31st Jul 2007 07:02
Xchanging PLC31 July 2007 XCHANGING PLC RESULTS FOR THE SIX MONTHS ENDED 30 JUNE 2007 Highlights of the Period 6 months 6 months Increase ended ended 30 June 2007 30 June 2006Revenue £222.4m £187.9m 18% Group adjusted operating profit £13.9m £11.7m 19%(1)Xchanging's share of adjusted £10.6m £8.5m 25%operating profit (XEBIT) (1) Xchanging's share of adjusted £8.4m £7.0m 20%profit after tax (XPAT) (2) Pro forma EPS - Diluted (3) 4.45p 3.72p 20% Key points: - Continuing track record of strong growth (revenues up 18% over H1 2006, which is virtually all organic) - Adjusted operating profit(1) attributable to Xchanging increased 25% to £10.6m (H1 2006: £8.5m) - Adjusted operating profit(1) margin attributable to Xchanging increased to 4.8% (H1 2006: 4.5%) - Strong operating cash flow with net cash flow from operations increasing by 27% in the period to £22.9m (H1 2006: £18.1m) - Completed successful IPO raising £75m of primary equity capital - Bought out minority stakes in HR and procurement businesses for £57m Notes: 1 Statutory operating profit (post exceptional IPO items) was £7.6m. Adjustedoperating profit excludes exceptional IPO items and certain non cash items,which comprise amortisation of intangible assets previously unrecognised byacquired entities and share based payment charges of £0.2m (H1 2006: £0.2m). 2 Statutory profit for the period was £4.3m (post exceptional IPO items). Addbacks to profit for the period comprise exceptional IPO items, amortisation ofintangible assets previously unrecognised by acquired entities, share basedpayment charges, imputed interest on the historic funding structure of the groupwhich fell away on admission, imputed interest on put options, imputed intereston employee loans and the related tax thereon. 3 Pro forma EPS is based on Xchanging's share of adjusted profit after tax.2006 EPS shown utilises the weighted average number of shares in the period to30 June 2007 in order to aid comparison. David Andrews, CEO of Xchanging, commented: "We are pleased with the maiden setof interim results we report today. Over the past six months Xchanging hascontinued to demonstrate strong growth by winning contracts with new customersand successfully expanding our existing relationships. Our focus onstandardisation is resulting in superior quality of service delivery andproductivity improvement. "Looking ahead, the business process outsourcing market remains active and ourexisting businesses are well placed to deliver organic growth. In addition, weare well positioned to add major new business through our unique partneringapproach. We will continue to seek infill acquisition opportunities tocomplement and strengthen our proposition and we remain confident in the outlookfor the full financial year." 31 July 2007 Enquiries:Xchanging plcDavid Andrews, Chief Executive OfficerRichard Houghton, Chief Financial Officer Tel: 020 7780 6999 Tulchan GroupDavid Trenchard Tel: 020 7353 4200Stephen Malthouse A presentation for investors and analysts will be held at Xchanging's offices at34 Leadenhall Street, London, EC3A 1AX at 10.45am on 31 July 2007. About Xchanging Xchanging is a fast-growing international, pure play business processoutsourcing company providing complex industry specific processing to thebanking and insurance industries such as securities processing, commercialinsurance premiums and claims processing. We also provide procurement, financeand accounting, and human resources services to customers across industries.www.xchanging.com Xchanging plc Interim Results for the 6 months to 30 June 2007 It has been an exciting first half of the year for the Group, with thesuccessful listing of Xchanging plc on the London Stock Exchange on 30 April.Our business continues to grow rapidly and the business process outsourcing(BPO) market remains buoyant with a healthy pipeline of opportunities. TheGroup raised £75m gross proceeds from the initial public offering (IPO) to fundthe continued fast growth of the business and to enhance our ability to improveoperational performance thereby maximising shareholder value. Revenue for the six months ended 30 June 2007 was £222.4 million, an increase of18% (H1 2006: £187.9 million). This was predominantly organic growth arisingfrom all five of Xchanging's service offerings (acquisitions accounting for lessthan 1%). Major contracts won in the second half of 2006 (e.g. Aon and NationalAustralia Bank) have