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Year in

review 2018

Chairman's introduction | CEO review | Financial performance | Divisional performance | KPIs | Downloads

CHAIRMAN'S INTRODUCTION

It’s been a significant year

"Positive steps have been taken towards the creation of a truly diverse, responsible, sustainable and digitally-enabled organisation."

SIR IAN POWELL

CHAIRMAN

Capita is in transition as, under new leadership, our people restructure and rebuild the business. A major turnaround, affecting every aspect of the business, is being undertaken. A corporate purpose has been defined for Capita for the first time. We are working towards our stated objectives of a return to organic growth and sustainable free cash flow.

We’ve drawn a line under the past, simplified and strengthened, and are regaining forward momentum. I believe we can now look forward positively to what a transformed and repositioned Capita can truly become.

It’s been a significant year in the story of Capita, with positive steps taken towards the creation of a truly diverse, responsible, sustainable and digitally-enabled organisation.

We must make sure we deliver consistently on our contracts and commitments, and follow through with our corporate purpose. There needs to be a relentless focus on earning the respect and trust of all our stakeholders, including our fellow shareholders, to whom we remain grateful and who have been very supportive throughout the many changes and challenges of the past year.

CEO REVIEW

Our transformation is on track

"Our operating model is our single biggest lever of change. It’s the blueprint for how we run the company and makes the reforming Capita real for all stakeholders."

JON LEWIS

CHIEF EXECUTIVE OFFICER

It’s now been more than a year since I joined Capita and the company has achieved a considerable amount. We have launched a multi-year transformation process and are rebuilding the organisation. Our mission is to become ‘One Capita’, an integrated and refocused business, successful and sustainable, with stronger client relationships. We want to make a positive, responsible contribution to society and be a force for good. From the financial perspective, the business will be more predictable, more profitable and sustainably cash-generative.

This has meant going back to fix the fundamentals and devising a new strategy, underpinned by a company-wide purpose and clear new operating model. We are continuing to execute our strategy – to simplify, strengthen and succeed – and have made real progress on remedying many of the basics. Over the past year, our thousands of people, in the UK and abroad, have proved very resilient. Important work has been done every day, aimed at delivering better outcomes for all stakeholders – our people, shareholders, clients, suppliers and the communities we serve.

As a more simplified and strengthened company, Capita will be well prepared to take advantage of the opportunities that lie before us in a fast-moving world. I am confident we will maintain our reforming momentum over the coming year – and am excited about the prospects for a successful, technology-driven, digitally-enabled Capita.

FINANCIAL PERFORMANCE

We are simplifying and strengthening

"What has struck me most is the importance to our clients and customers of the services we provide and the commitment of our people to creating better outcomes."

PATRICK BUTCHER

CHIEF FINANCIAL OFFICER

CHIEF FINANCIAL OFFICER’S REVIEW

I joined the Board in January this year, and have spent time meeting our people, clients, suppliers, shareholders and other stakeholders to gain a better understanding of the business. What has struck me most is the importance to our clients and customers of the services we provide and the commitment of our people to creating better outcomes.

In 2018 we developed and started to deliver on the strategy – simplify, strengthen and succeed – as part of which we launched a multi-year transformation plan, started to simplify Capita and progressed work to make our cost base more competitive. We strengthened the balance sheet by raising new equity and disposing of some non-core businesses. We delivered adjusted profit1 in line with the January 2018 trading update and remain on track with work to deliver our 2020 financial targets.

As part of our plan to strengthen the balance sheet, we launched a rights issue on 23 April, which received shareholder approval on 9 May and successfully completed later that month. The rights issue raised £701m gross proceeds and £663m after expenses, with a take-up rate of 97.3%.

