Final Results

15 March 2018

InterQuest Group plc

("InterQuest" or "Group")

Final Results

The InterQuest Group is a specialist technology recruitment business operating in high growth areas in the 'new digital economy' and today releases audited results for the year ended 31 December 2017.

Financial highlights

§ Group adjusted operating profit before exceptional items decreased 25% to £2.7m (2016: £3.6m). 1

§ PBT before exceptional items decreased 26% to £2.0m (2016: £2.7m).

§ Statutory profit after tax of £0.5m profit (2016: £1.2m loss).

§ Net fee income (NFI) increased 3% to £22.4m (2016: £21.7m). 2

§ Revenue decreased 5% to £136.0m (2016: £143.6m).

§ Basic earnings per share increased to a profit of 1.5 pence (2016: 3.4 pence loss).

§ Diluted earnings per share 1.5 pence (2016: 3.4 pence loss).

§ Basic adjusted earnings per share 5.1 pence (2016: 7.2 pence). 3

§ Diluted adjusted earnings per share 5.1 pence (2016: 7.0 pence). 4

§ Net cash generated from operating activities £2.2m (2016: £2.5m).

§ Net debt at year end improved by £1m to £4.6m (2016: £5.6m). 5

Improved margins

§ Gross margin improvement to 16.5% (2016: 15.1%).

Operational highlights

§ Headline results aligned with market expectations following a year of significant change.

§ Permanent placement fees increased by 25% to £10.4m (2016: £8.3m).

§ Successful integration of the RDW acquisition.

§ Improving the Group's international net fee income mix to 20.5% (2016:10.3%).

§ Expanding the Group's New York presence.

1 Adjusted for share-based payment charge, amortisation and exceptional items.

Group operating profit before exceptional items reconciliation is shown in the Consolidated Statement of Comprehensive Income.

2 NFI = Net Fee Income = Statutory Gross Profit.

3 Adjusted for share-based payment charge, amortisation and exceptional items.

4 Adjusted for share-based payment charge, amortisation, impairments and exceptional items.

5 Net Debt = Cash at bank and in hand less Borrowings.

Gary Ashworth, Chairman of InterQuest, said:

"The acquisition of RDW in 2016 had a positive material impact on the financial performance in 2017. The legacy businesses continued to be restructured in order to address underperformance and have the right management and personnel to focus on the niche markets that are growing in the face of the challenges brought on by Brexit.

Our recruitment process outsourcing business, InterQuest Solutions, added a further customer to the practice during the year and continues to be a focus for designing and delivering high value resourcing solutions.

Looking forward, the Group intends to continue to invest in our high performing brands and in our staff whilst focusing on paying down debt."

Chris Eldridge, CEO of InterQuest said:

"Following a year of change, the 2017 results for the Group were slightly behind the management team's expectations. The Group has invested in new service offerings and developed its international footprint in order to focus on niche, fast growth technologies and higher margin opportunities.

During the course of the year the Group leadership team has made significant progress in refining its value proposition and simplifying its brand structure in order to meet our client's needs and offer a total talent management solution.

The Group remains focused on capitalising on the opportunity in assisting our clients wherever they are in the digital maturity lifecycle.

On behalf of the board I want express our gratitude to all of my colleagues for their energy and commitment in 2017 and their ongoing hard work and dedication."

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Our markets

The Group is focusing on the markets that are being driven by digital innovation and working with companies that are investing in technology to drive their future growth.

The digital market place is both broad and dynamic, with areas of acute staff shortage across the globe. New technologies and protocols are being developed and adopted at an increasing rate and, just as quickly, legacy technology is being scrapped with companies looking to benefit from increased speed, mobility and flexibility. The way that consumers are accessing information is driving investment with B2C companies having to address their technology estate to ensure that they offer the ease of use demanded from an increasingly aware and app based set of customers. All of this is happening against a backdrop of increased awareness in issues such as security, sustainability, inclusion, mobility and the ethical use of data, which in turn is driving innovation and change.

The technologies that these applications, platforms and operating systems rely on are reasonably well established, however, the ongoing demand for talented people to design and develop effective and innovative solutions shows little sign of abating, and, in some niche areas, is the primary risk to growth.

§ 77% of CEOs in UK stated their top area of investment over the next three years will be recruiting and investing highly in people (75% global) - KPMG UK CEO Outlook 2017 Report.

§ The average digital salary in the UK is 44% higher than the national average - Tech nation report 2017.

§ 80% of company leaders believe digitising their enterprise is a critical part of innovation, however only 43% state they have a dedicated team for this - PwC Global Digital IQ Survey.

§ UK tech businesses are growing 2X faster than non-digital businesses - Tech nation report 2017.

