LONDON – Capita PLC (LSE:CPI) shares fell 6% after the outsourcing company provided a trading update that revealed weaker-than-expected revenues and cash flow concerns, despite improved margins and increased cost savings targets.

Capita reported that its fiscal year 2024 revenues declined 8% YoY, worse than the forecasted 4.7% drop. However, the company managed to offset some of the revenue weakness with better-than-anticipated margins, which improved by 50 basis points compared to the expected 10 basis point increase.

The company’s free cash flow outlook disappointed investors, with Capita now projecting an outflow of £120-140 million for FY2024, significantly higher than the original guidance of £90-100 million.

In response to the challenging environment, Capita has increased its cost savings target to £250 million from £160 million, though achieving this will require an additional £50 million in implementation costs.

Looking ahead to fiscal year 2025, Capita expects flat revenue growth, lower than previously anticipated. The company aims to deliver modest profit growth through further margin improvements and cost savings, which are intended to offset increased National Insurance costs.

“We are taking decisive action to strengthen our financial position and improve operational efficiency in the face of challenging market conditions,” said CEO Jon Lewis (JO:). “While revenue growth has been softer than expected, our focus on margin expansion and cost optimization is yielding results.”

According to RBC (TSX:), the trading update suggests that consensus earnings forecasts for Capita may need to be revised downward, with some analysts already reducing their 2025 EPS estimates by 10%.

Additionally, the expected free cash flow recovery is likely to be delayed by 9-12 months.

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