Final Results

7 March 2012

Embargoed until 07:00

InterQuest Group plc

("InterQuest" or "the Group")

Final Results

InterQuest Group plc (AIM: ITQ), the specialist IT recruitment group, is pleased to announce its audited results for the year ended 31 December 2011.

Financial Highlights

§ Revenue £120.9m (2010: £112.2m) up 8% 

§ Net fee income (NFI) £16.6m (2010: £14.7m) up 14% 

§ EBITA before non-recurring items and IFRS 2 charges £3.8m (2010: £3.6m) up 4% 

§ Loss for the year £1.1m (2010: £1.8m profit)

§ Basic adjusted earnings per share 8.0 pence (2010: 8.6 pence) down 7% 

§ Basic loss per share 3.4 pence (2010: earnings of 6.1 pence)

§ Net cash from operating activities £2.6m (2010: £1.8m) 

§ Net debt increased from £2.7m at start of 2011 to £5.5m at 31 December 2011 

§ Second interim dividend of 2 pence per share is proposed and will be paid on 12 April 2012 (2010: 2 pence per share) bringing the total dividend for the year to 2.5 pence per share (2010: 2.5 pence per share)

§ Exceptional charge of £2.9m comprising impairment and other costs following notification of apparent impropriety within a major client of Contract Connections Limited

EBITA = Earnings before interest, tax and amortisation.

Operational Highlights

§ Investment in Singapore, the Group's first international office, provides platform for expansion

§ IT industry seeing areas of growth, particularly in financial services and retail

§ Non public sector NFI grew by 22% to £14.7m (2010: £12.0m)

§ Successful programme to increase permanent recruitment resulted in 34% increase in Permanent NFI to £5.0m (2010: £3.8m)

§ IQ Equity businesses profitable

§ Group fee earner headcount increased by 17% to 169 31 December 2011 (31 December 2010: 144)

§ Clear strategy in place for UK and International expansion

Outlook

Gary Ashworth, Executive Chairman: "The Group commenced its plan for accelerated growth in 2011, with the appointment of Mark Braund as CEO in April 2011. This has led to investment in overseas markets and organic growth in both contract margin and permanent placement levels. Despite the sluggish nature of UK markets in 2011, I am delighted with the progress which has been achieved in the year.

With market conditions and margins in the UK now improving slightly, plus the operational contribution we expect from the already profitable IQ Equity businesses and our investment in Asia, I am confident that we will see Net Fee Income grow respectably in 2012, enabling increased investment in the business both in the UK and internationally."

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Chairman's Statement

The Group commenced its plan for accelerated growth in 2011, with the appointment of Mark Braund as CEO in April 2011. This has led to investment in overseas markets and organic growth in both contract margin and permanent placement levels. Despite the sluggish nature of UK markets in 2011, I am delighted with the progress which has been achieved so far.

Revenue for the year increased by 8% to £120.9m and Net Fee Income by 14% to £16.6m, confirming our position as one of the largest IT recruiters in the UK.

Within these figures, the IQ Equity majority owned businesses that we have seeded over the last two years delivered their first full year of profit, and EBITA before non-recurring items and IFRS 2 charges across the Group as a whole increased by 4% to £3.8m (2010: £3.6m).

While we have begun a programme to grow our permanent recruitment activities, 70% of our NFI came in the year from the recurring revenue associated with contract recruitment. This revenue provides a strong, profitable base for the business moving forward.

Perhaps one of the most significant developments in the year was the opening of our first overseas office in Singapore; an important first step towards the broadening of our fee income outside the UK. We have been pleased with the initial success of the office. Following the end of the year under report, we have taken further steps to align our strategy towards the areas of the technology market which we believe will provide InterQuest with an increased opportunity for growth.

A great deal of the success of a recruitment business depends upon the quality of its staff. We continued to "grow our own" sales force via our iQAD training academy programme and have added a middle managers training programme. We are confident we have one of the most skilled recruitment workforces in the UK.

The Board is recommending a second interim dividend of 2p which in addition to the interim dividend of 0.5p maintains the total for the year of 2.5p.

With market conditions and margins in the UK improving slightly, plus the operational contribution we expect from the already profitable IQ Equity businesses and our investment in Asia, I am confident that we will see Net Fee Income grow respectably in 2012, enabling increased investment in the business both in the UK and internationally.

I would like to thank all of our staff for their passion, commitment and hard work over the last twelve months.

