Final Results

1 March 2012

Xchanging plc

Full Year Results for the twelve months ended 31 December 2011

2011: A Year of Transition

Financial Summary (continuing operations)

Financial Highlights

·; Adjusted operating profit in line with average market expectations

·; Higher revenues in Insurance Services offset by lower revenues in Technology and Procurement and Other BPO, which are in transition

·; Strong cash performance, and adjusted cash conversion

·; Expected annualised cost savings achieved

Strategic Highlights

·; Four Part Action Plan to stabilise business implemented and business re-shaping well underway

·; Sold loss-making US workers' compensation business

·; Simplified the business:

- Restructured the Cambridge business

- Obtained 100% ownership of Xchanging Broking Services Limited

·; New and renewed contracts signed with:

- BAE Systems Inc. in North America

- L'Oréal for five European countries

- The London Metal Exchange

- State of Victoria, Australia

- London South Bank University, University of Exeter, and the University of Surrey

·; Renewed bank facilities for a period of four years

Ken Lever, Chief Executive, commented:

"We achieved a number of significant milestones for the business in 2011 as we implemented the Four Part Action Plan. Xchanging is on a sound financial footing and has made significant progress in the reshaping of its business portfolio. I am pleased with the progress we have made.

Now that the business is stabilised we are building our ability to compete effectively in our key markets so that we are in a stronger position to win new business. 2012 will be the year in which we demonstrate our ability to compete to win, and as we build momentum, any improvement in year-on-year profitability will come from the continuing benefit of cost savings made in 2011. Our success in 2012 will be measured by the extent to which we turn new sales opportunities into contracts to grow profitable revenue in 2013 and beyond."

Notes:

1 Adjusted revenue excludes exceptional revenue items. In 2011 and 2010, these relate to contract settlements (F2011: £1.2 million, 2010: £6.9 million).

2 Adjusted operating profit excludes exceptional items (2011: £31.8 million, 2010: £53.4 million), amortisation of intangible assets previously unrecognised by acquired entities (2011: £4.8 million, 2010: £4.7 million) and acquisition-related expenses (2011: £nil, 2010: £1.1 million).

3 Operating cash flow is calculated as cash generated from operations less net capital expenditure (including pre-contract costs) and dividends to non-controlling interests.

4 Adjusted cash conversion is calculated as cash generated from operations, after adding back the cash impact of exceptional items and acquisition-related expenses, less net capital expenditure and dividends to non-controlling interests divided by adjusted operating profit (as defined above).

5 Net cash is calculated as cash and cash equivalents less bank loans and overdrafts and finance lease liabilities.

6 Equity free cash flow is calculated as operating cash flow (as defined above) less cash tax and net interest paid.

7 Return on invested capital is adjusted operating profit less a tax charge at the Group's effective rate, divided by invested capital. Invested capital is calculated as the Group's net assets, less net cash.

Enquiries

Executive insight interview with CEO, Ken Lever

To see a short video interview with Ken Lever reviewing the 2011 results and outlook for 2012; click on the link on the home page at www.xchanging.com

A presentation for investors and analysts will be held at the City Presentation Centre, 4 Chiswell Street, London, EC1Y 4UP at 08:45 on 1 March 2012. For those unable to attend, the audio and the slides from the presentation will be streamed live over the internet, please use the following link to register:

http://webeventservices.reg.meeting-stream.com/58984_Xchanging/

For those not able to join in this way please dial +44 (0) 1452 555 566 using the ID 52281720.

About Xchanging

Xchanging is a business process and technology service provider and integrator specialising in Financial Services, Insurance Services, Technology and Procurement and Other BPO, with pervasive processing skills and capabilities applicable to other vertical industry and market sectors.

www.xchanging.com 

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 2011

CHAIRMAN'S STATEMENT

Xchanging has emerged from a year of considerable activity as it has addressed a number of operating and strategic issues. It was a year of transition as we started reshaping the business to meet the needs of changing markets.

During the year we generated adjusted revenues of £650.0 million and adjusted operating profit of £43.2 million. Net cash at the end of the year increased encouragingly to £45.2 million.

Operating progress

In early 2011, a Four Part Action Plan was developed to address a number of strategic and operating issues and to stabilise the business.

By the time of the half year results, significant progress with the plan had been made. Notably, the US workers' compensation business had been sold. In addition, the Group's bank facilities had been re-negotiated. These two actions provided reassurance to customers, investors and employees alike and were significant steps enabling the business to move forward.

By the end of the year, significant cost reductions had been made, a new sales and marketing framework had been established and a cultural change programme had been launched.

It was a busy year. Some initial benefits have started to show with cost savings and improved working capital management feeding into better than expected operating cash flow.

Strategic progress

In its first decade, pursuing the founding strategy based on Enterprise Partnerships, Xchanging became firmly established, developed depth of expertise and a strong customer base. However, growth stalled. In 2011, the Board re-examined the appropriateness of this strategy in the context of an evolving and maturing outsourcing market. This is described in more detail in the Chief Executive Officer's Report. The Board also faced up to the need for transition from the entrepreneurial phase of Xchanging's development to a strategy for sustainable growth.

As a result, towards the end of the year, Xchanging embarked on a highly focused drive to re-generate profitable sales growth, and this is also described in some detail in the Chief Executive Officer's Report. The process will continue in 2012 and the impact should be increasingly visible as we move through the year and into 2013.

Board

There have been a number of changes to the Executive and Non-executive members of the Board. In June, Ken Lever was appointed Chief Executive Officer, after a period as Acting Chief Executive Officer following David Andrews' departure in February 2011. At the same time, David Bauernfeind was appointed to the Board as Chief Financial Officer.

In August, Stephen Brenninkmeijer and Johannes Maret retired from their Non-executive Directorships. In December, Bill Thomas and I joined the Board as Non-executive Directors. On 1 January 2012, I assumed the role of Chairman, following the retirement of Nigel Rich from that role on 31 December 2011.

These changes represent, in part, retirement after long service. They also reflect the view that, to address the Xchanging's challenges and to drive the regeneration of profitable growth in the next phase of development, the Board will benefit from a higher degree of industry-specific expertise. I would like to thank all the departing Board members, and my predecessor Nigel Rich in particular, for their dedicated service to Xchanging.

