Final Results

Full year results for the twelve months ended 31 December 2014

Achieved key 2014 objectives: maintained profitability in a challenging year and positioned for renewed growth in 2015

STRATEGIC HIGHLIGHTS

· Our transformation is complete. Xchanging is now a business technology and services provider.

· Business Processing Services: further simplified structure with full ownership of German business, Fondsdepot Bank, and Xchanging Italy.

· Technology: accelerated strategic development of Xuber insurance software business with acquisitions of Total Objects (£11.5 million) and Agencyport Europe* (£64.1 million); well positioned to offer software products meeting international and standardised needs of our customers. Application Services business grew well.

· Procurement: now based around MM4 technology platform; refocused range of services; new leadership; good sales successes in the second half; acquisition of Spikes Cavell Analytic (in February 2015).

· Invested in Group's infrastructure to support future growth.

FINANCIAL HIGHLIGHTS

· Adjusted operating profit of £55.8 million (2013: £55.5 million), representing a 21.5% underlying year-on-year improvement.

· Expected revenue reductions (Xchanging Transaction Bank, HR Services business, London Metal Exchange) partially offset by full first year revenue benefit from MM4 and first contribution from acquisition of Agencyport Europe*.

· Year-end net cash of £13.7 million (2013: £120.1 million) reflected £90.3 million of acquisitions and £43.4 million of capital expenditure.

Notes

1 Net revenue is total revenue less supplier costs on procurement contracts (where the Group acts as principal) that are incurred by the Group and recharged to the customer.

2 Adjusted operating profit excludes exceptional items (2014: £7.1 million expense 2013: £29.9 million income), amortisation of intangible assets previously unrecognised by acquired entities (2014: £6.1 million 2013: £3.2 million) and acquisition-related expenses (2014: £6.0 million 2013: £0.3 million).

3 Net cash is calculated as cash and cash equivalents less bank loans and revolving credit facilities and finance lease liabilities.

\* The Agencyport Europe is currently under review by the Competition and Markets Authority. All Agencyport Europe companies acquired by Xchanging have now been rebranded as Xchanging Software. Please see note 13.

Ken Lever, Chief Executive, commented: "I am very pleased to report that we have achieved our key objective for 2014 which was to make up the gap from exiting certain businesses and maintain profitability in what was a challenging year, demonstrating good underlying growth performance. We also met our objective of positioning Xchanging for renewed growth in 2015.

"Our transformation process begun in 2011 is now complete. Xchanging is now a business technology and services provider. Our Technology and Procurement businesses offer the potential

or higher growth and margin expansion, rebalancing our overall Group significantly in the future. Our foundation Business Processing Services business offers moderate growth, good margins and strong cash generation.

"Our focus for 2015 is entirely on driving the revenue and profit growth performance of the new Xchanging."

Enquiries

Xchanging plc Tel: +44 (0) 20 3604 6999

David Bauernfeind, Chief Financial Officer 

Alexandra Hockenhull, Director of Corporate Communications and Investor Relations 

Maitland Tel: +44 (0) 207 379 5151

Peter Ogden

Martin Barrow

Emma Burdett

www.xchanging.com

@XchangingGroup

Linkedin/company/xchanging  

Executive Insight interview with CEO, Ken Lever

To see a short video interview with Ken Lever reviewing the 2014 results and outlook for 2015 click on the link on the home page at www.xchanging.com 

A presentation for investors and analysts will be held at The Walbrook Building, 25 Walbrook, London, EC4N 8AQ at 10:00am on 26 February 2015. For those unable to attend, there will be a live webcast of the presentation available on the company website www.xchanging.com. For audio only and questions there is a dial in number: +44 (0) 1452 580570, conference ID number: 88210268.

Cautionary Statement: 

This announcement contains forward-looking statements that are based on current expectations or beliefs, as well as assumptions about future events. These forward-looking statements can be identified by the fact that they do not relate only to historical or current facts. Forward-looking statements often use words such as anticipate, target, expect, estimate, intend, plan, goal, believe, will, may, should, would, could, is confident, or other words of similar meaning. Undue reliance should not be placed on any such statements because they speak only as at the date of this document and, by their very nature, they are subject to known and unknown risks and uncertainties and can be affected by other factors that could cause actual results, and Xchanging's plans and objectives, to differ materially from those expressed or implied in the forward-looking statements.

There are a number of factors which could cause actual results to differ materially from those expressed or implied in forward-looking statements. Among the factors that could cause actual results to differ materially from those described in the forward-looking statements are; increased competition, the loss of or damage to one or more key customer relationships, changes to customer ordering patterns, delays in obtaining customer approval or price level changes, the failure of one or more key suppliers, the outcome of business or industry restructuring, the outcome of any litigation, changes in economic conditions, currency fluctuations, changes in interest and tax rates, changes in raw material or energy market prices, changes in laws, regulations or regulatory policies, developments in legal or public policy doctrines, technological developments, the failure to retain key management, or the key timing and success of future acquisition opportunities or major investment projects.

RESULTS FOR THE TWELVE MONTHS ENDED 31 DECEMBER 2014

EXTRACTS FROM THE CHAIRMAN'S STATEMENT

Strategic Development

In last year's annual report I said that the new Xchanging was clearly starting to emerge. The last four years have been spent working to transform the Company according to a new business model and to position it as a strong competitor in its chosen markets. 2014 was another year of intense activity as the new Xchanging took further shape as a business technology and services provider.