made a significant contribution to this increase. Adjusted operating profit attributable to Xchanging shareholders (XEBIT) grew25% to £10.6m (H1 2006: £8.5m). XEBIT margins increased by 30 basis points from4.5% to 4.8%, helped by the buy out of the minorities of the BAE Systems'partnerships. Adjusted profit after tax attributable to Xchanging shareholders(XPAT) grew by 20%. Pro forma earnings per share grew in line with XPAT to 4.4pfrom 3.7p. The market opportunity The BPO market offers strong growth prospects. The Western European market,according to IDC (4), is set to grow by c.15% annually over the next 3 to 5years. Xchanging is represented in those areas of BPO with high growth.Furthermore, IDC sees procurement as an exciting new BPO area with the highestgrowth at c.24%, followed by complex industry processes. According to Ovum (5),in 2006, only 5% of the addressable cost base was outsourced in the UK.Continental Europe is a less developed BPO market than the UK and the potentialcost base for outsourcing is significantly larger. For Xchanging, as an international pure play BPO company, the UK and ContinentalEurope will continue to be a major strategic focus where we are already arecognised leader. The recent report on procurement outsourcing by marketcommentator Everest (6) cites Xchanging as the largest European procurement BPOsupplier with a 30% market share (9% globally). The global BPO market is also set to grow strongly - 13.8% CAGR over the fiveyears from 2005, reaching $92billion by 2010 (7), excluding industry-specificprocessing. Xchanging already serves "blue chip" customers in 34 countries, thelatest being China. Xchanging, which has over 3,900 people in 7 countries providing a broad scope ofBPO offerings, is already a recognised leader in the BPO market and is wellpositioned to capture future growth. Notes: 4 IDC - Western European BPO Services Market Forecast, 2005 - 2010, Doc #BP01N 5 Ovum (2006) 6 Everest Research Institute (2007) - "Procurement Outsourcing 2007: A Market on the Rebound" 7 Source: IDC - Doc #2014178, Doc #BP01N, and Doc #AP224107N Executing on our strategy to build shareholder value Xchanging is well placed to exploit this significant market opportunity over thenext 3 to 5 years not only in our historical base of Europe but also in otherregions where we are seeing opportunities. Our strategy is threefold: • Expanding our existing platforms in Commercial Insurance, Financial Markets, HR, Procurement, Accounting and Hosting; • Developing new platforms in new processes, new geographies or new industry sectors; and • Becoming the low cost producer in each major area of service through standardisation, scale and our balanced onshore/offshore approach Expanding our existing platforms We continue to expand the business through our full suite of BPO offeringscovering Partnering, Outsourcing, Products, Straight Through Processing, andBusiness Support. This is our "1+4 Go to Market Strategy", where Partneringgives scale with the other 4 offerings delivering growth at least in line withindustry forecasts. For each offering there has been significant activity andthere is a good pipeline for the second half of 2007 and encouraging strengthfor 2008 and beyond. Partnering We have successfully implemented our Commercial Insurance partnership with Aonfor broking services which we won in September 2006. Already we have addedthird party business to this partnership and are actively building theinternational integrated broking utility. We have bought out the BAE Systems' minority shares of our Xchanging HR Servicesand Xchanging Procurement Services Enterprise Partnerships in the first half of2007 for a total of £57 million. This acquisition was effective from 1 January2007. As a result of this buy out, we are actively seeking new partnerships inthese two markets as well as our other existing markets and the pipeline iscontinuing to build. Outsourcing We have secured a number of new international customers for processing andsettlement services to extend our reach in Commercial Insurance. Associated withthe buy-out of the BAE Systems' minority interests, we have agreed HR andprocurement service contract extensions to 2013. HR wins are particularlyencouraging. At SELEX Sensors and Airborne Systems, (acquired by Finmeccanicafrom BAE Systems) we signed a five-year £8.5m contract for the provision of HRservices. We have also signed a number of HR and payroll