Half Yearly Report

31 July 2013

Xchanging plc

Half Year Results for the six months ended 30 June 2013

Results Summary

Financial and Operational Highlights

·; Year-on-year improvement in financial performance

·; Ongoing good cash generation

·; Insurance Sector performed well; Netsett pilot going well and good levels of interest

·; Financial Services also performed well; Xchanging Italy integration underway

·; Technology makes encouraging progress; Xuber launched in US and pipeline building

·; Procurement sees disappointing first half, but strong pipeline building for second half

·; Sale of shareholding in Xchanging Transaction Bank approved; change of control effective from 1 September 2013

·; Continued to make incremental contract wins, broadening customer and contract base

·; Business transformation making good progress

Ken Lever, Chief Executive, commented:

"I am pleased to report a strong first half in which we delivered good year-on-year improvement, in line with our objectives. This comes as we continue to make good progress implementing the significant changes necessary to deliver our business transformation plans. We also continue to win incremental business, and our focus on technology-enablement and innovation is becoming increasingly evident in the type of business we win, and the products and services we are bringing to market. We are starting to see the 'new' Xchanging emerge.

In the second half of the year, we will remain focussed on investing in the business and the products and services that will deliver long term future growth as well as in development of the infrastructure of our business to deliver value through higher productivity. We believe we are on track to deliver absolute year-on-year improvement in financial performance for the year as a whole, in line with market expectations."

Notes

* The comparative amounts have been restated to reflect changes in the pension accounting policy where relevant. A further explanation of the restatement is included in note 3.

1. Net revenue excludes principal spend on procurement contracts that arises from supplier costs that are passed on to the customer.

2. Adjusted operating profit excludes exceptional items (HY 2013: £1.9 million, HY 2012: £nil) and amortisation of intangible assets previously unrecognised by acquired entities (HY 2013: £1.6 million, HY 2012: £2.0 million).

3. Adjusted operating profit margin is calculated as adjusted operating profit divided by net revenue.

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

5. Adjusted cash conversion is calculated as cash generated from operations plus the cash impact of exceptional items, acquisition related expenses and the movement in customer cash accounts held by Fondsdepot Bank, less net capital expenditure and dividends to non-controlling interests divided by adjusted operating profit (as defined above).

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

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

8. Return on invested capital is adjusted operating profit less a tax charge at the Group's effective tax rate 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 less net cash.

9. 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) 207 780 6999

David Bauernfeind, Chief Financial Officer

Alexandra Hockenhull, Director of Corporate Communications and Investor Relations

Maitland Tel: +44 (0) 207 379 5151

Neil Bennett

Emma Burdett

Dan Yea

A presentation for investors and analysts will be held at Brewers' Hall, Aldermanbury Square, City of London, EC2V 7HR at 09:30 on 31 July 2013. For those unable to attend, a live webcast of the presentation will be available on the company website, www.xchanging.com.

For those not able to join in this way please dial +44 (0) 145 255 5566 and enter conference ID 19845803 to listen to the live audio or to the audio recording that will be available after the presentation.

About Xchanging 

What we are 

Xchanging provides business processing, technology and procurement services internationally for customers across multiple industries.

What we do

Xchanging brings innovation, thought leadership and passion to its customers' businesses so as to enhance performance and value. Our values are embedded into everything we do.

What we want to be

Xchanging wants to be regarded as the best provider in its chosen markets by delivering services that are recognised for outstanding quality, reliability and innovation.

Cautionary Statement: 

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

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

RESULTS FOR THE SIX MONTHS ENDED 30 JUNE 2013

OVERVIEW

The main theme of the first half has been the good progress made in our business transformation whilst continuing to show year-on-year improvement in financial performance. We continued to win new and renewed contracts, and have been encouraged by the steady interest in our recently launched products, particularly in our Xuber range of insurance software products.

OBJECTIVES FOR 2013

Year-on-year improvement in financial performance

Despite the significant changes implied by our business transformation process, we have met our objective of achieving year-on-year improvement in financial performance in the first half of this year.

Our Insurance, Financial Services and Technology businesses all performed well, with only Procurement showing a weaker performance. This was partly due to lower than expected revenues from our North American contract combined with the impact of the lower margin, new, three year contract with BAE Systems in the UK.

It is our intention to deliver year-on-year improvement in profitability during this transformation.

Cash generation remained strong and includes an initial £6.0 million (including VAT) receipt related to the early surrender of the lease on our premises at 34 Leadenhall Street, London, which we are now scheduled to vacate in March 2014.

Further details on performance are included in the Operating and Financial Review section of this report.

