Half Yearly Report

31 July 2014

Xchanging plc

Results for the six months ended 30 June 2014

Results Summary

First half results in line with expectations; full year outlook unchanged

Operational Highlights

· On track to deliver 2014 profit objective

· Year-on-year organic growth in adjusted operating profit of 32.2% on a like-for-like basis

· Technology business has good start following restructuring in 2013

· Acquisition of Agencyport Europe and agreed acquisition of Total Objects contribute significantly to building Xuber insurance software business and position in insurance binders market

· Procurement business fundamentally repositioned around core technology offering and placed under new leadership

· Fondsdepot Bank now 100% owned by Xchanging, further simplifying business

· Significant 2014 programme of investment in growth potential on schedule

· Investment in internal change programme to reduce cost and enhance efficiencies advancing well

· Increased committed debt facility by £40 million to £165 million

Ken Lever, Chief Executive, commented:

"We continue to focus on technology and technology-enabled offerings which differentiate Xchanging in the market. We remain in line with expectations and on track to deliver our stated objective of maintaining operating profit in line with last year. The acquisition of Agencyport Europe and agreed acquisition of Total Objects will provide a marginal additional contribution to our profitability in 2014 and, more significantly, further enhance our positioning for a resumption of growth in revenues and profits in 2015 following the divestments and business exits which arose in 2013." 

Notes

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

2. Adjusted operating profit excludes exceptional items (HY 2014: £8.5 million income, HY 2013: £1.9 million income), acquisition costs (HY 2014: £2.5 million, HY 2013: £nil) and amortisation of intangible assets previously unrecognised by acquired entities (HY 2014: £1.8 million, HY 2013: £1.6 million).

3. Net cash is calculated as cash and cash equivalents (HY 2014: £118.3 million, HY 2013: £116.9 million) less bank loans and revolving credit facilities (HY 2014: £10.0 million, HY 2013: £25.2 million), finance lease liabilities (HY 2014: £0.8 million, HY 2013: £0.8 million) and loans from related parties (HY 2014: £nil, HY 2013: £0.9 million).

4. Equity free cash flow is calculated as operating cash flow (as defined above) less cash tax (HY 2014: £7.9 million, HY 2013: £5.6 million) and net interest paid including dividends received (HY 2014: £1.5 million, HY 2013: £1.8 million).

5. Economic profit is adjusted operating profit less a tax charge at the Group's effective tax rate for a rolling twelve month period, less a charge for invested capital. The charge for invested capital is calculated as the Group's invested capital (as defined above) multiplied by the Group's weighted average cost of capital, being 10%.

Enquiries

Xchanging plc Tel: +44 (0) 203 604 6999

David Bauernfeind, Chief Financial Officer

Alexandra Hockenhull, Director of Corporate Communications and Investor Relations

Maitland Tel: +44 (0) 207 379 5151

Emma Burdett

Peter Ogden

Martin Barrow

A presentation for investors and analysts will be held at The Lincoln Centre, 18 Lincoln's Inn Fields, London, WC2A 3ED at 9:00am on 31 July 2014. For those unable to attend, a live webcast of the presentation will be available on the company website, www.xchanging.com.

Executive Insight interview with CEO, Ken Lever

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

About Xchanging 

www.xchanging.com

@XchangingGroup

LinkedIn/company/xchanging

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. In particular, any statements regarding Xchanging's strategy, dividend policy and other future events or prospects are forward-looking statements.  Undue reliance should not be placed on any such statements because they speak only as at the date of this announcement 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.

These forward-looking statements are not guarantees of future performance and there are a number of factors (many of which are outside of Xchanging's control) which could cause actual results to differ materially from those expressed or implied in forward-looking statements. Among thesefactors 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.

Save for those forward-looking statements required by the Listing Rules, the Disclosure and Transparency Rules and/or the Prospectus Rules, Xchanging undertakes no obligation to update these forward-looking statements, and will not publicly release any revisions it may make to these forward-looking statements that may result from events or circumstances arising after the date of this announcement. Xchanging therefore will comply with its obligations to publish updated information as required by law or by any regulatory authority but assumes no further obligation to publish any additional information.

RESULTS FOR THE SIX MONTHS ENDED 30 JUNE 2014

OVERVIEW

It has been another busy half year, and we are particularly pleased to be making a step change to the development of our insurance software business through the acquisition of Agencyport Europe and the agreed acquisition of Total Objects. Investment in our potential for organic growth is also progressing apace.

We are pleased to report that Xchanging's financial performance is in line with expectations and we are on course to achieve our 2014 objectives of maintaining the 2013 level of profit and of positioning the company for a return to growth in 2015. This is despite starting the year with the challenge of making up the ground from businesses we chose to exit in 2013. Our Technology business has performed notably well in view of the reduction of the business with the London Metal Exchange, and cost reductions and efficiency gains resulting from our internal change programmes have contributed to the half year performance. The company remains in a strong financial position.

Our transformation continues and we have made good progress with the 2014 organic and inorganic investment programme we set out at the time of our 2013 results in February this year. Our self-help internal change programmes are advancing well.

STRATEGIC REVIEW

In our Annual Report 2013 we re-stated our objective of pursuing a business model that is less dependent on individual major customers; is built around technology as an enabler of business processes; and has a focus on differentiated products and service offerings driven through innovation that are repeatable and scalable, with a shorter selling cycle and lower costs to sell.

We are continuing to concentrate our efforts behind a focused range of offerings in areas where we have clear competitive advantage based on depth of domain expertise, such as Xuber in our technology business, and MarketMaker4 ("MM4") in procurement. We are staying closer to our customers and our markets, and combining industry insights with our innovative drive to solve customer problems. Being a provider of technology services in their own right in turn fuels our ability to develop and improve our business processing services through technology.