People

In a very active year there have been many changes at all levels, including amongst our leadership. This has been unsettling for customers and employees alike. Our business is dependent on our people, and so it was greatly reassuring to learn from the year's employee engagement focus groups of the high degree of dedication felt by our people. I would like to thank all our employees for their loyal determination through this difficult period.

Dividend and share price

Xchanging's share price ended the year at significantly less than its value at the start of the year. Together with the suspension of the dividend, this has not been a rewarding year for shareholders. However, the Board believes it is taking the right measures to address Xchanging's challenges, and that during this regeneration phase it remains prudent to conserve cash. Resumption of the payment of a dividend will be reviewed by the Board at the half year 2012.

Future

Xchanging is now moving out of a period of difficult change and into a time of renewal. Having stabilised the operations in 2011, attention is now focused on building our position with existing customers, further simplification of the business, on generating profitable new sales growth and increasing value for our shareholders.

Xchanging has a strong customer base and a track record of successful business processing, much of it in highly complex and technology-critical areas. However, we are not exploiting the full potential of either. We are clear about our mission in 2012. We will get closer to our customers, listen and respond better, and grow our existing relationships. We will develop our sales and marketing culture so that we can take the significant capabilities and offerings that exist within the Group to the market much more actively. We will do this by focussing on a more targeted set of primary offerings where we are demonstrably competitive.

We understand our markets better, as well as the opportunities they offer to Xchanging with our particular strengths. The reshaping of the Group is well under way, driven by a rigorous assessment of how best to generate value in each of the businesses.

2012 will be the year in which Xchanging focuses on proving itself. I joined the Group because I believe it has the talent, track record and capabilities - much of it unsung - as well as the opportunity to succeed. Under Ken Lever's leadership, a great deal of progress was achieved in 2011, and we will continue this rapid progress in 2012.

Geoff Unwin

Chairman

1 March 2012

CHIEF EXECUTIVE OFFICER'S REPORT

2011 has been a challenging year and a year of progress for Xchanging.

Stopping the bleeding - stabilising the business

In the first quarter, it was clear our business had stumbled. We had to address some key issues. Our workers' compensation claims operation in the United States was incurring accelerating losses and absorbing cash, our cost base was too high, our revenue growth had stalled and the cash generation of our business was inadequate.

The Four Part Action Plan was launched to address these issues. It was designed to stop the bleeding and stabilise the business:

• Part one: Strategic review

We performed a strategic review to identify our good businesses and those which were underperforming. We aimed to unlock value through operational improvement, business disposal and improvement in the economic value of our contract portfolio.

This resulted in the disposal of our loss-making US workers' compensation business and the introduction of a number of improvement actions. We stabilised our loss-making business in Italy, restructured our 76% owned listed business in India and facilitated the acquisition of the outstanding equity in our Broker Services business when Aon exercised the put option in the Enterprise Partnership.

We will continue to hone our portfolio of businesses to unlock value if we believe disposal provides a better opportunity to enhance the intrinsic value of the Group. We will also examine contract renewals diligently and will not renew contracts on unprofitable terms even if this involves contraction in overall revenue of the Group.

• Part two: Operational improvements and cost reduction

We established a new Executive Board structure and a Chief Executive Officer Support group. It includes the business sector heads that have revenue, profit and cash flow responsibility and accountability together with our Chief Financial Officer and our Chief Human Resources Officer.

The Chief Executive Officer Support group includes the senior executives with functional responsibility for sales and marketing, technology, operations, implementation, communications, corporate and strategic development, and legal and corporate governance compliance together with the executive responsible for the interface with the London Insurance market. This structure has provided a basis for greater collaboration and coordination of activities across the Group as well as a sharp focus on value creation. Since the year end we have appointed Subramanian Gopalaratnam as the Head of Innovation. He will coordinate the development of services and innovative ideas around the Group.

We introduced a number of cost cutting measures. These resulted in the elimination of a number of management positions, delivering annualised savings in the order of £16 million, of which £8m has benefitted 2011. Savings will be offset to some extent in 2012 by investment in our insurance growth strategy and potential expansion into Spain. We exited our Head Office and relocated the corporate staff into an existing, lower cost operational site in the City of London.

We also focused on reducing complexity in our business by starting to simplify internal company structures and operating units, and by eliminating processes and methodologies which were burdensome for a Group of our size.

We improved our processes for forecasting by introducing rolling 18-month forecasts so that we are more aware of developing trends in the business and can take corrective action as necessary.

• Part three: Revenue growth

The sales and marketing strategy was reconfigured. Rather than focusing only on developing Enterprise Partnerships with large organisations, we chose to compete more widely in business processing, technology and procurement services markets by engaging more actively with third party advisers and also more aggressively pursuing smaller opportunities which we believe will grow in time.

• Part four: Cash management and funding

We successfully renegotiated our banking arrangements with all of our existing banks to provide security of funding for the foreseeable future. Greater focus on investment and better management of working capital resulted in an improved cash performance. The details of the renewed banking arrangements are included in the Operating and Financial Review.

Getting fit again - building our ability to compete effectively across the board

As the business stabilised we moved into the "getting fit" phase - building our ability to compete effectively in our markets and to win new business.

Here we have redefined the strategic direction of our business. We have clarified our capabilities and our service offerings and further developed and refreshed the marketing strategy. We have reassessed our position in our key markets and identified those relationships we want to defend and those which we believe we can grow. We are also focusing on the opportunities we believe we can win. As a consequence, we have started to rebuild our pipeline of opportunities.

We have also launched an internal programme of change management to ensure that, as an organisation, we are less inward-looking and process-driven and more outward-looking and customer-focused. This programme is aimed at "Changing Xchanging" and has a focus on four primary areas.

Through this programme we aim to have the whole business aligned to the challenges ahead of us in 2012.

A key element of this programme is the focus on innovation. We believe that inspiring innovation is a key to building long-term relationships with our customers, helping us to stimulate creative change in their businesses and so to create value. A great example of our approach to innovation was the work we performed with YTL during 2011 in Malaysia, where we supported the roll out of the first national 4G network and are now supporting the roll out of e-learning to 10,000 schools.