Increased sales to new and existing customers

We continued to win incremental contracts from new and existing customers across all our businesses, including from Bell Microsystems Ltd, the University of South Australia, Toyota Motor Corporation Australia Ltd, Gatwick Airport, G4S, Zenit, Regents University, London and Standard Bank in South Africa.

In our insurance claims business, we signed a large number of small contracts to provide elective claims adjusting services. These contract wins provide a helpful endorsement of our service as this market opens up to competition. Our new Fees Direct+ insurance service continued to build its customer portfolio, and our Xuber range of insurance software products made steady progress.

We are making good progress in managing our business portfolio away from a small number of large legacy contracts and building instead a broader base of smaller, more widely spread contracts.

We continued to develop our sales and marketing capabilities and to broaden our base of customers and contracts. We made good use of digital channels to support our programmes and of the Salesforce.com platform to improve the quality of our pipeline management data. We have put in place a new 'Go-to-market' structure organised around our three industry sectors (Insurance, Financial Services and Enterprise) and three service lines (Business Processing Services, Technology and Procurement). Our aim is to take all our offerings to market, across all the industries we serve. We are also seeking to promote cross-selling to existing customers through greater emphasis on account management, and have seen some early success with this.

Sector review

Business Processing Services

Within Business Processing Services our focus remained on our areas of domain strength, Insurance Services and Financial Services.

In our insurance business, we continued to invest in development of our X-presso and Netsett products as well as in the technology that supports the Insurer's Market Repository. X-presso is a good example of the technology-led innovation we want to deliver to maintain and grow our role in the insurance market.

The Netsett pilot has been going well and we are seeking further customers in the corporate sector. We are also seeing a good level of interest in Netsett for its primary intended use as a global insurance net settlement service.

In our insurance broking business, we are addressing weak performance by looking to generate a broader client base and by seeking a greater technology focus.

In Financial Services, the integration of Kedrios S.p.A. ("Kedrios") and AR Enterprises S.r.L. ("AR Enterprises"), now 'Xchanging Italy', is well underway. Cost reduction measures and migration of Kedrios customers onto the AR Enterprises technology platform will continue in the second half. We plan to complete the integration process by the year end.

In Fondsdepot Bank GmbH ("Fondsdepot Bank"), we are seeking to broaden the customer base and grow the business. We are also working to improve profitability through a cost reduction programme that is already in progress.

In our Enterprise sector, we are particularly focussing on Finance & Accounting services, and on investment in developing our analytics capabilities. Additionally, we are seeking to capitalise on capabilities we have developed for existing customers, particularly in manufacturing, real estate and healthcare. Much of this activity is being driven from our Indian operations.

Technology Services

Our Technology business is making encouraging progress. Xuber revenues grew, and we continued to see strong interest, helped by a number of marketing initiatives. In April, Xuber was launched in the US where we participated in two major industry events. More recently we added a team to our Kuala Lumpur office to provide customer support in our South East Asia market. We are continuing to invest in this business.

The impending conclusion of the London Metal Exchange contract in May 2014 is providing a catalyst for review of our Technology Services business. We are now focussing our product offerings around five areas: application development, support and maintenance, particularly in the mid-tier sector; application engineering services, particularly around software in manufacturing; virtual learning (building on our initial success in Malaysia); 'the internet of things' (the use of technology to link physical objects); and our insurance software business, Xuber.

Our capabilities in hosting, connectivity, network and infrastructure services will be refocused as needed to support our newly defined core offerings.

Procurement Services

Procurement had a disappointing first half. However, during the period, it saw a strong pipeline develop in all its regions of operation. We have strong intellectual property in our Procurement business, and now also have infrastructure in the US, the world's largest sourcing market. We intend to build on these foundations.

Going for Gold

Early this year we introduced an internal programme to accelerate our business transformation and to move us towards our objective of having world class selling capabilities and customer engagement, the ability to innovate to differentiate successfully, and competitive edge. Our progress in developing our sales and marketing capabilities is described above.

Our drive for competitive edge is being driven mainly through Human Resource initiatives seeking to develop our talent and skill base, and through our One Xchanging Integration workstream, we are looking to generate improved productivity and improved margins for the business. This is further described below under 'Business improvement'.

STRATEGIC DIRECTION

Developments in the first half of the year contributed further to the transformation of our business model and a reduction in complexity. We now have a clearer business composition with enhanced scope for margin improvement, and a simplified basis for strategic planning.

