Half Yearly Report

1 August 2011

Xchanging plc

Half Year Results for the six months ended 30 June 2011

In the first half of the year, considerable progress has been made with the Four Part Action Plan announced in March.

Financial Highlights (continuing operations)

·; Reported revenue was £329.5 million (HY 2010: £333.9 million)

·; Adjusted operating profit was £13.8 million (HY 2010: £24.0 million)

·; After adjustments mainly related to restructuring costs statutory operating

profit was £3.2 million (HY 2010: £21.7 million)

·; Adjusted operating margin was 4.2% (HY 2010: 7.2%)

·; Adjusted basic earnings per share was 1.63 pence (2010 HY: 5.54 pence)

Operational Highlights

·; Significant progress made against the Four Part Action Plan

·; Renegotiation of the Group bank facilities completed - new term of four years

·; Sold US workers' compensation business for £13.6 million

·; Acquired 100% ownership of Cambridge Solutions Limited's ("Cambridge")

Australian workers' compensation and Indian BPO businesses

·; Stabilised Kedrios and introduced new management team

·; Re-focused senior management teams, eliminating duplication

Financial Summary (continuing operations)

Notes:

1 Adjusted operating profit excludes exceptional items (HY 2011: £8.2 million, HY 2010: £nil), amortisation of intangible assets previously unrecognised by acquired entities (HY 2011: £2.4 million, HY 2010: £1.6 million) and costs of acquisitions (HY 2011: £nil, HY 2010: £0.8 million).

2 Adjusted basic earnings per share (EPS) - Xchanging's share of adjusted profit after tax for the period divided by the weighted average basic number of Xchanging plc shares in issue for the period ended 30 June 2011.

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

4 Net cash is calculated as cash and cash equivalents less bank loans and overdrafts, finance lease liabilities and receivable purchase facilities.

5 Equity free cash flow is calculated as operating cash flow less tax and interest.

Ken Lever, Chief Executive, commented:

"This is a year of transition for Xchanging as we put in place a structure and strategy for renewed growth. I am pleased with the significant progress the Group has made with the Four Part Action Plan. We have disposed of the US BPO business, taken action to reduce costs and improve cash management, and secured our funding. In the second half of the year we will continue to develop our strategy focusing on our competitive strengths to ensure we return to profitable growth. For 2011 we are on track to achieve our financial expectations for the year as a whole."

Enquiries

Xchanging plc Tel: +44 (0) 207 780 6999

Ken Lever, Chief Executive

Alexandra Hockenhull, Head of Corporate Communications

and Investor Relations

Maitland Tel: +44 (0) 207 379 5151

Neil Bennett

Emma Burdett

Daniel Yea

A presentation for investors and analysts will be held at the City Presentation Centre, 4 Chiswell Street, London, EC1Y 4UP at 09:00 on 1 August 2011. For those unable to attend, the audio and the slides from the presentation will be streamed live over the internet, please use the following link to register:

http://webeventservices.stream57.com/20110801_Xchanging/ 

For those not able to join in this way please dial +44 (0) 1452 555 566 using the ID 86318493.

About Xchanging

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

www.xchanging.com 

Cautionary Statement: 

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

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

RESULTS FOR THE SIX MONTHS ENDED 30 JUNE 2011

FINANCIAL OVERVIEW

In the first half of the year, there has been considerable progress with the Four Part Action Plan announced in March.

Against this backdrop, reported revenue in the six month period to 30 June 2011 was £329.5 million (HY 2010: £333.9 million). Adjusted operating profit was £13.8 million (HY 2010: £24.0 million). After adjustments mainly related to restructuring costs, this becomes a statutory operating profit of £3.2 million (HY 2010: £21.7 million).

Adjusted operating profit margin was 4.2% (HY 2010: 7.2%) and adjusted basic earnings per share was 1.63 pence (HY 2010: 5.54 pence).

All figures in this report are based on the results from continuing operations, unless stated otherwise.

FOUR PART ACTION PLAN

At the time of our Preliminary Results on 1 March 2011 we set out a Four Part Action Plan to provide the foundation for future growth in profitability.