In this way we are seeing Xchanging start to emerge from its transformation process as a business services provider with a set of clearly differentiated service offerings driven and enhanced by technology, that bring value to our customers' businesses and where we own the underlying intellectual property.

We have stepped up investment in our growth potential this year and taken some strategic steps that contribute significantly to our objectives.

Insurance software business

In early July we announced the acquisition of two insurance software businesses, Agencyport Europe and Total Objects. The Total Objects acquisition is subject to clearance by the Competition and Markets Authority ("CMA"). Without pre-empting the decision of the CMA, the commentary in this report assumes that the acquisition is completed as planned.

Agencyport Europe and Total Objects will combine with Xuber to create a substantial insurance software business that contributes to our strategic objective of combining technology, innovation and domain strength to deliver differentiated services that bring value to our customers' businesses. The acquisitions bring new customers, providing the opportunity to cross-sell our respective existing offerings and further broadening our overall customer base; they bring complementary products to extend and enhance our existing offerings; and they provide entry to new markets, in risk exposure modelling and health insurance. In addition, they bring us additional high calibre management to add to our growing Xuber business, as well as a healthy pipeline. There are also opportunities to improve efficiency and achieve more effective cost management.

Repositioning of Procurement business under new leadership

The acquisition of the eSourcing business MM4 in September 2013 is enabling us to develop our overall Procurement business around a leading technology platform. To emphasise the importance of the technology focus, we have appointed the three business leaders of MM4 to senior positions in our Procurement business, with Chirag Shah now in the role of Executive Director, Procurement.

MM4 has performed well since acquisition with customer numbers growing by about a half since acquisition. We are confident that putting the eSourcing platform at the core of our overall Procurement business, refocusing the market strategy to lead with our technology offering and combining it with our existing procurement expertise, will enable that business to generate growth and profitability going forward.

We are focusing our business on higher margin, technology-based offerings where we can either provide the technology to be used directly by our customers or where we support customers with technology that has a service wrapper.

Full ownership of Fondsdepot Bank and development of our investment account and fund administration business

In our May 2014 Interim Management Statement we reported that we were in exclusive discussions with our Enterprise Partner, Allianz Global Investors Europe GmbH ("AllianzGI"), regarding the transfer to Xchanging of ownership of a final tranche of client accounts, and of overall ownership of the Enterprise Partnership Fondsdepot Bank GmbH. We reported on 30 July that we have now successfully concluded these discussions. Fondsdepot Bank is now wholly owned by Xchanging. This brings another Enterprise Partnership to a close and further simplifies Xchanging's business.

Following this transaction, Xchanging will have over one million investment accounts under evergreen end-customer contracts, strengthening FdB's position as one of the leading independent investment account administration platforms in Germany. Our objective is to increase the market-facing presence of this business and reinforce our competitive position. We have accelerated investment in development of an enhanced range of products, and in the introduction of robotic automation to reduce cost and increase operating efficiency.

In Xchanging Italy, we have completed our integration programme following the acquisition of AR Enterprise in 2012. We are now focusing our efforts on developing the Italian customer base and on opening up new end markets for our offering.

Investment Programme

We have continued our programme of investment in our existing businesses and offerings. Notably, we are developing additional modules for our Xuber insurance software; for workers' compensation, to support our rebid for the New South Wales contract in Australia, due for renewal at the end of this year, and for the US Admitted insurance market.

We continue to develop Netsett in the insurance business, following a successful pilot, with the challenge now being to gain widespread implementation in the market. We saw a good response to the re-launch of our Fees Direct + product under the brand 'Verometrix'.

In March we invested in an 8.3% stake in the enterprise middleware provider MachineShop Inc.; this is referred to below.

SECTOR REVIEW

Business Processing Services

Business Processing Services net revenue was £142.1 million (HY 2013: £198.8 million). Adjusted operating profit was £26.1 million (HY 2013: £29.9 million), representing an adjusted operating profit margin of 18.4% (HY 2013: 15.0%). The current year performance is lower as the prior year period included Xchanging Transaction Bank ("XTB") which was divested in August 2013. XTB contributed revenue of £51.6 million and adjusted operating profit of £7.0 million in the first half 2013.

We have seen a good profit and margin performance in the first half although, as referred to in our May Interim Management Statement, we have seen a faster than expected contraction in the lower margin legacy contract revenues. Offsetting this, we won a 3-year claims processing contract with the Lloyd's market, and have been winning elective Claims service business, enabling us to plan for the longer term and to take investment decisions that help us improve the profitability of this business as it adjusts to change in its market. Insurance Services has continued to invest in the upgrade to the London Insurer's Market Repository, under the contract renewal signed in 2012, and in expanding its mobile application services.

In workers' compensation in Australia, our State of Victoria contract has performed up to our expectations in the first half. The New South Wales contract, which saw a solid performance, is due for renewal at the end of 2014. Ahead of this, we have submitted our bid for an expanded share of the market from the beginning of January 2015. Currently we have a 5% share, and increasing this would significantly improve the attractiveness of the contract. To support our bid we are investing in the development of a new Xuber workers' compensation module.

We launched our Binder 360 product into the insurance Binders market in the first half of the year, and saw some encouraging early contract wins. The recent Total Objects acquisition will help build our position in this market.

Technology

Net revenue for the Technology sector was £47.1 million (HY 2013: £49.0 million). Adjusted operating profit was £2.7 million (HY 2013: £2.5 million), representing an adjusted operating profit margin of 5.7% (HY 2013: 5.1%).