FINANCIAL HIGHLIGHTS

Adjusted revenue

£3,867.6m

2017: £4,091.8m

+

Adjusted revenue

The adjusted revenue in 2018 was £3,867.6m.

x

Adjusted profit before tax

£282.1m

2017: £383.1m

+

Adjusted profit before tax

The adjusted profit before tax in 2018 was £282.1m.

x

Adjusted earnings per share

16.37p

2017: 27.99p

+

Adjusted earnings per share

Adjusted earnings per share in 2018 was 16.37p.

x

Adjusted free cash flow

(£82.5)m

2017: £75.4m

+

Adjusted free cash flow

Adjusted free cash flow in 2018 was (£82.5)m

x

Reported revenue

£3,918.4m

2017: £4,234.6m

+

Reported revenue

The reported revenue in 2018 was £3,918.4m.

x

Reported profit before tax

£272.6m

2017: (£513.1)m

+

Reported profit before tax

The reported profit before tax in 2018 was £272.6m.

x

Reported earnings per share

17.99p

2017: (48.82)p

+

Reported earnings per share

Reported earnings per share in 2018 was 17.99p.

x

Reported free cash flow

(£260.5)m

2017: £66.6m

+

Reported free cash flow

Reported free cash flow in 2018 was (£260.5)m

x

WE HAVE GOOD REVENUE VISIBILITY

The majority of our revenue is underpinned by contracts with clients.

2018

73% long term contractual 2 years or longer
14% Short term contractual less than 2 years
13% transactional

DIVISIONAL PERFORMANCE

We are currently reporting our financial performance across six separate operating divisions.

SOFTWARE

Our specialist enterprise software products serve sector specific and cross-sector markets in the UK and overseas. We develop and deliver specialist application software and wider solutions for education, local government, public safety, utilities and transport, consulting and legal, and payments.

FINANCIAL PERFORMANCE

  • Adjusted revenue fell by 1.3%, reflecting good growth in AMT-Sybex and growth in our cross-sector products, including Payments, which was offset by declines in Healthcare Decisions, as a result of the end of our NHS24 Scotland contract, and Secure Solutions. Education Software was flat.
  • Our book-to-bill ratio was 104%, reflecting an encouraging improvement in order intake, and we expect revenue to grow in 2019.
  • Adjusted operating profit increased by 1%, due to the aforementioned changes in revenue, investments in sales, including the US pilot, and benefits from transformation actions.

2018 PROGRESS AGAINST STRATEGIC PRIORITIES

  • Defined and commenced investment strategy.
  • Established digital development centre in India.
  • Introduced product management capability across product portfolio.
  • Executed cost competitiveness and offshoring targets.
  • Executed US entry strategy for selected products.
  • Introduced standardised core processes across 29 businesses.

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Adjusted revenue

£396m

Adjusted operating profit

£112.4m

Adjusted operating margin

28.4%

Order book

£560m

Employees

4,000

PEOPLE SOLUTIONS

People Solutions provides a full suite of HR offerings across the employment life cycle. They include leading market positions in recruitment process outsourcing (RPO), learning process outsourcing, HR service (including payroll), and pensions and benefits administration, which are supported by our proprietary digital platforms, Orbit, Hartlink and Tessello. We also provide attraction, screening and performance management services, and best-in-class fire prevention and protection training facilities from the Fire Service College.

FINANCIAL PERFORMANCE

  • Adjusted revenue fell by 4.3% as a result of declines in our transactional businesses Capita Resourcing and Learning Services, which were impacted by the transition to a new public sector training framework, previously Civil Service Learning, and the transfer of the Contingent abour One (CL1) public sector resourcing contract to a new provider in the second half.
  • Adjusted operating profit decreased, reflecting the above decline in revenue, investment to strengthen the business and lower margins in employee Solutions, which have yet to be offset by cost reduction actions.

2018 PROGRESS AGAINST STRATEGIC PRIORITIES

  • Creation of a new division with new leadership team and operating model.
  • Investments in people and process to address specific operational under performance.
  • Investments made in sales, technology platforms and digital.
  • Met cost-out targets.
  • Identified additional opportunities for automation and offshoring.
  • Cultural change programme aligned with Capita-wide, refreshed values and behaviours.
Adjusted revenue

£498m

Adjusted operating profit

£40.7m

Adjusted operating margin

8.2%

Order book

£715m

Employees

5,800

CUSTOMER MANAGEMENT

We primarily serve customers in the telecommunications, retail and utility sectors, from a mix of onshore locations in Europe and offshore locations in India, Poland, South Africa, Argentina and Bulgaria. The division also provides remediation, complaints management and collections services, including TV Licensing.