First and foremost, we took a number of organic and inorganic steps in pursuit of our strategy of putting technology at the core of our business. We further simplified the Company's structure. In Germany we drew to a close another legacy Enterprise Partnership, giving us direct control and full enjoyment of the benefits of future growth. We have made good progress addressing customer concentration and are starting to see the balance of smaller customers grow.

Critically, building on the work of 2013 our sales and marketing capability has gained momentum. We focused on putting our resources behind a prioritised range of offerings and were more selective about the sales opportunities that we pursued. The benefits are starting to show. Management changes have re-energised parts of our business, notably in Procurement and Application Services, and investment in a more efficient infrastructure is evidenced by the reduction in our operating cost.

We said in last year's annual report that we expected 2014 to be a challenging year. We rose to the challenge, achieving our objectives of matching 2013 profitability, making up the additional ground from business exited in 2013, and positioning the Company for growth in 2015. We had our disappointments: Xuber contracts have proved slower to crystallise than we expected; the Agencyport Europe* acquisition was referred for CMA Phase 2 review; and we did not win the New South Wales Workers' Compensation contract re-bid. Despite these, we achieved a commendable performance in a demanding year. We have concluded the year having met our financial objectives and having also further shaped the business in line with our strategic aims.

Board

Our current Board composition has been in place for two years. This period of stability has enabled Board members to develop a deeper understanding of the Company and its operations. In turn, this has brought continuity to the Board's strategic thinking at a critical and demanding period in Xchanging's development.

The benefits these factors are bringing to overall Board performance were reflected in the first external assessment which was conducted during the year. Other factors included the satisfactory resolution of legacy issues and stronger relationships between Board members.

We have welcomed a number of new people at Executive Board and senior management levels. The appointments are a further measure of the transformation of our businesses, and an integral part of our repositioning for renewed growth in refocused markets.

\* The Agencyport Europe is currently under review by the Competition and Markets Authority. All Agencyport Europe companies acquired by Xchanging have now been rebranded as Xchanging Software. Please see note 13

Shareholder Returns and Dividend

After a strong +23% performance in 2013, and a further 20% rise by autumn 2014, the share price ended the year flat. This was disappointing. We believe the Competition and Markets Authority ('CMA') decision towards the end of the year to refer the Agencyport Europe* acquisition for a Phase 2 review has had an impact.

We have felt and, in the first half of 2015, will continue to feel the negative effects of the demands the CMA review process places upon the Company's resources, and on our ability to win new business in the insurance software market. We cannot predict the outcome of the review, expected mid-2015, however we remain confident that our own assessment at the time we made the acquisition in July 2014, showing no competition issues, was sound.

Given the year's performance, sales success in 2014 and the growth prospects for the business in 2015, the Board feels it is appropriate to recommend raising the dividend by 0.25 pence to 2.75 pence.

Future

After four exacting years, we have completed the re-shaping of the Company and have positioned it for a resumption of revenue and profit growth in 2015. We have a much stronger senior management team and have started to demonstrate our ability to sell effectively. We are closer to our customers and are using the insights we gain to raise the value of the services we provide to them.

Much still remains to be done, and in 2015 our challenge will be to prove ourselves and demonstrate absolute growth in the business. Our focus will remain on developing and deploying our sales capabilities; on stimulating and harnessing innovation; and on putting technology at our core. Having resolved the majority of our legacy issues, simplified the business, continued to progress our strategy and invested in strong offerings with improved sales capability, 2015 is the year we prove ourselves.

CHIEF EXECUTIVE'S REPORT

Meeting the Challenge

We have completed our transformation into a business technology and services provider. In last year's annual report we said 2014 would be a challenging year as we transition from 'old' to 'new' Xchanging. We set ourselves two objectives for the year: to match 2013 profitability, despite the additional ground we needed to make up from businesses we chose to exit in the previous year; and to position the Company for a resumption of growth in 2015. I am pleased to report we have met the stretching challenge we set ourselves and achieved both our objectives.

Strategic Progress

In 2014 Xchanging turned the corner. We continued to simplify our structure as we exited legacy business and, as set out in last year's report, we have invested significantly in our strategy to put technology at the heart of all our businesses.

Business Processing Services

We exited another Enterprise Partnership when we gained 100% ownership of our German Investment Account Administration BPS business, Fondsdepot Bank. We further strengthened this business by acquiring the remaining accounts we did not already own. The contract to service these remaining accounts was due for renewal in 2015, so by securing this customer base we have removed a significant risk. We now have an opportunity to develop and grow this business.

Our remaining, core, partnerships lie in our Insurance business where we enjoy a good and mutually supportive relationship with our Lloyd's and International Underwriters Association partners. In our provision of services to the market we are active contributors to the Lloyd's Central Services Refresh Programme and integral to the

\* The Agencyport Europe is currently under review by the Competition and Markets Authority. All Agencyport Europe companies acquired by Xchanging have now been rebranded as Xchanging Software. Please see note 13

Lloyd's Market Modernisation Programme. Investment will commence in 2015 alongside investment by our partners as we collectively invest in technology to support market modernisation.

Technology

In our Technology segment, to accelerate the building of our Xuber insurance software business, we made two acquisitions: Total Objects and Agencyport Europe*. These two businesses offer operating synergies, bring new customer bases and open up or support existing additional segments of the insurance software market including in Binders, Risk exposure modelling and Health Insurance claims processing. The CMA decision to refer the Agencyport Europe acquisition for a Phase 2 review was disappointing. We await the outcome which should be known by the middle of the year.

Insurance is increasingly a global business and we are well positioned to offer insurance software products that meet the international and standardised needs of global players.

