XCH.L Share News (XCH)

Outsourcing specialist Xchanging has parted ways with its chief executive and also binned its 2010 dividend after announcing a shock profits warning on Wednesday morning.Though revenue and underlying operating profit for 2010 are both expected to be within the current range of analysts' estimates, underlying operating profit for 2011 will be below the most bearish forecast (from Matrix Group) of £55.5m. Revenue for 2011 should be within the current range of market estimates, however. The company attributed the expected shortfall in operating profit to a number of factors, including the absence of the contract settlements and consulting income which benefited 2010 results, and the loss of a contract worth £2m.Xchanging has also seen a deterioration of performance in the US Claims business of around £4.0m while at the same time it is investing more heavily, to the tune of around £4m, in developing business in the Americas. On top of that, the company predicted business margins in the financial services business will come under pressure as customers push for further price discounts. Given the bleaker outlook the board has decided not to pay a dividend for 2010. The company paid a full year dividend of 2.75p in 2009 and was expected by the market to increase this to 3.09p in 2010.As for 2010, the company said reported underlying operating profit will include a £6.9m fillip relating to contract settlements arising in the second half of the year and, as previously stated, it will also include consulting income from the Compagnie Pour Assistance Technique et Investissements S.A. (CATISA) arrangement of £4.9m.On the downside, the company is likely to take impairment charges of around £12m relating to the carrying values of intangible and other assets, plus a £100m goodwill write down, relating primarily to its Cambridge business.A search for a new chief executive officer is underway after the abrupt departure of David Andrews, who is stepping down from the board with immediate effect.Company founder Andrews will take on a new role as senior adviser to the chairman to support the company's business development initiatives.In the meantime, chief financial officer Ken Lever will act as interim chief executive officer, while chairman Nigel Rich will take on an executive role.Broker Peel Hunt has made an initial stab at forecasting 2011 earnings before interest and tax (EBIT) and has come up with a rough figure of £30m, down from its previous projection of £63.8m. The broker, which has a sell recommendation on the shares, believes the shares could halve in the short term, a prediction that quickly came to pass on the morning of the profits warning, as the shares plunged from an overnight price of `117p to 54.75p, before recovering somewhat.Matrix Group, meanwhile, suggests that "aggressive accounting appears to have caught up with Xchanging." The broker had previously forecast 2011 earnings per share (EPS) of 12.6p, versus market consensus of 17.92p; it now thinks EPS will be closer to 10p. It has slashed its price target from 79p to 50p.Turning his attention to the write-downs the company announced, Matrix analyst Matthew Earl said: "In our 19 October 2010 note, we suggested that a c.£127m write-down would be appropriate. However, we also cited the risk that a write-down of this magnitude would threaten to breach one of the group's three banking covenants, which centres on minimum net worth. That risk remains, in our view."