Competing to win - regenerating growth

So as we move into 2012 we will focus on demonstrating our ability to compete to win in the markets where we operate. We will measure our success in 2012 by the momentum which develops from our selling effort and the improvement in sales and revenue opportunities.

Trading Performance

Business Processing Services

Insurance Services has continued to sustain steady growth and maintained good profitability and cash generation. In the UK we saw a steady advance in revenue at good margins. Insurance Premium Processing and Claims Handling continued to be the mainstay of our Insurance Services business.

We continued our proactive dialogue with Lloyd's around the Claims Transformation Programme. This in due course will lead to an increase in choice in the market as Lloyd's no longer mandates the processing of claims through one service provider. We also continue to participate actively in the market modernisation programme, which should also lead to greater clarity around the role of Xchanging in the Lloyd's market in the future.

Our Broker Services business continued to progress well and the move to 100 per cent ownership provides opportunities for developing this business further.

In Australia, we successfully renewed the workers' compensation contract with the State of Victoria. We also improved the financial performance of the contract with the State of New South Wales. We are planning entry into the US Insurance business processing market in 2012.

Financial Services performed satisfactorily in Germany but overall financial performance was affected by the losses in the Italian business, Kedrios.

In Germany, we saw further expansion of our investment account administration processing for Independent Financial Advisers within Fondsdepot Bank, reducing the dependence of that business on Allianz Global Investors. At Xchanging Transaction Bank, we were able to improve margins as a result of cost reduction. In Italy we reduced cost and improved operating performance as we pursued the plan to achieve a breakeven position by the end of 2013.

Our near-shore facility at Hof in Germany and offshore services facilities in India continued actively to support Financial Services during the year with much of the securities processing business and the investment account administration business being processed in these locations.

Technology

The Technology business was disappointing. Our investment in resources in our Infrastructure management services business ahead of anticipated revenue growth caused some cost recovery issues when the revenue did not materialise. However, we continued to achieve good results from our major customers at the London Metal Exchange, Gatwick Airport and Northgate. Actions have been taken to reduce cost and to improve cost recoverability. The renewal of the IT services contract with the London Metal Exchange was secured at the end of 2011.

Following on from a strong year in 2010 our software business only achieved a breakeven result as there were no additional sales of our newly developing insurance application platform. We have defined a new go-to-market strategy which should lead to a resumption of growth in 2012 through a combination of conversions from legacy products, direct sales and sales through channel partners. Annuity maintenance and licence fees continued for the other insurance software product offerings.

Actions taken to reduce costs and the benefit of the growing relationship with YTL in Malaysia have moved the Application management business, primarily providing application systems development and management services, into profit.

Procurement and Other BPO Services

This was a transition year for Procurement and Other BPO Services. Many of the smaller legacy contracts in the UK business were renewed and we successfully secured the L'Oréal contract in Europe and the BAE Systems contract in the US. These major contract wins have provided good momentum for the business going into 2012 when it is expected these new contracts will contribute to profitability. It was disappointing that we did not secure the renewal of the BAE Systems Human Resources contract. We will continue to provide services under this contract to BAE Systems through 2012 and we will actively participate in the migration of the service to a new provider. We continue to seek new business opportunities in HR services.

All our segments are supported by our low cost operations in India where we have significant depth of expertise. These operations saw revenue and profit growth as we continued to secure incremental accounts and controlled costs tightly. We are also seeing increasingly encouraging signs of growing activity in the local market. Recently we have been awarded pilot projects in the Indian domestic market with L&T Insurance and L&T Financial Services.

There is much emphasis in this business on expanding through proactive account management with existing customers and growing accounts from small beginnings.

Strategic direction

We expect the growth of the Business Processing market to continue for some time to come. There is no doubt that the market is changing. Once the focus of very large businesses, outsourced business processing and technology services are increasingly available to lesser sized businesses as developing technology makes available 'everything-as-a-service'.

As the economies of the developed world struggle to show growth we see opportunities to provide services that enable our customers to reduce their cost base through outsourcing and innovative management of processes and the use of technology. We also see the so-called 'developing' economies of the world offering opportunities for growth as new and developing businesses seek to secure services through a form of service delivery framework made available through advances in remote and Cloud computing technology.

We are aware of the competitiveness of the markets in which we operate and seek to differentiate our offering through technology, our ability to innovate and to provide superior service delivery.

The focus of our service offering will be procurement services and indirect cost reduction; the provision of offshore services; Business Processing as a Service ("BPaaS"), particularly in areas where we have industry strength; insurance software, complex processing and critical technology; and transformation services (particularly in the financial services market).

Our industry strength remains in Insurance Services and Financial Services but we operate in a number of other industries such as logistics, healthcare, manufacturing, real estate and aerospace and defence.

Outlook

We achieved a number of significant milestones for the business in 2011 as we implemented the Four Part Action Plan. Xchanging is on a sound financial footing and has made significant progress in the reshaping of its business portfolio. I am pleased with the progress we have made.

Now that the business is stabilised we are building our ability to compete effectively in our key markets so that we are in a stronger position to win new business. 2012 will be the year in which we demonstrate our ability to compete to win, and as we build momentum, any improvement in year-on-year profitability will come from the continuing benefit of cost savings made in 2011. Our success in 2012 will be measured by the extent to which we turn new sales opportunities into contracts to grow profitable revenue in 2013 and beyond.

Ken Lever

Chief Executive Officer and

Acting Executive Director,

Procurement

1 March 2012

OPERATING AND FINANCIAL REVIEW

GROUP KEY PERFORMANCE INDICATORS

During the year, the Group disposed of its US workers' compensation and third party administration operations. As these operations represented a separate major line of business, they constituted a discontinued operation. As a result, the results and cash flows of the discontinued operation have not been included in the Group's analysis of continuing operations. All prior year comparatives have been restated to allow a like-for-like comparison.

The Group's adjusted KPIs are calculated after adding back a number of non-cash and acquisition-related items and exceptional items, as noted below, in order to present the underlying performance of the business.