Although interest is strong, the signing of Xuber contracts is taking longer than we anticipated, affected by softness in the market and the inherent time it takes for large software infrastructure investments to be approved by potential customers. The uncertainty created by the CMA review process has also impacted this business. The significant Everest Re win in the US in late 2013 however evidences why we remain confident about the prospects for Xuber over time.

Our Technology business is also being reshaped by the strong emergence of our Application Services business, which came under dynamic new leadership in late 2011. This business, which was also reviewed at our November 2014 Investor Seminar (see www.xchanging.com), addresses a large and attractive global market where we have demonstrated our ability to grow existing accounts as well as to win new contracts.

Procurement

We have now also largely dealt with the legacy issues in our Procurement business which since July has been under new leadership. We have dramatically refocused the range of our traditional services and introduced a new offering, Tail-end Spend Management. This is an emerging market segment where we believe we can compete very effectively. All our procurement offerings are now based around the MM4 technology platform which is enhanced by our acquisition of Spikes Cavell in February 2015.

Following these changes mid-year we have seen some significant sales successes in the second half of 2014, building on a good year's performance by the core MM4 business. Our rejuvenated Procurement business was reviewed at our November 2014 Investor Seminar (see www.xchanging.com).

Infrastructure for Future Growth

To support our future growth, we continued to invest in our organisational infrastructure in 2014. This has in part involved rationalising a myriad of legacy systems, for example in HR, Finance and IT, as well as introducing new technology, in particular, to enhance our Management Information systems and our ability to collaborate efficiently.

We also made further investment in the development of our Sales & Marketing infrastructure, and our improving sales performance in 2014 provided some first rewards from this. After three years, we are well through both of these investment programmes, which are starting to show returns. We will continue to invest incrementally.

Our London head office move into new premises in early April has proved successful, offering a much improved working environment for employees and the technology infrastructure to suit our re-focused technology-enabled portfolio of offerings.

\* The Agencyport Europe is currently under review by the Competition and Markets Authority. All Agencyport Europe companies acquired by Xchanging have now been rebranded as Xchanging Software. Please see note 13

Investment Proposition

In 2011 we set out to reshape the Company. We recognised that revenue was likely to shrink as we improved the quality of our earnings. Navigating through the replacement of legacy business with new has presented timing challenges, in particular in 2014. We have had disappointments, for example in not winning the re-bid for the New South Wales Workers' Compensation contract in Australia, and the CMA Phase 2 referral for the Agencyport Europe* acquisition. Xuber contracts are taking longer to secure than we originally anticipated.

However we have now completed our transformation process. Our BPS business has substantially exited all the legacy business that did not fit our future strategy and will see the last of this run-off in 2015. Technology has also made good progress exiting its legacy portfolio and reshaping the business, although we must wait for the CMA outcome to know if we can look forward to the benefits of the Agencyport Europe* acquisition. Procurement is now remodelled and already demonstrating significant sales agility.

Our objective remains to develop higher value offerings that help customers achieve their desired business outcomes, rather than simply offering discrete processing services. Our three business segments together provide a range of offerings that, through technology, are increasingly bound together. This is evidenced by the growing level of cross-selling we are achieving.

The new Xchanging shape is clearer now. We have a core Business Processing Services business, built on significant depth of expertise in the complex areas of the Insurance and Financial Services sectors. The business offers lower risk, predictable revenue with good margins, moderate growth, and strong cash generation. Currently this represents the majority of our business.

Coupled with BPS, our Technology and Procurement businesses, offer the potential for higher growth and margin expansion. Both of these businesses have been going through significant transformation and carry higher risk profiles than our BPS business. They also have the potential to rebalance our overall business significantly in the future.

Outlook

In 2014 the 'new Xchanging' emerged.

An enormous amount of work has been accomplished over the last four years to reshape the business. We are clear about our strategy. We are no longer pursuing major business process outsourcing contracts. This market is commoditising in the absence of technology and organisations are increasingly looking to automation or to returning activity in-house. The potential for the growth we seek is no longer available in that arena.

To address the future market we have re-defined and focused our range of higher value offerings, based around technology, both in its own right and as an enabler and differentiator, and driven by innovation and insight into our markets.

In the first half of 2015, our Technology business will be hampered by the CMA review of our Agencyport Europe* acquisition and the longer than expected Xuber sales cycle. However, Xchanging has undoubtedly turned a corner. We have repositioned the Company and in 2015 we will devote our resources to proving our technology strategy and demonstrating renewed revenue and profit growth.

\* The Agencyport Europe is currently under review by the Competition and Markets Authority. All Agencyport Europe companies acquired by Xchanging have now been rebranded as Xchanging Software. Please see note 13

BUSINESS REVIEW

BUSINESS PROCESSING SERVICES

Financial Highlights

Business Processing Services ('BPS') net revenue decreased 23.7% to £282.4 million (2013: £370.0 million), including a negative foreign exchange impact of £7.0 million related to movements in the Euro. Adjusted operating profit increased 7.4% to £64.1 million (2013: £59.7 million), representing an adjusted operating profit margin of 22.7% (2013: 16.1%), including a negative foreign exchange impact of £1.2 million. This increase in profit is despite the sale of the XTB business in 2013 that contributed £10.5 million adjusted operating profit in 2013. The business delivered an improved profit performance with the increase in processing volumes offsetting the reduction in broking and securities processing revenues. The business has invested £5.8 million in a combination of internal change programs and strategic product development that will simultaneously drive cost reduction and further enhance the product offering.