Gary Ashworth

Executive Chairman

6 March 2012

Chief Executive's Report

Highlights

InterQuest is a group of specialist recruitment businesses, placing both Contract and Permanent staff into niche disciplines within the information & communications technology sector (ICT).

We operate a balanced portfolio of recruitment businesses with an increasing focus on markets where there is both growth in demand and a shortage of key technology skills. Our interests are aligned to customers where quality is much more valued than quantity and as such, we increasingly target markets where our services derive higher than industry average margins.

The Group delivered a solid performance in 2011 growing net fee income (NFI) by 14% to £16.6m and EBITA before non-recurring items and IFRS 2 charges by 4% to £3.8m, in a lacklustre UK market impacted by slow economic growth and market uncertainty.

Significant, is the 22% growth in NFI earned by our businesses operating in markets outside the Public Sector, which as an industry sector has witnessed a steady decline in demand due to government cutbacks in expenditure. This shift in market focus and performance demonstrates the increasing level of agility at InterQuest to direct our expertise into markets where there is both growth in demand and a shortage of key technology skills.

Public Sector represented just 12% of the Group's NFI in 2011 (18% in 2010). It is worth noting that despite depressed demand we saw modest growth in NFI of 2% in our Public Sector business as we moved from the first half into the second half of 2011. This not only shows the strength of our brand in a market that has shrunk dramatically, it also acknowledges the strength of our value proposition - something we intend to further leverage across all our businesses in the following year to win market share from our competitors.

To strengthen our position for profitable growth the Group has begun to implement its strategy to streamline and focus its business into niche markets with strong demand for highly skilled niche candidates and to develop its footprint overseas in stable yet fast growing markets.

Early signs of success in following this strategy have enabled InterQuest to lift gross margins. Overall gross margin has improved by 80-basis points from 13.0% to 13.8%. Just as importantly, we converted 22.6% of our gross profit (or NFI) into EBITA before non-recurring items and IFRS 2 charges of £3.8m. 

Equally impressive is the improvement in Contract recruitment margins (excluding PayQuest Group Limited); these have improved on a run-rate basis during 2011 by 120-basis points increasing from 9.6% at the beginning of the year to 10.8% in December 2011, despite the intense competitive nature of the UK market during this period.

Leveraging best practice across the Group also helped redefine our Permanent recruitment capability, lifting performance to £5.0m of NFI, up 34% on the previous year (2010: £3.8m).

Whilst I am delighted to report NFI from Permanent recruitment has increased, it is reassuring to recognise that 70% of our income comes from the recurring revenue associated with our specialist Contract recruitment business.

New Customer Acquisition

Improvements to our performance in winning new business helped InterQuest add a further 261 new customer accounts from which we derived £3.0m of incremental NFI in 2011; 18% of the total. With a strong track record of customer retention, these new customers are set to add further income in the year to follow.

The Group's Solutions business, which provides customers with a single, easy-to-use process to source and pay for a selection of specialist recruitment services from niche businesses within InterQuest, also delivered growth, adding two new mid-sized RPO contracts to their customer base.

IQ Equity grows into Profit

IQ Equity delivered strong growth in 2011. Our majority-owned business-incubator for recruitment entrepreneurs achieved NFI growth of 53% to enable IQ Equity to deliver its first full year of profit.

Developing our International footprint

In 2011 InterQuest made its first material step into international markets by opening an office in Singapore; a recruitment market experiencing sustained growth in which a large number of our UK customers are present. We have attracted an experienced local team under the direction of an experienced local executive, with a solid track record of growing specialist recruitment businesses in the region. The first commercial fee earning placements, both Contract and Permanent, have been made and the office sees a growing pipeline of opportunities.

Sector analysis

InterQuest Group operates a portfolio of specialist recruitment businesses operating in deliberately targeted markets. All of these markets experienced growth in NFI during 2011 with the exception of Public Sector.

The strongest sector growth came from Financial Services and Retail. Financial Services experienced a level of volatility through the year as pressures within the industry sector ebbed and flowed. Retail however has seen sustained growth brought on largely by demand for specialist skills in areas such as ecommerce, digital media and analytics; niche markets in which InterQuest has a strong niche capability to support.

People

At the heart of our success are the exceptional people that make up our team throughout the InterQuest Group. In addition to our thanks for a solid year of improving the business in a tough market, we have continued our programme of people development. The focus of our efforts include;

Ø Industry leading training and development; 80% of our new Recruitment Specialists are 'home grown', passing through an intensive iQAD training programme (iQAD : InterQuest Advanced Development).