All numbers presented below, unless stated otherwise, are from continuing operations only.

Notes:

1 Adjusted revenue excludes exceptional revenue items. In 2011 and 2010, these relate to contract settlements (2011: £1.2 million, 2010: £6.9 million).

2 Adjusted operating profit excludes exceptional items (2011: £31.8 million, 2010: £53.4 million), amortisation of intangible assets previously unrecognised by acquired entities (2011: £4.8 million, 2010: £4.7 million) and acquisition-related expenses (2011: £nil, 2010: £1.1 million).

3 Operating cash flow is calculated as cash generated from operations less net capital expenditure (including pre-contract costs) and dividends to non-controlling interests.

4 Adjusted cash conversion is calculated as cash generated from operations, after adding back the cash impact of exceptional items and acquisition-related expenses, less net capital expenditure and dividends to non-controlling interests divided by adjusted operating profit (as defined above).

5 Net cash is calculated as cash and cash equivalents less bank loans and overdrafts and finance lease liabilities.

6 Equity free cash flow is calculated as operating cash flow (as defined above) less cash tax and net interest paid.

7 Return on invested capital is adjusted operating profit less a tax charge at the Group's effective rate, divided by invested capital. Invested capital is calculated as the Group's net assets, less net cash.

Group performance

Adjusted Revenue

Adjusted revenue from continuing operations for the year ended 31 December 2011 was £650.0 million (2010: £681.8 million).

Organic revenue was £604.9 million, a decline of 6.9% on a like-for-like basis. In 2011, organic revenue excludes £45.2 million relating to the full year impact of acquisitions completed in 2010, including Data Integration ("DI"), Kedrios, FondsServiceBank ("FSB") and SEB Investment service ("SEB ISG") transactions. In addition, organic revenue excludes positive currency movements of 0.6%.

The organic decline was driven primarily by lower UK procurement revenues, and lower revenues in the UK technology sector. These are partially offset by higher processing volumes in the UK insurance business, additional revenues in the Australian workers' compensation business and growth in our South East Asian technology business.

Statutory revenue from continuing operations was £651.2 million (2010: £688.7 million). Statutory revenue includes exceptional revenue in respect of contract settlements recognised in the year of £1.2 million (2010: £6.9 million). In both years, these settlements arose in the Financial Services sector.

Adjusted Operating Profit

Adjusted operating profit from continuing operations was £43.2 million (2010: £56.1 million). On a like-for-like basis, adjusted operating profit decreased 17.9%, excluding the full period impact of the 2010 acquisitions of DI (movement of £(2.0) million), SEB ISG (movement of £(0.2) million), FSB (movement of £1.2 million) and Kedrios (movement of £(2.6) million).

Beneficial foreign exchange movements in the Euro and the US Dollar have broadly offset adverse movements in the Indian Rupee.

The organic decline in adjusted operating profit was driven by the impact of lower revenues, as noted above, on the Group's profitability, further exacerbated by incremental investment costs incurred in both setting up the US Procurement entity following the contract agreed in August 2011 with BAE Systems North America, and in establishing an insurance presence in the US. These adverse variances were offset to an extent by improved profitability in the Australian workers' compensation business, in the South East Asian technology business, and in the Indian BPO offshoring businesses.

Statutory operating profit from continuing operations increased to £6.6 million (2010: statutory operating loss of £(3.1) million). Statutory operating profit includes the following:

·; net exceptional costs of £31.8 million (2010: £53.4 million), primarily relating to restructuring costs (£18.4 million) incurred in respect of the Four Part Action Plan, to the impairment of goodwill, intangibles and other assets (£14.6 million) and in respect of contract settlements of £1.2 million;

·; amortisation of acquired intangibles of £4.8 million; and

·; acquisition related expenses of £nil

The table below sets out the reconciliation from statutory to adjusted operating profit for continuing operations.

Xchanging's share of adjusted operating profit after tax for the year from continuing operations was £19.2 million (2010: £29.4 million).

Margins

Adjusted operating profit margin for continuing operations was 6.6% (2010: 8.2%). Margins have decreased by 160 bps, driven by a decrease in adjusted operating profit margins in the Technology sector due to lower levels of high margin implementation revenue, and in the Procurement and Other BPO sector due to initial costs incurred following the contract signed with BAE Systems North America, offset by an increase in margins in Financial Services which benefitted from the impact of cost savings in the year. Please refer to the business sector analyses for further details.

Earnings per share (EPS)

When considering EPS, the Group uses Xchanging's share of adjusted profit from continuing operations to represent the performance of the business.

On this basis, adjusted basic EPS for the period was 8.01 pence (2010: 12.30 pence).

For a reconciliation of Xchanging's share of statutory profit after tax to Xchanging's share of adjusted profit after tax, as used to determine adjusted EPS, please refer to note 4 of this announcement.

Adjusted basic/diluted earnings per share - continuing operations

Exceptional items

The Group recorded total exceptional items of £36.1 million (2010: £53.4 million). In 2011, these related to:

·; restructuring costs of £18.4 million incurred as part of the review of the Group's overall cost base under the Four Part Action Plan

·; impairment of goodwill, intangible and other assets totalling £14.6 million (see section below)

·; exceptional income relating to contract settlements totalling £1.2 million (2010: £6.9 million)

·; exceptional finance costs of £4.3 million (2010: £nil) have been incurred in respect of the refinancing of the Group's debt facility, dated 29 July 2011.

Impairments

Following a review of goodwill and other intangible and asset balances, impairment charges totalling £14.6 million have been recorded. These relate to:

·; impairment of goodwill and other intangible assets totalling £10.4 million, relating to the HR business, reflecting the anticipated impact on the business following notification received by BAE Systems of their intention not to renew a significant contract with effect from December 2012

·; £4.2 million impairment of an available-for-sale financial asset, on the basis that a sustained decline in value of the share price of the company in which Xchanging had invested is not expected to reverse, and the investment holds no further strategic value to the Group. The £4.2 million, had previously been recognised through reserves, but has been recycled to the income statement in the current year.