During 2014 within the Insurance business, the Claims Adjusted Followers ('CAF') contract in London ended and we received notice that the New South Wales Workers' Compensation contract would not be renewed in 2015. The exit of our New South Wales Workers' Compensation contract resulted in £7.1 million of exceptional expenses. £4.1 million of this cost resulted from writing off the software developed for the contract and £3.0 million of restructuring related charges to be incurred on contract exit.

On a like-for-like basis the Financial Services business has improved revenue and profit performance during 2014, as the investment in operational efficiencies continues. During the year the Group gained 100% ownership of the German Investment Account Administration BPS business, Fondsdepot Bank, as well as gaining 100% of the Italian business. During the year the German business renewed the Allianz Global Investor ('AGI') processing contract, which will result in a transfer of approximately 250,000 AGI accounts to Fondsdepot Bank.

TECHNOLOGY

Financial Highlights

Net revenue for the Technology sector has decreased 9.0% to £93.1 million (2013: £102.3 million), including a negative foreign exchange impact of £1.6 million. Adjusted operating profit decreased 26.1% to £6.8 million (2013: £9.2 million), representing an adjusted operating profit margin of 7.3% (2013: 9.0%). The material reduction in scope of the London Metal Exchange contract from May 2014 accounted for this decrease.

During the year the Technology sector continued to invest in the insurance software business. £75.6 million was spent on the acquisitions of Agencyport Europe* (4 July 2014) and Total Objects (18 December 2014). A further £11.7 million was spent developing the modules of the Xuber software suite, the global insurance application platform that provides support for the full insurance processing cycle. In March we also invested in an 8.3% stake in the enterprise middleware provider MachineShop Inc. for £0.6 million.

The Application Services business continued to grow in the year and now constitutes a significant part of the Technology sector. Since its acquisition Agencyport Europe* has performed well, delivering net revenue of £10.5 million and adjusted operating profit of £2.8 million in the 6 months to 31 December 2014. The performance of Total Objects since acquisition on 18 December 2014 has not been included in the Group results due to materiality.

PROCUREMENT

Financial Highlights

Procurement net revenue decreased 42.1% to £31.3 million (2013: £54.1 million), including a negative foreign exchange impact of £0.5 million. Adjusted operating profit decreased 241.2% to a loss of £2.5 million (2013: profit of £1.8 million), representing an adjusted operating loss margin of (8.0%) (2013: adjusted operating profit margin of 3.3%), including a positive foreign exchange impact of £0.2 million.

\* The Agencyport Europe is currently under review by the Competition and Markets Authority. All Agencyport Europe companies acquired by Xchanging have now been rebranded as Xchanging Software. Please see note 13

The reduction was primarily due to the decision to exit from the Human Resources Services business ('XHRS') that was returned to BAE Systems at the end of 2013. The reduction in net revenue and adjusted operating profit was partially offset by the additional revenue from the acquired business MM4 in September 2013. In the second half of the year the Procurement sector had new leadership (one of the founders of MM4), and as such the earn-out arrangements were altered to reflect the broader management responsibilities in the Procurement business. The total potential earn-out remained unchanged, but the performance criteria changed to be more relevant to the boarder roles. During the year the sector was awarded a three-year contract from Godiva and MM4 entered Australia for the first time.

During the year £1.5 million was invested in the MM4 platform. There have also been a series of steps taken throughout 2014 to restructure the operations and reduce the cost base within the sector in Europe, Australia and the US.

The existing L'Oréal contract, due to expire at the end of 2015, is being terminated for convenience five months early, in August 2015, in accordance with the terms of the contract. However, Xchanging has received a Letter of Intent from L'Oréal for a new contract proposal for a minimum of 18 months' duration with one extra year extension under discussion.

FINANCIAL REVIEW

Group Financial Performance Summary

In 2014, the Group's performance was impacted by the disposal of Xchanging Transaction Bank ('XTB') in August 2013 that was not treated as a discontinued operation, combined with the significant investment programme during 2014. Please refer to the 'Like-for-Like analysis' in the Sector performance section 1, for the impact of the disposal of XTB on net revenue and adjusted operating profit.

Notes:

1Net revenue is total revenue less supplier costs on procurement contracts (where the Group acts as principal) that are incurred by the Group and recharged to the customer.

2Adjusted operating profit excludes exceptional items (2014: £7.1 million expense 2013: £29.9 million income), amortisation of intangible assets previously unrecognised by acquired entities (2014: £6.1 million 2013: £3.2 million) and acquisition-related expenses (2014: £6.0 million 2013: £0.3 million).

3Operating cash flow is calculated as cash generated from operations less net capital expenditure (including pre-contract costs) (2014: £43.4 million 2013: £26.6 million) and dividends to non-controlling interests (2014: £11.2 million 2013: £8.7million).

4Adjusted cash conversion is calculated as operating cash flow, after adding back the cash impact of exceptional items (2014: £0.7 million outflow 2013: £6.6 million inflow), acquisition-related expenses (2014 £1.7 million 2013: £0.4 million) and the movement in customer cash accounts held by Fondsdepot Bank (2014: £0.7 million outflow 2013 £14.5 million inflow) divided by adjusted operating profit.

5Net cash is calculated as cash and cash equivalents less bank loans and revolving credit facilities and finance lease liabilities.

6Equity free cash flow is calculated as operating cash flow less cash tax (2014: £12.4 million 2013: £17.0 million) and net interest paid including dividends received (2014: £1.7 million 2013: £2.5 million).

7 Return on invested capital is adjusted operating profit (2014: £55.8 million 2013: £55.5 million) less a tax charge at the Group's effective tax rate (2014:14.9% 2013: 26.9%), divided by invested capital. Invested capital (2014: £226.3 million 2013: £122.0 million) is calculated as the Group's net assets (2014: £240.0 million 2013: £242.1 million), less net cash (2014: £13.7 million 2013: £120.1 million).

