Smaller top line, wider margins

Redcentric's first-half trading update, published on 27 October 2026, showed a Business that is earning more from each pound of sales even as total Revenue falls. First-half revenue for the 2027 financial year was about £63.7m, down from £66.8m a year earlier. Adjusted EBITDA was described as stable at around £9.1m, which lifted the Margin to 14.3% from 13.6%, while gross margin improved to 63.1% from 61.6%.

The company attributed the revenue decline to a deliberate shift towards higher-margin work, together with customer churn. That combination is the central question for the group as it moves into the next stage of its strategy: how much of the shrinkage is chosen, and how much is lost business.

What Redcentric now is

Redcentric (LSE:RCN) is a UK managed services provider supplying cloud, network connectivity, communications and security services, mainly to public sector bodies and mid-sized businesses on recurring contracts. Its financial year ends on 31 March. In September 2026 it completed the sale of its data centre business, a disposal intended to focus the group on managed services and to return Capital to shareholders. Without the capital-intensive data centre estate, operating margins and cash conversion become the main measures by which the remaining business will be judged.

Reading the half-year numbers

A stable profit on lower revenue suggests that the business is shedding low-margin resale and legacy services, which tend to carry thin gross profit. The gross margin gain of 1.5 percentage points is consistent with that explanation. The company also reported net Debt of around £5.0m, and said the board was confident of achieving its full-year adjusted EBITDA target of £18.4m. Hitting that target would require a second half broadly similar to the first.

Buyback alongside the strategy

Two days after the update, on 29 October, LSE:RCN launched a share buyback of up to £1.5m, run by Cavendish Capital Markets until 11 December 2026, with repurchased shares held in treasury, which allows them to be reissued later, for example to satisfy employee share schemes. A notice on 9 November recorded the purchase of 44,765 shares on 6 November at 95.88p each, taking treasury holdings to 1,634,515 shares, or 1.59% of issued capital. The programme is small relative to the group's size, but it signals that the board sees value in reducing the share count while the strategy beds in. The annual grant of share Options was announced on 29 October.

Risks

A falling Top Line can become self-reinforcing if churn accelerates, and margin gains from exiting low-value work are finite. The group operates in a competitive market against larger cloud and connectivity providers, and public sector budgets can shift. Execution of the post-disposal plan, including any reorganisation of central costs, also matters. Net debt of about £5.0m looks modest.

Margin arithmetic

Revenue of £63.7m with adjusted EBITDA of £9.1m gives a margin of 14.3%. A year earlier, revenue of £66.8m and a margin of 13.6% imply EBITDA of about £9.1m, so profit was unchanged while sales fell by £3.1m, or about 4.6%. Gross margin rose 1.5 percentage points to 63.1%, which on revenue of £63.7m implies Gross Profit of about £40.2m, compared with about £41.1m a year earlier on the same arithmetic, so gross profit fell slightly, though by less than revenue.

The full-year target

The target of £18.4m for adjusted EBITDA for the year implies about £9.3m in the second half if the first half is £9.1m. That is just above the first-half level, so the target requires the second half to match or slightly exceed the first. Margin on that basis would remain around 14% if revenue is stable.

The effect of the data centre disposal

Selling the data centre estate removes Assets that need heavy capital spending and power costs, so the remaining business is lighter. Net debt of around £5.0m is small relative to annual EBITDA of £18.4m, at about 0.3 times, so the Balance Sheet is conservative. That supports the plan to return capital to shareholders.

The buyback

A buyback of up to £1.5m is small relative to the company's size, since at a price of about 95.88p it would buy about 1.56 million shares. The purchase of 44,765 shares at 95.88p on 6 November cost about £42,900, which is about 3% of the programme. The programme runs until 11 December 2026, about six weeks from the date of the latest notice. Holding shares in treasury allows them to be reissued, for example to employee share schemes, instead of creating new shares.

Choice versus churn

Churn is the loss of customers whose contracts end, while the shift to higher-margin work is a chosen change in the mix. Management says both contributed to the lower revenue, but it has not split the decline between them. The rise in gross margin supports the view that part of the change was deliberate, while stable EBITDA suggests the loss of low-margin revenue did not hurt profit.

The managed services model

A managed services provider takes responsibility for running a customer's IT systems for a fee under a contract, which can last several years. Revenue is recurring, but customers can leave when contracts end, which is the churn the company mentions. Margins depend on how efficiently services are delivered and on the mix of higher-value services such as security and cloud against lower-value resale.

The public sector is a large part of the customer base, which brings contracts with long procurement cycles and requirements for security and compliance. After the data centre sale, the group relies less on its own physical infrastructure and more on partners and cloud platforms, which lowers capital spending but can also change the cost structure.

The financial year ends on 31 March, so the half-year to 30 September 2026 covers the first six months. The full-year figures will show whether the second half matched the first, as the target of £18.4m of adjusted EBITDA requires.

What comes next

LSE:RCN said interim results are expected in December 2026, when it anticipates resuming an interim dividend. Those accounts should provide the detail missing from the trading update: recurring revenue, churn, contract wins and the cash position after the disposal. The buyback runs until 11 December, so its total take-up should also be known by then.