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Underlying revenue down 4% YoY at year-end 2017 for Capita

Capita has released its results for the year ended 31st December 2017.

Reported revenue decreased by 3.1% to £4,234.6m (2016: £4,368.6m) and underlying revenue decreased by 4.3% to £4,167.9m (2016: £4,357.3m). Underlying revenue on a like for like basis, excluding results from businesses exited in both years, decreased by 0.6% including 1.5% organic decline and 0.9% growth from acquisitions.

Capita’s revenue mix in 2017 was 70% long term contracts, 16% short term contracts of up to two years and 14% transactional.

Underlying operating profit increased by 34% to £447.4m (2016: £334.6m). This included restructuring costs of £(17.9)m (2016: £(57.2)m), relating to professional fees associated with the broadened transformation plan and, separately, the restructuring of a small number of businesses. Underlying operating profit before significant new contracts and restructuring costs increased by 19% to £465.3m (2016: £391.8m).

Capita’s segmental reporting is aligned with management's view of divisional performance, including allocating only direct overheads, such as payroll administration, pension and insurance costs, to the divisions, and showing central costs separately. Underlying revenue and profit are used by management to assess the performance of the divisions and exclude certain items, as detailed in note 5. This and the impact of IFRS 15 on the timing of recognition of revenue and costs are reflected in the discussion of divisional performance below:

In private sector partnerships, underlying revenue increased by 3%, driven by growth in Capita Europe, including the benefit of our new contract with mobilcom-debitel, an increase in TV Licensing and mortgage solutions. There was a modest decline in UK customer management, which reflected weakness in remediation services.

Underlying profits increased due to the renegotiation of The Co-operative Bank contract, a £26m swing from loss to profit on a major contract which reflected the dropping out of one-off modification costs incurred in 2016, cost initiatives and lower restructuring costs, partially offset by a lower contribution from remediation and additional costs on the transformation of mobilcom-debitel in Germany.

In January 2018, Capita announced that the administration of Prudential's life and pensions business, around 2% of its revenue, will be transferring from Capita to a new supplier later in 2018. As previously disclosed, another of its life and pensions clients is conducting a strategic review, the outcome of which remains uncertain but is expected to result in the continuation of the contract with amended terms or the termination of the contract.

Capita expects private sector partnerships profits to decline in 2018 due to a combination of higher contract and volume attrition and increase in costs, including adoption of the General Data Protection Regulation, in insurance services and customer management.

In public services partnerships, underlying revenue fell by 4% due to weakness in real estate and central government services, which was partially offset by growth in its Department for Work and Pensions (DWP) PIP and DCC Smart Metering contracts. The majority of Capita’s contracts are performing well but it continue to face challenges in its NHS Primary Care Support England (NHS PCSE) contract. NHS PCSE has improved operationally during the year and it continues to drive improvements across the service in conjunction with stakeholders and NHSE, but it has had to invest in the service in order to achieve this and the cash cost of recovering performance has been high.

Underlying profits increased as a result of its Transport for London contract, on which it incurred £25m one-off costs in 2016, the re-shaping of its Defence Infrastructure Organisation (DIO) contract and the aforementioned performances from its DWP PIP and DCC Smart Metering contracts. The results include a £22m benefit from the re-shaping of the DIO contract, arising from the recognition of previously deferred income, which is not expected to recur in 2018. This re-shaping arises as a result of its new revenue recognition policy under IFRS 15. Capita now defers revenue over the expected life of a contract. Where a contract is terminated early, all deferred revenue is pulled forward and recognised in the year of termination. Similarly, any associated contract specific assets that were being amortised over the expected life of the contract are written off in the year of termination, unless there are alternative uses on other contracts. The DIO contract is expected to end in 2019.

In professional services, underlying revenue fell by 30%, as a result of the disposal of its specialist recruitment businesses. Underlying revenue also fell on a like-for-like basis, excluding specialist recruitment from both years, due to the loss of part of its Civil Service Learning contract, a decline in Capita Resourcing and the dropping out of property commercialisation revenue, which was recognised in the second half of 2016. This was partially offset by growth in the Army Recruiting Partnering Project (RPP) contract and some of our trading businesses.

Underlying profits decreased due to the dropping out of property commercialisation profits, which was partially offset by costs reducing on RPP and good growth in parking services and Fera.

In digital and software solutions, with the introduction of IFRS 15, the majority of its software licence sales are recognised as 'active' licences, with revenue spread over the contract lifetime. Underlying revenue fell by 2%, reflecting a decline in software services (local government, social housing and social care) and the end of a long-term active software licence with The Co-operative Bank. There was good growth in AMT-Sybex (utilities) but education software services revenue was flat. The majority of division revenue is UK based but we are putting partnerships in place with a view to increasing international sales.

Underlying profits fell by 14%, reflecting the above decline in sales and increases in amortisation and staff costs. We continued to invest in product development and sales, including the next version of education software, and are progressing the offshoring of development work to enhance capability and efficiency.

In IT services, underlying revenue increased by 5%, including the full year benefit from the acquisition of Trustmarque. Good organic growth in networking solutions and managed print services was offset by declines in technology solutions, managed IT solutions and major clients within enterprise services.

Underlying profits increased sharply, reflecting the benefits from its restructuring of the business in the second half of 2016 and a £9m one-off supplier settlement in 2017. Looking forward, Capita expects IT services profits to decline in 2018, as a result of contract and volume attrition and the dropping out of the supplier settlement.

Underlying operating margin was 10.7% (2016: 7.7%), reflecting the aforementioned items which have impacted upon our trading performance. Underlying operating margin before significant new contracts and restructuring costs was 11.2% (2016: 9.0%).

The underlying net interest charge was £64.4m (2016: £66.1m), including a £2.6m increase in pension finance costs.

Underlying profit before tax increased by 43% to £383.0m (2016: £268.5m) and underlying profit before tax before significant new contracts and restructuring costs increased by 23% to  £400.9m (2016: £325.7m).

Reported loss before tax was £(513.1)m (2016: £(89.8)m), including a charge for specific items of £850.7m (2016: £361.2m). The significant movement from 2017 arises from the impairment of goodwill, intangible assets, other non-current assets, and investment loans as at 31 December 2017, detailed in notes 3 and 5 of this statement.

Underlying earnings per share for continuing operations increased by 44.0% to 45.61p (2016: 31.68p).

The reported loss per share for continuing operations was (80.14)p (2016: (14.27)p) and the reported loss per share for total operations was (17.58)p (2016: (8.72)p).

Net debt at end December 2017 was £1,117.0m (2016: £1,778.8m). As at 31st December 2017, Capita had £1,484m of private placement bond debt of which £153m matures in 2018 and the remainder matures over the period up to 2027. In addition, it has £100m of bank debt which matures in 2019, and an undrawn £600m revolving credit facility of which £81m matures in August 2020 and £519m in August 2021.

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