Spending cuts put the squeeze on Capita revenues

Outsourcer Capita admits the Government cuts will hurt more than it expected. But will the pain be short-lived?

by Emma Haslett
Last Updated: 18 Nov 2010
Capita, the outsourcing company responsible for everything from the BBC’s complaints system to the Teachers’ Pension Scheme, has admitted that despite its previous protestations that the imminent Government cuts wouldn’t affect it too badly, it's had to revise its views. The group warned this morning that sales will probably be weaker than expected during the second half of the year as Government contracts come to an end. But it reckons that while this may hurt in the short term, things are still looking fairly positive in the longer term. Not everyone’s so certain, though.

In a trading update for the 10 months to November, Capita said it now looks as though revenue growth in the second half of the year will slow ‘more than previously anticipated’. It put this down to an ‘unusually high degree of revenue attrition’ – aka customers not renewing contracts – and slow sales over the last few months, plus, of course, the 'short term impact of current public sector retrenchment'. The news knocked 5% off the company’s shares in early trading this morning.

There are two schools of thought on this. Capita itself remains bullish, insisting that ‘overall trading remains very solid’ and talking optimistically about opportunities 'in 2011 and beyond'. It points out that while, in the short-term, efforts to cut costs will scupper some of its existing contracts, in the longer term, a slimmed-down public sector will need to be outsourcing more and more of its current back office functions - which should be good news for Capita. And it said that despite those subdued revenues, it still expects to make some acquisitions before the end of the year, having already splashed out £149m since the beginning of 2010.

Analysts, however, seem less convinced. They reckon Capita could continue to see revenues slow even in 2011; investment bank Seymour Pierce has even downgraded its forecasts for 2011 (from £3.1bn to £3bn) because, it says, there’s likely to be ‘uncertainty’ throughout next year. There’s also a worry that if the Government tries to cut costs by consolidating its suppliers, Capita might well lose out to competitors who offer a broader range of services - like Serco, for example, which earlier this week said it was expecting to deliver ‘strong growth’ in 2010.

It’s difficult to say how Capita will fare in the coming months. But one thing’s for sure: the worst is not over yet for the public sector, or the private sector businesses that rely on it.

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