The Application Engineering Services and Learning Platform business in India and South East Asia continues to grow, so that, despite the significant reduction in the London Metal Exchange contract from May 2014, adjusted operating profit has increased.

We have accelerated our Xuber investment programme. This, together with the acquisition of Agencyport Europe, will further contribute to the creation of a leading global insurance software business. Total Objects will also help us to build our position in the insurance Binders market and will offer synergies with our existing offerings, particularly with our broker services and Binder 360.

We are building on the success of our Learning Platform in Malaysia by pursuing other opportunities in other developing parts of the world. We were delighted in May to win the Global AirRail (GARA) 2014 'Best Payment Solution' Award for the pioneering cloud based automatic fare collection system we developed for the operators of the KLIA Ekspres and KLIA Transit services in Kuala Lumpur, Malaysia.

The minority stake in middleware specialist MachineShop, referred to earlier, provides access to application programme interface capabilities ("API's") that link operating and information technology. We already have a number of mutual customers with MachineShop and support the development of the APIs. This is a good example of the provision of a technology enabled service, which is repeatable and scalable and which has intellectual property, through the use of third party technology. Reflecting this, we have now appointed a global head of Internet-of-Everything, based in Singapore.

Procurement

Net revenue for Procurement was £15.9 million (HY 2013: £22.9 million), the reduction was primarily due to the decision to exit from the Human Resources Services business ("XHRS"), which was returned to BAE Systems at the end of 2013. The sector reported a reduced adjusted operating loss of £1.7 million (HY 2013: £2.1 million loss) despite the exit from the XHRS business.

MM4 has been performing up to our expectations. Additional costs have been incurred at the start of the year for the integration of MM4, and for investment in the underlying technology platform, along with MM4's eSourcing suite.

Change Programme

Our programme has advanced well with shared service centres now established in the UK and India for functions including finance, HR and internal technology. Following the introduction of Salesforce.com, and of Workday in the UK, the latter is now moving into global rollout. We are also rolling out end user computing across our businesses, and have started our finance transformation programme. This includes provision of a single SAP system to replace the number of legacy systems that have been in use. Our drive to develop world class operations continues, with further automation, standardisation and simplification, and facilities rationalisation.

Financial Position

Cash flow prior to investment has been robust in the first half of the year. The company remains in a strong financial position and in July we agreed with our banks to increase the revolving credit facility by £40.0 million to £165.0 million.

OUTLOOK

The growth momentum of our new business has been very encouraging in the year to date and, combined with the efficiency gains we are seeing through our internal change programme, we remain on track to meet our profit objective for 2014 and to see a return to growth in 2015.

OPERATING AND FINANCE REVIEW

Group financial indicators

Notes

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

2. Adjusted operating profit excludes exceptional items (HY 2014: £8.5 million income, HY 2013: £1.9 million income), acquisition costs (HY 2014: £2.5 million, HY 2013: £nil) and amortisation of intangible assets previously unrecognised by acquired entities (HY 2014: £1.8 million, HY 2013: £1.6 million).

3. Operating cash flow is calculated as cash generated from operations less net capital expenditure (including pre-contract costs HY 2014: £0.3 million, HY 2013: £0.1m) and dividends to non-controlling interests (HY 2014: £11.2 million, HY 2013: £8.8 million).

4. Adjusted cash conversion is calculated as operating cash flow, after adding back the cash impact of exceptional items (HY 2014: £7.5 million inflow, HY 2013: £5.3 million inflow), acquisition related expenses (HY 2014: £nil, HY 2013: £nil) and the (decrease) / increase in customer cash accounts held by Fondsdepot Bank (HY 2014: (£0.7 million), HY 2013: £1.0m) divided by adjusted operating profit.

5. Net cash is calculated as cash and cash equivalents (HY 2014: £118.3 million, HY 2013: £116.9 million) less bank loans and revolving credit facilities (HY 2014: £10.0 million, HY 2013: £25.2 million), finance lease liabilities (HY 2014: £0.8 million, HY 2013: £0.8 million) and loans from related parties (HY 2014: £nil, HY 2013: £0.9 million).

6. Equity free cash flow is calculated as operating cash flow (as defined above) less cash tax (HY 2014: £7.9 million, HY 2013: £5.6 million) and net interest paid including dividends received (HY 2014: £1.5 million, HY 2013: £1.8 million).

7. Return on invested capital is adjusted operating profit less a tax charge at the Group's effective tax rate (HY 2014: 22.7%, HY 2013: 29.6%) for a rolling twelve month period, divided by invested capital at the period end date. Invested capital is calculated as the Group's net assets (HY 2014: £235.9m, HY 2013: £206.0m), less net cash noted in the table above.

8. Economic profit is adjusted operating profit less a tax charge at the Group's effective tax rate for a rolling twelve month period, less a charge for invested capital. The charge for invested capital is calculated as the Group's invested capital (as defined above) multiplied by the Group's weighted average cost of capital, being 10%.

Financial Highlights

· Year-on-year organic growth in adjusted operating profit of 32.2% on a like-for-like basis

· Year-on-year growth in Xchanging's share of net cash of 66.8%

· Exceptional profit during the year from the surrender of the Leadenhall Street Office lease and related items of £11.2 million

· Capital expenditure of £23.9 million on product development and internal change projects

· Conditional acquisition of Total Objects on 3 July 2014

· Acquisition of Agencyport Europe on 4 July 2014

· Increased committed debt facility by £40.0 million to £165.0 million on 28 July 2014

· Acquisition of remaining shares in Xchanging Italy

· Acquisition of remaining shares in Fondsdepot Bank

Income Statement

Net revenue

Net revenue for the six months ended 30 June 2014 was £205.1 million (HY 2013: £270.7 million).