In May we announced the proposed sale of our 51% shareholding in Xchanging Transaction Bank GmbH ("XTB") to our partner Deutsche Bank AG ("Deutsche Bank"). At the 26 July General Meeting, shareholders voted to approve the transaction. Xchanging now has all the necessary approvals and so change of control will take place, as planned, with effect from 1 September 2013. This transaction represents the last substantial strategic element of the Four Part Action Plan launched in 2011. As part of the transaction, we now have direct ownership of our 51% shareholding in Fondsdepot Bank. This further simplifies our business structure.

The loss of the current London Metal Exchange contract, now due to end in May 2014, underscores the rationale for the transformation of our business model from one based on a small number of large contracts to one based on a large number of smaller contracts. Reducing customer concentration will lower business risk.

After paying down our bank debt, we plan to use the proceeds of the sale of our shareholding in XTB for investment in growth opportunities for the future. We are looking at three principal areas of opportunity:

Organic growth

We plan to invest in our existing businesses and in innovating new products and services. For example, our Xuber suite of insurance software products has been well received by the market and we believe has significant potential. The suite currently addresses four segments of the insurance market; we plan to invest in extending this range to encompass additional segments. Following on the success of our work with the Ministry of Education in Malaysia linking 10,000 schools, we are investing further in the area of connectivity, and are looking at other geographies where we might replicate our Malaysian formula.

Inorganic growth based on existing domain strength

Technology-enablement is key to our future success. We are looking to inject into our existing businesses technology that both raises the value of our offerings and increases their propensity to become embedded in our customers' processes. In addition to developing our own technology, we will seek to make bolt-on acquisitions where we identify suitable opportunities. Our acquisition of AR Enterprises in Italy late last year is a good example of this. We will also seek opportunities in new geographies, to take our domain strengths into a larger market place.

Business improvement

We have made progress, but must accelerate transformation of the company from its legacy silo structure. There is significant cost and inefficiency associated with operating multiple systems and we must become one, truly integrated business in order to deliver the benefits of greater productivity as well as reduced costs. We are investing in developing better Management Information systems, in rationalising our multiple systems into single shared services in areas such as Human Resources and Finance, and in simplifying and standardising our internal IT systems. These efforts form part of our 'Going for Gold' initiative.

Our new business model has less dependence on individual major customers with very long term contracts. It is built around technology as an enabler of business processes; and the focus is on differentiated products and service offerings driven through innovation.

Moving forward the components we bring into Xchanging will fit into this framework; at the same time, the components leaving do not.

In 2013 we are exiting the Xchanging Transaction Bank business and the UK HR Services business. We did not own technology in either case and so the planned departure of this business is consistent with the transformation we are pursuing. The loss of the London Metal Exchange contract was however unplanned and this has been a disappointment.

Adjusting for the above revenue reduction, and for principal revenue in Procurement, then pro forma net revenue is going to be, inevitably, lower. However, we retain our objective of delivering year-on-year improvement in financial performance over the transformation period, with our operating margins continuing to improve, driven by revenue growth in areas of 'new' Xchanging, the benefits of productivity improvements and the impact of cost reduction. We therefore aim to build a business with higher quality revenues, growing in line with or slightly better than the market.

Over the initial phase of our transformation Xchanging has moved from being financially challenged to having financial strength. We demonstrated year-on-year improvement in profitability in 2012. We have seen cash generation improve and overall net cash increase. The company is now in a strong position to invest for the future.

OUTLOOK

In the second half of the year, we will continue to pursue contract wins, and the building of our broader customer base. We will also remain focussed on investing in the business and the products and services that will deliver long term future growth as well as in development of the infrastructure of our business to deliver value through higher productivity.

With the completion of the XTB transaction in August 2013, we will see a proportional reduction in revenue in the second half of the year. Despite this, our internal expectations for the year's financial performance remain unchanged overall. We believe we are on track to deliver absolute year-on-year improvement in financial performance for the year as a whole, in line with market expectations.

OPERATING AND FINANCE REVIEW

Group key performance indicators

Set out below are Xchanging plc's (the Group's) key performance indicators for the six months to 30 June 2013, compared to the same period last year. These KPIs and the analysis presented in this section of the report are based on net revenue, as set out in the income statement.

The Group's adjusted KPIs are calculated based on the adjustments and definitions set out below in order to present the underlying performance of the business.

 Notes:

* The comparative amounts have been restated to reflect changes in the pension accounting policy where relevant. A further explanation of the restatement is included in note 3.

1. Net revenue excludes principal spend on procurement contracts that arises from supplier costs that are passed on to the customer.

2. Adjusted operating profit excludes exceptional income items (HY 2013: £1.9 million, HY 2012: £nil) and amortisation of intangible assets previously unrecognised by acquired entities (HY 2013: £1.6 million, HY 2012: £2.0 million).

