Half Yearly Report

25 May 2011

The Innovation Group plc

("Innovation Group" or the "Group")

Interim Results for the six months ended 31 March 2011

The Innovation Group plc (LSE: TIG), a global provider of business process outsourcing ("BPO") and software solutions to the insurance, fleet, automotive and property industries, announces interim results for the six months ended 31 March 2011.

Financial Highlights

* Adjusted profit is profit/(loss) before tax after adding back amortisation on acquired intangible assets of £1.2m (H1 2010: £1.8m), exceptional restructuring costs of £nil (H1 2010: £3.1m) and a share-based payments charge of £0.8m (H1 2010: £1.3m credit) as analysed on the face of the income statement.

Performance Indicators

Highlights

·; Strong growth in BPO and software revenue

·; Underlying operating cash flow conversion ahead of our expectation

·; New BPO wins with high profile household names - Tesco and Ford

·; Successful launch of Insurer Claims v7.0 leading to significant US contract win

·; No further exceptional charges incurred in the period, all restructuring completed in 2010

Andy Roberts, Chief Executive Officer of The Innovation Group commented:

"We are particularly pleased with the performance of the Group in the first half. We have seen a return to strong organic growth and improved margins. This, and the early success of our recently launched Insurer software gives the Board confidence in meeting full year expectations.

The work needed to get us to this point should not be underestimated and I would like to pay tribute to the teamwork and continued commitment of all our employees."

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Half Year Review

We are particularly pleased with the performance of the Group in the first half of 2011 following the completion of a significant restructuring programme last year, as evidenced by a return to strong organic growth and improved margins. We continue to see more predictable revenue, profit and operating cash flow and have successfully realised the anticipated cost savings from the prior year restructuring.

For the six months to 31 March 2011 Group revenue and adjusted profit before tax were £85.8m and £6.3m respectively (H1 2010: £76.9m and £2.5m). Overall reported revenue growth was 11%, or 10% at constant currency. Revenue from acquisitions in the period was £0.7m. The Group ended the period with net cash of £29.0m (H1 2010: £22.3m) with underlying operating cash flow conversion to EBITDA for the six months ahead of plan at 93% (H1 2010: 90%).

Global motor industry statistics continue to show claims volumes below 2008 and 2009 levels. However, against this backdrop, new business wins from both new and existing customers have enabled the Group to achieve an 8% increase in outsourcing revenue at constant exchange rates. Although software is a much smaller part of the Group's revenue, we are also pleased to report an increase in software revenue, reflecting the strength of the recently launched Insurer v7.0 product suite.

The demand for our services and technology continues to grow and we have been successful in adding to both our BPO and software pipelines across all regions. Customer retention remains high and during the period the Group has secured several contract renewals, announced some significant contract wins and signed numerous smaller deals.

Across the BPO businesses, the Group's South African subsidiary signed three new important outsourcing contracts to manage and administer both the installation of solar powered water heaters as well as the ongoing service and maintenance plans for the equipment. These contracts, which build upon the South African business' strength in managing service and maintenance plans for motor vehicles, provide the Group with a solid entry point into the property-related market: a new vertical for the Group in this country. In the UK, the Group's motor division was selected by Tesco Cars to provide outsourced maintenance, repair and servicing for customers of Tesco's new online vehicle sales proposition and, more recently, we signed a contract with Ford UK to provide a range of accident management services, enabling Ford's repair network to interact effectively and efficiently with all of the accident insurance claims it receives from insurers of new and used Ford vehicles in Britain. These high profile framework contracts are all new initiatives and as such it is difficult to predict the volume of business they will bring. However, we believe them to be a powerful endorsement of the comprehensive and high-value service that Innovation Group can deliver to other sectors such as motor manufacturers and retail channels as well as to its core global insurance market.

Across the software businesses, the Group has signed a contract with a Tier one US insurer to provide it with our newly released Insurer Claims v7.0 software and with our Insurer Analytics v7.0 software, which is due for release later this year. The contract, which was signed following an extensive evaluation and in-depth Proof of Concept, is expected to generate software revenue of approximately $6.0m (£3.75m) over the next 18 months, plus on-going maintenance and support revenues. The Group is delighted with this contract win so soon after the launch of Insurer Claims v7.0 in January 2011 and is particularly pleased with the positive reception the product is receiving from industry analysts with whom we work closely to validate the technology roadmap.

The Group's development programme for Insurer v7.0 remains on track with Insurer Claims having been successfully launched in January 2011 and Insurer Policy and Insurer Analytics due for release later this year. We are encouraged with the pipeline which is building, particularly in the US and Australia and although the sales cycle for product sales remains long, we expect revenue for this product to build in 2012 and beyond.