Organic net revenue shrinkage was £9.1 million, a decrease of 4.3% on a like-for-like basis. This excludes £7.0 million of adverse currency movements, primarily related to the Australian Dollar.

Organic revenue growth also excludes £2.1 million from MM4 following its acquisition in September 2013.

Adjusted operating profit

Adjusted operating profit (AOP) for the six months ended 30 June 2014 was £20.0 million (HY 2013: £23.0 million). On a like-for-like basis, there was a 32.2% increase in AOP, excluding MM4 following its acquisition and adjusting for the disposal of XTB in 2013.

The like-for-like increase in AOP is primarily driven by the Business Processing Services sector. The fall in AOP due to revenue shrinkage is predominately driven by the loss of the London Metal Exchanging contract within the Technology Sector and the HR business within the Procurement Sector.

Margins

Adjusted operating profit margin (based on net revenue) improved to 9.8% (HY 2013: 8.5%). This improvement was driven by winning higher margin contracts and cost base improvements.

Corporate

Corporate costs for the six months ended 30 June 2014 totalled £7.1 million (HY 2013: £7.3 million). The reduction in corporate costs has been delivered through on-going cost management.

Taxation

The Group's effective tax rate on adjusted profit before tax was 22.7% (HY 2013: 29.6%). The decrease in the rate in 2014 is due to the recognition of the tax benefit of historic losses in France, Singapore and the US, and the lower UK corporate tax rate.

The cash tax rate on adjusted profit before tax was 24.4% (HY 2013: 28.1%). The effective rate for 2014 is lower than the 2014 cash tax rate largely due to the recognition of the tax benefit for losses.

Earnings per share

Adjusted basic earnings per share were 2.93p, a decrease of 15.8% on 2013 (HY 2013: 3.48p).

Significant events in the period

Acquisitions and investments

On 23 January 2014 SIA S.p.A. exercised their put option on their remaining 1.3% shareholding in Xchanging Italy S.p.A. for £4.0 million (€4.8 million). The Group now owns 100% of the share capital of Xchanging Italy S.p.A. A further £2.6 million was paid as deferred consideration for the AR Enterprise S.r.l. business that we acquired in October 2012.

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

On 3 July 2014 the Group signed an agreement to acquire 100% of the share capital of Total Objects Limited (Total Objects), subject to clearance by the Competition and Markets Authority (CMA). On CMA clearance, Xchanging will pay a total cash consideration of up to £21.0 million for the acquisition on a cash-free, debt-free basis. Of this, £11.5 million is payable on completion, and up to a further £9.5 million is payable in 2015, 2016 and 2017, of which £1.5 million is fixed and the balance is subject to certain performance targets being achieved. Total Objects provides the London and global markets with (re)insurance software that fully automates the insurance lifecycle.

On 4 July 2014 the Group acquired 100% of the share capital of Agencyport Europe, the European operating division of Agencyport Software Ltd for £64.1 million cash. Agencyport Europe provides policy administration, billing and claims software to the health insurance and property & casualty markets, together with risk analysis and exposure modelling software that is complementary to the existing insurance software suite of Xchanging's Xuber business.

Exceptional Items

Exceptional items have been recognised in the period, which have a net operating profit impact of £8.5 million. The largest item was £11.2 million of income from the exit of the Leadenhall Street premises. This includes final receipt for the early surrender of the lease on the premises and the associated costs of moving.

Sector performance

The table below shows net revenue and adjusted operating profit movements, by sector, after adjusting for the effects of foreign exchange, acquisitions (MM4) and disposals (XTB).

The table does not include the exit of the LME contract or the HR services business.

Cash flow

The Group continues its focus on strong cash generation and cash generated from operations increased from £39.0 million in the first half of 2013 to £50.6 million in the first half of 2014. The net cash outflow for the period was £12.6 million.

Operating cash flow includes the receipt of £18.0 million (including VAT) for the final payment of the early surrender of the lease on the Leadenhall Street premises in London and a subsequent tax payment of £2.9 million for the capital gain.

On 30 July 2014, consistent with our plan to transform the Procurement business, we agreed to transfer back to BAE Systems the UK procurement services during 2015. On contract termination there will be a cash outflow of approximately £15 million in respect of a change in working capital. In addition, dependent on the services transfer date in 2015, the impact on results is expected to be a net revenue decrease of approximately £2.5 million (and annual gross revenue reduction of approximately £150 million).

Net capital expenditure increased significantly to £23.9 million in the first half of 2014. This included £11.6 million spend on product developments such as Xuber and £9.6 million on internal change programmes, including £4.6 million on Xchanging's new office at the Walbrook.

During the first half of 2014 the Group spent £7.2 million on acquisitions. We acquired our joint venture partner's shares in Xchanging Italy through a put option exercise for £4.0 million. A further £2.6 million was paid as deferred consideration for the AR Enterprise business that we acquired in October 2012 and we made a £0.6 million investment in MachineShop.

The amount spent on acquisitions in the period and the remaining expected amounts to be paid are as follows:

Net Cash

The total cash held on the Group consolidated balance sheet was £118.3 million on 30 June 2014, £72.9 million of which was held by Enterprise Partnerships. The aggregate cash balance in Enterprise Partnerships represents working capital, accumulated but unpaid distributions to the shareholders and, in the case of Fondsdepot Bank, customer cash accounts. Xchanging receives cash from Enterprise Partnerships through contractual licence fees and dividends. Xchanging's share of net cash provides a simple guide to the amount of cash that is freely available to deploy across the whole Group. It takes a prudent view as it makes no attempt to attribute Xchanging's share of working capital that is held in the Enterprise Partnerships.