Our approach is to build shared outcome partnerships, increasingly based on partnering for value, not transactional supply. The value we bring to our clients is increasingly built around transforming the customer experience through the application of data insight and analytics. These enable us to manage complex, high-value interactions, drive positive quality improvement, and improve financial benefits for clients.

FINANCIAL PERFORMANCE

  • Adjusted revenue fell by 4.2%, due to contract scope changes and lower volume in the UK retail and energy sectors and Switzerland.
  • Adjusted operating profit decreased due to: the aforementioned decline in revenue; a weaker performance in Europe, which was impacted by lower profits in Switzerland, and a slightly higher loss on our contract with mobilcom-debitel; increases in some cost items including the adoption of General Data Protection Regulation; and the dropping-out of a one-off contract modification benefit in 2017. Excluded from 2018 adjusted profit is a charge of £61.7m from the impairment of acquired intangibles (refer to note 3 of the consolidated financial statements).

2018 PROGRESS AGAINST STRATEGIC PRIORITIES

  • Investment in sales resource to drive origination and consultative selling, reflected in order book growth in 2018.
  • Pilots built for both omni-channel and new automation technologies, ahead of full production in 2019, underpinning our differentiated customer experience approach.
  • Customer Experience Improvement methodology proposition embedded and rolled out to first tranche of clients.
Adjusted revenue

£794m

Adjusted operating profit

£39.6m

Adjusted operating margin

5.0%

Order book

£2,012m

Employees

30,000

GOVERNMENT SERVICES

Capita is a trusted strategic partner to central government for the delivery and transformation of technology-enabled business services. It includes the operation of large, complex contracts that underpin the achievement of policy outcomes. We are also a leading provider of support services such as revenues, benefits and back-office processing, IT, HR, and finance to local authorities, and education and health organisations.

FINANCIAL PERFORMANCE

  • Adjusted revenue fell by 13.5%, due to the re-shaping of our Defence Infrastructure Organisation (DIO) contract, which benefited from the recognition of previously deferred income in the prior year, and a decline in our local government long-term strategic partnerships, reflecting the aforementioned market weakness.
  • Adjusted operating profit decreased due to the dropping-out of the £22m one-off benefit from DIO, as previously disclosed, and weakness in local government, which were partially offset by a reduction in loss on Primary Care Support England (PCSE). Excluded from 2018 adjusted profit is a charge of £33.8m from the impairment of goodwill (refer to note 15 of the consolidated financial statements).

2018 PROGRESS AGAINST STRATEGIC PRIORITIES

  • Local government strategy reviewed and reset to address accelerated market and contract decline.
  • Commenced local government transformation programme to change service model.
  • Investment in establishing delivery excellence partnership relationships with key government departments.
  • Focused resources on securing re-bids with targeted accounts.
  • Delivered cost-out targets.
Adjusted revenue

£746m

Adjusted operating profit

£35.2m

Adjusted operating margin

4.7%

Order book

£2,188m

Employees

8,700

IT AND NETWORKS

Our IT services business acts as a technology enabler across all of Capita’s services both internally and externally. We provide end-to-end enterprise IT services and solutions focused around four key areas: digital transformation and innovation; core platforms – cloud, hosted and on-premise and services; LAN and WAN connectivity solutions; and professional services – advising and running IT solutions for our customers, testing, data consulting and cybersecurity.

We operate across the UK and from our operations in India, supporting clients at a local and national level. We have strategic partnerships with leading global IT vendors, have invested in our own portfolio of hosted platforms and operate our own UK-wide network and data centres.

FINANCIAL PERFORMANCE

  • Adjusted revenue fell by 2.7%, due to contract losses and lower volume in Managed IT Solutions and Enterprise Services.
  • Adjusted operating profit decreased due to the dropping-out of a £9m one-off supplier settlement in the prior year and lower margins in Networking Solutions.

2018 PROGRESS AGAINST STRATEGIC PRIORITIES

  • Improved our conduct and control environment.
  • Upgraded our legacy IT infrastructure (data centres) and technical capabilities.
  • Achieved cost competitiveness targets.
  • Revamped our brand and client value proposition.
  • Improved our services, internal relationships and customer experience.
  • Simplified our organisation and our service/product offering.
Adjusted revenue

£404m

Adjusted operating profit

£45.3m

Adjusted operating margin

11.2%

Order book

£380m

Employees

3,400

SPECIALIST SERVICES

The division includes those businesses which either are not within Capita’s growth markets and/or have little in common with our other divisions and/or are at an early phase in their development but may be scaled up in the future. These businesses are mostly standalone operations and are actively managed on a portfolio basis in order to maximise value and include Life Insurance, Insurance Services, Mortgage Services & Collections, Optima, Travel & Events, Evolvi, Real Estate & Infrastructure, AXELOS, Fera, Managed Print, Hardware Reselling and Enforcement.