The InterQuest business model

InterQuest Group's human capital management business is an award-winning specialist staffing, executive search and solutions provider.

Following a simplification of the Group's brand architecture in 2017 the Group goes to market with four operating brands, InterQuest (technology talent acquisition), ECOM (digital talent acquisition), Rees Draper Wright (executive search) and InterQuest Solutions (workforce optimisation) to help organisations acquire in-demand talent and develop human capital. InterQuest Group's approach to human capital acquisition, management and optimisation enables every type of organisation to respond more effectively to the challenges and opportunities of the future.

Demand for highly skilled and experienced technology professionals continues to develop alongside new and innovative applications. The Group has structured itself to directly map our services to the in demand technology areas of Digital Change, Security, Analytics, Risk, Telecommunications, ESM, ERP and have begun to develop capability in Intelligent Automation.

Alongside this the InterQuest Solutions business focuses on providing a range of innovative recruitment services and solutions that respond effectively to the changing demands of the recruitment outsourcing market. Focusing on clients that face significant transformation with high demand for niche skills, InterQuest Solutions have built a robust specialist workforce management proposition that delivers fast, effective results.

Review of the business in 2017

The Group has implemented a number of changes during 2017 to ensure that the business is capitalising on growth markets. However, during this restructuring Group profitability has decreased.

§ Group adjusted operating profit before exceptional items decreased 25% to £2.7m (2016: £3.6m).

§ PBT before exceptional items decreased 26% to £2.0m (2016: £2.7m).

§ Statutory profit before tax was £0.9m (2016: £0.5m loss).

§ Statutory profit after tax of £0.5m (2016: £1.2m loss).

§ Net fee income (NFI) increased 3% to £22.4m (2016: £21.7m).

§ Permanent NFI increased 25% to £10.4m (2016: £8.3m).

§ Contract NFI decreased 11% to £12.0m (2016: £13.5m).

The Group's financial results were impacted during the year by the bid from Chisbridge Limited. The defence costs of the bid amounted to £0.45m.

The revenues from permanent placements increased in the year by 25% to £10.4m. However, the primary cause of the Group's reduction in revenue during 2017 was a continued decline in contractor numbers. The revenue resulting from contract recruitment decreased by 7% during the year with the most significant impact being felt in ECOM, and certain practices reported in Enterprise (Telecoms, Enterprise Service Management and IT Sales). The reduction in revenues led to an 11% decrease in contract Net Fee Income as margins came under pressure.

The Group's permanent revenue increased by 25%, which was positively affected by the acquisition of RDW in August 2016 and therefore trading for the full year in 2017.

The leadership team took further action to challenge and restructure the cost base which resulted in one off redundancy and loss of office costs of £0.4m.

ECOM

On 26 November 2013, the Group acquired 100% of the share capital of ECOM Recruitment Limited ("ECOM"), the UK's leading digital technology recruitment business for a total consideration of up to £7.04m.

At 30 June 2016 the Board conducted a review of the carrying value of the intangibles and goodwill associated with the business of ECOM and as a result of that review the goodwill was impaired by £3,152k in the 2016 financial year. The carrying value of the goodwill at 31 December 2017 is £1,711k. There has been no change to the carrying value of goodwill in 2017.

The change in activity has resulted in a decline in contractor levels and a 9% decline in revenues but an increase in Net Fee Income of 3% in 2017.

Public Sector

The Group's Public Sector practice was not affected in any significant way by the uncertainty over the changes in IR35 regulations implemented by the UK government in April 2017. The number of contractors reduced during the year but the margins achieved improved in 2017 which, added to an increase in permanent placements, led to a reduction in revenue but an increase in Net Fee Income of 23%.

The business continues to grow its customer base and is delivering new products into the public sector market, including supplying niche consulting solutions.

Enterprise

The enterprise markets facing the financial services industry continued to suffer a material reduction in contractor numbers during 2017 which negatively impacted its full year results and a reduction in Net Fee Income of 5%. The effect of this was partly mitigated by the Solutions practice, (the Group's RPO and Managed Service business) where Net Fee Income increased by 5%. This was driven by increased demand from Solutions' six existing customers and the winning of a further new customer engagement in 2017.

Niche

The Group's NFI from niche practices decreased by 15% in 2017. The niche practices include Analytics, Information Security, Technology and Networks. The over reliance on long standing clients with attritional margins and the slower than anticipated development of new opportunities led to the decrease. A change in senior leadership has occurred during the year and they are focused on increasing productivity in the various practices.