Borrowing facilities

Our principal source of debt finance is a £125.0 million multi-currency revolving credit facility. At 30 June 2014, £10.0 million (HY 2013: £16.8 million) was drawn as cash and a further £16.0 million (HY 2013: £16.3 million) was utilised to provide a letter of credit.

In addition to the above facilities, there is a working capital facility of INR330.0 million (£3.2 million) provided to Xchanging Technology Services Private Limited in India. At 30 June 2014, the amount drawn was £nil (HY 2013: £nil).

At 30 June 2014, the Group had £99.0 million (HY 2013: £47.7 million) of headroom under its committed debt facilities.

Following the acquisition of Agencyport Europe and the potential acquisition of Total Objects Limited, it was agreed with existing lenders to increase the size of the existing revolving credit facility by £40.0 million to £165.0 million. All the other terms of the revolving credit facility, that is due to mature in June 2018, remain unchanged.

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 30 June 2014, the Group was compliant with both of its financial covenants:

· the ratio of consolidated borrowings to Xchanging's share of consolidated profit before depreciation and amortisation (pre-exceptional items) must not exceed 2.5 times. As at 30 June 2014, the ratio was 0.1 times; and

· 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 5.0 times. As at 30 June 2014, the ratio was 38.0 times.

Dividends

The 2013 full year dividend of 2.5 pence per ordinary share was paid on 23 May 2014. In line with previous years the Board is not recommending the payment of an interim dividend.

Group risk factors

There have been no significant changes to the strategic, commercial, operational and financial risks facing the Group as explained in the Principal Risks section of the 2013 Annual Report, on pages 29 to 31, a copy of which can be found on www.xchanging.com. These were listed as follows:

Strategic risks

· Failure to secure new business from both new and existing customers (*)

· Failure to utilise and exploit technology-enablement for growth

· Failure to identify and execute appropriate acquisitions and disposals

Commercial risks

· The development of, and increased competition within, the London insurance market (*)

· Concentration of material new and existing contracts with customers in key markets that may have a significant impact on Group's performance.

Operational risks

· Our customers demand efficient processing and high levels of service to help them achieve their objectives and protect their reputation (*)

· Our reputation and ultimately our profitability are reliant on successful implementation and delivery of new contracts

Financial risks

· The Group's financial results may be subject to volatility arising from movements in interest rates, foreign exchange rates, pension asset and liability valuations, liquidity and changes in taxation legislation, policy or tax rates.

(*) Identified as a key risk

Notes 1 to 22 form an integral part of these condensed consolidated interim financial statements.

1Adjustments to adjusted in 2013 and 2014 include exceptional items (Note 7), amortisation of intangible assets previously unrecognised by an acquired entity, acquisition related costs and imputed interest on put options.

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

Notes 1 to 22 form an integral part of these condensed consolidated interim financial statements.

Consolidated cash flow statement for the six months ended 30 June 2014

Notes 1 to 22 form an integral part of these condensed consolidated interim financial statements.

Consolidated balance sheet as at 30 June 2014

Notes 1 to 22 form an integral part of these condensed consolidated interim financial statements.

Consolidated statement of changes in equity for the six months ended 30 June 2014

For a description of the nature and purpose of each reserve within shareholders' equity refer to note 32, on pages 133-135, in the 2013 Annual Report.

Movements in the period 1 January 2013 to 30 June 2013 and the period 1January 2014 to 30 June 2014 are unaudited

Notes 1 to 22 form an integral part of these condensed consolidated interim financial statements.

Notes to the consolidated interim financial statements for the six months ended 30 June 2014

1. General information

Xchanging plc and its subsidiaries provide a range of business processing services, primarily to the financial services and insurance industries, as well as procurement and technology services across industries.

Xchanging plc is a public limited company incorporated and domiciled in the UK. The address of its registered office is 25 Walbrook, London, EC4N 8AQ. The Company's ordinary shares are traded on the London Stock Exchange.

On 31 July 2014, the Board approved the condensed consolidated interim financial statements.

The financial information included in these condensed consolidated interim financial statements does not constitute full statutory financial statements within the meaning of section 434 of the Companies Act 2006. The statutory accounts for the year ended 31 December 2013 were approved by the Board of Directors on 27 February 2014 and have been delivered to the Registrar of Companies. The auditors' report on those accounts was unqualified, did not contain an emphasis of matter paragraph and did not contain any statement under sections 498 (2) or (3) of the Companies Act 2006.

These condensed consolidated interim financial statements have not been reviewed or audited by our auditors.

2. Basis of preparation

The condensed consolidated interim financial statements for the half year ended 30 June 2014 have been prepared in accordance with the Disclosure and Transparency Rules of the Financial Conduct Authority, and with IAS 34, "Interim financial reporting" as adopted by the European Union. The condensed consolidated interim financial statements should be read in conjunction with the annual financial statements for the year ended 31 December 2013 in the 2013 Annual Report, which were prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union.

Going concern

The Directors have reviewed the expected liquidity position of the Group for the period to 31 December 2015. The cash flows of the Group have been assessed against the Group's available sources of finance on a monthly basis to determine the minimum and maximum expected levels of headroom. Based on this analysis, and an assessment of the potential cash risks, the Directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. The Group therefore continues to adopt the going concern basis in preparing its condensed consolidated interim financial statements.

3. Accounting policies

The accounting policies adopted in the preparation of these condensed consolidated interim financial statements are consistent with those followed in the preparation of the Group's annual financial statements for the year ended 31 December 2013, except for those standards and amendments that have been adopted as follows, none of which have had a material impact on the financial position or performance of the Group:

· IFRS 10 Consolidated financial statements builds on existing principles by identifying the concept of control as the determining factor in whether an entity should be included within the consolidated financial statements of the parent company. The standard provides additional guidance to assist in the determination of control where this is difficult to assess.

