Capita: Improving performance across Group but more to do in Contact Centre business

Capita is a modern outsourcer, helping clients across the public and private sectors run complex business processes more efficiently, and is listed on the premium segment of the London Stock Exchange. The company is a constituent of the FTSE All Share index and at the current share price of 238p has a market capitalisation of £275m.

Half year results to 30 June 2025 were published on 5 August 2025 and we were delighted to welcome CEO Adolfo Hernandez and CFO Pablo Andres, to a Yellowstone webinar to talk about these results and the strategy and outlook for the rest of 2025 and beyond. A recording of the webinar is available here.

Capita is going through a transformation into a better company and the change is coming through a focus of improvements in four areas: Technology; Efficiency; Delivery and Company (culture). The services the company provides have not been in question but how they provide those services offer room for improvement and management are targeting providing them in a way that drives improved financial performance. Central to this is placing the customer front and centre for everything they do.

Management is pleased with the progress made in the first half in each of these four strategic pillars. In technology the Capita AI Catalyst Lab has been launched which is already delivering efficiencies and innovative customer solutions. Customers are showing a step change in their interest in AI/agentic AI solutions and there is a £4.4bn pipeline of higher quality technology opportunities.  Under the efficiency pillar, over £190m of annualised cost savings were delivered at 30 June and £205m had been delivered at 31 July 2025. The targeted figures of £250m of cost savings by the end of 2025 is very much on track. In Delivery there have been client wins at EANI, Royal Navy, PCSE and Southern Water and overall value of contracts won is up 17% at £1.1bn with certain parts growing much faster than this. The book to bill ratio improved to 0.9x and in the Public Service division it rose to 1.1x. There are also importantly no red rated contracts which is down to the controlled execution taking place. All of this achieved whilst making big improvements to the company culture including a large a 10 point improvement to employee net Promoter Score. It’s been a difficult 18 months but the company is excited about the direction of travel.

In terms of the financial performance in the first half there has been good progress in some areas, most notably in operating and free cash flow which rose 10% and 50.3% respectively. The improvement in cash flow to an outflow of £23m (from a £53m outflow in the prior period) was after incurring £21m of costs to deliver the savings programme which will not be incurred again. However overall revenues declined 3.7% to £1,154.8m and operating profits declined 21.8% to £42.6m. The Group’s operating margin was 3.7%.

Within the divisions, Capita Public Service reported strong growth in both revenues and margin. Revenues were up 3.8% to £711.8m, operating profit rose 20.7% to £57.2m and the operating margin increased 110bps to 8% illustrating the benefits of the cost reduction programme are being seen. The revenue growth in Public Services of 3.8% is the highest growth seen since 2021.

It’s been a different story at the Contact Centre Business within Capita Experience. Here revenues fell 19.9% to £277.4m, the business fell into a loss of £11.4m and this equated to a negative operating margin of 4.1%.  Volumes lost from Telecoms clients have been costly and whilst offshoring to India and South Africa has helped the cost position more is needed and will be achieved in the second half. Perhaps these cost savings could have been achieved more quickly but this will be all done by the end of the year.

Pension Solutions is a good business and whilst margins declined to 11.3% management is confident they will recover in the second half. Revenues declined marginally but this is more of a timing issue and the pipeline of business for the second half looks very encouraging. The digital solutions platform that they are currently working on is considered a game changer and this will be delivered by the end of the year.

The Regulated Services at Capita Experience which are part of the Groups ‘manage for value’ businesses saw revenues falling 1.1% to £79.5m and operating profit falling 80.2% to £2.5m, reflecting contract hand backs as expected. Progress is being made on exiting the contracts and they have commenced negotiations with their last customer. A solution is required that suits both parties and resolving this is one of the highest priorities of the Group.

In terms of cash flow, the cash conversion improved to 70% which was a good outcome. Net financial debt stands at £87m and net debt including lease receivable is £319m. Overall guidance for the group remains the same but within this Public Services (62% of group revenue) is expected to be a little stronger and Contact Centres (24% of group revenues) a little weaker. Public Services is expected to grow mid-single digit and Contact Centres is expected to decline by mid-teens. Overall £45-65m of cash outflow is expected in 2025, this is after the £55m cost of the efficiency programme and management are confident the company will be free cash flow positive at the end of the year.

AI is becoming increasingly important to how Capita delivers its services and the AI enabled BPO market is growing rapidly. Already it’s estimated to generate annual revenues of £10bn and this is forecast to grow to £30bn by 2027 and nothing will stop this revolution. Customers need help with skills, data and making sense of the huge range of solutions being invented almost on a daily basis.

Capita has developed a range of AI products that are already gaining traction with their customers. CallSight, one of their AI products, listens to all calls to improve quality levels where previously 5% of calls were listened into manually. In Capita Public Services AI is used to improve efficiency and workflows in the front, middle and back office whilst in Capita Experience its mainly limited to customer facing roles in the front office. A key distinction for Capita in terms of how they deploy AI is that they will always have a human in the loop. Some specific examples of how AI is being used today include: AgentSuite is live at Southern Water (and 5 other clients)  reducing handling times and increasing the first time resolution of customer queries; the DWP also use AgentSuite to provide automatic transcriptions to improve the quality and accuracy of engagements; in the middle office Transport for London uses an AI powered verification system to automate 29 fraud checks reducing processing time from 5 days to 1 minute; and Bexley Local Borough Council is using an AI powered Aged debt tool to improve the collection process.

Importantly, Capita is not spending huge amounts on their own hardware to offer these solutions but rather they have built partnerships with the hyperscalers to get ahead of the curve. There are already over 200 use cases for AI and they will continue to innovate to develop more services and automations that add real value for customers.

Looking towards the second half of the year the priorities are improving the performance in Contact Centres, resolving the remaining Manage for Value businesses, delivering the remaining cost savings, future proofing the business with the right investment, maintaining contract discipline and building on the refreshed values and culture. The medium term targets were also reiterated: operating margins of 6-8%, free cash flow positive from the end of 2025, operating cash conversation of 65-75% and low-mid single digit revenue growth pa.

Good progress has been made in the transformation of Capita but there is still work to be done particularly in the Contact Centre and resolving the closed book Life and Pensions business.  This is a stronger business now and will be much stronger by the end of the year. No wonder the CEO and CFO are excited about the future prospects.

A recording of the webinar can be found on the Yellowstone Advisory YouTube channel or by clicking here.

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