FINANCIAL PERFORMANCE

  • Adjusted revenue decreased by 3%.This reflected good growth at AXELOS and modest growth at Fera and Enforcement, which was outweighed by declines in Real Estate & Infrastructure, Insurance and Life nsurance. Revenue included a £38m release of deferred income on the early transfer of Prudential UK’s life insurance business to a new supplier in the second half of 2018.
  • Adjusted operating profit fell by 1%, as a result of increases in AXELOS and Real Estate, which benefited from restructuring actions, which were offset by declines in Managed Print and Mortgage Services.
  • Profits included a £9m one-off benefit on the end of the general insurance contract with Marsh and a £6m one-off benefit
  • on the end of the Prudential contract, which were partly offset by one-off write downs and provisions.

2018 PROGRESS AGAINST STRATEGIC PRIORITIES

  • Restructured a number of businesses and closed unprofitable service lines.
  • Introduced tightly managed investment process and governance.
  • Delivered cost competitiveness targets in 2018.
  • Investment in a number of product/ service enhancements.
Adjusted revenue

£992m

Adjusted operating profit

£139.5m

Adjusted operating margin

14.1%

Order book

£1,241m

Employees

11,000

SOFTWARE

Our specialist enterprise software products serve sector specific and cross-sector markets in the UK and overseas. We develop and deliver specialist application software and wider solutions for education, local government, public safety, utilities and transport, consulting and legal, and payments.

FINANCIAL PERFORMANCE

  • Adjusted revenue fell by 1.3%, reflecting good growth in AMT-Sybex and growth in our cross-sector products, including Payments, which was offset by declines in Healthcare Decisions, as a result of the end of our NHS24 Scotland contract, and Secure Solutions. Education Software was flat.
  • Our book-to-bill ratio was 104%, reflecting an encouraging improvement in order intake, and we expect revenue to grow in 2019.
  • Adjusted operating profit increased by 1%, due to the aforementioned changes in revenue, investments in sales, including the US pilot, and benefits from transformation actions.

2018 PROGRESS AGAINST STRATEGIC PRIORITIES

  • Defined and commenced investment strategy.
  • Established digital development centre in India.
  • Introduced product management capability across product portfolio.
  • Executed cost competitiveness and offshoring targets.
  • Executed US entry strategy for selected products.
  • Introduced standardised core processes across 29 businesses.

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Adjusted revenue

£396m

Adjusted operating profit

£112.4m

Adjusted operating margin

28.4%

Order book

£560m

Employees

4,000

PEOPLE SOLUTIONS

People Solutions provides a full suite of HR offerings across the employment life cycle. They include leading market positions in recruitment process outsourcing (RPO), learning process outsourcing, HR service (including payroll), and pensions and benefits administration, which are supported by our proprietary digital platforms, Orbit, Hartlink and Tessello. We also provide attraction, screening and performance management services, and best-in-class fire prevention and protection training facilities from the Fire Service College.

FINANCIAL PERFORMANCE

  • Adjusted revenue fell by 4.3% as a result of declines in our transactional businesses Capita Resourcing and Learning Services, which were impacted by the transition to a new public sector training framework, previously Civil Service Learning, and the transfer of the Contingent abour One (CL1) public sector resourcing contract to a new provider in the second half.
  • Adjusted operating profit decreased, reflecting the above decline in revenue, investment to strengthen the business and lower margins in employee Solutions, which have yet to be offset by cost reduction actions.