3. Adjusted operating profit margin is calculated as adjusted operating profit divided by net revenue.

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

5. Adjusted cash conversion is calculated as cash generated from operations plus the cash impact of exceptional items, acquisition related expenses and the movement in customer cash accounts held by Fondsdepot Bank, less net capital expenditure and dividends to non-controlling interests divided by adjusted operating profit (as defined above).

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

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

8. Return on invested capital is adjusted operating profit less a tax charge at the Group's effective tax rate 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 less net cash.

9. 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%.

Group performance

Net revenue

Net revenue for the six months ended 30 June 2013 was £270.7 million (HY 2012: £254.8 million).

Organic net revenue growth was £6.9 million, an increase of 2.7% on a like-for-like basis. This excludes £2.8 million of favourable currency movements, primarily related to the Euro. The increase in organic revenues was driven across each of our Sectors.

Revenue growth also includes £6.3 million from our Italian operations following the acquisition of AR Enterprises in November 2012.

Adjusted operating profit

Adjusted operating profit (AOP) for the six months ended 30 June 2013 was £23.0 million (HY 2012: £16.0 million). On a like-for-like basis, there was a 40.1% increase in AOP, excluding the growth associated with the Italian business following the AR Enterprises acquisition.

The like-for-like increase in adjusted operating profit is primarily driven by the Financial Services and the Insurance Services sectors. These improvements are partially offset by further investment in the US Procurement business.

Statutory operating profit increased to £23.3 million (HY 2012: £14.0 million). The reconciliation between statutory operating profit and adjusted operating profit is set out below.

Note 7 explains the exceptional items in the income statement.

Adjusted operating profit margin

Adjusted operating profit margin (based on net revenue) improved to 8.5% (HY 2012: 6.3%). This improvement was driven by the increased adjusted operating profits within the Financial Services and the Insurance Services sectors, as set out in the following sector performance analysis.

Earnings per share

When considering earnings per share, the Group uses Xchanging's share of adjusted profit after tax to reflect the performance of the business.

Adjusted basic / diluted earnings per share

1 The comparative amounts have been restated to reflect the changes in the pension accounting policy. A further explanation of the restatement is included in note 3.

Sector performance

Analysis by sector

Net revenue and adjusted operating profit like-for-like analysis

The table below shows net revenue and adjusted operating profit movements, by sector, excluding the impact of foreign exchange movements and the acquisition and disposal in 2012.

Insurance Services

Insurance Services net revenue increased 2.6% to £99.7 million (HY 2012: £97.2 million). Adjusted operating profit increased 31.4% to £20.5 million (HY 2012: £15.6 million), representing an adjusted operating profit margin of 20.6% (HY 2012: 16.0%).

Revenues for the sector benefitted from a higher run rate in the UK business following increased volumes from the core London market platforms across 2012. The Australian business has benefitted from a revised remuneration model and higher project revenues in 2013 to date. These increases more than offset the reduction in revenue in the claims processing and broking services businesses.

The benefit of the increased revenue had a positive impact on adjusted operating profit, while the phasing of development income is expected to be more even across 2013 than 2012. This has led to an increase in profit in the first half of this year.

Financial Services

Financial Services net revenue increased 12.7% to £92.3 million (HY 2012: £81.9 million), including a favourable foreign exchange impact of £2.6 million related to the Euro. Adjusted operating profit increased 65.4% to £8.6 million (HY 2012: £5.2 million), representing an adjusted operating profit margin of 9.3% (HY 2012: 6.3%), including the favourable foreign exchange impact of £0.3 million.

Revenue growth within the sector has been delivered across both the securities processing business and Fondsdepot Bank, with the fund administration business benefiting from the revenue of the acquired AR Enterprises business.

The adjusted operating profit increase is due to the increased revenues described above and strong cost control in securities processing.

Both the revenue and adjusted operating profit in the sector have benefitted from the impact of the acquired AR Enterprises business, which is now part of Xchanging Italy S.p.A. ("Xchanging Italy"). This new entity, which combines the legacy Kedrios business with the acquired business, has recorded an adjusted operating profit in the first half of 2013, reversing the trend of historic losses seen within our Italian operations. For the first half of 2012 Kedrios made a loss of £1.0 million. The amortisation of the £3.6 million of acquired software assets in AR Enterprises is included in adjusted operating profit. Due to this accounting treatment the reported adjusted operating profit of Xchanging Italy will be reduced by £0.7 million (€1.0 million) in 2013, although there will be no impact on cash or statutory profit.