deals with NHSTrusts, including the North Devon NHS Trust, to provide payroll services to over9,000 NHS employees for the next 5 years. A further 5,900 NHS employees wereadded in a new contract signed in July 2007. This builds on the Xchangingpartnering relationship with University Hospital Birmingham and brings the totalnumber of NHS employees to whom Xchanging provides payroll services to over130,000. Products We completed delivery of a full insurance processing solution to Lloyd'sReinsurance (China) Company Limited. We have also implemented our first U.S.sale of Brokasure (our wholesale broking product) to a significant U.S.re-insurance intermediary and our first sale of G4RI (Genius for re-insurance)for a Bermudian re-insurer. The Enterprise Partnership with Aon has beensuccessful in providing services to third party customers with additions in thefirst half of the year. In Financial Markets, our Central Pricing Serviceproduct continues to open up new client relationships with four new deals signedin the six months to 30 June 2007. Straight Through Processing (STP) Significant progress has been achieved in automating the interfaces with ourInsurance customers. To this end we have signed an MOU with RI3K (the paperlesstrading service for insurance and re-insurance) to co-operate in the developmentof a highly automated platform for policy, premium and claims processing, andcustody services for international markets including Bermuda. We also confirmedplans to launch an ACORD messaging hub to all brokers and insurers in the LondonMarket. This hub will support message traffic for placement, endorsements,accounting & settlement and electronic claims, whether in a peer-to-peer orbureau-based trading model. Financial Markets shows consistent organic growth from our existing client base,deepening our relationships with these major German financial institutions.Organic booked STP revenues are growing in line with the sector performancetargets. Business Lines signed STP contracts in the first half of the year with one ofits key customers generating a total contract value in excess of £1m. Thesecontracts extend the scope and scale of the existing relationship. Business Support Business Support continues to enable Xchanging to open up new sectors inexisting and new territories as well as new offerings in existing businesses.In the first half of 2007, we have signed deals in the UK and Germany for sixsigma advisory services in the healthcare and telecom sectors. New sales inXchanging's immigration advisory business, Ferguson Snell, are driven bycontinuing immigration from India to the UK. Xchanging's largest immigrationservices client is now Tech Mahindra, the global leader in providing end-to-endIT services and solutions to the telecom industry, which became a customer atthe end of 2006. Developing new platforms We use our unique Partnering offering for developing new areas of businessprocessing, as well as infill acquisitions to add skills and new marketchannels. Historically, we have added a major new partnership every 18 to 24months; our most recent partnership with Aon started in September 2006. Our aimis to reduce this interval, whilst at the same time protecting our reputationfor high quality implementation. As well as the opportunity pipeline in the UK and Germany, we are beginning tobuild a pipeline in France and Italy where we now believe there is an appetitefor our unique open book gainshare partnering approach. We are also continuing to assess infill acquisition opportunities. We expectresults in this area of our strategy to be medium-term in nature. Becoming the low cost producer - the Xchanging way Underpinning our strategy as a fast-growing international pure play businessprocessor is the achievement of higher quality services, productivityimprovements and economies of scale. At the heart are standardisation and abalanced onshore/offshore model together with rigorous performance management. During the first half of the year, we have made excellent progress in each ofour major platforms and overall performance is rising in line with expectations.First, implementation of our Enterprise Partnership with Aon, XchangingBroking Services, has seen the completion of the re-alignment phase includingagreement of the service and production definitions and the rebased costs.Streamlining has started and so far the Glasgow and Redhill sites have beenaggregated with other