2018 PROGRESS AGAINST STRATEGIC PRIORITIES

  • Creation of a new division with new leadership team and operating model.
  • Investments in people and process to address specific operational under performance.
  • Investments made in sales, technology platforms and digital.
  • Met cost-out targets.
  • Identified additional opportunities for automation and offshoring.
  • Cultural change programme aligned with Capita-wide, refreshed values and behaviours.
Adjusted revenue

£498m

Adjusted operating profit

£40.7m

Adjusted operating margin

8.2%

Order book

£715m

Employees

5,800

CUSTOMER MANAGEMENT

We primarily serve customers in the telecommunications, retail and utility sectors, from a mix of onshore locations in Europe and offshore locations in India, Poland, South Africa, Argentina and Bulgaria. The division also provides remediation, complaints management and collections services, including TV Licensing.

Our approach is to build shared outcome partnerships, increasingly based on partnering for value, not transactional supply. The value we bring to our clients is increasingly built around transforming the customer experience through the application of data insight and analytics. These enable us to manage complex, high-value interactions, drive positive quality improvement, and improve financial benefits for clients.

FINANCIAL PERFORMANCE

  • Adjusted revenue fell by 4.2%, due to contract scope changes and lower volume in the UK retail and energy sectors and Switzerland.
  • Adjusted operating profit decreased due to: the aforementioned decline in revenue; a weaker performance in Europe, which was impacted by lower profits in Switzerland, and a slightly higher loss on our contract with mobilcom-debitel; increases in some cost items including the adoption of General Data Protection Regulation; and the dropping-out of a one-off contract modification benefit in 2017. Excluded from 2018 adjusted profit is a charge of £61.7m from the impairment of acquired intangibles (refer to note 3 of the consolidated financial statements).

2018 PROGRESS AGAINST STRATEGIC PRIORITIES

  • Investment in sales resource to drive origination and consultative selling, reflected in order book growth in 2018.
  • Pilots built for both omni-channel and new automation technologies, ahead of full production in 2019, underpinning our differentiated customer experience approach.
  • Customer Experience Improvement methodology proposition embedded and rolled out to first tranche of clients.
Adjusted revenue

£794m

Adjusted operating profit

£39.6m

Adjusted operating margin

5.0%

Order book

£2,012m

Employees

30,000

GOVERNMENT SERVICES

Capita is a trusted strategic partner to central government for the delivery and transformation of technology-enabled business services. It includes the operation of large, complex contracts that underpin the achievement of policy outcomes. We are also a leading provider of support services such as revenues, benefits and back-office processing, IT, HR, and finance to local authorities, and education and health organisations.

FINANCIAL PERFORMANCE

  • Adjusted revenue fell by 13.5%, due to the re-shaping of our Defence Infrastructure Organisation (DIO) contract, which benefited from the recognition of previously deferred income in the prior year, and a decline in our local government long-term strategic partnerships, reflecting the aforementioned market weakness.
  • Adjusted operating profit decreased due to the dropping-out of the £22m one-off benefit from DIO, as previously disclosed, and weakness in local government, which were partially offset by a reduction in loss on Primary Care Support England (PCSE). Excluded from 2018 adjusted profit is a charge of £33.8m from the impairment of goodwill (refer to note 15 of the consolidated financial statements).

2018 PROGRESS AGAINST STRATEGIC PRIORITIES

  • Local government strategy reviewed and reset to address accelerated market and contract decline.
  • Commenced local government transformation programme to change service model.
  • Investment in establishing delivery excellence partnership relationships with key government departments.
  • Focused resources on securing re-bids with targeted accounts.
  • Delivered cost-out targets.
Adjusted revenue

£746m

Adjusted operating profit

£35.2m

Adjusted operating margin

4.7%

Order book

£2,188m

Employees

8,700

IT AND NETWORKS

Our IT services business acts as a technology enabler across all of Capita’s services both internally and externally. We provide end-to-end enterprise IT services and solutions focused around four key areas: digital transformation and innovation; core platforms – cloud, hosted and on-premise and services; LAN and WAN connectivity solutions; and professional services – advising and running IT solutions for our customers, testing, data consulting and cybersecurity.

We operate across the UK and from our operations in India, supporting clients at a local and national level. We have strategic partnerships with leading global IT vendors, have invested in our own portfolio of hosted platforms and operate our own UK-wide network and data centres.

FINANCIAL PERFORMANCE

  • Adjusted revenue fell by 2.7%, due to contract losses and lower volume in Managed IT Solutions and Enterprise Services.
  • Adjusted operating profit decreased due to the dropping-out of a £9m one-off supplier settlement in the prior year and lower margins in Networking Solutions.

