) or U.K.-based Logica PLC (LOG.LN) could be hit by public spending cuts.

Such 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.

In May, the U.K. government outlined GBP6.25 billion in cuts, with more to come, saying it wanted to save GBP1.7 billion from stopping projects and renegotiating large government contracts with suppliers.

"Will we be impacted by public sector spending cuts? Obviously, yes," Chief Financial Officer Michel Alain Proch said in a conference call. He said the bulk of Atos's public sector business however comes from multi-year contracts that are unlikely to see major cancellations.

The public sector accounts for about EUR1.1 billion of Atos's annual EUR5.13 billion revenue, of which about 50% is generated in the U.K., 25% in France and 15% in Benelux, Proch said.

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

The group, which is managing the IT systems for the 2012 Olympic Games in London, said a steady recovery in its markets is likely to lead to a return to revenue growth next year.

"Activities continue to improve progressively," Deputy Chief Executive Gilles Grapinet said. 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.

Atos said the financial sector is recovering strongly and growth in the manufacturing sector is also strong after customers last year delayed investment and purchasing plans amid the financial and economic crisis. Proch said the group's pipeline has been strong and it should land some major contracts in the second half.

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

Atos also 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 analysts' forecasts of EUR134 million. 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.

-By Ruth Bender, Dow Jones Newswires; +33 1 40 17 17 54; ruth.bender@dowjones.com

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