locations, whilst 76 roles have been successfullytransferred to India. Secondly, the procurement and procure-to-pay contract with National AustraliaGroup Europe is now trading in eight key categories of spend. The business alsoachieved SOX accreditation for its procure-to-pay service to National AustraliaGroup Europe in June 2007. Xchanging is now processing 100% of NationalAustralia Group Europe's external spend which has helped to ensure compliance ofprocurement from preferred suppliers. Thirdly, regarding our balanced onshore/offshore approach, Xchanging hascontinued to invest in its offshore operations in India, with the phasedtransition of Financial Markets and Insurance processing activity continuingthrough the first half of the year. At 30 June, the Group's India operationsemployed 495 staff (13% of the Group's employees) providing business processingand application development services across the Group. We still aim to increaseour offshore employees to 30% of the Group total over the next few years. We arealso exploring near-shoring opportunities for our European processing businesseswhere this is more appropriate for regulatory or cultural reasons. People make it happen Xchanging wants to unleash the entrepreneurial spirit in everyone. Our staffshare participation programme, whereby all staff received a gift of 200 sharesfrom the CEO David Andrews, has been a great success. We will continue tocreate programmes to stimulate the entrepreneurial spirit in all we do. We wantall of our sales forces and production staff alike to feel real motivation tobuild the business, to enhance their careers and, as a result, to buildshareholder value for everyone. Shareholder value - key performance indicators (KPIs) The Group's KPIs are detailed below (8) 6 months ended 6 months ended Growth 30 June 2007 30 June 2006 £m £m % Adjusted EBIT 13.9 11.7 19%XEBIT 10.6 8.5 25%XPAT 8.4 7.0 20% Adjusted EBIT% 6.3% 6.2%XEBIT % 4.8% 4.5%XPAT % 3.8% 3.7% Note: (8) The Group measures and tracks profit directly attributable to equityshareholders (net of Enterprise Partnership minority interests) as thecomparable and consistent measure of profit performance for the Group'sshareholders. The Group uses two such measures to monitor the performance ofprofit attributable to equity shareholders of the Group: • Adjusted operating profit attributable to equity holders of the Group (XEBIT). • Adjusted profit attributable to equity holders of the Group (XPAT). XEBIT has grown faster than both sales and adjusted operating profit with growthof 25% to £10.6m (H1 2006: £8.5m). This increased share of profits isprincipally due to the buy out of the minorities of the BAE Systemspartnerships. XPAT also outperformed adjusted operating profit and sales with growth of 20%.The growth is somewhat lower than XEBIT due to the interest charges on thedeferred consideration for the acquisition of the minorities in XchangingProcurement Services, which was settled on 11 May 2007. The tables below detail the adjustments to operating profit to determine XEBITand XPAT: XEBIT 6 months ended 6 months ended 30 June 2007 30 June 2006 £m £mXEBIT 10.6 8.5Adjusted profit after taxation attributable to minority 3.3 3.2interestsAdjusted operating profit 13.9 11.7Less: IPO exceptional items (5.9) (1.9) Share based payment charges (0.2) (0.2) Other add backs (0.2) (0.4)Statutory operating profit 7.6 9.2 XPAT 6 months ended 6 months ended 30 June 2007 30 June 2006 £m £mXPAT 8.4 7.0Adjusted profit after taxation attributable to minority 2.3 2.4interestsAdjusted operating profit 10.7 9.4Less: IPO exceptional items (6.3) (1.9) Share based payment charges (0.2) (0.2) Other add backs (0.7) (1.0)Tax effect of above 0.8 0.4Statutory profit for the period 4.3 6.7 Earnings per share - pro forma analysis When considering earnings per share, the Group considers it appropriate to useXPAT, as described above, as it represents the underlying performance of thebusiness. In addition, as the Group's first half results were impacted by thechange in capital structure resulting from the IPO, a pro forma number of sharesshould be used for comparative purposes. Consequently, a pro forma analysis is set out below to show how the Group'searnings per share would have been calculated had the Group's current capitalstructure been in place from the start of both accounting periods. Pro forma basic / diluted earnings per share 6 months ended 6 months ended 30 June 2007 