Capita faces drop in revenue and profit due to Covid-19

25 August 2020 4 min. read
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UK professional services firm Capita has posted a £28.5 million pound loss for the first half of 2020. The firm’s revenue has been decimated by falls in demand amid the coronavirus pandemic, and has sparked Capita to accelerate plans to sell off parts of its business.

Hit by a wave of government cutbacks exacerbated by the country’s decision to leave the European Union, Britain’s outsourcing industry was forced to cut costs and shrink operations over the last four years. Exemplifying this, in early 2018, professional services firm Capita issued a shock profit warning, sounding alarm bells in the wake of the collapse of fellow outsourcer Carillion, which had been liquidated only weeks before.

The following two years saw Capita work to radically transform its business. Following that turbulent period, the company managed to stabilise its operations via a year-long turnaround project led by new CEO Jon Lewis, announcing a return to profit by the spring of 2019. As the firm sought to make good on its momentum, Capita resolved to kick on with sweeping changes in the coming year.

Capita - Financial results 2020

In September 2019, the outsourcing and consulting firm launched a new corporate brand, and declared it would pay all its 40,000 UK staff the real living wage as a minimum from April 2020. The firm also pushed for a change in emphasis in its work, bolstering its banking consulting arm notably with the appointment of Michelle Prance in November, before announcing plans to boost its profitability with the launch of a new consulting brand. At launch, Capita Consulting was said to be aiming to hire a headcount of 450 consultants across the UK by the end of 2020.

Just as Capita looked to have turned a corner, however, new figures released by the firm reveal that its finances have been ravaged by the global coronavirus pandemic. Describing the start of 2020 as a “challenging six months” in the firm’s half year results, Capita reported a loss before tax of £28.5 million – a startling contrast with its first half results in 2019, where it enjoyed a £31.2 million profit.

The outsourcing firm did pick up around 100 government pandemic response projects during the height of the crisis – something which saw competitor Serco record a jump in profit earlier in the summer – however, this was apparently not enough to avoid taking a massive financial hit. Even as Capita recently announced a string of contract wins, adjusted revenue still decreased by 9% to £1,652.2 million, something it said was due to 2019 contract losses and the impact of Covid-19.

According to Capita’s release on the situation, profit has been so significantly affected that, coupled with the delay in the return to growth resulting from the current global recession, it believes it may not generate sustainable cash flow – reported free cash flow including restructuring costs, pension deficit payments, non-recourse trade receivables financing and payment of deferred VAT – for as long as two years.

Capita has already been working to offset the losses. As part of the company’s “robust response” to Covid-19 – in which over 50,000 employees worked remotely and 4,400 were furloughed at peak – the firm announced it would axe at least 200 jobs in June. Meanwhile, the firm moved to hasten its simplification of its portfolio, accelerating strategic its focus on a portfolio of software capabilities aligned to Capita’s core services and vertical markets. This resulted in the sale of Eclipse Legal Systems in June, and also placing its Education Software Solutions wing on the market.

Ultimately, Capita’s cost and cash preservation measures delivered £57 million of offset to revenue loss in the first half, while its cost transformation programme delivered £73 million in savings. Despite this, the firm is far from out of the woods yet. Outlining its outlook for the coming months, Capita stated it expected Covid-19 to continue to negatively impact volumes and transactional revenue – something which it expects to offset with “further disposals,” along with “other measures” to strengthen its balance sheet.

Capita CEO Jon Lewis stated, “This crisis has come in a pivotal year for Capita when we had expectations of beginning to generate revenue growth and sustainable cash flow… These are unprecedented times and we need to adapt but our strategy remains the right one… Thanks to our transformation progress over the last two years - and the hard work and professionalism of our colleagues - we were able to deliver a strong and decisive operational response to the Covid-19 crisis.

According to Reuters, shares in Capita have lost around 80% of their value so far this year, falling as much as 21% in one morning. The news echoes the period in 2017 and 2018 when it was labelled ‘the next Carillion,’ with its share price crashing by 14% at the end of a turbulent 2017, and then a further 40% following its 2018 profit warning.