Ø Development of a highly competitive remuneration package and career structure.

Ø A strong and focused management development programme to support personal aspirations and the scalability of our business.

These initiatives have helped us retain exceptional talent in our team and underpinned the growth in the number of fee earners across the Group from 147 at the start of the year to 169 in December 2011.

Outlook

We continue into 2012 the process begun in the second half of 2011, restructuring the business to align our strategy towards sectors of the market we believe provide InterQuest with increased opportunity for profitable growth. The central elements of this strategy are;

Ø To increase our International footprint in Asia, Europe and UAE.

Ø To carry out further investment in key niche disciplines such as Analytics, Business Intelligence, Digital Media, eCommerce, ERP, Infrastructure and Enterprise Service Management, Project and Programme management.

Ø The migration of our candidate-centric recruitment business - sometimes referred to as Spot Recruitment - into a single, separate practice aimed at placing niche candidates into niche roles rather than just filling vacancies.

I am also delighted with the post-balance sheet appointment to the InterQuest Board of Gary Goldsmith as Chief Operating Officer. Gary is a highly experienced Recruitment Executive with an exceptional track record of building industry leading recruitment practices operating in the UK and overseas - his appointment is complimentary to, and indicative of, our ambition. As such, 2012 will be a year of continued investment to strengthen the quality and performance of the key attributes of our business, specifically; our people, our value proposition and the recognition of our brand. 

Inevitably there will be a 'cost of change', however this change is rapidly being completed to set the business on a clear path towards strong growth in resilient markets in 2013 and beyond.

We will use the appropriate measures and key performance indicators (KPI's) to monitor progress in both real-time and on a periodic basis, remaining agile in our response to material changes in market conditions.

Mark BraundChief Executive6 March 2012

Finance Director's Report

Revenue

Revenue (all from continuing operations) increased by 8% during 2011 to £120.9m (2010: £112.2m).

Net fee income ("NFI")

Net fee income increased by £1.9m or 14% to £16.6m (2010: £14.7m). Our net fee income (gross margin) percentage increased from 13.0% to 13.8% reflecting the fact that a larger proportion of our gross profit was derived from permanent recruitment in 2011; 30% versus 26% in 2010.

Our contract recruitment gross margin % was unchanged from 2010 at 10%. It is worth noting that PayQuest Group Limited, our contractor payroll service (not recruitment) business which operates a 2% gross margin contributed £8.2m of our turnover in 2011 versus only £2.7m in 2010. Our recruitment businesses therefore registered an improvement in contract % margin from 10.3% to 10.6%.

As pointed out in the operational review our contract margin has been on an upward trend by month during 2011 registering a 120 basis point increase between January and December 2011.

EBITA

EBITA before non-recurring items and IFRS 2 share charge increased by 4% to £3.8m (2010: £3.6m).

The intangible asset amortisation decreased by 28% to £0.7m (2010: £1.0m). The net finance cost increased to £0.3m (2010: £0.2m), as we have utilised our invoice discounting facilities to fund our contract business as well as the acquisition of Contract Connections Limited during the year.

Loss before tax increased to £0.2m (2010: profit of £2.2m).

Tax on profits was £0.9m; a detailed analysis is included at note 6.

Loss per share and dividend

Basic loss per share was 3.4 pence (2010: earnings of 6.1 pence). When non-recurring items, amortisation and the IFRS 2 share based payment charge and the deferred tax credits in respect of the three items are removed, the basic adjusted earnings per share is 8.0 pence representing a decrease of 7% from 8.6 pence in 2010. See note 7 for details of the calculation.

An interim dividend of 0.5 pence per share (2010: 0.5 pence) was paid on 28 October 2011. A second interim dividend of 2 pence per share (2010: 2 pence per share) has been proposed. The dividend will be paid on 12 April 2012 to all eligible shareholders on the register as at 14 March 2012. The corresponding ex-dividend date will be 16 March 2012.

Acquisition of Contract Connections Limited

On 21 June 2011 the Group acquired the entire share capital of Contract Connections Limited for a total consideration of £3.7m in cash and £0.3m in new InterQuest Group Plc shares issued at 63.5 pence each.