Part One: Strategic and Intrinsic Value Review

The first part of the plan was to gain a clear understanding of the intrinsic value and potential return on investment in each of our businesses. The process identified the weaker and under-performing parts of our business.

The US workers' compensation and third party administration business ("US BPO") was the most significant underperforming business. Loss-making, it was also absorbing cash at an accelerating rate and taking up management resource. On 1 June 2011 we announced the sale of this business to Sedgwick Claims Management Services for £13.6 million.

On 13 June 2011 we announced a series of intra-group transactions that brought important benefits. This resulted in the repayment of a large part of the outstanding loan made by Xchanging to Cambridge Integrated Solutions Group Inc. ("CISGI"), the wholly owned US subsidiary of Cambridge Solutions Limited ("Cambridge"), which is in turn 76% owned by Xchanging, and 100% Xchanging ownership of the Australian workers' compensation business and the Indian BPO business formerly owned by Cambridge. These outcomes had no impact on the net cash position of the Group. They will be earnings enhancing by reducing the profit attributable to non-controlling interests. This also reduces complexity in our business and improves operating flexibility.

Following these transactions, the remaining Cambridge business is dedicated to IT outsourcing.

Kedrios, our investment account administration and securities processing business in Italy, was also identified as an under-performing business. In the first half of this year we have stabilised this business and brought in a new management team. We have reduced operational costs through restructuring and supplier negotiations. However, we still expect this business to make a loss in the order of €4-5 million (c. £3.5 - £4.4 million). We are implementing a plan to reach break-even during 2013.

We continue to examine the financial performance of our Financial Services businesses in Germany. We see some great opportunities for the businesses but we do need to change the ways in which we transact. We are progressing discussions with our Enterprise Partnership partners. We are hopeful these discussions will be concluded in the second half of the year.

We have also implemented a performance management system with a focus on value creation and economic returns in our business.

Part Two: Operational Improvements

We have re-focused our senior management teams, eliminating duplication between operating businesses and the Corporate centre. To date 37 senior management roles have been eliminated, with a small number of further departures planned for the second half of the year. This is expected to result in full year savings for 2012 of approximately £6 million.

By amalgamating business entities we have also reduced middle management numbers by 90 in the period, with further reductions planned. This is expected to achieve full year savings of £7.5 million from 2012.

In the UK, we have re-organised both our Insurance and our Technology businesses into single entities. These measures are designed to improve customer service as well as create operating and management efficiencies within those businesses.

Our space rationalisation programme is underway. We are reviewing our overall space needs in the UK and Malaysia and continuing our moves towards lower cost locations in India, namely at Shimoga and Solan, north of Delhi. We no longer have our Chicago office, which formed part of the sale of our US BPO business. In Italy, we have closed our Rome office and relocated our office in Milan to lower cost premises.

At the end of June we moved out of our Head Office in Hanover Square, relocating our Corporate functions to our existing operating office in Leadenhall Street, in the City of London. This is expected to result in a saving of £1 million per annum from 2012.

Our supplier management programme is also underway and we expect savings of at least £1 million in the current year with further savings in 2012. We continue to seek opportunities to eliminate cost from our supply base.

In our offshoring programme, part of the cost reduction in the New South Wales workers' compensation contract was achieved through the provision of support from India. Elsewhere, further offshoring planned for the US did not take place due to the sale of the US BPO business. Offshoring remains a strategic imperative.

Part Three: Revenue Growth

We are focusing our sales efforts on the generation of a greater number of opportunities from third party advisers and other intermediaries. We are reconfiguring our sales teams involving recruitment of new sales resources and have established a global sales and marketing support group, which will ensure the best resources in our business are directed to the conversion of the most attractive opportunities. We have redoubled our efforts through our account management structure to achieve further growth from our existing customer base. We have also established direct marketing into the UK, US and Germany of our offshore services out of India.

In the first half of the year we continued to win new customers and renew existing contracts. Notable amongst these were the renewal of the workers' compensation contract in the State of Victoria, a further new contract with Gatwick Airport, and further involvement with the launch of the 4G network in Malaysia by YTL.

Part Four: Cash Flow and Funding Structure

Our net cash position is better than planned, and we have maintained an overall net cash position for the Group. The disposal of our US BPO business stemmed a source of significant cash outflow and has eliminated the liquidity risk that this business posed to the Group.