Discontinued operation

On 1 June 2011, we announced the sale of our US workers' compensation and third party administration business ("US BPO"), of Cambridge Integrated Services Group Inc ("CISGI"), to Sedgwick Claims Management Services Inc for £13.6 million. The sale included virtually all contracts, assets, employees, current liabilities and future service obligations of CISGI. This constitutes a discontinued operation, and the associated results and cash flows have therefore been presented separately on the face of the income and cash flow statements. They are not included within the Group's analysis of continuing operations, and prior year comparatives have been restated to allow for like-for-like comparisons.

Subsequent to the sale of our US BPO operations, on 27 September 2011, we announced that the residue of CISGI would be wound down by means of voluntary insolvency and put into an Assignment for the Benefit of Creditors ("ABC" process). All remaining assets and liabilities were assigned to the insolvency trustee.

The results of the discontinued operation show a statutory profit of £4.5 million for the period (2010: statutory loss of £(51.0) million). This includes an exceptional release of deferred income of £11.5 million on a significant contract termination, a loss on disposal from the ABC process of £(7.3) million (including £3.3 million relating to net exchange losses previously charged to reserves and now recycled through the income statement) and a profit on disposal from the transaction with Sedgwick of £11.8 million.

At an adjusted operating profit level, the results of the discontinued operation show a loss for the period of £(4.0) million (2010: loss of £(0.9) million).

Adjusted revenue and adjusted profit movement: like-for-like analysis

The table below shows the adjusted revenue and adjusted operating profit movements, by sector, excluding the impact of foreign exchange movements and acquisitions.

Segmental analysis

Insurance Services

Financial Highlights

Insurance Services external adjusted revenue increased 5.1% to £189.0 million (2010: £179.8 million), including a positive foreign exchange impact of £1.8 million related mainly to movements in the Australian Dollar. Adjusted operating profit increased 9.4% to £36.6 million (2010: £33.4 million), representing an adjusted operating profit margin of 19.3% (2010: 18.6%), with a £0.3 million adverse variance arising due to foreign exchange movements (positive movements in the Australian Dollar have been offset by adverse movements in the US Dollar).

Revenues for the sector increased due to a number of factors. The sector benefitted from an increase in the volume of insurance premiums processed by our UK insurance businesses in the Lloyd's market. In addition, the UK completed delivery of the Electronic Claims File project ("ECF2"). The Australian workers' compensation business benefitted from both improved performance fees and discretionary payments received under the terms their contract with the New South Wales state government, and from an increase in market share following the renewal of the contract with the Victoria state government, effective 30 June 2011. These positive movements were slightly mitigated by lower project development revenues in both the Broker Services and Premium Processing businesses.

The UK insurance entities have once again delivered a stable, and profitable, result for the year, with increased processing volumes mitigating the impact on margins of lower development revenues. In the Australian business, the benefit of incremental revenue has had a positive impact at the adjusted operating profit level, as performance fees have had a direct impact on profitability. These movements have been partially offset by investments made in the year on developing a global insurance strategy, and establishing a US presence for the Insurance Services sector. During the year, the sector incurred £0.9 million of exceptional restructuring costs.

We no longer expect the contract with the New South Wales state government to be loss-making in 2012, although the longer term profitability of this contract remains uncertain. Therefore, at the current time no adjustment has been made to the carrying value of the onerous contract provision recognised in 2010 in respect of this contract (AUD4 million), which will be reassessed when the longer term outlook of the contract is known with more certainty.

Financial Services

Financial Highlights

Financial Services external adjusted revenue was £179.8 million (2010: £174.2 million), including incremental revenues from 2010 acquisitions of £9.4 million, and a positive foreign exchange impact of £2.1 million. On a like-for-like basis, adjusted revenue was £146.8 million (2010: £152.8 million). Adjusted operating profit for the year was £12.3 million (2010: £11.2 million), representing an adjusted operating profit margin of 6.8% (2010: 6.4%), including the adverse impact of £1.6 million from acquisitions in 2010 and a favourable foreign exchange impact of £0.1 million. On a like-for-like basis, adjusted operating profit has increased 29.1% to £11.1 million (2010: £8.6 million).

Adjusted revenue for the year includes £3.9 million of incremental revenue in the year from the additional investment account administration volumes added to the Fondsdepot Bank ("FdB") platform in 2010 as a result of the acquisitions of FSB and SEB ISG, and £5.5 million of incremental revenue from Kedrios, the Italian Enterprise Partnership established with SIA-SSB during 2010.

In our securities processing business, Xchanging Transaction Bank ("XTB"), the impact of indexation on key contracts has also had a positive impact on revenue for the year. The impact of this was offset however by contractual discounts offered to key customers by XTB. In our investment account administration business, FdB, a decline in overall investment account numbers and discounts on contractual prices with key customers has also adversely impacted revenue.

Overall profitability for the sector was impacted by the EUR3.9 million loss for the year generated by Kedrios. Although Kedrios has now been stabilised with new management and cost control measures, the business is still expected to remain loss-making during 2012.

On a like-for-like basis, the increase in profitability within the Financial Services sector has been driven by operational improvements identified as part of the Four Part Action Plan, especially within XTB. In the current year, the sector incurred £7.8 million of exceptional restructuring costs. Restructuring the levels of senior management, and achieving other sustainable cost savings have offset the impact of lower revenue on margins for the current year. The sector has also benefitted from lower depreciation charged in the year, due to lower levels of capital expenditure compared with levels of depreciation and amortisation in recent years.

Technology

Financial Highlights

External adjusted revenue for the Technology sector was £97.9 million (2010: £116.2 million), including incremental revenues of £0.1 million relating to the 2010 acquisition of DI, and an adverse foreign exchange impact of £0.2 million. Adjusted operating profit was £7.0 million (2010: £17.3 million) representing an adjusted operating profit margin of 7.2% (2010: 14.9%), including an adverse movement of £(2.0) million from 2010 acquisitions and an adverse foreign exchange impact of £(0.1) million.