30 June 2006 £m £m XPAT 8.4 7.0Pro forma number of shares in issue* 178.0 178.0Pro forma basic earnings per share (pence) 4.70 3.93 XPAT 8.4 7.0Pro forma diluted number of shares* 188.3 188.3Pro forma diluted earnings per share (pence) 4.45 3.72 * Weighted average number of shares Management believes that the pro forma earnings per share above provides thebest picture of the underlying performance of the business for the period. IPO exceptional costs The Group incurred significant exceptional costs during the first half of theyear related to the IPO in April. These costs totalled £6.3m, of which themajority related to advisors fees and costs associated with share gifts from theCEO's own share allocation. Details of these IPO exceptional costs are given innote 4. Finance costs Net finance income (pre exceptional items) decreased to £0.02m from £0.3m.Finance costs incurred on the deferred consideration for acquisitions andimputed interest charges on put options offset additional finance income earnedon the primary funding received from the IPO. The consideration of £47.0m forthe acquisition of the minorities of one of the BAE Systems partnerships, whichhad been deferred, was paid on 11 May 2007. Taxation The effective tax rate excluding exceptional items and add backs is comparablefor the two periods at 25% in the first half of 2007 (H1 2006: 26%). The Group's statutory effective tax rate was up for the period at 39% (H1 2006:30%) due to the IPO exceptional costs, some of which will be deemed disallowablefor tax purposes. Balance sheet The balance sheet has strengthened significantly between reporting periods,primarily as a result of the IPO in the second quarter. In addition, the netdeficit in relation to defined benefit pension and retirement schemes hasreduced to £10.0m (£20.0m H1 2006) before deferred tax. Cash flow The business continued to be strongly cash generative, pre exceptional items,with reported net cash flow from operations increasing by 26.8% to £22.9m (H12006: £18.1m). 6 months ended 6 months ended 30 June 2007 30 June 2006Cash conversion £m £m Cash flows from operating activities 22.9 18.1Adjusted operating profit 13.9 11.7Cash conversion 165% 155% Cash performance is measured using a cash conversion ratio, calculated as cashgenerated from operations divided by the Group's adjusted operating profit. Cashconversion was also strong improving by 10 percentage points to 165% (H1 2006:155%). Cash conversion in the first half of the year is influenced by prepaymentof annual service charges in the form of subscriptions in some of the operatingbusinesses, primarily in the Insurance sector. Cash held by the Group at the period end was £88.0m (H1 2006: £63.0m). Net cashat the period end was £57.1m (H1 2006: £27.3m). This figure excludesnon-distributable cash balances held by the Enterprise Partnerships. There weresignificant movements in cash between the periods, most notably receipt of theprimary funding of £75m from the IPO and payment of £57m for the acquisition ofminority interests in partnerships with BAE Systems. The Group maintains a £35mdebt facility. Capital expenditure We aim to keep capital expenditure (which includes intangible assets) around 4%of revenue. During the period, we met this objective with capital expenditure at2.9% of revenue (H1 2006: 4.6%). Dividend As set out at the time of the IPO, we intend to adopt a dividend policy whichreflects the growth prospects and cash flow generation of the Group whilstmaintaining an appropriate level of dividend cover. This will be reviewed inlight of the full year results. Excellent future prospects for Xchanging We are positive about the growth prospects for the business. Xchanging hasestablished a strong reputation in the fast-growing global BPO market. We have continued to display strong organic growth through our Outsourcing,Products, Straight Through Processing and Business Support market offerings.Our Partnering offering is seen as distinctive for handling large and complexbusiness processing and we expect to continue to win major partneringarrangements, albeit timing can not be predicted. Our balanced onshore/offshore model is driving productivity improvement. We areconfident that we can extend the model to include near-shoring as a way ofembracing Continental European cultural, regulatory and non-English speakingrequirements. The business process outsourcing market remains active and our existingbusinesses