We are seeing the benefits of lower than planned capital expenditure and greater focus on working capital management. Together with the cash flow benefits of the US BPO disposal, we expect to remain net cash positive in the second half of the year, prior to the impact of the potential exercise of the put options in the UK Xchanging Broking Services ("XBS") and German Fondsdepot Bank Enterprise Partnerships by the respective partners.

At the end of July, our bank refinancing was agreed and signed. The refinancing, which is for four years, is an important cornerstone in the foundations of our transition programme, ensuring the Group is adequately funded.

OPERATING AND FINANCIAL REVIEW

SECTOR REVIEW

Insurance Services

Insurance Services external revenue was £92.7 million (HY 2010: £87.0 million), adjusted operating profit was £15.9 million (HY 2010: £13.7 million), and adjusted operating profit margin was 17.1% (HY 2010: 15.8%).

Our UK Insurance business has delivered a stable result. Revenues overall for the sector benefitted from a number of factors: better than expected performance fees and discretionary payments totalling £2.1 million in the Australian New South Wales workers' compensation business, an increase in the volume of insurance premiums processed by our UK business and cost cutting across the sector. Offsetting these factors were lower project revenues in both the Broking services and Premium Processing businesses.

The better than expected performance fees in Australia helped margin improvement.

The Insurance business has relatively high earnings visibility and so provides a steady and cash generative core to the Group. As a platform for growth we are looking to develop this business within and outside the UK by capitalising on our considerable insurance industry expertise. We are also looking at ways to achieve value from the knowledge assets we have accumulated through the provision of higher value added services.

In our Claims business, we are working to ensure we remain competitive as further participants enter this market. In our Broking business, the put option held by Aon, the partner in our XBS Enterprise Partnership, is exercisable from September 2011 and, if exercised, we will be looking to a transition of this partnership to a straightforward service contract.

Financial Services

Financial Services external revenue was £97.7 million (HY 2010: £89.0 million), adjusted operating profit was £2.6 million (HY 2010: £6.9 million) and adjusted operating profit margin was 2.7% (HY 2010: 7.7%).

Revenues benefitted by £14.7 million from the new accounts added to the Fondsdepot Bank platform in 2010, and from Kedrios (also acquired in 2010). This was offset to some extent by contractual discounts in our securities processing business, Xchanging Transaction Bank ("XTB"), by a lower level of change requests and a reduction in revenues from Abgeltungssteuer, our withholding tax service in Germany.

Overall profitability for the sector was impacted by the anticipated losses at Kedrios and by the effect of the contractual discounts to key customers. Kedrios has now been stabilised with new management and cost control measures. However the business is still expected to remain loss-making this year and in 2012, but to reach break-even during 2013.

XTB remains challenged and, under a new management team, options are being explored to improve profitability. Overall management costs have been reduced and further cost reductions are planned. We have accumulated great depth of expertise in the securities processing and investment account administration sectors, and we are looking for opportunities to grow in this area within Germany and more generally. We have a strong financial services capability in our offshore services business in India which can provide low cost support to this business.

Technology

In Technology, external revenue was £52.4 million (HY 2010: £55.6 million), adjusted operating profit was £2.3 million (HY 2010: £7.2 million) and adjusted operating profit margin was 4.5% (HY 2010: 13.0%).

The slow start to the year reported in our May Interim Management Statement continued through the first half. We saw initial revenue contributions from new contracts won in 2010 from Gatwick Airport Limited and from the YTL relationship in Malaysia, and further revenue growth from our existing customer, the London Metal Exchange ("LME"). However this was offset by the delayed timing of expected revenue from our new insurance software product (Xchanging Insurance Application Platform, "XIAP") after heavy initial investment.

Revenue was further impacted (c. £6.5 million) by the decision to end the reseller programme in our data centre hosting business, where margins were not attractive, although this has had a negligible impact on profitability and a beneficial effect on working capital. Our new data centre hosting capacity is not being sold as quickly as anticipated and resource utilisation is lower than planned.

