Having already warned of a ‘small reduction’ in organic revenue at half time (see here), support services and BPO giant Serco reported a fall of 2%, largely as a result of a 16% slump in the US federal government market, and difficulties in the UK public sector.
Serco’s UK and Europe division (where the UK is the vast majority) saw revenue decline 1% to £1.28bn, as a result of the termination of its Bradford education contract, the closure of most of its Business Link contracts with the Regional Development Agencies (RDA), and fewer contracts in the welfare to work market where Serco is one of a number of providers in the UK’s Work Programme (see here). Serco is suffering from spending cuts at the Business Link, but perhaps also the negative impact of well-publicised issues relating to A4E, one of the other suppliers on the Work Programme scheme (see here).
Taking into account Serco's recent spate of M&A, headline revenue grew 4.3% to £2.35bn, notably BPO is the big growth area as Serco establishes its Global Services BPO operation (see Serco pays £55m for Vertex Public Sector, and work back). Meanwhile, group adjusted operating profits (including reorganisation costs) fell 7.4% to £123.9m, pushing Serco’s margin down to 5.3% from 6% last time.
Serco is confident it will bounce back from this first half blip with ‘strong second half growth’, driven by recent BPO contract wins, such as its Anglia Support Partnership deal (see here), and its customer management megadeal with Shop Direct (see here). The operating margin is also expected to head northwards as recent cost cutting and restructuring benefits the bottom line.
While there are clearly weak spots, the Australasia, Middle East, Asia and Africa (AMEAA) emerging markets are performing very well. Organic revenue growth here was 22% to £400m (now 17% of group revenue), although at the expense of margins, which fell to 6.7% from 9.2%. This was due to new wins and a ‘considerable increase’ in the amount of work done for the Australian Department of Immigration and Citizenship (DIAC).
We will provide more colour and movement later after the management call in UKHotViewsExtra.