Non-recurring items

Following notification of an apparent impropriety and alleged fraud within a major client of Contract Connections Limited and the termination of the contract between Contract Connections Limited and the client, the Board conducted an impairment review on the carrying value of the goodwill arising on the acquisition of the company. The impairment review was based on the value in use of the company using a discount rate of 10.48%. The discount rate represents the weighted average cost of capital of the 'Private Other' segment. The post acquisition results of the company are included within the 'Private Other' segment. As a result of the review, an impairment charge of £2m has been recognised in the financial year and has been treated as a non-recurring item.A provision of £0.5m has been made in the financial year, and treated as a non-recurring item, to impair certain trade receivable balances which have been withheld as a result of the alleged fraud.

A further £0.4m of costs have been treated as non-recurring during the period which relate to the acquisition of Contract Connections Limited, an onerous lease provision within the Company, some redundancy costs, certain professional fees in connection with the Group's independent investigation by forensic accountants into the alleged fraud and legal fees in connection with a warranty claim announced on 8 February 2012 totalling £3.8m (see note 10).

Balance sheet, cash flow and financing

The Group's net assets decreased by £1.4m to £19.5m at 31 December 2011 (2010: £20.9m).

Underlying profitability and tight control of working capital delivered £3.4m of operating cash flow (before tax and interest payments). The Group paid £0.8m of corporation tax and £0.3m of interest during the year. Net capital expenditure was £0.6m and dividends of £0.8m were paid. The cash consideration paid to the vendors of CCL was £3.7m and as a result of these cash flows, net debt increased from £2.7m at the start of the year to £5.5m at the end of 2011.

Michael Joyce

Finance Director

6 March 2012

Condensed consolidated statement of comprehensive income

(Loss) / earnings per share

from both total and continuing operations:

All results for the Group are derived from continuing operations in both the current and prior year.

Condensed consolidated statement of financial position

Condensed consolidated statement of changes in equity

Condensed consolidated statement of cash flows

Notes to the consolidated financial information

1 Nature of operations and general information

The InterQuest Group is a specialist IT recruitment Group providing contract and permanent recruitment services within niche disciplines in the UK, Europe and Singapore. The Group's specialist divisions cover a broad range of skill sets and industries including Public Sector, SAP, Oracle, CRM Testing, Banking, Insurance, Retailing, Pharmaceuticals, Media, Analytics, Infrastructure and Communications. The Group operates from eight United Kingdom locations and Singapore and has a centralised finance and administration function.

The Group's consolidated financial information is presented in thousands of Pounds Sterling (£'000).

InterQuest Group plc is the Group's ultimate parent company. It is incorporated and domiciled in England and Wales. The address of InterQuest Group plc's registered office, which is also its principal place of business, is 16 - 18 Kirby Street, London, EC1N 8TS. InterQuest Group plc's shares are listed on the Alternative Investment Market (AIM).

2 Basis of preparation

The financial statements of the Group have been prepared in accordance with International Financial Reporting Standards ("IFRS") as adopted by the European Union (EU) and company law applicable to companies reporting under IFRS. The financial statements have been prepared under the historical cost convention.

3 Summary

The same accounting policies, presentation and methods of computation are followed in this condensed consolidated report as were applied in the preparation of the Group's annual financial statements for the year ended 31 December 2011.

4 Revenue and segmental reporting

For management reporting purposes the Group is organised by individual specialist business units. All business units, with the exception of PayQuest Group Limited, provide Contract and Permanent recruitment services. Our UK recruitment businesses have similar economic characteristics and are considered to meet the aggregation criteria of IFRS. They are analysed below with respect to the market segments where they focus their activities - Private Sector Financial Services, Private Sector Non-Financial Services (described as 'Other') and Public Sector focused. Our IQ Equity division was founded in 2009 to provide start up capital and infrastructure to new specialist IT recruitment and related businesses, and forms a separate reportable segment. PayQuest Group Limited is part of our IQ Equity division but is shown as a separate reportable segment because it does not provide recruitment services. It provides payroll services to contractors.

The information provided below is consistent with the information provided to the Groups chief operating decision maker.

* Includes newly formed Singapore operation

¹ PayQuest Group Limited, our payroll services business, is part of our IQ Equity division but shown separately because it does not provide recruitment services.

¹ PayQuest Group Limited, our payroll services business, is part of our IQ Equity division but shown separately because it does not provide recruitment services.

The information reviewed or otherwise regularly provided to the chief operating decision maker does not include net assets. The cost to develop this information would be excessive in comparison to the value that would be derived.

There is one external customer that represented more than 10% of the entity's external revenues with revenue of £15.8m in the Financial Services segment (2010: £12.7m).