The shortfall in higher margin insurance software services revenues and lower hosting services margins have impacted overall margins, offset to some extent by business won towards the end of 2010 in Malaysia, including with YTL, providing software development and consultancy services.

Our UK Technology business has been operating an oversized cost structure which is being reduced to align it more closely with the current activity level. This will result in further restructuring charges in the second half of the year.

We have depth of experience in applying our expertise in complex, operationally critical environments such as at Lloyd's of London, the LME and Gatwick Airport Limited.

Technology is central to our growth plans for the future. Strategically, in Malaysia we are working with YTL to develop their 4G capabilities. We see this as an important area in the future development of our technology service offering.

Operationally, we are structuring the business and management to support a more flexible sales strategy, targeting intermediaries and partnering arrangements to develop further growth of the business.

Procurement and Other BPO

External revenue for this sector was £86.8 million (HY 2010: £102.4 million), adjusted operating profit was £4.0 million (HY 2010: £4.8 million) and adjusted operating profit margin was 4.6% (HY 2010: 4.7%).

The Procurement and Other BPO sector continued to be impacted by government budget cuts and some pricing pressures. The results were also affected by the loss of a pensions services contract at the end of 2010. These factors offset the incremental revenue benefits from procurement contracts won last year.

BOARD CHANGES

On 9 February Ken Lever, then Chief Financial Officer was appointed Acting Chief Executive Officer. Following a search, which included external candidates, the Board decided to confirm Ken Lever's appointment as Chief Executive Officer. Ken Lever relinquished the role of Chief Financial Officer simultaneously. At the same time David Bauernfeind, previously the Chief Financial Officer of the UK business, was appointed Chief Financial Officer of Xchanging plc and a Director of the Company.

A search is currently underway for at least one new Non-executive Director.

STRATEGY

Alongside our activities to stabilise the business and improve return on invested capital we are reshaping the strategy of the business.

We are in attractive markets which are exhibiting growth rates in the range of 5% to in excess of 10% which offer opportunities for economic returns. We have the opportunity to rebuild the business from the legacy provided by the existing contracts, building on our strengths.

Our markets are changing. There has been a move to multi-sourcing, shorter duration contracts, lower value contracts, more sophisticated buyers and competitive tendering encouraged by intermediaries. We will no longer rely on the generation of Enterprise Partnerships to sustain growth in the future. They will continue to be a method of delivery but less so a product in their own right.

Against this background we want to be a leading business process and technology service provider and integrator. We also want to move up the value chain, performing more complex processes and building new knowledge services such as management information and analytics, which may previously have been regarded as integral to its business by the customer.

To achieve this we will focus on what we are good at. Initially we will build on our domain strengths: Insurance Services, Financial Services, Technology, and Procurement. But we will not rule out other business process and technology service opportunities. We will build opportunistically in industry sectors outside of our domain strength such as property, the educational sector, transport and healthcare where we already have relevant experience.

We will carefully develop our business sectors outside of their base regions as we seek to replicate locally developed strengths and capabilities more globally.

We will also seek growth from our existing customers through more effective account management.

We will differentiate through technology, either through building on our existing capabilities in software services, hosting services, network management and integration and IT outsourcing, or through partnering arrangements. We have appointed our first Chief Technology Officer with effect from 1 July 2011. This appointment reflects the significance of technology in our strategic planning.

Finally, we will drive more business development from India, selling offshore services with a thin onshore model rather than treating India just as a delivery engine. Our offshore capability is one of the benefits we did realise from the Cambridge acquisition.

As we see the benefits flowing from cost reduction, new service innovation and strengthening our organisational capability, we will continue to reshape the strategy in a dynamic way responding to the changing requirements of the markets in which we are operating.

OUTLOOK

This is a year of transition for Xchanging as we address areas of weakness in our business and put in place a structure and strategy for renewed growth. To date we have made good progress. We have tackled the most serious immediate problems threatening our business, taken action to reduce costs and secured our funding. The business has been stabilised and the cornerstones of our transition plan are now in place.

In the second half of the year, we will continue to roll out the Four Part Action Plan and to develop our strategy based on the competitive strengths we have and the opportunities we are well suited to exploit.

