XPS Pensions Group: Can Operational Efficiency and Strategic Growth Reverse Margin Erosion?

When a company like XPS Pensions Group reports a 18% revenue surge and 27% EBITDA growth, it's tempting to write off a 44% drop in net income as a temporary hiccup. But in this case, the numbers tell a more nuanced story—one of structural challenges, rising costs, and the delicate balance between aggressive expansion and margin preservation. Let's dissect what's driving XPS's profitability struggles and whether its long-term strategy can justify investor optimism.

The EPS Miss: A Tale of Two Years

XPS's FY 2025 earnings per share (EPS) fell to £0.15 from £0.26 in FY 2024, a 44% decline. At first glance, this seems alarming. But the drop isn't entirely organic. The prior year's results were inflated by a £32.5 million gain from the sale of the NPT business, a one-off event that skewed the comparison. Adjusted for this, FY 2025's diluted EPS rose 36% to 20.6p—a solid performance. The real issue isn't XPS's core operations but the lack of a similar windfall this year.

However, the EPS miss still matters. Rising costs, particularly in the cost of sales (77% of revenue) and non-operating expenses (£16.7 million), have eroded margins. The company's net margin plummeted from 27% in 2024 to 13% in 2025. While revenue growth outpaced the industry, the profit margin contraction suggests operational inefficiencies are biting deeper than expected.

Operational Inefficiencies: Scaling Challenges and Cost Overruns

XPS's workforce has grown from 400 employees in 2017 to 2,000 by 2025—a necessary expansion to handle high-profile projects like the McCloud rectification. But scaling up isn't without risks. The cost of sales as a percentage of revenue has spiked, indicating either higher input costs or inefficiencies in delivering services.

The company attributes part of this to the MacLeod project, a one-off high-margin endeavor that boosted earnings in 2025. As management warns, these gains won't repeat in 2026, and margins are expected to normalize. Meanwhile, the recent acquisition of Polaris Actuaries has added £23 million in debt and increased leverage from 0.27x to 0.57x. While strategic, the integration of Polaris is likely to strain margins in the short term due to higher National Insurance costs and share-based payments.

The Tech Edge: A Double-Edged Sword

XPS has invested heavily in technology, including the Aurora platform and AI-driven tools. These innovations have improved project delivery efficiency—90% of McCloud cases were resolved on time, and the John Lewis Partnership scheme was onboarded ahead of schedule. But technology is a long-term play. The upfront costs of development and integration are eating into margins now.

Client satisfaction remains high (97% of clients “enjoy working with XPS”), and the firm's reputation for handling complex projects is a strength. Yet, with 77% of revenue tied to cost of sales, the question is whether these tech investments will eventually pay off by reducing labor costs or if they'll become a drag on margins in the near term.

Long-Term Growth: A High-Stakes Bet

XPS's strategy hinges on expanding into insurance consulting via Polaris and leveraging AI to scale operations. The insurance market is a $1.5 billion opportunity, and the firm's balance sheet remains robust (net debt of £40.3 million, leverage at 0.57x). Management is confident in its ability to grow revenue at a 8% CAGR over the next three years, outpacing the 2.1% industry average.

But growth alone isn't enough. For investors to stay bullish, XPS must demonstrate that it can stabilize margins. The company expects a 0.5% annual margin improvement in the medium term, but this will require cost discipline amid rising National Insurance rates and the normalization of project-based revenue. The dividend hike (19% in 2025) signals confidence, but it's a gamble if margins continue to compress.

Final Verdict: A Buy for the Patient, a Wait-and-See for the Pragmatic

XPS Pensions Group isn't in crisis—it's growing revenue, expanding into new markets, and maintaining a strong balance sheet. The EPS miss is a symptom of a tough comparator and short-term cost pressures, not a collapse in fundamentals. For long-term investors, the firm's strategic bets on tech and insurance consulting could pay off handsomely.

However, the near-term outlook is clouded. Margins are expected to dip as the MacLeod project fades and Polaris integration costs mount. If XPS can't rein in expenses or offset rising costs with higher-margin work, the stock may remain range-bound. Investors should monitor two key metrics: the pace of EBITDA margin expansion and the firm's ability to convert its tech investments into sustainable cost savings.

In the end, XPS is a company at a crossroads. Its ability to reverse margin erosion and prove that growth isn't just a function of one-off projects will determine whether it becomes a buy-and-hold winner or a cautionary tale of scaling too fast. For now, patience—and a watchful eye on the cost line—is warranted.