· IFRS 11 Joint arrangements focuses on the rights and obligations of the parties to the arrangement rather than its legal form. There are two types of joint arrangements: joint operations and joint ventures. Joint operations arise where the investors have rights to the assets and obligations for the liabilities of an arrangement. A joint operator accounts for its share of the assets, liabilities, revenue and expenses. Joint ventures arise where the investors have rights to the net assets of the arrangement; joint ventures are accounted for under the equity method. Proportional consolidation of joint arrangements is no longer permitted.

· IFRS 12 Disclosures of interests in other entities, includes the disclosure requirements for all forms of interests in other entities, including joint arrangements, associates, special purpose vehicles and other off balance sheet vehicles.

· IFRIC 21 Levies sets out the accounting for an obligation to pay a levy that is not income tax. The interpretation addresses what the obligating event is that gives rise to a levy becoming payable and when a liability should be recognised.

· Investment Entities (Amendments to IFRS 10, IFRS 12 and IAS 27). These amendments provide an exception to the consolidation requirement for entities that meet the definition of an investment entity under IFRS 10 Consolidated Financial Statements. The exception to consolidation requires investment entities to account for subsidiaries at fair value through profit or loss.

· Amendments to IFRS 10, 11 and 12 on transition guidance, IAS 27 (revised 2011) Separate financial statements and IAS 28 (revised 2011) Associates and joint ventures, in relation to IFRS 10, 11 and 12.

· Offsetting Financial Assets and Financial Liabilities - Amendments to IAS 32. These amendments clarify the meaning of 'currently has a legally enforceable right to set-off' and the criteria for non-simultaneous settlement mechanisms of clearing houses to qualify for offsetting.

· Novation of Derivatives and Continuation of Hedge Accounting - Amendments to IAS 39. These amendments provide relief from discontinuing hedge accounting when novation of a derivative designated as a hedging instrument meets certain criteria.

4. Estimates

The preparation of condensed consolidated interim financial statements requires management to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets and liabilities, income and expense. Actual results may differ from these estimates.

In preparing these condensed consolidated interim financial statements, the significant judgements made by management in applying the Group's accounting policies and the key sources of estimation uncertainty were the same as those applied to the consolidated financial statements for the year ended 31 December 2013, with the exception of changes in estimates that are required in determining the provision for income taxes.

5. Seasonality of operations

Our financial performance is expected to be more weighted to the second half of the year at an adjusted operating profit level compared to 2013. For the year ended 31 December 2013, 59% of adjusted operating profit accumulated in the second half of the year. During the second half of 2013, performance was impacted by the disposal of XTB.

6. Segmental reporting

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

The Board considers the business as follows:  

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

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

· Procurement Services provides procurement services to a range of customers.

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

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

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

There have been no changes to the reportable segments as presented in the Annual Report for the year ended 31 December 2013. All figures reported are unaudited.

In 2014 Other BPO is included in the Financial Services segment. Comparative numbers have been presented on the same basis.

The segment information for the six months ended 30 June 2014 is as follows:

The segment information for the six months ended 30 June 2013 is as follows:

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

1Acquisition-related expenses include £1.3 million expensed as part of the total amount payable to the sellers of MarketMaker4 in respect of the acquisition earn-out mechanism. £1.2 million of acquisition-related expenses relates to professional fees for the acquisition of Agencyport Europe and Total Objects Limited.

7. Exceptional items

Exceptional items are those items that in the Directors' view are required to be separately disclosed by virtue of their size or incidence and in order to improve a reader's understanding of the financial statements. During the six months to 30 June 2014 the following exceptional items were recognised:

· £11.2 million lease surrender receipt, net of related items. This includes the final receipt for the early surrender of the lease on the Leadenhall Street premises and the associated costs of moving. This is considered exceptional as it is a significant amount.

· Restructuring costs of £2.7 million incurred across the Group. In keeping with the 2013 financial statements, these were considered exceptional as they were incurred as part of a significant Group-wide restructuring plan taking place over 2013 and 2014.

8. Cash generated from operations

Included in the cash generated from operations was a net receipt of £18.0 million (including VAT) as a part payment for the early surrender for the lease on the Leadenhall Street premises.

9. Taxation

The income tax expense for the six months ended 30 June 2014 is recognised based on management's estimate of the annual income tax rate on profit before tax expected for the full financial year. The estimated annual tax rate for the year to 31 December 2014 on adjusted profit before tax is 22.7% (the estimated equivalent tax rate applied to the six months ended 30 June 2013 was 29.6%). The rate has fallen due to the recognition of the tax benefit of historic losses and the lower UK corporate tax rate.

10. Dividends

A dividend of £6.1 million (2013: £2.4 million) in relation to the full year 31 December 2013 was paid in May 2014.

11. Share capital and share premium

During the period to 30 June 2014 the Group issued 2,137,087 ordinary shares at 5 pence each to satisfy employee share options that were exercised (30 June 2013: 200,000 ordinary shares), with exercise proceeds of £1.5 million (30 June 2013: £0.2 million). As a result of the share issue, share premium increased by £1.4 million (30 June 2013: £0.2 million). The related weighted average price for the time of the exercise was 161.79 pence (30 June 2013: 132.56 pence) per share. During the period to 30 June 2014 the Group repurchased 1,328,626 ordinary shares for £2.2m.

