Support services and BPO giant Serco has had a strong FY10 despite the challenging conditions in the UK public sector market. It’s benefited both from a string of contracts signed in 2009 and a growing international business (40% of revenues now come from outside the UK). Total revenue is up 9% organically (7.6% at constant currency) on the previous year at £4.3bn and operating profit climbed 13.8% to £241m as Serco moves closer to its 2012 target for operating margins of 6.3%.
UK revenue grew 2% to £2.58bn as good momentum from wins in 2009, which drove growth particularly in Serco’s civil government markets, was countered by the effects of austerity measures notably in defence and local government.
Of course it is Serco’s IT and business process services business that we’re most interested in and teasing clues to its performance out from 61 pages of results isn’t always easy. The UK and European IT and BPO business now sits within Serco’s Local Government and Commercial division, which grew by 5.5% last year to £854m, or 20% of Group revenue. Growth was driven by a range of 2009 contract wins including deals to deliver the European Space Agency and Peterborough City Council’s ICT services. Serco also had some notable contract successes in the sector in 2010 including its £200m/8-year strategic partnership with Hertfordshire County Council, which starts in April this year (see Serco takes over from Vertex at Hertfordshire).
Serco is likely to find 2011 more of a challenge in the UK as its ‘Maude moment’ MOU with the Cabinet Office delivers savings on a number of contracts (see here) and it feels the effect of the cancellation of a prison contract and the phasing out of its Business Link contracts pending developments in public service reform. Indeed, its order book was down about 3% on the previous year to £16.6bn at the end of December ’10 as a result of these ‘headwinds’ in the UK public sector. Longer term, however, there will undoubtedly be opportunities for the support services player which is well placed to deliver more public sector services – whether that be pathology or prison services -as the government looks to commission more from the private or third sectors.
Moreover, as a group, Serco is fortunate to have excellent visibility on revenues – 92% of planned revenue in 2011 and 77% for 2012 - and a substantial £29bn pipeline. It continues to expect good organic revenue growth in 2011 and claims to be on target for £5bn of revenue and 6.3% adjusted operating margin by the end of 2012.