5 Non-recurring items

The following non-recurring items were incurred during the year:

Following notification of an apparent impropriety and alleged fraud within a major client of Contract Connections Limited and the termination of the contract between Contract Connections Limited and the client, the Board conducted an impairment review on the carrying value of the goodwill arising on the acquisition of the company. The impairment review was based on the value in use of the company using a discount rate of 10.48%. The discount rate represents the weighted average cost of capital of the 'Private Other' segment. The post acquisition results of the company are included within the 'Private Other' segment. As a result of the review, an impairment charge of £2.0m has been recognised in the financial year and has been treated as a non-recurring item.A provision of £0.5m has been made in the financial year, and treated as a non-recurring item, to impair certain trade receivable balances which have been withheld as a result of the alleged fraud.

A further £0.4m of costs have been treated as non-recurring during the period which relate to the acquisition of Contract Connections Limited, an onerous lease provision within the Company, some redundancy costs, certain professional fees in connection with the Group's independent investigation by forensic accountants into the alleged fraud and legal fees in connection with a warranty claim announced on

8 February 2012 totalling £3.8m (see note 10).

6 Income tax expense

7 (Loss) / earnings per share

The calculation of the basic earnings per share is based on the earnings attributable to ordinary shareholders divided by the weighted average number of shares in issue during the year.

The calculation of diluted earnings per share is based on the basic earnings per share, adjusted to allow for the issue of shares and the post tax effect of dividends and/or interest, on the assumed conversion of all dilutive options and other dilutive potential ordinary shares.

Reconciliations of the earnings and weighted average number of shares used in the calculations are set out below.

8 Cash and cash equivalents

Cash, cash equivalents and bank overdrafts include the following for the purposes of the cash flow statement:

The carrying value of cash and cash equivalents are considered to be a reasonable approximation of fair value.

9 Acquisitions

On 21 June 2011 the Group acquired the entire share capital of Contract Connections Limited for a total consideration of £3.7m in cash and £0.3m in new InterQuest Group shares issued at 63.5 pence each.

Analysis of the acquisition of Contract Connections Limited

Net assets at date of acquisition:

The fair value adjustments are provisional as the Directors intend to reserve their right to re-appraise fair values up to twelve months from the date of acquisition.

The goodwill arising on the acquisition relates to the Groups investment in the staff and management of the company.

During the year £2.0m of the goodwill arising on acquisition was impaired, see note 5 for further details. The customer relationship intangible asset arising on acquisition does not ascribe any value to the customer relationship that was terminated following the acquisition.

A fair value adjustment of £0.1m has been made to reflect trade receivables not expected to be recovered.

Contract Connections Limited incurred a loss of £0.4m for the 7 month period from 21 June 2011. If Contract Connections Limited had been acquired on 1 January 2011, revenue of the group would have been £124.8m, and profit for the year would have increased by £0.3m.

10 Contingent assets

Subsequent to the acquisition of Contract Connections Limited on 12 August 2011 InterQuest Group Plc announced that due to apparent impropriety and alleged fraud within a major client of Contract Connections Limited, the client subsequently terminated its contract with Contract Connections Limited.

The Board has no further update to our announcement on 8 February 2012 confirming the lodgement of a Warranty Claim totalling £3,835,909 excluding interests and costs against the vendors of Contract Connections Limited.

The information usually required by IAS 37 Provisions, Contingent Liabilities and Contingent Assets is not disclosed on the grounds that it can be expected to prejudice seriously the outcome of the litigation. The directors are of the opinion that the claim will be successful.

11 Financial information 

The financial information in this preliminary announcement which comprises the Condensed Consolidated Statement of Comprehensive Income, Condensed Consolidated Statement of Financial Position, Condensed Consolidated Statement of Changes In Equity, Consolidated Cash Flow Statement and related notes is derived from the full Group financial statements for the year ended 31 December 2011 and does not constitute statutory accounts within the meaning of Section 435 of the Companies Act 2006. Group statutory accounts for 31 December 2010 and 31 December 2009 have been delivered to the Registrar of Companies and those for 31 December 2011 will be delivered following the Company's annual general meeting. The auditors have reported on each set of Group statutory accounts and their reports were (i) unqualified, (ii) did not include a reference to any matters to which the auditors drew attention by way of emphasis without qualifying their report and(iii) did not contain a statement under Section 237(2) or Section 237(3) of the Companies Act 1985 or Section 498(2) or Section 498(3) of the Companies Act 2006.