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Xchanging’s positive first half results build on progress made in FY12 (see here). But recent contract losses and disposals will make it more difficult for Xchanging to continue delivering growth in the near term.
Xchanging now reports both headline revenue and a net revenue figure (excluding spend on procurement contracts that are then passed on to the customer). Net revenue should provide a better picture of the underlying performance since it excludes costs relating to outsourcing contracts that it recoups over the lifetime of the deal.
And the good news, in the six months ended 30 June, net revenue was up 6.2% to £270.7m (2.7% of which was organic) – with headline revenue up 7.6% to £347.3m. The adjusted operating profit margin improved significantly to 8.5% from 6.3% last time.
While this all looks much better, there are plenty of challenges ahead, which will make H2 far tougher. Xchanging will have to plug a big gap left by the Deutsche Bank JV (Xchanging Transaction Bank) which it exits in August (see here), and it is now also exiting the UK HR Services business when its contract with BAE Systems expires on 31 December, 2013. Xchanging had hoped to hold on to this relationship following BAE’s decision to grant it a year’s extension after pulling out from its contract agreement with Logica post takeover by CGI (see BAE terminates HR BPO deal with Logica).
XTB and BAE HR are two of Xchanging’s largest BPO contracts, so will no doubt put significant pressure on revenue in the next six to twelve months. Next year, Xchanging will also have to plug another hole when the London Metal Exchange contract comes to an end in May 2014 (see here).
CE Ken Lever is doing a good job restructuring, investing in new products and innovations, and getting the underlying financials in order. But there are still big issues at play that could knock Xchanging’s recovery off course. Lever’s strategy refocusing Xchanging's business model ‘from one based on a small number of large contracts to one based on a large number of smaller contracts’ is taking shape. But we think getting there is going to be a long and painful process.