A slow start to the year impacted results throughout 2011. Revenue contributions from new contracts won in 2010 with Gatwick Airport Limited and YTL in Malaysia, as well as further growth noted from contracts with existing customers, including the London Metal Exchange, were offset by the delayed timing of expected revenue from our new insurance software product (Xchanging Insurance Application Platform, "XIAP").

The decision was taken at the end of 2010 to exit the IT reseller programme in our data centre hosting business. With a negligible impact on profitability, and a beneficial impact on working capital, the decision to exit the reseller programme does however account for £12.5m of the decline in organic revenue in the current year (2011: c. £3.5m of reseller revenue; 2010: c. £16.0m).

Profit for the Technology sector has fallen below expectation. Adjusted operating profit has been significantly impacted not only by the overall decline in revenue, but also by the mix of revenue recognised in the year. Declines in higher margin insurance software service revenue have been offset to an extent, but by lower margin hosting services revenue. The profitability of the sector has been further impacted by investment in our hosting and network services business at the start of the year ahead of anticipated revenue growth (which did not materialise), and by higher amortisation charges in the year, in line with the incremental investment over 2010 and 2011 in the Group's software assets, including XIAP.

With the decline in revenue adversely impacting the profitability of the Technology sector, the cost structure was rationalised during the year in order to align the cost base with the changes in activity level. During the year the sector recognised £3.5 million of exceptional restructuring costs.

Following on from this restructuring exercise, the business and management layers of the business have been revised to support a more flexible sales strategy, targeting intermediaries and partnering arrangements to develop further growth of the business. Further actions have been taken to leverage more offshore resources, improve resource utilisation, clarify the sales offering and refocus the sales effort. We are confident that the Technology sector can be more profitable going forward as a technology-enabled business. A new Executive Director and a new Finance Director have been recruited to drive improved performance of the Technology business.

Procurement and Other BPO

Financial Highlights

External adjusted revenue for this sector was £183.3 million (2010: £211.6 million), with marginal impact from foreign exchange rates. The revenue decline was driven by the lower labour volumes from government spending cuts in the UK impacting a key customer, although this was partially offset by the impact of significant new contracts signed with CHEP Europe in April 2010 and L'Oréal in August 2011. The sector also includes the results from the Group's HR businesses, which were adversely impacted in the current year from the termination of a pensions service contract in 2010. New contracts with L'Oréal and BAE Systems North America contributed £1.4 million of revenue in the current year, as these contracts are in their start up phases.

Adjusted operating profit was £7.2 million (2010: £11.1 million), representing an adjusted operating profit margin of 3.9% (2010: 5.3%). Operating profit margins have been adversely impacted by the investment outlay in establishing the US Procurement business following the contract signed with BAE Systems North America in August 2011, and maturing contracts on certain key contracts. A further £1.8 million of investment expenditure was incurred in developing the procurement business in the US in the first half of the year. These costs have been recognised within Corporate costs (refer to the Corporate section below). Margins have however benefitted from the reduction in the lower margin activity associated with defence spending, while the recent contracts signed with CHEP Europe and L'Oréal have both contributed to the sector's profit for the year.

During the year, the sector recognised £2.9 million of exceptional restructuring costs.

Corporate

Corporate costs for the year totalled £19.9 million (2010: £16.9 million). Included within the 2011 costs (and incremental to the 2010 numbers) is £1.8 million of expenditure on specific new business opportunities in the US. Subsequent to the half year, and following the finalisation of the contract with BAE Systems North America, these costs now part of the ongoing cost base of the new US procurement entity. A further £0.8 million within Corporate costs relate to employees previously considered part of the US BPO operations, but retained by Xchanging following the business' sale to Sedgwick, and who transferred to form part of the Group's business development team. During the second half of the year, these employees have either exited the business, or have now been allocated to sectors (notably Insurance Services) and will be form part of their sector results going forward.

Corporate costs have been impacted in the year by costs associated with the exit of the Head Office premises, with the restructuring of the Group following the disposal of the US BPO operations, and with incremental investment in sales and marketing. The Corporate cost base has, however, benefitted from restructuring undertaken during the year, with a focus on reducing complexity in processes and rationalising headcount. Exceptional restructuring costs of £3.3 million were recognised in the current year. The prior year comparatives benefitted from the release of accruals no longer required.

Net finance cost

Adjusted net finance costs (pre-imputed interest on put options of £0.7 million (2010: £0.8 million) and pre-exceptional finance costs of £4.3 million (2010: £nil)) increased from £3.7 million in 2010 to £4.1 million in 2011. The increase in net finance cost is due to a combination of having a higher margin applied to the Group's debt facilities following the refinancing in July and re-denominating the currency of bank debt from US Dollar to Sterling.

£4.3 million of debt refinancing costs were written off during the year as the Group refinanced its debt facility in July 2011. Of this, £4.0 million of arrangement fees were incurred in the year, with £0.3 million relating to pre-existing unamortised arrangement fees. The fees, which relate to arrangement, legal and advisory charges have been written off, and have been included as exceptional finance costs.

Adjusted cash conversion

The Group delivered a strong performance in the year for adjusted cash conversion, improving significantly to 114.8% (2010: 100.9%). This improvement reflects the increased focus on cash and cash management instilled as part of the Four Part Action Plan across the Group.

Cash flow

Operating cash flow from continuing operations was £35.9 million (2010: £49.9 million).

Cash generated from continuing operations decreased by 23.6% to £ 61.1 million. The year on year decline in operational performance has not been fully offset by the efforts made to improve our management of working capital in line with the Four Part Action Plan.

The level of cash generated from operations in 2010 was adversely impacted by cash outflows in respect of the utilisation of previous restructuring provisions (outflow of £12.5 million). During 2011, £14.9 million of cash was spent on restructuring costs as part of the rationalisation of the Group's overall cost base.

Dividend payments to non-controlling interests were £7.7 million (2010: £8.5 million).

Equity free cash flow for the year was £ 21.3 million (2010: £33.8 million). No dividend was declared or paid in relation to 2010 (2010: a dividend of £6.6 million was paid in respect of 2009).