are well placed to deliver organic growth. We will continue to seekinfill acquisition opportunities to complement and strengthen our propositionand we remain confident in the outlook for the full financial year. XCHANGING PLCConsolidated income statementfor the 6 months ended 30 June 2007 Unaudited 6 months 6 months ended ended 30 June 2007 30 June 2006 Notes £'000 £'000 Revenue 3 222,437 187,945Cost of sales (201,006) (169,879)Gross profit 21,431 18,066 Administrative expenses - before exceptional items (7,987) (6,943)Administrative expenses - exceptional items 4 (5,891) (1,943)Administrative expenses (13,878) (8,886)Operating profit 3 7,553 9,180 Finance costs - before exceptional items 5 (5,670) (4,192)Finance costs - exceptional items 4 (439) -Finance costs (6,109) (4,192)Finance income 5 5,692 4,524Profit before taxation 7,136 9,512 Taxation (2,809) (2,846)Profit for the period 3 4,327 6,666 Attributable to: - Equity holders of the Company 1,976 4,275 - Minority interests 2,351 2,391 4,327 6,666 Earnings per share (expressed in pence per share) - Basic 6 1.11 2.77 - Diluted 6 1.05 2.63 XCHANGING PLCConsolidated statement of recognised income and expensefor the 6 months ended 30 June 2007 Unaudited 6 months 6 months ended ended 30 June 2007 30 June 2006 Notes £'000 £'000 Actuarial gains arising from defined benefit pension schemes 9 12,072 8,478Movement on deferred tax relating to pension assets 9 (3,735) (2,478)Revaluation of available-for-sale financial assets 9 874 (2,079)Deferred tax on revaluation of available-for-sale financial assets 9 238 378Deferred and current income tax on share options 9 5,470 -Exchange differences 9 114 (110)Net gains recognised directly in equity 15,033 4,189Profit for the period 3 4,327 6,666Total recognised income for the period 19,360 10,855 Attributable to: - Equity holders of the Company 15,703 8,026 - Minority interests 3,657 2,829 19,360 10,855 XCHANGING PLCConsolidated balance sheetas at 30 June 2007 Unaudited 30 June 2007 30 June 2006 Notes £'000 £'000 AssetsNon-current assetsGoodwill 7 84,615 28,966Intangible assets 28,693 28,828Property, plant and equipment 14,619 14,835Available-for-sale financial assets 21,297 20,228Trade and other receivables 11,220 5,465Retirement benefit assets 2,075 -Deferred income tax assets 15,586 12,974Total non-current assets 178,105 111,296 Current assetsTrade and other receivables 76,661 75,997Cash and cash equivalents 88,037 63,017Total current assets 164,698 139,014 LiabilitiesCurrent liabilitiesTrade and other payables (92,313) (91,487)Derivative financial instruments (20) -Current income tax liabilities (3,646) (6,593)Borrowings 8 (3,192) (5,921)Provisions (4,275) (12,738) Net current assets 61,252 22,275 Total assets less current liabilities 239,357 133,571 Non-current liabilitiesTrade and other payables (9,434) (7,709)Financial liabilities - Borrowings 8 (788) (12,715) - Other liabilities (7,407) -Deferred income tax liabilities (2,520) (1,214)Retirement benefit obligations (12,048) (20,025)Provisions (7,865) (8,936) Net assets 199,295 82,972 Shareholders' equityOrdinary shares 10,576 220Share premium 72,651 82,697Merger reserve 409,672 -Reverse acquisition reserve (312,345) -Other reserves 9,259 1,422Retained earnings (963) (11,200)Total shareholders' equity 188,850 73,139Minority interest in equity 10,445 9,833Total equity 9 199,295 82,972 XCHANGING PLCConsolidated cash flow statementfor the 6 months ended 30 June 2007 Unaudited 6 months 6 months ended ended 30 June 2007 30 June 2006 £'000 £'000 Cash flows from operating activitiesCash generated from operations 22,923 18,084Income tax paid (4,613) (4,561)Net cash from operating activities 18,310 13,523 Cash flows from investing activitiesAcquisition expenses (553) (115)Acquisition cost of minority interests in subsidiaries (56,934) -Acquisition cost of subsidiaries (508) (3,275)Cash and cash equivalents acquired with subsidiaries - 402Purchase of property, plant and equipment (2,431) (5,401)Purchase of intangible assets (3,943) (3,165)Pre-contract expenditure (78) (1,697)Proceeds from sale of property, plant and equipment 16 108Interest received 1,973 1,341Net cash used in investing activities (62,458) (11,802) Cash flows from financing activitiesProceeds from issue of shares 81,998 1,393Transaction costs of shares issued (4,279) -Interest paid (1,147) (28)Dividends paid to minority interests (3,072) (10,222)Net cash from/(used