Enterprise, the implementation of Insurer v7.0 into our own BPO businesses, is an important foundation for the Group's internal development programme. This has been successfully implemented in France and Spain, with planned efficiency benefits and margin enhancements now being realised in full this financial year. The roll-out of this platform continues with implementation in Germany, Australia and then the UK.

The Group has made two small acquisitions during the period tocomplement and broaden the Group's existing range of outsourcing services.The first, Wintec, is a leading franchised windscreen repair network with over 250 mobile and fixed repair centres operating across Germany. Wintec's nationwide coverage and technical expertise, combined with the Group's strong relationship with the insurance industry, will enable us to considerably accelerate our penetration into the growing market for windscreen repair in Germany. The second, TJH Financial Services in South Africa, is an insurance administrator providing underwriting administration as well as policy administration and claims handling services for insurers and brokers. TJH was already a user of the Group's technology to enable its broker clients to write and manage policies more effectively and efficiently. By combining resources, the Group sees enhanced potential for growth in this area for its South African business in 2012 and beyond. 

Financial Review

On a constant currency basis, overall revenue has increased by 10% (H1 2010: 3% decrease). Outsourcing revenue has increased by 8% at constant currency whilst software revenue has increased by 20% on the same basis, albeit from a low base. Total revenue for the six months was £85.8m (H1 2010: £76.9m) of which £73.9m, representing 86%, is outsourcing revenue (H1 2010: 88%). Total software revenue of £11.9m (H1 2010: £9.3m) includes £1.6m of one-time licence fees (H1 2010: £0.6m). Revenue from acquisitions in the period was £0.7m.

Overall gross margin was 41% (H1 2010: 38%). Gross margin from outsourcing has increased from 36% in the same period last year to 38%, driven primarily by the right-sizing of our BPO operations. Gross margin from software sales is 59% (H1 2010: 46%), with the improved margin predominantly due to increased levels of licence fees.

Adjusted profit before tax has increased to £6.3m (H1 2010: £2.5m). There are no significant one-off items in the adjusted profit before tax for this half year. Adjusted profit for H1 2010 included a one-off gain of £0.8m from a change in accounting estimates in relation to administration fees recognised in the Group's property subsidence division and £0.8m relating to a loan which was waived in that period.

The reported profit before tax of £4.3m (H1 2010: loss £1.0m) is after deducting amortisation of acquired intangible assets of £1.2m (H1 2010: £1.8m) and a share-based payment charge of £0.8m (H1 2010: credit £1.3m). There were no exceptional restructuring costs in the period (H1 2010: £3.1m). Adjusted EPS is 0.41p per share (H1 2010: 0.17p) and basic earnings per share is 0.22p (H1 2010: loss per share 0.29p). The Group's full year effective tax rate is expected to be approximately 31% depending on the location of trading profits in the remainder of this year. The tax rate remains high due to the level of profits expected from Germany and South Africa, both of which are tax-paying regions with no tax losses available for offset against profits.

The net cash balance at 31 March 2011 was £29.0m (H1 2010: £22.3m) Operating cash inflow of £6.3m (H1 2010: outflow £4.6m) is after deducting the payment of the prior year's exceptional costs of £2.2m. Gross cash of £41.3m (H1 2010: £41.1m) also includes funds of approximately £2.0m collected as a rebate on behalf of a customer (H1 2010: £1.5m). This rebate, collected throughout the year is paid annually in April, and although this enhances cash at the half year, has no impact on the full year cash conversion. After adjusting for these items and adding back tax payments in the half year, cash to EBITDA conversion is approximately 93% (H1 2010: 90%).

The Group has made two small acquisitions in the period for a maximum total cash consideration of £3.9m. Both of these acquisitions, as described in the half year review above, complement and broaden the Group's existing range of outsourcing services. The revenue and adjusted profit before tax generated from the acquisitions in the period was £0.7m and £0.3m respectively.

The Group continues to provide segmental reporting by geography to reflect the way the business is structured and managed. In the final quarter of the 2010 financial year all geographies moved into profitability and cash generation. We are pleased to report that this trend has continued through the first half of 2011.

Board Change

Chris Banks, Non-Executive Director retired from the Board on 21 March 2011 following the Annual General Meeting of the Company. In succession, the Board appointed James Morley as Senior Independent Director and as a member of the Nomination Committee. The Board would like to thank Chris for his service and commitment to the Group and wishes him every success in his future endeavours.

On 18 April 2011, Chris Harrison was appointed Non-Executive Director and Chairman of the Audit Committee. Mr Harrison brings significant, complementary experience to the Board with extensive knowledge of both the European technology sector and of the international professional services arena, drawn from a career spanning more than 30 years at Ernst & Young.