8 Economic profit is adjusted operating profit (2014: £55.8 million 2013: £55.5 million) less a tax charge at the Group's effective tax rate (2014:14.9% 2013: 26.9%), less a charge for invested capital. The charge for invested capital is calculated as the Group's invested capital (as defined above, (2014: £226.3 million 2013: £122.0 million)) multiplied by the Group's weighted average cost of capital, being 10.0% (2013: 10.0%).

1. Income statement

Net Revenue

Net revenue decreased by £119.6 million. The growth in revenue from the full year impact of MM4 (£3.5 million) and the acquisition of Agencyport Europe* during the year were offset by the loss of revenue following the disposal of XTB (£71.8 million), the exiting of the Xchanging HR Services business (£25.8 million) and the loss of the London Metal Exchange ('LME') contract (a net reduction of £22.0 million in 2014). Further details on the net revenue performance of each sector can be found in the business review.

Adjusted operating profit

Adjusted operating profit increased to £55.8 million, representing a 21.5% increase on a like-for-like basis. This resulted in an adjusted operating profit margin of 13.7%. The increase was driven by further operating efficiencies and the impact of the restructuring activities taken during the year, offset by the reduction in revenue. Further details on the adjusted operating profit performance of each sector can be found in the business review.

\* The Agencyport Europe is currently under review by the Competition and Markets Authority. All Agencyport Europe companies acquired by Xchanging have now been rebranded as Xchanging Software. Please see note 13

Sector performance

Margins

Adjusted operating profit margin improved by 320 bps to 13.7% in 2014. Further details on the adjusted operating profit performance of each sector can be found in the business review.

Corporate

Corporate costs for the year totalled £12.6 million (2013: £15.2 million). Corporate run costs in 2014 have benefited from the restructuring activities undertaken in previous years, which led to a reduction in headcount and simpler, more streamlined processes. However, there was also an increase in costs due to the investment in change projects during the year as part of the Group transformation, and the investment in the creation of shared services.

Taxation

The Group's effective tax rate on adjusted profit before tax was 14.9% (2013: 26.9%). The decrease in the rate in 2014 is largely due to the recognition of the tax benefit of historic losses in Italy and the lower UK corporate tax rate. The cash tax rate on adjusted profit before tax was 24.8% (2013: 28.2%). The effective rate for 2014 is lower than the 2014 cash tax rate largely due to the recognition of the tax benefit for the Italian losses.

2. Earnings per share

Adjusted basic earnings per share were 11.86 pence, an increase of 15.1% on 2013, primarily due to the very low tax rate incurred in 2014.

3. Exceptional Items

Statutory operating profit was £36.6 million (2013: £81.9 million). This includes the following exceptional items that have been recognised in the year resulting in a net operating loss of £7.1 million (2013: profit of £29.9 million) and an operating cash outflow of £3.1 million (2013: cash inflow of £21.5 million).

The most significant items within this are:

· Accelerated exit of Leadenhall Street premises: £9.7 million has been recognised as being the net of the incentive received from the landlord for the early surrender of the leasehold, the release of an historic lease incentive and the associated costs of moving that have been incurred during the year.

· Restructuring costs of £10.3 million, as part of a Group-wide restructuring plan in order to drive operating efficiencies within the business.

· £7.1 million of costs relating to the restructuring of the Australian business following the loss of the Workers' Compensation contract with the State of New South Wales.

4. Operating cash flow

The movement in pensions was impacted by a transfer by Fondsdepot Bank of £3.2 million into a trust to fully fund its future pension liabilities. This was a one-off payment to fund previously unfunded liabilities. Working capital was impacted by the acquisition of Agencyport Europe* as it collects a significant amount of its cash at the start of the year.

On 30 July 2014, consistent with our plan to transform the Procurement business, we agreed to transfer back to BAE Systems the UK procurement services in 2015. As a result there will be a cash outflow of approximately £15.0 million relating to the working capital unwind during the first half of 2015.

5. Capital Expenditure

The Group increased capital expenditure to £46.7 million in 2014 (2013: £26.6 million), of which £43.4 million was paid out as cash during the year. Our organic investment programme can be split into three areas:

· Expenditure on product development was £21.4 million (2013: £11.9 million). We accelerated our development plans for Xuber to enhance existing modules as well as creating a US Admitted module. In Germany we are investing significantly in product development, automation and process efficiency in our investment accounts administration business to ensure that we remain competitive in this market. We have invested in new products for the London insurance market and we are also further developing our Procurement technology, building on the MM4 software framework.

· 2014 has been a pivotal year for our internal change programme following an investment of £13.8 million (2013: £3.0 million). Shared service centres have been established in India and Basildon for shared functions such as sales, finance, HR and IT. We have invested in technology to drive performance and cost efficiencies within these service centres such as Salesforce, Workday for HR and Office 365. We have started a finance transformation programme, which will provide a single SAP finance system, supporting our finance shared service and giving our managers the tools and information to better manage resources and costs. We have completed the move to our new Walbrook London office, spending £4.6 million on fit out costs. The bulk of this work is largely done and will provide the backbone for leveraging operational and performance efficiencies as the business grows. We expect the investment required in 2015 to bring the outstanding projects to conclusion to be around £5.0 million.

\* The Agencyport Europe is currently under review by the Competition and Markets Authority. All Agencyport Europe companies acquired by Xchanging have now been rebranded as Xchanging Software. Please see note 13

· Expenditure on refresh was £5.6 million (2013: £9.4 million). During 2014 we spent £3.9 million upgrading the technology platforms that underpin the London Insurance Market.