Technology

Net revenue for the Technology sector increased 5.4% to £49.0 million (HY 2012: £46.5 million). Adjusted operating profit increased 4.2% to £2.5 million (HY 2012: £2.4 million), representing an adjusted operating profit margin of 5.1% (HY 2012: 5.2%).

Sales of our new Technology sector insurance software product, Xuber have been the main driver behind the increase in sector revenue. Revenues include the Marsh contract that was signed at the end of 2012. Revenue growth has also been seen within the application engineering services and infrastructure managed service businesses.

Adjusted operating profit has increased slightly as a result of the increased revenues, as investment continues in the Xuber product suite.

Procurement and Other BPO

Net revenue for Procurement and Other BPO increased 1.7% to £29.7 million (HY 2012: £29.2 million). The sector recorded an adjusted operating loss of £1.3 million (HY 2012: £0.3 million profit).

Net revenues for the sector were marginally ahead year-on-year. Whilst being lower than expected, net revenues from the US procurement business increased year-on-year, offset by reductions in Europe and Australia.

The adjusted operating loss in the sector is due to the performance of the Procurement business in the UK and Europe. The UK has been particularly impacted with the lower margin renewal of the BAE Systems procurement contract which came into effect on 1 January 2013. This has been partially offset by increased profits within the HR Services business, where the UK operations are due to close on 31 December 2013.

Corporate

Corporate costs for the six months ended 30 June 2013 totalled £7.3 million (HY 2012: £7.5 million). The reduction in corporate costs has been delivered through ongoing cost management.

Net finance costs

Net finance costs (including imputed interest on put options of £0.1 million (HY 2012: £0.1 million)) for the six months ended 30 June 2013 were £2.3 million (HY 2012: £2.5 million). This lower net finance cost is the result of repaying £12.7 million of debt in the first six months of 2013, and the increased net cash position within the Group as at 30 June 2013.

Cash flow

Operating cash flow

Operating cash flow was lower by £3.1 million at £23.5 million (HY 2012: £26.6 million) driven by the increase in payments in dividends to non-controlling interests of £3.7 million. Dividends paid to non-controlling interests were £8.8 million (HY 2012: £5.1 million). The increase was due to the full amount of dividends due to non-controlling interests for 2013 being paid in the first half of 2013, compared to 2012, where the full amount of dividends due to non-controlling interests for 2012 was split between the first and second half of the year.

Operating cash flow includes the receipt of £6.0 million (including VAT) as part payment for the early surrender for the lease on the Leadenhall Street premises in London.

Equity free cash flow for the period was £16.1 million (HY 2012: £19.4 million) in line with the movement in operating cash flow.

Net cash for the period increased by £13.2 million (HY 2012: £16.9 million) with the other significant movements being the payment of the reinstated shareholder dividend of £2.4 million (HY 2012: £nil).

Capital expenditure

Net capital expenditure for the period was £6.7 million (HY 2012: £7.3 million), representing 2.5% of net revenue (HY 2012: 2.9%). This included further spend on developing our insurance software product, Xuber, our new global insurance and settlements service, Netsett, and system infrastructure enhancements in our Italian business.

Funding, distribution policy and dividends

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

The 2012 full year dividend of 1.0 pence per ordinary share was paid on 22 May 2013. In line with previous years the Board is not recommending the payment of an interim dividend.

Borrowing facilities

During the six months ended 30 June 2013, the Group repaid £12.7 million of debt (HY 2012: £18.9 million).

Our principal sources of debt finance are a £75.0 million multi-currency revolving credit facility and a £20.0 million term loan. At 30 June 2013, £16.8 million (HY 2012: £20.0 million) was drawn under the term loan and cash drawn under the revolving credit facility was €10.0 million (HY 2012: £12.0 million). Repayments of £3.25 million are due on the term loan every six months starting from January 2013. The Group also has a £10.0 million uncommitted overdraft facility.

In addition to the above facilities, there is a working capital facility of INR330.0 million (£3.6 million) provided to Xchanging Technology Services Private Limited in India. At 30 June 2013, the amount drawn was £nil (HY 2012: £0.7 million).

At 30 June 2013, the Group had £47.7 million (HY 2012: £45.2 million) of headroom under its committed debt facilities. We expect to be able to finance our current business plans from ongoing operations and our committed funding facilities.

Headroom under committed and uncommitted credit facilities as at 30 June 2013

1Committed facilities include the £75.0 million multi-currency revolving credit facility, the £16.8 million term loan, a £2.2 million non-cash

guarantee facility for letters of credit issued in Australia as well as the Group's finance leases.