RDW

The Group acquired RDW in August 2016 and the acquisition has materially contributed to the Group's financial outcome in 2017. RDW focus their attention at senior management and board positions both in the consulting and the wider private sector. The salary levels that are achieved and the resulting fees significantly exceed the average placement value of the broader Group.

Net Fee Income in RDW grew to £3.1m from £0.9m in 2016. RDW has benefitted from offering executive search services to existing InterQuest customers but has also grown its own customer base, particularly in the US market.

The digital transformation cycle

One of the Group's primary differentiators is achieved through focusing on specialist skills. We differentiate ourselves from the competition by recruiting effectively across each of the core stages of digital transformation, providing a cohesive solution across all stages of the process:

§ Creative design & development - served by ECOM among other IQ brands

§ IT & infrastructure - served by niche brands such as IQ Tech and Enterprise

§ Connectivity & mobility - Served by niche IQ brands such as IQ Networks

§ Information & cyber security - served by niche IQ brands such as IQ InfoSec

§ Analytics - served by niche IQ brands such as IQ Analytics

§ Change & transformation - served by niche brand IQ Change

§ InterQuest is therefore able to support our clients' recruitment demands as they progress with their digital strategy ensuring a continuity of service that is highly valued.

§ Being able to offer support across all the stages of the digital transformation cycle enables the Group to benefit from cross selling opportunities and creates the opportunity to present fully managed recruitment process, outsourcing and managed service programmes.

§ The ability to offer a one off solution to a specific client's mandate, as well as being able to provide a market leading, large scale RPO or managed services programme domestically and in the US, marks InterQuest Group apart from its competitors.

Operational Overview

Internationalisation

The Group expanded its office in NY investing in the existing RDW team and establishing both an Analytics and ECOM practice. The teams work in similar markets to their UK counterparts focusing primarily on the NY state geography. Demand for digital and consulting skills in NY is currently strong, being driven by a mix of start- ups and digitally mature companies who are seeking experienced talent to gain a competitive advantage. As a result of high demand and low supply both the salaries candidates can command and the margin at which the Group works are significantly higher than the UK equivalent, making it an attractive geography for further investment.

Consolidation of London offices

During the second half of 2017 the Group relocated its four London based offices in to one new headquarters near Cannon Street. This move creates one unified head office for the Group with several practices working in one location for the first time. The opportunity for cross selling will be significantly enhanced as well as creating a client suite for the Group to host events and exhibitions.

Simplification of brand architecture

The Group operating structure was reviewed during the year with the result being a simplification of the Group's 16 brands in to 4. The revised brand architecture sees the Group going to market under:

§ InterQuest

§ ECOM

§ Rees Draper Wright

§ InterQuest Solutions

The Group operations board has been changed accordingly, leading to a more streamlined management team.

Contractor numbers

The Group's contractor numbers were negatively affected by a reduction in ECOM and certain Enterprise accounts. The drop off in ECOM was as a result of increased use of online portals and a growing number of in-house recruitment teams being established in agencies. The focus has changed within the team with an increased number of consultants working with end customers. Within the Enterprise business, several of the Groups contractors were working with large client organisations via competitor managed service programmes at low margins. As these agreements have come up for review and renewal the Group have chosen not to work with several clients on unfavourable terms resulting in a temporary reduction in overall demand.

InterQuest Solutions

The Group's workforce optimisation brand continues to manage several of the Group's larger customer recruitment needs. Over the course of 2017 a number of new products were developed and launched to meet the increasingly sophisticated demands of companies' total talent management requirements. This has led to the creation of a new programme management office improving the level of service and support that the Group can offer its current and prospective clients.

Key performance indicators

The directors use a range of performance indicators to measure the delivery of the Group's strategic objectives. The most important of these are considered key performance indicators ("KPI's") and their targets are determined annually. The KPI's are set out below:

Key performance indicators (continued)

The primary cause of the Group's reduction in revenue during 2017 was a reduction in contractor numbers in ECOM and certain practices within Enterprise. The revenue resulting from contract recruitment decreased by 7% during the year but increased by 25% regarding permanent fee placements. This resulted in an overall reduction in revenues of 5% but an increase in Net Fee Income of 3% and a Gross Profit percentage increase from 15.1% to 16.5% overall.

Net debt was reduced through a careful management of credit terms with customers during the course of 2017. Net finance costs were £0.24m (2016: £0.31m) reflecting the lower levels of debt required during the year by the Group and improved terms from the new banking arrangments.

Tax on profits was £0.48m before exceptional items (2016: £0.56m); a detailed analysis is included at note 3.

Net finance costs were £0.24m (2016: £0.31m) reflecting the lower levels of debt required during the year by the Group.