· £5.9 million (2013: £2.3 million) was spent on miscellaneous capital expenditure, including pre-contract costs (£2.6 million (2013: £0.9 million)).

6. Movements in Net Cash

Net cash has decreased by £106.4, primarily driven by the increase in acquisitions due to the focus on investments in 2014.

7. Acquisitions and investments

In 2014 we invested £85.6 million on acquisitions.

· On 24 January 2014 SIA S.p.A. exercised their put option on their remaining 1.3% shareholding in Xchanging Italy S.p.A. for £4.0 million (€4.8 million). The Group now owns 100% of the share capital of Xchanging Italy S.p.A. A further £2.6 million was paid as deferred consideration for the AR Enterprise S.r.l. business that we acquired in October 2012.

· On 20 March 2014 the Group acquired an 8.3% stake in MachineShop Inc., a US based enterprise middleware provider for £0.6 million (US$ 1.0 million).

· On 4 July 2014 the Group acquired 100% of the share capital of Agencyport Europe*, a provider of insurance software to the property & casualty and health insurance markets in Europe and the US, for consideration of £64.1 million. The acquisition was subsequently reviewed by the Competition Market Authority ('CMA') and in December the CMA announced that it would be extended to a Phase 2 Review. We continue to work constructively with the CMA and the outcome of the review will be known at the latest on 24 May 2015.

· On 30 July 2014 Allianz Global Investors GmbH exercised their put option on their remaining shareholding in Fondsdepot Bank GmbH for £10.8 million (€13.6 million). The Group now owns 100% of the share capital of Fondsdepot Bank GmbH.

· On 18 December 2014 the Group acquired 100% of the share capital of Total Objects Ltd, a provider of (re)insurance software to the London and global insurance markets. Xchanging paid initial consideration of £11.5 million in cash with further payments of up to £9.5 million payable in 2015, 2016 and 2017, of which £1.5 million is deferred and £8.0 million is subject to certain performance targets being achieved. IFRS 3 Business Combinations requires the contingent payments to be recognised as post-acquisition related expenses if they are conditional on the employee staying with the business, and therefore are not included in the purchase price. See note 13 for more information.

· On 10 October 2014 the Group disposed of an office building in Chatham for net proceeds of £4.7 million.

\* The Agencyport Europe is currently under review by the Competition and Markets Authority. All Agencyport Europe companies acquired by Xchanging have now been rebranded as Xchanging Software. Please see note 13

This table shows the total cash outflow during 2014 and potential future payments for acquisitions. Note that in the cash flow these amounts are presented net of any cash acquired from the business on acquisition.

8. Net cash

1 The aggregate cash balance in Enterprise Partnerships represents working capital and accumulated but unpaid distributions to the shareholders. Xchanging receives cash from Enterprise Partnerships through contractual licence fees and dividends. To provide greater transparency on the amount of cash that is attributable to the shareholders of Xchanging we show Xchanging's share of net cash. It takes a prudent view as it makes no attempt to allocate Xchanging's share of working capital that is held in the Enterprise Partnerships.

In July 2014 Xchanging acquired the remaining shares in Fondsdepot Bank from Allianz Global Investors through the exercise of a put option. Fondsdepot Bank's cash is now included in Xchanging wholly owned entities although the cash held in customer deposit accounts, which totalled £34.5 million at 31 December 2014, continues to be excluded from Xchanging's share of net cash.

\* The Agencyport Europe is currently under review by the Competition and Markets Authority. All Agencyport Europe companies acquired by Xchanging have now been rebranded as Xchanging Software. Please see note 13

9. Borrowing facilities

In February 2014 the Group signed a new £125.0 million four and a half year revolving credit facility with four of its existing lenders that is committed until June 2018. Following the announcement of the acquisition of Agencyport Europe* in July, the Group agreed with its lenders to increase the size of its revolving facility by a further £40.0 million to £165.0 million.

At 31 December 2014, £115.0 million (2013: £nil) was drawn as cash and a further £0.8 million (2013: £16.7 million) was utilised through guarantees and the Group had £49.2 million (2013: £58.4 million) of headroom under this facility.

In addition to the committed revolving credit facility the Group has uncommitted working capital facilities of INR330.0 million (£3.3 million) in India and £10.0 million in the UK. At 31 December 2014 no funds were drawn under these facilities.

10. Borrowing covenants

The Group is subject to covenants, representations and warranties commonly associated with corporate bank debt. As at 31 December 2014, the Group was compliant with both of its financial covenants:

11. Dividends

The Board is recommending a final dividend of 2.75 pence per share for 2014, compared to 2.5 pence per share in 2013. Dividend cover on this basis would be 4.3 times.

David Bauernfeind

Chief Financial Officer

26 February 2015

Consolidated income statement for the year ended 31 December 2014

\* The Agencyport Europe is currently under review by the Competition and Markets Authority. All Agencyport Europe companies acquired by Xchanging have now been rebranded as Xchanging Software. Please see note 13

1 Adjustments in 2014 and 2013 are presented in note 4.

2 Net revenue excludes principal spend on procurement contracts that arise from suppliers costs that are passed on to the customer.

Consolidated statement of comprehensive income for the year ended 31 December 2014

Consolidated cash flow statement for the year ended 31 December 2014

Consolidated balance sheet as at 31 December 2014

Consolidated statement of changes in equity for the year ended 31 December 2014

Notes to the consolidated financial statements for the year ended 31 December 2014

The preliminary announcement for the full year ended 31 December 2014 has been prepared in accordance with the accounting policies as disclosed in Xchanging plc's 2013 Annual Report, as updated to take effect of any new accounting standards applicable for 2014 as set out in Xchanging plc's 2014 Half Year Report.