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 2013, the Group was compliant with all three 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 2.0 times. As at 30 June 2013, the ratio was 0.6 times;

·; the ratio of Xchanging's share of consolidated profit before depreciation and amortisation (pre-exceptional items) to net consolidated finance charges must not be less than 6.0 times. As at 30 June 2013, the ratio was 15.4 times; and

·; the ratio of net cash flow to UK cash pool debt service must not be less than 1.0 times. As at 30 June 2013, the ratio was 5.0 times.

Cash balances

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

The majority of our wholly owned UK entities are included in a pooling arrangement, to optimise liquidity management.

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 deposits. Although subject to timing variances, as a general statement we would expect the aggregate cash balance to remain relatively stable, as a high proportion of Enterprise Partnerships' equity free cash flow is distributed to their shareholders.

Included in net cash is the cash held in XTB of £7.4 million at 30 June 2013.

Taxation

The Group's effective tax rate on adjusted profit before tax was 29.6% (HY 2012: 33.0%). The cash tax rate on adjusted profit before tax was 28.1% (HY 2012: 30.5%).

The 2013 rates are higher than the UK statutory tax rate of 23.25% (2012: 24.5%) due to profits arising in overseas jurisdictions with higher tax rates and other non-deductible items.

The 2013 effective rate has additionally been adversely affected by the write-down of the closing UK deferred tax assets, in accordance with the reduction in the UK corporate tax rate.

Non-controlling interests

For the six months ended 30 June 2013, the adjusted profit after tax attributable to non-controlling interests was £6.4 million (HY 2012: £3.4 million). The performance of the Enterprise Partnerships within the Insurance Services sector is the main reason for this year-on-year increase in non-controlling interest.

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

Non-controlling interest calculations for other non-wholly owned companies are based on the non-controlling interests' proportionate share of profit, net assets and other comprehensive income.

Group risk factors

Other than the expected disposal of XTB, there have been no significant changes to the strategic, commercial, operational and financial risks facing the Group as explained on pages 24 to 26 of the 2012 Annual Report, a copy of which can be found on www.xchanging.com. These were listed as follows:

Strategic risks

·; Failure to utilise and exploit technology-enablement for growth

·; Failure to grow existing businesses

·; Failure to secure new business from both new and existing customers

·; Identification and management of non-profitable businesses

·; Failure to manage the impact of the changing economic environment on our business

Commercial risks

·; Concentration of material new and existing contracts with customers in key markets that may have a significant impact on Group's performance. Partial or full termination of certain customer contracts could result in impairment of goodwill as well as impacting operational performance

·; In certain cases, partners have rights to 'put' their shares to us, creating a cash requirement, or to 'call' our shares for low consideration

·; The development of, and increased competition within, the Lloyd's and London insurance market

·; Increased pricing pressures in the Financial Services sector

·; Failure to deliver new customers in the US Procurement business

Operational risks

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

·; Our customers demand efficient processing and high levels of service to help them achieve their objectives and protect their reputation. Failure to meet their expectations would in turn have a significant impact upon our reputation and profitability

·; Business disruption, IT system issues or security issues could result in loss of service, loss or compromise of customer and internal data, breach of legal and regulatory obligations and damage to our reputation

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

Risks associated with the disposal of XTB

·; The disposal may cause disruption to the Group's planned strategy or disruption to the business of the Group

·; Xchanging will provide an uncapped indemnity for Fondsdepot Bank

·; Xchanging will provide an uncapped guarantee in respect of XTB

·; There is a risk the disposal will increase Xchanging's exposure to other costs

·; The disposal may affect Xchanging's ability to attract and retain management and employees

·; There is a tax risk

·; Existing risks that will be impacted by the proposed transaction include the fact that the Group operates in a highly competitive environment, the Group is affected by adverse effects of general economic conditions and the Group is subject to a number of operational risks

For further detail on the risks of the expected sale of XTB, refer to the circular publication that can be found in the Investors Relations section of our website.

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

1 Adjustments to adjusted in 2012 and 2013 include exceptional items, amortisation of intangible assets previously unrecognised by an acquired entity and imputed interest on put options.

2 The comparative amounts have been restated to reflect the changes in the pension accounting policy. A further explanation of the restatement is included in note 3.

3 Net revenue excludes principal spend on procurement contracts that arises from supplier costs that are passed on to the customer.

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

1 The comparative amounts have been restated to reflect the changes in the pension accounting policy. A further explanation of the restatement is included in note 3.

Consolidated cash flow statement for the six months ended 30 June 2013

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

1 Included within cash and cash equivalents as at 30 June 2013 is £7.4 million (30 June 2012: £nil) presented within the assets of the disposal group held for sale, refer to note 8.