Net expenditure on acquisitions in the year was £9.7 million (2010: inflow of £1.7 million), £ 5.0 million of which related to deferred consideration for the 2010 acquisition of Data Integration, £4.0 million to the acquisition of the remaining 50% of Xchanging Broking Services Limited from Aon Limited, and £0.9 million to an interim payment of the Fondsdepot Bank put option.

Overall, the net cash position improved by £11.7 million compared with 2010. The Group's cash position has benefited from the sale of the loss-making US BPO business, suspension of the dividend payment in 2011, improved working capital management and lower levels of capital expenditure. Net cash at the end of the period was £45.2 million (2010: £33.5 million).

Capital expenditure

Our net capital expenditure for continuing operations for the year was £17.5 million (2010: £21.6 million), representing 2.7% of adjusted revenue (2010: 3.2%) and 61.2% of depreciation and amortisation, excluding amortisation on assets previously unrecognised by an acquired entity (2010: 74.7%). In 2011, Xchanging invested in further developing our Technology sector insurance software product XIAP, and progressed in building our additional Indian processing centre in Shimoga.

Funding, distribution policy and dividends

Funding for sustaining investment and organic growth is met initially from operating cash flow. Our equity free cash flow and available debt finance determine the funding available for acquisitions and distributions.

To ensure that we have sufficient cash to fund future growth, it remains prudent to conserve cash, and therefore the Board has decided not to pay a dividend for 2011. Resumption of the payment of a dividend will be reviewed by the Board at the 2012 Half Year.

Treasury management

All of our treasury activity takes place within a formal control framework, under policies approved by the Board. We monitor compliance with these policies and guidelines through regular reporting of treasury activities.

The treasury function's primary responsibilities are to procure our capital resources and manage our liquidity, foreign exchange and interest rate risks on a Group-wide basis.

Borrowing facilities

On 29 July 2011, the Group successfully agreed the refinancing of its term loan and revolving credit facilities, and extended the maturity for a period of four years to August 2015. The revolving credit facility remains at £75.0 million. The USD26.0 million term loan was redenominated into Sterling and increased to £20.0 million. At 31 December 2011, £20.0 million (2010: USD34.0 million) was drawn under the term loan and cash drawn under the revolving credit facility was £28.0 million (2010: USD45.0 million). Bank guarantees of €20.0 million (£16.8 million) and USD2.7 million (£1.7 million) were also drawn against the revolving credit facility (2010: £17.1 million).

The Group has a £10.0 million uncommitted overdraft facility linked to its UK notional cash pooling arrangement.

In addition to above facilities, there is a working capital facility of INR 330.0 million (£3.9 million) provided to Xchanging Technology Services Private Limited in India. The amount outstanding at the year end date was £2.9 million (2010: £nil).

The Group also has non-fund based facilities for the provision of bank guarantees. At the year end date, £2.6 million of guarantees had been issued.

During the year the Group repaid all bank term loan and working capital facilities provided to Cambridge Solutions Limited and there were no outstanding balances at 31 December 2011 (2010: £5.1 million).

At 31 December 2011, the Group had £28.5 million (2010: £28.8 million) of headroom under its committed debt facilities.

We expect to be able to finance our current business plans from ongoing operations and our committed funding facilities.

Borrowing covenants

The Group is subject to covenants, representations and warranties commonly associated with corporate bank debt for its term loan and revolving credit facilities.

As at 31 December 2011, there were financial covenants associated with the committed debt facilities relating to leverage, interest cover and debt service. The Group was compliant with all three covenants:

·; the ratio of consolidated borrowings to Xchanging's share of consolidated profit before depreciation and amortisation (pre-exceptional items) must not exceed 2.0 times. As at 31 December 2011, the ratio was 1.1 times.

·; the ratio of Xchanging's share of consolidated profit before depreciation and amortisation (pre-exceptional items) to net consolidated finance charges must not be less than 6.0 times. As at 31 December 2011, the ratio was 18.4 times; and

·; the ratio of net cash flow to UK cash pool debt service must not be less than 1.0 times. As at 31 December 2011, the ratio was 3.0 times.

Levels of borrowing and seasonality

Xchanging operates in a wide range of markets and locations and, as a result, the seasonality of our borrowing requirements is relatively low. Underlying cyclicality before capital expenditure is driven principally by collections of dividends and royalties from Enterprise Partnerships and scheduled repayments under the term loan facilities.

During 2011, the lowest level of net cash was £6.8 million (2010: net debt £ (7.0) million).

Cash balances

We invest surplus cash to maximise return, within liquidity and counterparty credit constraints that have been approved by the Board.

The majority of our wholly owned UK entities are included in a notional pooling arrangement, to optimise liquidity management. We review the efficiency of our other cash balances on a monthly basis.

The aggregate cash balances in Enterprise Partnerships represents working capital, accumulated but unpaid distributions to the Group and, in the case of FdB, customer cash deposits. Although subject to timing variances, as a general statement we would expect the aggregate cash balance to remain relatively stable as a high proportion of Enterprise Partnerships' equity free cash flow is distributed to the Group. In 2011 total distributions from the Enterprise Partnerships to the Group exceeded their aggregate equity free cash flow due to the phasing of licence fee collections from XTB.

Approximately £15.1 million of the cash balance in Enterprise Partnerships at the year end represented accrued but unpaid licence fees that are expected to be paid to the Group in 2012, and a further £9.7 million is expected to be paid to the Group in 2012 as dividends in respect of 2011 performance. A further £11.6 million represented cash placed in customer deposit accounts offered by FdB for which an equal liability is recognised (2010: £10.4 million).The remaining cash balance in the Enterprise Partnerships represent dividends due to non-controlling interests and working capital.

Foreign currency translation exposure

We do not hedge foreign currency profit and loss translation exposures and our reported results may therefore be affected by currency fluctuations.

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Foreign currency transaction exposures

We are subject to foreign exchange transaction exposure in our Indian operations, where revenues are generated in Sterling, US Dollars and Euros and the cost base is primarily in Indian Rupees. The principal transaction exposures arising during 2011 included Sterling revenue of £23.0 million and US Dollar revenue of USD24.5 million. Under our foreign exchange risk management policy, exposures may be hedged with forward foreign exchange contracts when the underlying cash flows are deemed to be highly probable. Typically, we will look to hedge revenue to protect operating cash flow and to support the planning cycle. Foreign exchange contracts hedging revenue against the Indian Rupee amounting to £4.8 million and USD4.8 million were outstanding at the year end (2010: £nil).