The benefits of actions taken in the first half should start to materialise in the second half. Our financial performance is normally weighted to the second half of the year and, as set out in our May Interim Management Statement, we expect this will be accentuated in 2011. We are on track to achieve our financial expectations for the year as a whole.

As we move into 2012, profitability and margin growth will be largely driven by the benefit of substantial cost reductions and business restructuring in 2011. Moving through 2012 and 2013, we will build on momentum, demonstrating our ability to compete to win. This will be based on our depth of capabilities and domain strengths, and on our more externally focused sales and marketing strategy. Profitability and margin growth should then be driven by revenue growth.

We still have much to do and there are many challenges ahead, but the process of rebuilding Xchanging is well underway.

REVIEW OF FINANCIAL PERFORMANCE

GROUP KEY PERFORMANCE INDICATORS

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

Notes:

1 Adjusted operating profit excludes exceptional items (HY 2011: £8.2 million, HY 2010: £nil), amortisation of intangible assets previously unrecognised by acquired entities (HY 2011: £2.4 million, HY 2010: £1.6 million) and costs of acquisitions (HY 2011: £nil, HY 2010: £0.8 million).

2 Adjusted basic earnings per share (EPS) - Xchanging's share of adjusted profit after tax for the period divided by the weighted average basic number of Xchanging plc shares in issue for the period ended 30 June 2011.

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

4 Net cash is calculated as cash and cash equivalents less bank loans and overdrafts, finance lease liabilities and receivable purchase facilities.

5 Equity free cash flow is calculated as operating cash flow less tax and interest.

GROUP PERFORMANCE

Revenue

Revenue from continuing operations for the six month period ended 30 June 2011 was £329.5 million (HY 2010: £333.9 million). This includes incremental revenue contribution from acquisitions made in 2010 of £19.5 million, and adverse foreign exchange movements of £2.0 million.

Adjusted Operating Profit

Adjusted operating profit from continuing operations was £13.8 million (HY 2010: £24.0 million). This includes incremental losses of £0.2 million from acquisitions in 2010, and adverse foreign exchange movements of £0.3 million.

Statutory operating profit from continuing operations was £3.2 million (HY 2010: £21.7 million). Statutory operating profit includes exceptional costs of £8.2 million (HY 2010: £nil), amortisation of acquired intangibles of £2.4 million (HY 2010: £1.6 million), and acquisition related expenses of £nil (HY 2010: £0.8 million), as set out below.

Margins

Adjusted operating profit margins for continuing operations were 4.2% (HY 2010: 7.2%).

Earnings per share

Calculated using Xchanging's share of adjusted profit from continuing operations, adjusted basic earnings per share for the period was 1.63 pence (HY 2010: 5.54 pence). Adjusted diluted earnings per share was 1.63 pence (HY 2010: 5.51 pence). The weighted average number of shares in issue for the period was 239,510 (HY 2010: 238,469).

Exceptional items

Of total exceptional items of £8.2 million (HY 2010: £nil) £8.0 million relates to restructuring costs incurred as part of the review of the cost base under the Four Part Action Plan. They relate primarily to a reduction in senior management, particularly in Financial Services and Technology, and at the Corporate centre. The Group expects further restructuring costs to be incurred in the second half of the year, as the reduction of management layers and operating costs continues.

The remaining exceptional items relate to £0.2 million of costs associated with the acquisition from Cambridge Solutions Limited of its Australian workers' compensation and Indian BPO businesses.

Discontinued operation

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

The results of the discontinued operation show a statutory profit of £13.4 million for the period (HY 2010: £(0.3) million). This includes an exceptional release of deferred income of £11.6 million on a significant contract termination, and a profit on disposal from the transaction of £11.9 million.

SEGMENTAL ANALYSIS

Revenue and adjusted profit movement : like-for-like analysis

Insurance Services

Insurance Services external revenue was £92.7 million (HY 2010: £87.0 million), including an adverse foreign exchange impact of £1.4 million mainly related to the Australian dollar. Adjusted operating profit was £15.9 million (HY 2010: £13.7 million), representing an adjusted operating profit margin of 17.1% (HY 2010: 15.8%), including an adverse foreign exchange impact of £0.2 million.