2018 PROGRESS AGAINST STRATEGIC PRIORITIES

  • Improved our conduct and control environment.
  • Upgraded our legacy IT infrastructure (data centres) and technical capabilities.
  • Achieved cost competitiveness targets.
  • Revamped our brand and client value proposition.
  • Improved our services, internal relationships and customer experience.
  • Simplified our organisation and our service/product offering.
Adjusted revenue

£404m

Adjusted operating profit

£45.3m

Adjusted operating margin

11.2%

Order book

£380m

Employees

3,400

SPECIALIST SERVICES

The division includes those businesses which either are not within Capita’s growth markets and/or have little in common with our other divisions and/or are at an early phase in their development but may be scaled up in the future. These businesses are mostly standalone operations and are actively managed on a portfolio basis in order to maximise value and include Life Insurance, Insurance Services, Mortgage Services & Collections, Optima, Travel & Events, Evolvi, Real Estate & Infrastructure, AXELOS, Fera, Managed Print, Hardware Reselling and Enforcement.

FINANCIAL PERFORMANCE

  • Adjusted revenue decreased by 3%.This reflected good growth at AXELOS and modest growth at Fera and Enforcement, which was outweighed by declines in Real Estate & Infrastructure, Insurance and Life nsurance. Revenue included a £38m release of deferred income on the early transfer of Prudential UK’s life insurance business to a new supplier in the second half of 2018.
  • Adjusted operating profit fell by 1%, as a result of increases in AXELOS and Real Estate, which benefited from restructuring actions, which were offset by declines in Managed Print and Mortgage Services.
  • Profits included a £9m one-off benefit on the end of the general insurance contract with Marsh and a £6m one-off benefit
  • on the end of the Prudential contract, which were partly offset by one-off write downs and provisions.

2018 PROGRESS AGAINST STRATEGIC PRIORITIES

  • Restructured a number of businesses and closed unprofitable service lines.
  • Introduced tightly managed investment process and governance.
  • Delivered cost competitiveness targets in 2018.
  • Investment in a number of product/ service enhancements.
Adjusted revenue

£992m

Adjusted operating profit

£139.5m

Adjusted operating margin

14.1%

Order book

£1,241m

Employees

11,000

MEASURING OUR PROGRESS - KPIs

FINANCIAL KEY PERFORMANCE INDICATORS (KPIs)

Adjusted profit before tax

£282.1m

2017: £383.1m

+

Adjusted profit before tax

Our aim: Achieve long-term growth in profit.

x

Adjusted operating margin

8.7%

2017: 10.9%

+

Adjusted operating margin

Our aim: Maintain adjusted operating margin.

x

Adjusted earnings per share (EPS)

16.37p

2017: 27.99p

+

Adjusted earnings per share (EPS)

Our aim: Achieve long-term growth in EPS.

x

Adjusted free cash flow

£82.5m

2017: £75.4m

+

Adjusted free cash flow

Our aim: Achieve sustainable, long-term free cash flow growth.

x

Return on capital employed (ROCE)

17.9%

2017: 18.4%

+

Return on capital employed (ROCE)

Our aim: Deliver ROCE in excess of our cost of capital.

x

Gearing: adjusted net debt to adjusted EBITDA

1.2x

2017: 2.2x

+

Gearing: adjusted net debt to adjusted EBITDA

Our aim: Keep ratio of adjusted net debt to adjusted EBITDA in the range of 1.0 and 2.0 times over the long term.

x

NON-FINANCIAL KPIS

SME supplier payment terms

77%

2017: N/A

+

SME supplier payment terms

Our aim: SME suppliers to be paid within 30 days.

x

Employee retention

72%

2017: 79%

+

Employee retention

Our aim: Improve employee retention rate.

x

Carbon footprint reduction

4%

2017: 11%

+

Carbon footprint reduction

Our aim: Reduce our carbon footprint annually.

x

Community investment

£1.5m

2017: £1.9m

+

Community investment

Our aim: Invest and engage with our local communities to deliver programmes for local needs.

x

DOWNLOADS

The full 2018 Annual Report and key sections are available to download below.

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