Outlook

The Board is pleased with the Group's performance in the first half. The major progress made in the BPO business across all regions, with the corresponding improvement in profit and cash, and the early success of our recently launched Insurer software combine to give us confidence in meeting expectations for the year.

Andy Roberts

Chief Executive Officer

The Innovation Group plc

Unaudited Consolidated Income Statement

For the six months ended 31 March 2011

The Innovation Group plc

Unaudited Consolidated Statement of Comprehensive Income

For the six months ended 31 March 2011

The Innovation Group plc

Unaudited Consolidated Balance Sheet

As at 31 March 2011

The Innovation Group plc

Unaudited Consolidated Statement of Changes in Shareholders Equity

As at 31 March 2011

The Innovation Group plc

Unaudited Consolidated Cash Flow Statement

For the six months ended 31 March 2011

The Innovation Group plc

Notes to the Unaudited Results

For the six months ended 31 March 2011

1. BASIS OF PREPARATION

The condensed consolidated interim statement has been prepared on the basis of the accounting policies set out in the Annual Report and the financial statements for the year ended 30 September 2010.

The condensed consolidated interim statements for the six months ended 31 March 2011 has been prepared in accordance with the Disclosure and Transparency Rules of the Financial Services Authority and with IAS 34, "Interim Financial Reporting" as adopted by the European Union.

The financial information contained in this interim statement does not amount to statutory financial statements within the meaning of section 435 of the Companies Act 2006. The financial information contained in this report is unaudited but has been reviewed by Ernst & Young LLP. The financial statements for the year ended 30 September 2010, from which information has been extracted, were prepared under IFRS and have been delivered to the Registrar of Companies. The report of the auditors was unqualified in accordance with sections 495 to 497 of the Companies Act 2006 and did not contain a statement under section 498 (2) or (3) of the Companies Act 2006. This condensed consolidated interim statement was approved by the Board of Directors on 24 May 2011.

Adoption of new and revised International Financial Reporting Standards

A number of new, revised or amended standards and interpretations are effective for the current financial year, but none have had any material impact on the condensed financial information.

Critical accounting estimates and judgements

In preparing the consolidated financial statements, management has had to make judgements, estimates and assumptions that affect the reported amounts of assets and liabilities, income and expenses.

The interim statement has been prepared on the basis of the critical accounting estimates and judgements set out in the Annual Report and the financial statements for the year ended 30 September 2010. These have been reviewed by management and are considered to be unchanged for the reporting period.

Restatement of comparatives

The comparatives for the half year to 31 March 2010 and the full year to 30 September 2010 have been restated to reflect the creation of a deferred tax asset that should have been recognised in the year ending 30 September 2007 and in each subsequent reporting period, to offset the corresponding deferred tax liability recognised on the acquisition of First Notice Systems in December 2006. The adjustment affects both deferred tax assets and retained earnings as at 1 October 2009, 31 March 2010 and 30 September 2010 and has the effect of increasing net assets of the Group by £2,479,000 at each date.

This restatement has not affected the profit or loss for the Group for the current or comparative reporting periods.

As a result, the presentation of deferred tax assets and retained earnings in the prior year balance sheet have been adjusted, so disclosure is on a consistent basis with the current year figures.

2. SEGMENT INFORMATION

The Group has six reportable operating segments which are separately disclosed, together with a central cost centre which includes unallocated corporate costs, expensed development costs and transfer pricing royalties. Operating segments have been aggregated where the aggregation criteria have been met. More specifically, Asia Pacific includes Australia, Japan and India, the Rest of Europe includes France, Spain and Benelux and North America includes the US and Canada.

Management monitors the operating results of its business units separately for the purposes of making decisions about resource allocation and performance assessment. Segment performance is evaluated based on adjusted profit which is the Group's internal principal measure of profit. Segment revenue excludes transactions between business segments.

The Group's revenues, which are derived from the products and services in the tables below, are attributed to business units based on customer location. The total external revenue attributable to all countries other than the UK was £67.8m (H1 2010: £60.9m).

A reconciliation of the total adjusted profit before tax for the reportable segments to the Group's profit before tax is shown in the Income Statement.

Six months ended 31 March 2011

* EBITDA is shown before share-based payments charge, impairment of goodwill and financial assets and exceptional items.

** Included within Motor BPO and networks is an amount relating to the sale of goods (motor parts) of £11,200,000.

*** Included within Software is an amount relating to the sale of goods (software licences) of £1,628,000.

Six months ended 31 March 2010

* EBITDA is shown before share-based payments credit, impairment of goodwill and financial assets and exceptional items.

** Included within Motor BPO and networks is an amount relating to the sale of goods (motor parts) of £10,486,000.

*** Included within Software is an amount relating to the sale of goods (software licences) of £620,000.

Year ended 30 September 2010