Exceptional items

The following table summarises the exceptional items in the 2017 financial statements:-

Earnings per share and dividend

Basic earnings per share was 1.5 pence (2016 loss: 3.4 pence per share). When exceptional items, the IFRS 2 share-based payment charge, amortisation of intangibles, impairment and the tax in respect of these items are removed, the basic adjusted earnings per share was 5.1 pence representing a decrease of 30% from 7.2 pence in 2016. See note 5 for details of the calculation. Due to the reduction in operating profits and the need for liquidity in order to fund further growth in the Group, the Board are not declaring a dividend. The total dividend for the year was nil pence per share (2016: 1.5 pence per share)

Balance sheet, cash flow and financing

The Group's net assets increased by £0.2m to £22.3m at 31 December 2017 (2016: £22.1m). Continued delivery of operating profit before exceptional items and tight control of working capital delivered £2.2m of operating cash flow (2016: £2.5m). The Group paid £0.24m (2016: £0.31m) of net interest during the year. Net capital expenditure was £0.60m (2016: £0.28m) and dividends of £0.4m (2016: £0.9m) were paid.

Net debt decreased from £5.6m at the start of the year to £4.6m at the end of 2017 (2016: decreased from £6.0m at the start of the year to £5.6m at the end of the year). The Group continues to finance its activities through the utilisation of a trade receivables finance facility. The facility of £24m has a three month rolling notice period. The Group cannot utilise invoices if they remain unpaid 120 days from the end of the month in which they were issued.

Consolidated income statement

For the year ended 31 December 2017

Statement of comprehensive income

For the year ended 31 December 2017

Profit per share from both total and continuing operations:

Consolidated balance sheet

As at 31 December 2017

Consolidated statement of changes in equity

For the year ended 31 December 2017

Consolidated cash flow statement

For the year ended 31 December 2017

Notes to the consolidated financial statements for the year ended 31 December 2017

Basis of preparation of the preliminary announcement

The financial information in this statement does not constitute the Company's statutory accounts for the years ended 31 December 2017 or 2016 but is derived from those accounts. Statutory accounts for 2016 have been delivered to the Registrar of Companies, and those for 2017 will be delivered in due course. The auditor has reported on those accounts; 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 498(2) or (3) of the Companies Act 2006.

This preliminary announcement was approved by the Board of Directors on 13 March 2018.

InterQuest Group Plc (the "Company") is incorporated in the UK. The information within this document has been prepared based on the Company's consolidated financial statements which are prepared in accordance with International Financial Reporting Standards as adopted by the EU (adopted IFRS) and consistent with the accounting policies as set out in the previous consolidated financial statements.

The Group's financial statements have been prepared on the historical cost basis. The preparation of financial statements requires the application of estimates and judgements that affect the reported amounts of assets and liabilities, revenues and costs and related disclosures at the balance sheet date. The accounting policies have been consistently applied across Group companies to all periods presented.

The Group and Company financial statements have been prepared on the going concern basis, as the directors are satisfied that the Group and Company have adequate resources to continue to operate for at least a period of 12 months from the date of approval of the financial statements. An explanation of the directors' assessment of using the going concern basis is given in the Directors' report in the Annual Report and Accounts 2017 which will be made available to shareholders in 15 March 2018.

1. Revenue and segmental reporting

There were £2,217k of revenues earned from outside of the UK, mainly in the US but no material non-current assets held outside the UK. For management reporting purposes the Group is organised into the following six divisions:

1. Niche - comprising specialist recruitment practices focused on Analytics, Business Intelligence, Cyber Security, Internet of Things, Telecommunications, Risk and Compliance which provide access to talent in some of the most critical areas of demand in the modern economy;

2. ECOM Recruitment Limited - our division operating in the digital market space which the Group acquired in November 2013;

3. Enterprise - comprising our Recruitment Process Outsourcing services together with legacy client relationships with significant customers in the financial services and retail sectors;

4. Public Sector - focused on the public sector and not for profit markets;

5. RDW - an executive search recruiter acquired in August 2016 with offices in the UK and the USA.

6. Other - including central costs and the centralised sales function

All business units provide contract and permanent recruitment services and have similar economic characteristics and are considered to meet the aggregation criteria of IFRS.

Information regarding segment assets is not provided to the Group's chief operating decision maker. This is because the Group considers net fee income (gross profit) and profitability for the purpose of making decisions about allocation of resources.

2017

2016

The Group does not report items below EBITA by segment in its internal management reporting.

There are no external customers who individually represent more than 10% of the entity's external revenues during the year (2016: no client represented more than 10%).

2. Exceptional items

The below represent exceptional items in the 2017 financial statements:

3. Income tax expense

4. Cash and cash equivalents

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

5. 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.