The annual financial information presented in this preliminary announcement for the year ended 31 December 2014 is based on, and is consistent with, that in the Group's audited financial statements for the year ended 31 December 2014, and those financial statements will be delivered to the Registrar of Companies following the Company's Annual General Meeting. The independent auditors' report on those financial statements is unqualified and does not contain any statement under section 498 (2) or 498 (3) of the Companies Act 2006. The Group financial statements and this preliminary announcement were approved by the Board of Directors on 26 February 2015. 

Information in this preliminary announcement does not constitute statutory accounts of the Group within the meaning of section 434 of the Companies Act 2006. The full financial statements for the Group for the year ended 31 December 2013 have been delivered to the Registrar of Companies. The independent auditor's report on those financial statements was unqualified and did not contain a statement under section 498 (2) or 498 (3) of the Companies Act 2006.

1. Segmental analysis

Management has determined the operating segments based on the internal reporting and information presented to and reviewed by the Board (the chief operating decision-maker for the year) on which strategic decisions are based, resources are allocated and performance is assessed.

The Board considers the business as follows:

· Business Processing Services that has two distinct components, Insurance Services and Financial Services. Insurance Services provides technology infrastructure and managed services for processing policies and premiums as well as handling claims, to the insurance market. It includes the workers' compensation claims processing services business in Australia. Financial Services provides securities processing, investment account administration and fund administration in Germany, Italy and India for financial institutions.

· Technology provides technology infrastructure management services, insurance software and application services to a range of customers.

· Procurement provides procurement and human resources services to a range of customers.

Corporate provides the infrastructure, resources and investment to sustain and grow the Group, including performance management, and business management functions. Corporate is not considered an operating segment but its numbers are presented in order to reconcile reportable segment numbers back to the consolidated financial statements.

Management uses net revenue and adjusted operating profit as measures of segment performance. Interest income and expenses are not allocated to sectors, as this type of activity is driven by the Group treasury function, which manages the cash position of the whole Group. Corporate costs reallocated to operating segments include depreciation and amortisation of centrally recognised other intangible assets, lease payments and other costs incurred centrally on behalf of other operating segments.

The Group's reportable segments account for inter segment sales, and transfers, as if the sales or transfers were to third parties, i.e. at current market prices.

The segment information for the year ended 31 December 2014 is as follows:

The segment information for the year ended 31 December 2013 is as follows:

The depreciation and amortisation included in adjusted operating profit is as follows:

 Reconciliation of Non-GAAP adjusted operating profit to IFRS statutory operating profit:

1Acquisition-related expenses include:

· £2.7 million expensed as part of the total amount payable to the sellers of MM4 in respect of the acquisition earn-out mechanism recognised in gross profit

· £2.4 million of professional fees for the acquisition of Agencyport Europe* and Total Objects, £2.2m is recognised in administrative expenses and £0.2m is recognised in gross profit

· £0.5 million of post-acquisition performance-related incentive costs relating to the acquisition of Agencyport Europe* recognised in gross profit

· £0.4 million of post-acquisition integration costs relating to the acquisition of Agencyport Europe*recognised in gross profit

The tables below present revenue from continuing operations by the geographical location of customers and by category:

Material customers

One customer accounted for greater than ten per cent of the Group's gross revenues. Revenues of £168.3 million, attributable to the Procurement segment, have been derived from this customer for the year ended 31 December 2014 (2013: £181.2 million).

No customers accounted for greater than ten per cent of the Group's net revenues.

Information about product/service

The information to report revenue by individual product/service is not available, as the cost to develop it would be excessive.\* The Agencyport Europe is currently under review by the Competition and Markets Authority. All Agencyport Europe companies acquired by Xchanging have now been rebranded as Xchanging Software. Please see note 13

2. Exceptional items

Exceptional items are those items that in the Directors' view are required to be separately disclosed by virtue of their size or incidence and in order to improve a reader's understanding of the financial statements. These may include items relating to the restructuring of a significant part of the Group, impairment charges, items relating to acquisitions and disposals, and other one-off events or transactions. The tax impact of the total exceptional cost is a credit of £2.6 million (2013: £nil).

For 2014, exceptional items are:

· £9.7 million lease surrender receipt, net of related items. This includes the final receipt for the early surrender of the lease on the Leadenhall Street premises, net of the associated costs of moving. This is considered exceptional as it is a significant amount and is outside the normal course of business.

· Restructuring costs of £10.3 million incurred across the Group. These are considered exceptional as they were incurred as part of a significant Group-wide restructuring plan taking place over 2013 and 2014.

· Expense of £7.1 million for the exit of the Workers' Compensation contract with the State of New South Wales that was announced in November 2014. This includes £4.1 million for the impairment of the Xuber Insurance Software module developed specifically for the contract, and other restructuring related costs of £3.0 million. This is considered exceptional as it is a significant amount.

· The Cambridge Integrated Services Group Inc. ('CISGI') insolvency trustee distributions of £0.6 million to the Group have been recognised as exceptional other income to be consistent with the initial impairment of the CISGI group being presented as exceptional.

3. Finance costs and income

4. Earnings per share

Basic earnings per share is calculated by dividing the profit attributable to owners of the parent by the weighted average number of ordinary shares of the Company.

For diluted earnings per share, the weighted average number of ordinary shares in existence is adjusted to include all potential dilutive ordinary shares. The Group has three types of potential dilutive ordinary shares: share options, share awards under the Performance Share Plan and other share awards.