Consolidated balance sheet as at 30 June 2013

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

1The comparative amounts have been restated to reflect the changes in the pension accounting policy. A further explanation of the restatement is included in

note 3.

Consolidated statement of changes in equity for the six months ended 30 June 2013

For a description of the nature and purpose of each reserve within shareholders' equity refer to note 28 in the Annual Report for the year ended 31 December 2012.

Movements in the period 1 January 2012 to 30 June 2012 and the period 1 January 2013 to 30 June 2013 are unaudited.

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

1The comparative amounts have been restated to reflect the changes in the pension accounting policy. A further explanation of the restatement is included in note 3.

Notes to the consolidated interim financial information for the six months ended 30 June 2013

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 34 Leadenhall Street, London, EC3A 1AX. The Company's ordinary shares are traded on the London Stock Exchange.

On 30 July 2013, the Board approved the condensed consolidated interim financial statements.

The financial information included in this 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 2012 were approved by the Board of Directors on 27 February 2013 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 2013 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 2012 in the 2012 Annual Report, which were prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union.

For the period ending 30 June 2013, in addition to Revenue, Net Revenue is a new key performance indicator used by management. Net revenue has been separately disclosed on the face of the income statement and presented in the segment note (note 6) to provide greater disclosure. Net revenue relates to the supplier costs on procurement contracts (where the Group acts as principal) that are incurred by the Group and recharged to the customer. Net revenue better reflects the Group's revenue performance, as this measure removes those revenue transactions where the Group makes no margin and has no control over the volume of supplier costs to be recharged.

2.1 Going concern

The Directors have reviewed the expected liquidity position of the Group for the period to 31 December 2014. 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 2012, except for:

·; the amendments to IAS 1 Presentation of financial statements that became effective for annual periods beginning on or after 1 July 2012 requires items presented in the statement of other comprehensive income to be separated into two groups, based on whether or not these items may be recycled to the income statement in the future;

·; the amendments to IAS 19 Employee benefits (revised) that become effective on 1 January 2013 and changed the basis for accounting for past services costs and determining the income or expenses related to defined benefit plans. The Group has applied the standard retrospectively in accordance with the transition provisions of the standard. The impact on the Group has been to replace interest costs and expected return on plan assets with a net interest amount that is calculated by applying the discount rate to the net defined pension asset/(liability). For the period ended 30 June 2012, this change in accounting policy has decreased the net interest income and decreased the actuarial loss arising from defined benefit pension schemes by £0.3 million after tax. There was no change in the pension assets and liabilities. A restated balance sheet as of 1 January 2012 has not been presented as the only change as a result of the amendments is to reserves, and that change has been considered immaterial.

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 2012, 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 less weighted to the second half of the year at an adjusted operating profit level compared to 2012. For the year ended 31 December 2012, 68% of adjusted operating profit accumulated in the second half of the year. During the second half of 2013, performance will be 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 Executive Board, the chief operating decision-maker for the year, on which strategic decisions are based, resources are allocated and performance is assessed.

A brief description of each reportable segment is as follows:

Insurance Services and Financial Services form a significant part of our Business Processing Services offering.

Management uses net revenue and adjusted operating profit as measures of segment performance. Net revenue excludes principal spend on procurement contracts that arise from supplier costs that are passed onto customers. Adjusted operating profit excludes exceptional items, amortisation of intangible assets previously unrecognised by an acquired entity and acquisition-related expenses. Interest income and expenditure 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.

Management makes regular use of these measures to evaluate performance in the operating segments, both in absolute terms and comparatively from period to period, and to allocate resources among its operating segments. Management believes that these measures provide a better understanding, for both management and investors, of the operating results of its business segments for the year under review.

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.

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.

There have been no changes to the reportable segments as presented in the Annual Report for the year ended 31 December 2012. All figures reported are unaudited.

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

Net revenue of £270.7 million excludes £76.7 million of supplier costs on procurement contracts (where the Group acts as principal) that are incurred by the Group and recharged to the customer, that are included in 30 June 2013 statutory revenue.

Reconciliation of non-GAAP operating profit to IFRS statutory operating profit:

The segment information for the six months ended 30 June 2012 is as follows:

1The comparative amounts have been restated to reflect the changes in the pension accounting policy. A further explanation of the restatement is included in note 3.

7. Exceptional items

During the six months to 30 June 2013, the Cambridge Integrated Services Group Inc. (CISGI) insolvency trustee made an initial distribution of USD2.0 million (£1.3 million) to the Group (2012: £nil). This has been recognised as exceptional other income.