The New South Wales contract was provided for as onerous at the end of 2010. As the performance benefits seen in the first half of 2011 are not expected to be repeated the contract is still assessed as being loss making over the remaining term.

Financial Services

Financial Services external revenue was £97.7 million (HY 2010: £89.0 million), including incremental revenues from 2010 acquisitions of £14.7 million, and an adverse foreign exchange impact of £0.3 million. Adjusted operating profit was £2.6 million (HY 2010: £6.9 million), representing an adjusted operating profit margin of 2.7% (HY 2010: 7.7%), including incremental net losses of £0.3 million from acquisitions in 2010 and a favourable foreign exchange impact of £0.1 million.

Technology

In Technology, external revenue was £52.4 million (HY 2010: £55.6 million), including incremental revenues from 2010 acquisitions of £4.8 million and an adverse foreign exchange impact of £0.3 million. Adjusted operating profit was £2.3 million (HY 2010: £7.2 million) representing an adjusted operating profit margin of 4.5% (HY 2010: 13.0%), including incremental profit from 2010 acquisitions of £0.1 million and an adverse foreign exchange impact of £0.1 million.

Procurement and Other BPO

External revenue for this sector was £86.8 million (HY 2010: £102.4 million), with marginal impact from foreign exchange rates. Adjusted operating profit was £4.0 million (HY 2010: £4.8 million), representing an adjusted operating profit margin of 4.6% (HY 2010: 4.7%).

Corporate

Corporate costs were £11.0 million (HY 2010: £8.7 million). These costs include £1.8 million of expenditure on a specific new business opportunity in the US. There will be further expenditure to support this opportunity, but towards the end of this year, this will either cease or be absorbed into the operational cost base of a new business account. There was also £0.8 million (HY 2010: £0.4 million) of costs associated with the US regional structure which will diminish over the second half of the year.

Net finance cost

Net finance costs (pre imputed interest on put options of £0.4 million (HY 2010: £0.4 million)) increased from £1.7 million in 2010 to £1.9 million in 2011. The increase in net finance cost is in line with the average balance of outstanding facilities during the period.

Cash flow

Operating cash flow from continuing operations was £5.7 million (HY 2010: £17.6 million), in line with the £18.5 million fall in statutory operating profit, partially offset by improvements in the level of working capital absorption, from £(6.5) million in the six months ended 30 June 2010 to £(1.4) million in the current period. Dividend payments to non-controlling interests were £5.4 million (HY 2010: £6.4 million).

Equity free cash flow for the year was £0.8 million (HY 2010: £10.8 million). No dividend was declared or paid in relation to 2010 (HY 2010: £6.6 million paid in relation to 2009).

Expenditure on acquisitions in the year was £4.4 million (HY 2010: £10.8 million), £3.5 million of which was in respect of deferred consideration for the acquisition of Data Integration in 2010, and £0.9 million in respect of an interim payment of the Fondsdepot Bank put option. Overall, the net cash position improved by £22.5 million compared with HY 2010, largely due to proceeds from the disposal of the US BPO business, and no dividend payment in the first half of 2011 in respect of 2010.

Capital expenditure

Our net capital expenditure for the period was £8.4 million (HY 2010: £8.3 million), representing 2.5% of revenue (HY 2010: 2.5%). This included further spend on Technology sector insurance software product XIAP, and progress in building our additional Indian processing centre in Shimoga.

Funding, distribution policy and dividends

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

Borrowing facilities

At the end of July the Group successfully signed an agreement to refinance its term loan and revolving credit facilities and extend the maturity for a period of four years. The revolving credit facility remains at £75 million and the US$ 26 million term loan was redenominated into Sterling and increased to £20 million. The Group has provided security in the form of share pledges over the majority of its 100 per cent owned subsidiaries. At 30 June 2011 US$ 26 million (FY 2010: US$ 34 million) was drawn under the term loan and cash drawn under the revolving credit facility was US$ 45 million (FY 2010: US$ 45 million).

The Group also has a £10 million uncommitted overdraft facility.

At 30 June 2011 the amount outstanding under the Cambridge Indian debt facilities was £3.7 million (FY 2010: £5.3 million). These facilities have subsequently been repaid in full.