The following reflects the share data used in the basic and diluted earnings per share calculations:

Adjusted basic and diluted earnings per share

Adjusted earnings per share values are disclosed to provide a better understanding of the underlying trading performance of the Group. The adjusted value is in line with the KPIs as used to measure the Group's performance in 2014.

The adjusted earnings per share figures are calculated based on the Company's share of adjusted profit for the year, divided by the basic and diluted weighted average number of shares as stated above.

The owners of the parent's share of adjusted profit for the year is calculated as follows:

5. Dividends payable

Dividend distributions to the Company's shareholders are recognised as a liability in the Group's financial statements in the period in which the dividends are approved by the Company's shareholders.

A dividend of 2.75 pence per share in respect of the year ended 31 December 2014, amounting to a total dividend of £6,717,781 is to be proposed at the Annual General Meeting on 13 May 2015. If approved, this dividend will be paid on 22 May 2015 to shareholders on the register as at the close of business on 24 April 2015. These financial statements do not reflect this dividend payable.

A dividend of 2.5 pence per share in respect of the year ended 31 December 2013, amounting to a total dividend of £6,094,190, was paid on 23 May 2014 and is recorded in these financial statements.

6. Goodwill

Goodwill arises from the purchase of subsidiary undertakings and represents the excess of the fair value of the consideration paid over the fair value of the Group's interest in net identifiable assets of the acquiree and the fair value of the non-controlling interest in the acquiree. After initial recognition, goodwill is stated at cost less any accumulated impairment losses.

Goodwill is allocated to the Group's cash-generating units ('CGUs') being the lowest level at which assets generate separately identifiable cash inflows independent of the cash inflows of other assets or groups of assets.

Goodwill impairment reviews are undertaken annually or, more frequently if events or changes in circumstances indicate a potential impairment. The carrying value of goodwill is compared to the recoverable amount, which is the higher of value-in-use and the fair value less costs to sell. Any impairment would be recognised immediately as an expense and would not be subsequently reversed.

An analysis of goodwill and adjusted operating profit by operating segment is as follows:

Impairment testing of goodwill

The key assumptions applied in the impairment testing of goodwill as at 31 December 2014 are set out in the table below. All margins are calculated using net revenue and adjusted operating profit.

The recoverable amounts of all CGUs have been determined based on value-in-use calculations using pre-tax cash flow projections based on budgets approved by the management of the CGU and the Board. The budgets cover a two year period, as well as cash flows for years three and four using management's expectations of sales growth, operating costs, adjusted operating profit and margin based on past experience, and expectations regarding future performance and profitability for each individual CGU.

A terminal value has been calculated using a nil growth rate assumption for all CGUs.

Sensitivity analysis

The carrying value of goodwill is most sensitive to changes in average growth rates as described below:

Insurance Services

This sector is consistently profitable and cash generative. It is considered unlikely that there could be reasonable changes to key assumptions sufficient to give rise to an impairment at an individual CGU level.

Financial Services

The acquisition of AGI's holding in Fondsdepot Bank during 2014 combined with the restructuring of the investment account administration contract has reduced the risk within Fondsdepot Bank.

The performance of Xchanging Italy has improved in 2014, following the successful merger of Kedrios and AR Enterprise S.r.l in 2013, and the realisation of synergies within the combined business. A significant loss of customers could give rise to an impairment.

TechnologyThe acquisition of Agencyport Europe* and Total Objects Ltd during the year has increased the customer base and product offering of the insurance software business, and reduced the dependency on securing large new Xuber contracts. An adverse outcome from the CMA Phase 2 review in 2015 or a failure to integrate the two acquisitions or to win new business, including conversion of the Xuber pipeline, could result in an impairment. The weighted average growth rate of 19% would have to fall to 9% in order for the recoverable amount of the Technology CGU to equal its carrying value.\* The Agencyport Europe is currently under review by the Competition and Markets Authority. All Agencyport Europe companies acquired by Xchanging have now been rebranded as Xchanging Software. Please see note 13

ProcurementThe underlying business performance has improved in 2014, after adjusting for the loss of the HR business in 2013. The business plan for the Procurement sector reflects targeted cost reductions, growth and synergies associated with the MM4 acquisition and a growth in revenue reflecting the improved sales pipeline and win rate experienced in the business in 2014. Failure to deliver the improved efficiencies and sufficient growth in the medium term could result in an impairment of goodwill. The weighted average growth rate of 38% would have to fall to 19% in order for the recoverable amount of the Procurement CGU to equal its carrying value.

7. Borrowings

The carrying amounts of the Group's borrowings are denominated in the following currencies:

Bank loans and revolving credit facilities

The Group maintains committed credit facilities to ensure that it has sufficient liquidity to maintain its on-going operations.

In February 2014 the Group signed a new £125.0 million four and a half year revolving credit facility with four of its existing lenders that is committed until June 2018. Following the announcement of the acquisition of Agencyport Europe* in July, the Group agreed with its lenders to increase the size of its revolving facility by a further £40.0 million to £165.0 million. The margin on this facility is between 200 and 300 basis points depending on the prevailing leverage ratio. Security is provided in the form of a subsidiary cross guarantee

\* The Agencyport Europe is currently under review by the Competition and Markets Authority. All Agencyport Europe companies acquired by Xchanging have now been rebranded as Xchanging Software. Please see note 13\* The Agencyport Europe is currently under review by the Competition and Markets Authority. All Agencyport Europe companies acquired by Xchanging have now been rebranded as Xchanging Software. Please see note 13