During July 2013, an agreement was finalised with a US insurance company to transfer all residual liabilities associated with the workers' compensation claims for former employees of the US BPO operation that was sold in 2011, as set out in note 22. This post balance sheet adjusting event has resulted in the partial utilisation of an employee related provision (see note 18), and an exceptional release of the remaining unrequired provision to administrative expenses of USD0.9 million (£0.6 million).

There are no tax charges arising in the period in relation to the exceptional items.

8. Non-current assets held for sale

The assets and liabilities of XTB and its holding company, Xchanging etb GmbH (Xetb) that are part of the Financial Services sector, have been presented as held for sale following the approval of the Group's Board on 15 May 2013 to sell Xchanging plc's 51% shareholding of these entities to Deutsche Bank. At the 26 July 2013 General Meeting, shareholders voted to approve the transaction. The transaction is expected to be completed on 31 August 2013.

1Net assets of the disposal group exclude intercompany balances of £5.5 million, payable by XTB/Xetb to the Group. Of this balance £4.8 million reflects intercompany royalties payable by XTB to the Group.

The disposal proceeds will be £34.2 million (€40.5 million), less adjustments for intercompany royalties and certain other adjustments, as set out in the circular publication that can be found in the Investors Relations section of our website.

On disposal certain reserves relating to XTB and Xetb will be recycled to the income statement. These reserves have not been presented above as part of the disposal group. The anticipated accounting profit on disposal for the Group is estimated to be in the range of £10.0 - 15.0 million.

9. Cash generated from operations

Included in the cash generated from operations was receipt of £6.0 million (including VAT) as a part payment for the early surrender for the lease on the Leadenhall Street premises. This receipt is recognised as deferred income as of 30 June 2013.

10. Taxation

The income tax expense for the six months ended 30 June 2013 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 2013 on adjusted profit before tax is 29.6% (the estimated equivalent tax rate applied to the six months ended 30 June 2012 was 33.0%). The rate has fallen due to a reduction in losses arising in the Group where historically no tax benefit was recognised.

11. Share capital and share premium

During the period to 30 June 2013 the Group issued 200,000 ordinary shares at 5 pence each to satisfy employee share options that were exercised (31 December 2012: 801,180 ordinary shares), with exercise proceeds of £0.2 million (31 December 2012: £0.5 million). As a result of the share issue, share premium increased by £0.2 million (31 December 2012: £0.8 million). The related weighted average price for the time of the exercise was 132.56 pence (31 December 2012: 86.46 pence) per share.

12. Other intangible assets

The carrying value of other intangible assets of £48.9 million at 30 June 2013 decreased by £4.5 million compared to £53.4 million at 31 December 2012. £4.8 million of intangible assets has been presented as assets of the disposal group that is held for sale, refer to note 8. Intangible assets have increased by £7.6 million (30 June 2012: £4.3 million) as a result of additions that include Xuber and Netsett software, and decreased due to amortisation of £7.3 million (30 June 2012: £8.9 million).

13. Property, plant and equipment

The carrying value of property, plant and equipment of £16.0 million at 30 June 2013 decreased by £1.5 million compared to £17.5 million at 31 December 2012. £0.9 million of property, plant and equipment has been presented as assets of the disposal group that is held for sale, refer to note 8. Property, plant and equipment has increased as a result of additions of £2.9 million (30 June 2012: £3.1 million) and decreased due to depreciation of £3.4 million (30 June 2012: £5.0 million).

14. Cash and cash equivalents

1Included within cash and cash equivalents at the end of the period is £7.4 million of cash and cash equivalents (30 June 2012: £nil) presented within the non-current assets held for sale relating to XTB, refer to note 8.

The cash reflected on the Group's balance sheet not only includes cash immediately accessible for wholly owned operations but also includes cash held within the Enterprise Partnerships. Enterprise Partnerships operate a 100% profit distribution policy and make cash payments to the Group on an annual, or in some cases quarterly, basis as dividends and contracted licence fees.

Included in the cash at bank and in hand held in Enterprise Partnerships at 30 June 2013 is £21.7 million (at 31 December 2012: £20.7 million), which relates to interest-bearing cash accounts held by Fondsdepot Bank, on behalf of its customers. A customer accounts liability for the outstanding cash accounts is recognised on the balance sheet as Fondsdepot Bank is liable to repay these funds on demand to its customers.

15. Net cash

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

1Included within cash and cash equivalents at the end of the period is £7.4 million of cash and cash equivalents (30 June 2012: £nil) presented within the non-current assets held for sale relating to XTB, refer to note 8.

Movement in net cash