Interest rate risk management

The Group reviews its interest rate exposure against acceptable risk profiles on a periodic basis and may enter into interest rate swap agreements in order to achieve an acceptable balance of fixed and floating rate interest exposure. At 31 December 2011 all drawn debt was subject to floating rate interest.

Pensions

The Group has three funded Defined Benefit Schemes in the UK, all of which are closed to new members. The Group works closely with the trustees of the schemes to manage risk in the schemes and, during 2012, will review the investment strategy on all three schemes, following the completion of the actuarial valuation exercises.

The cash contribution to the UK plans (Insurance Services and Technology sectors) includes £1.9 million per year in respect of recovery plans agreed with the trustees on two UK Plans, one in 2008 and the other in 2011. Recovery plans are agreed on completion of the triennial actuarial valuations and therefore new recovery plans for two UK schemes that currently have valuations underway will be put in place during 2012 following discussions with trustees. It is expected that contributions in respect of the UK defined benefit schemes during 2012 will be £5.4 million (of which £1.8 million is expected to be funded from UK Enterprise Partnerships, and the remainder from a wholly owned subsidiary) and these figures include the anticipated level of deficit recovery payments.

Around 60 UK employees are members of various BAE Systems defined benefit pension schemes; however, the contributions made by the Group to the BAE Systems schemes can only vary in respect of future service contributions and are therefore accounted for on a defined contribution basis. The Group has various indemnities in place with BAE Systems and therefore could only be exposed to deficits in the BAE Schemes in the event that BAE Systems were to become insolvent.

In Financial Services, the Group operates various unfunded defined benefit plans, the largest of which is supported by a Contractual Trust Arrangement (CTA). The CTA investment strategy adopted by the Group seeks to match asset movements to changes in the value of the liabilities. It is expected that contributions in respect of the Financial Services defined benefit schemes during 2012 will be £2.8 million (all of which is expected to be funded from Financial Services Enterprise Partnerships).

The Group works closely with the trustees of each of the pension plans to manage the risks associated with the defined benefit pension provision. The factors that most affect the value of the liabilities are interest rate and longevity, and the Group's sensitivity to these particular risks is shown in notes to the accounts.

Capital structure

The Group seeks to maintain a strong credit profile to aid its ability to partner in business and will aim not to exceed consolidated borrowings of 2.0 times Xchanging's share of consolidated profit before depreciation and amortisation. In order to achieve its desired capital structure, the Group may adjust the amount of dividends paid to shareholders, return capital to shareholders and adjust asset holdings to reduce or increase debt.

Regulatory capital

Xchanging operates in a number of regulatory regimes. The key businesses affected by regulatory requirements are XTB and FdB, which conduct securities processing and retail investment account management in Germany. They both maintain full banking licences and are regulated under the German Federal Financial Supervisory Authority (BaFin). Sufficient regulatory capital must be held in these entities to cover the operating and credit risks of the business. The regulatory capital requirement is based on market, operating and credit risk factors applied to asset classes. The regulatory capital in the business is calculated as total equity less total intangible assets. There is no obligation to set cash aside to meet regulatory capital requirements but funding may be required from the holding company if the required regulatory capital is less than the calculated regulatory capital.

No additional regulatory capital was contributed to the German banking group during 2011.

Components of the Insurance Services business are regulated in the United Kingdom by the Financial Services Authority (FSA).

Weighted average cost of capital

The Group uses a weighted average cost of capital of 10%.

Taxation

The Group's effective tax rate on adjusted operating profit from continuing operations was 36.3% (2010: 29.2%).

The cash tax rate on adjusted profit from continuing operations was 34.5% (2010: 28.7%). The 2011 rates have been adversely affected by losses in Italy and the US, where no tax benefit has been recognised, by profits arising in overseas jurisdictions with higher tax rates and by other non-deductible items.

The statutory tax charge and tax rate have been distorted by the effect of restructuring and by the discontinuance of the US BPO business, which have been treated as exceptional. Planning has been undertaken to mitigate the associated cash tax costs.

Non-controlling interests

In 2011, the profit after tax for total operations attributable to non-controlling interests was £4.8 million (2010: £7.5 million).

Non-controlling interest calculations for the Group's Enterprise Partnerships are dependent upon the individual contractual terms. Some define adjustments in relation to certain items prior to calculating profit share based on the percentage share ownerships. These may include, for example, adjustments for differences between local and international accounting standards and adjustments for any discounts or fees payable between parties.

David Bauernfeind

Chief Financial Officer

1 March 2012

Consolidated income statement

for the year ended 31 December 2011

1 Adjustments to adjusted in 2010 and 2011 include exceptional items, amortisation of intangible assets previously unrecognised by an acquired entity, acquisition-related expenses and imputed interest on put options.

2 The comparative amounts have been restated 1) to reflect the impact of the discontinued operation, 2) to show adjusted profits and 3) to reflect changes in accounting policies. Further explanation of the restatement is included in note (i) on page 36.

Consolidated statement of comprehensive income

for the year ended 31 December 2011

Items in the statement above are disclosed net of tax.

1 The comparative amounts have been restated to reflect the impact of the discontinued operation. Further explanation of the restatement is included in note (i) on page 36.

Consolidated cash flow statement

for the year ended 31 December 2011

1 The comparative amounts have been restated to reflect the impact of the discontinued operation and to recognise the impact of the gross up of the customer accounts. Further explanation of the restatement is included in note (i) on page 36.

Reconciliation of net cash flow to movement in net cash

for the year ended 31 December 2011

Movement in net cash

for the year ended 31 December 2011

1 The comparative amounts have been restated to gross up customer accounts.

Consolidated balance sheet

as at 31 December 2011

1 The comparative amounts have been restated to gross up customer accounts. Further explanation of the restatement is included in note (i) on page 36.

Consolidated statement of changes in equity

For the year ended 31 December 2011