12. Other intangible assets

The carrying value of other intangible assets of £64.4 million at 30 June 2014 increased by £8.4 million compared to £56.0 million at 31 December 2013. Intangible assets have increased by £17.1 million (30 June 2013: £7.6 million) as a result of net additions that include Xuber and Netsett software, and decreased due to amortisation of £7.1 million (30 June 2013: £7.3 million).

13. Property, plant and equipment

The carrying value of property, plant and equipment of £22.1 million at 30 June 2014 increased by £1.5 million compared to £20.6 million at 31 December 2013. Property, plant and equipment has increased by £7.1 million (30 June 2013: £2.9 million) as a result of net additions that include investment in the new London Office and internal change projects, and decreased due to depreciation of £3.0 million (30 June 2013: £3.4 million). Land and buildings with a carrying value of £2.6 million have been presented as assets held for sale.

14. Cash and cash equivalents

Xchanging receives cash from Enterprise Partnerships through contractual licence fees and dividends. At 30 June 2014 a total £3.1 million (31 December 2013: £6.1 million) was due from Enterprise Partnerships to Xchanging as accrued but unpaid licence fees. Enterprise Partnerships operate a 100% profit distribution policy and £11.8 million (31 December 2013: £9.3 million) of profit earned in the full year 2013 was distributed to Xchanging in 2014. £6.4 million (30 June 2013: 5.9 million) of profit earned in the six months ended 30 June 2014 will be distributed to Xchanging in 2015.

Also included in the cash at bank and in hand held in Enterprise Partnerships at 30 June 2014 are £34.5 million (at 31 December 2013: £35.2 million), of customer cash deposits held at Fondsdepot Bank. An equal customer cash accounts liability is recognised on the balance sheet.

15. Net cash

The consolidated movement in net cash for the first six months of the year is:

Movement in net cash

Included within net current and non-current borrowings in the consolidated balance sheet of £8.9 million (HY 2013: £26.9 million) is £1.9 million (HY 2013: £nil) of capitalised loan fees relating to the £125.0 million multi-currency revolving credit facility. Capitalised loan fees are not included within net cash.

During the six months ended 30 June 2014, the Group drew down £10.0 million of debt under the revolving credit facility (HY 2013: repaid £12.4 million).

16. Other financial liabilities

17. Financial Instruments

Financial risk management

The multi-national nature of the Group's operations and their financing exposes it to a variety of financial risks:

· market risk (including foreign exchange risk, fair value risk and interest rate risk);

· credit risk;

· liquidity risk;

· price risk; and

· capital risk.

The condensed consolidated interim financial statements do not include all financial risk management information and the disclosures required in the annual financial statements; they, therefore, should be read in conjunction with the Group's annual financial statements as at 31 December 2013, pages 130 to 132. There have been no changes in the risk management department since the year ended 31 December 2013 or in any risk management policies.

The only significant changes in financial risks since the 2013 Annual Report are in the foreign exchange risk and liquidity risk as follows:

Foreign exchange risk

At 30 June 2014 the Group had forward foreign exchange contracts of £13.9 million, €3.4 million and USD8.5 million (30 June 2013: £5.2 million, €1.5 million and USD4.7 million) in place to mitigate foreign exchange volatility relative to the Indian Rupee. Of these, £12.9 million, €3.2 million and USD7.5 million (30 June 2013: £4.4 million, €1.2 million and USD2.7 million) were designated as cash flow hedges of highly probable Sterling, Euro and US Dollar revenue. The cash flow hedges were assessed to be highly effective as at 30 June 2014 and a net unrealised loss of £0.2 million (30 June 2013: £0.4 million net unrealised loss) was recognised in equity. The cash flow hedges fix the Indian Rupee value of Sterling, Euro and US Dollar cash flows expected to arise during the period 01 July 2014 to 31 May 2015.

Further the Group has booked forward foreign exchange contracts of USD11.0 million and €17.0 million to hedge the foreign exchange exposure arising on its foreign currency denominated monetary assets and liabilities. The fair value movement of these derivatives is recognised in the income statement.

Liquidity risk

As at 30 June 2014, the Group had available cash of £118.3 million (30 June 2013: £116.9 million) and undrawn committed debt facilities of £99.0 million (30 June 2013: £47.7 million). On 28 July 2014 the Group agreed with its lenders to increase the size of its committed debt facility by £40.0 million to £165.0 million.

Fair value estimations

The table below analyses financial instruments carried at fair value, by valuation method. The different levels have been defined as follows:

· Level 1 - Quoted prices (unadjusted) in active markets for identical assets or liabilities.

· Level 2 - Inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly (that is, as prices) or indirectly (that is, derived from prices).

· Level 3 - Inputs for the asset or liability that are not based on observable market data (that is, unobservable inputs).

The determination of the fair value of level 1, 2 and 3 financial instruments has not changed since 31 December 2013. For the valuation techniques used refer to Note 24 on pages 117-120 of the 2013 Annual Report.

The following table presents the Group's assets and liabilities that are measured at fair value at 30 June 2014:

The following table presents the Group's assets and liabilities that are measured at fair value at 31 December 2013:

Level 3 instruments

The following table presents the changes in level 3 instruments that relate to the put options to acquire the non-controlling interest in Enterprise Partnerships for the period ended 30 June 2014:

On 23 January 2014 SIA exercised the put option over the remaining 1.3% shareholding in Xchanging Italy S.p.A.. £4.0 million (€4.8 million) was paid by the Group to purchase these shares.

In February 2014 the Group paid £2.6 million (€3.2 million) of deferred consideration to the shareholders of AR Enterprise S.r.L.