At 30 June 2011, the Group had £29.3 million (FY 2010: £28.8 million) of headroom under its committed debt facilities.

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

Borrowing covenants

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

As at 30 June 2011, there were financial covenants associated with the prevailing facilities relating to leverage, interest cover and net worth. The Group was compliant with all three covenants:

·; the ratio of consolidated borrowings to Xchanging's share of consolidated profit before depreciation and amortisation (pre-exceptional items) must not exceed 2.0 times. As at 30 June 2011, the ratio was 0.73 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 2011, the ratio was 29.2 times; and

·; total net worth must exceed £175 million plus an adjustment for retained earnings. As at 30 June 2011, the total net worth covenant headroom was £60.1 million.

Going forward, under the new facility agreement, the net worth covenant has been replaced with a debt service covenant. This covenant will measure the Group's cash generation in wholly owned UK entities relative to interest and principal repayments under the debt facilities. Tests will be performed on a quarterly basis and the ratio which will need to be met will vary from 0.5 to 1.5 times, according to a defined schedule.

Cash balances

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

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

In Enterprise Partnerships all distributable profit is paid out to shareholders, so the net equity in each partnership is maintained at a stable level. On an annual or quarterly basis, contractual performance or licence fee payments are also made into the UK cash pool.

Dividend

The Board remains of the view that it is prudent to retain cash in the business at this time to support the reshaping of the business and investment in growth for the future. No dividend is being proposed at the half year, but the Board will review this again at the end of the year.

Taxation

The tax charges and tax rates for the first half of the year are distorted by the effect of the restructuring and by the discontinuance of the US BPO business.

During the period we have focused on the management of the cash tax position and savings have been achieved from various tax planning initiatives.

The cash tax rate on adjusted profit from continuing operations was 30.4% (HY 2010: 28.1%). The effective tax rate on adjusted profit from continuing operations was 36.8% (HY 2010: 30.0%). These rates have been negatively impacted by losses in Italy and the US, where no tax benefit has been recognised.

Non-controlling interests

For the six months ended 30 June 2011, the adjusted profit after tax attributable to non-controlling interests totalled £3.0 million (HY 2010: £1.9 million).

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

GROUP RISK FACTORS

As with all businesses, the Group is exposed to certain risks, which could have a material impact on the Group's long term performance and could cause actual results to differ materially from forecast and historic results. Some of the principal risks and uncertainties facing the Group have changed from those set out in the 2010 Annual Report and accounts as the Group has worked through the Four Part Action Plan. The sale of the US BPO business, and the acquisition of Indian and Australian BPO assets from Cambridge Solutions Limited have reduced the strategic risks of the Group by providing more certainty over cash flow.

The ongoing commercial, operational and financial risks are similar to those identified in the 2010 Annual Report. These include changes in the economic environment, including the effect of local inflation rates on the cost base in India, attracting new customers, implementation of large contracts, continuation of efficient processing, exposure to complex and technical contractual terms, successful retention of key employees, business continuity and security of IT systems and regulatory and legislative changes. For a full discussion of these risks to our future business performance, please refer to page 39 of our 2010 Annual Report and accounts, a copy of which can be found on www.xchanging.com.

David Bauernfeind

Chief Financial Officer

1 August 2011

Consolidated income statement

for the six months ended 30 June 2011

Notes 1 to 21 form an integral part of these condensed consolidated interim financial statements.

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

2 The comparative amounts have been restated for discontinued operations and to show adjusted profits. Further explanation of the restatement is included in note 1(ii).

Consolidated statement of comprehensive income

for the six months ended 30 June 2011

Notes 1 to 21 form an integral part of these condensed consolidated interim financial statements.

Consolidated cash flow statement

for the six months ended 30 June 2011

Notes 1 to 21 form an integral part of these condensed consolidated interim financial statements.

Supplemental cash flow information

Reconciliation of net cash flow to movement in net cash

for the six months ended 30 June 2011

Movement in net cash

for the six months ended 30 June 2011

Consolidated balance sheet

as at 30 June 2011

Notes 1 to 21 form an integral part of these condensed consolidated interim financial statements.

Consolidated statement of changes in equity

for the six months ended 30 June 2011