Fair value of financial assets and liabilities measured at amortised cost

The fair value of the following financial assets and liabilities approximate their carrying value (including those presented within the held for sale disposal group):

· Trade and other receivables

· Cash and cash equivalents

· Trade and other payables

· Borrowings and loans

· Customer accounts

· Deferred contingent consideration on acquisitions

18. Provisions

The total provisions balance includes £12.2 million (2013: £14.0 million) presented as current, with the remaining £1.7 million (2013: £2.5 million) presented as non-current.

The nature of each provision remains consistent with the annual financial statements for the year ended 31 December 2014 as described on page 124 of the 2013 Annual Report.

19. Contingent liabilities

The Group has provided £18.7 million (30 June 2013: £21.3 million) of bank guarantees in respect of put option liabilities, obligations under contracts entered into in the ordinary course of business and lease property deposits. £16.0 million of the guarantees (30 June 2013: £18.9 million) are issued under the Group's £125.0 million revolving credit facility and a further £2.7 million (30 June 2013: £2.5 million) are guarantees issued under separate facilities.

In the normal course of the Group's business, legal proceedings are pending or may be brought against the Company and its subsidiaries arising out of current and past operations, including matters relating to commercial disputes, product liability, antitrust, premises-liability claims and warranty/indemnity claims. The Directors assess these legal proceedings on a regular basis and a provision is recognised when the claim is probable, an obligation exists as a result of a past event and a reliable estimate of the outflow of economic resources can be made.

20. Retirement benefit obligations

Changes in the pension assumptions from those presented in the annual financial statements for the year ended 31 December 2013 relate to the discount rates applied. The discount rate applied to the UK retirement benefit plans was revised from 4.4% as at 31 December 2013 to 4.2% as at 30 June 2014 in line with market data. This change has had the impact of increasing the Group's retirement benefit obligation by £4.2 million as at 30 June 2014.

21. Related party transactions

The Group's significant related parties are as disclosed in note 30, on pages 130 to 131 of the 2013 Annual Report. The only change in related parties or related party transactions in the period compared to the prior period is that Xchanging etb GmbH and its subsidiaries (including XTB) are not considered a related party for the period ended 30 June 2014.

A description of the nature of the services provided to/from these companies by/to the Group and the amount receivable/(payable) in respect of each are set out in the table below:

Transactions with Directors and key management

The total gain made by directors during the year from the exercise of share options was £1.2 million (2013: £0.2 million)

No balances are outstanding from current Directors and key management personnel.

22. Post balance sheet events

a) Agencyport Europe

On 4 July 2014 the Group acquired 100% of the share capital of Agencyport Europe, the European operating division of Agencyport Software Ltd. Agencyport Europe provides policy administration, billing and claims software to the health insurance and property & casualty markets, together with risk analysis and exposure modelling software that is complementary to the existing insurance software suite of Xchanging's Xuber business. The company has 160 employees based in offices in London, Leeds and Cwmbran.

The Group paid consideration of £64.1 million cash.

For the year ended 31 December 2013, Agencyport Europe earned revenue of £18.9 million and generated adjusted earnings before interest, taxation, depreciation and amortisation (EBITDA) of £5.0 million. The gross assets of Agencyport Europe as at 31 December 2013, excluding goodwill, were £15.2 million. The acquisition has been financed from Xchanging's debt facility.

If the acquisition date had been 1 January 2014, Agencyport would have contributed revenue of £10.0 million and profit before tax of £2.0 million to the 30 June 2014 results.

The fair values of significant assets and liabilities acquired are set out below:

Estimates and judgements were applied in determining the fair values of customer contracts of £33.2 million and software assets of £12.5 million. The fair values were estimated by applying the income approach to estimates of future cash flows. Goodwill represents the value of future potential sales and cost synergies. Note that amortisation arising from customer contracts is an adjusting item, whereas the amortisation of software assets is not.

b) Total Objects Limited

On 3 July 2014 the Group signed an agreement to acquire 100% of the share capital of Total Objects Limited (Total Objects), subject to clearance by the Competition and Markets Authority (CMA).

Total Objects provides the London and global markets with (re)insurance software that fully automates the insurance lifecycle. The acquisition will enable Xchanging to realise product development synergies in the Binder market by combining its Binder360 offering with the Total Objects BinderCloud software offering. Total Objects also offers further potential synergies with Xchanging's Xuber insurance software.

On CMA clearance, Xchanging will pay a total cash consideration of up to £21.0 million for the acquisition on a cash-free, debt-free basis, to be satisfied from Xchanging's existing cash resources. Of this, £11.5 million is payable on completion, and up to a further £9.5 million is payable in 2015, 2016 and 2017, of which £1.5 million is fixed and the balance is subject to certain performance targets being achieved.

The revenue generated by the business in the year ended 31 December 2013 was £8.0 million. The adjusted EBITDA generated by the business in the year ended 31 December 2013 was £0.5 million.

The Group incurred acquisition-related expenses of £1.2 million for the above-mentioned acquisitions.

c) Revolving credit facility

On 28 July 2014 the Group agreed with its current lenders to increase the size of its revolving facility by £40.0 million to £165.0 million. The maturity date and other terms of the credit facility remain unchanged.

d) 100% ownership of Fondsdepot Bank

On 30 July 2014 Allianz Global Investors Europe GmbH (AllianzGI) exercised its put option for £10.9 million (€13.6 million) with respect to Fondsdepot Bank GmbH (FdB), thereby giving Xchanging 100% ownership of FdB. As part of this transaction, all remaining customer accounts administered by FdB, but contracted with AllianzGI under a service contract due to expire in October 2015, will transfer to FdB in June 2015. Xchanging is to provide an updated customer portal in accordance with agreed specifications, and adjustments are being made to the ongoing fee arrangements with AllianzGI.