in) financing activities 73,500 (8,857)Effects of exchange rate changes 1 (175)Net increase/(decrease) in cash and cash equivalents 29,353 (7,311)Cash and cash equivalents at 1 January 58,684 70,328Cash and cash equivalents at 30 June 88,037 63,017 XCHANGING PLC Notes to the consolidated financial information for the 6 months ended 30 June 2007 1. Basis of preparation (i) Development of the Group Xchanging plc (the "Company") was incorporated as Tabbyview plc on 16 May 2006and changed its name to Xchanging plc on 27 June 2006. It did not operate fromthe period of incorporation to 30 April 2007. With effect from 30 April 2007, the Company became the legal parent company ofXchanging B.V. and its subsidiary undertakings. This business combination,effected through an exchange of equity interests, has been accounted for as areverse acquisition in accordance with IFRS 3 'Business combinations'. The keyfeatures of this basis of consolidation are: • The consolidated income statement includes the results of Xchanging B.V. and its subsidiaries for the 6 months ended 30 June 2007, with the results of Xchanging plc from 30 April 2007 (the acquisition date). • The comparative figures in the income statement are the results of Xchanging B.V. and its subsidiaries for the 6 months ended 30 June 2006. The consolidated retained earnings reserves of the Group include the preXchanging plc acquisition retained earnings of Xchanging B.V. and itssubsidiaries. (ii) Accounting policies These unaudited interim financial statements have been prepared in accordancewith the Listing Rules of the Financial Services Authority. In preparing theseinterim financial statements the same accounting policies, methods ofcomputation and presentation have been applied as those set out in the XchangingB.V. annual report for the year ended 31 December 2006. The accounting policiesare drawn up in accordance with International Accounting Standards (IAS) andInternational Financial Reporting Standards (IFRS) as endorsed by the EuropeanUnion . The accounting policies adopted in the preparation of the interim consolidatedfinancial statements are consistent with those followed in the preparation ofthe Group's annual financial statements for the year ended 31 December 2006,except for the adoption of the following standards mandatory for annual periodsbeginning on or after 1 January 2007: • IFRS 7, Financial instruments: Disclosure; • IFRIC 7, Applying the restatement approach under IAS 29; • IFRIC 8, Scope of IFRS 2; • IFRIC 9, Reassessment of embedded derivatives; and • IFRIC 10, Interims and impairment. The adoption of these standards did not affect the Group results of operationsor financial position. 2. Financial information The financial information included in this statement does not constitute fullfinancial statements within the meaning of section 240 of the Companies Act1985. The full financial statements for the Group for the year ended 31December 2006 have been delivered to the Dutch Chamber of Commerce, as theparent company of the Group for that period was registered in the Netherlands.The independent auditors' report on those financial statements was unqualifiedand did not contain a statement under section 237 (2) or (3) of the CompaniesAct 1985. 3. Segmental reporting The Group has three reportable business sectors for financial reportingpurposes: Insurance, Financial Markets and Business Lines. In both of theInsurance and Financial Markets sectors the Group provides industry specific BPOservices and software to customers. Business Lines is a cross-industry sectorin which the Group provides procurement, human resources, finance and accountingand IT hosting services. These three operating sectors are supported by theGroup's offshore business processing services facility ("BPS") and "Corporate",which provides the infrastructure, resources and investment to sustain and growthe business, including sales and commercial, performance management,implementation and business management functions. Business Insurance Financial BPS and Total Lines Markets CorporateFor the six months ended 30 June 2007 £'000 £'000 £'000 £'000 £'000 Revenue 103,545 82,738 45,833 - 232,116 - From external customers 96,523 80,151 45,763 - 222,437 - Inter segment 7,022 2,587 70 - 9,679 Adjusted operating profit 7,249 10,978 5,511 (9,815) 13,923Adjusted operating profit percentage 7.0% 13.3% 12.0% 6.3% Exceptional items (120) (66) (23) (5,682) (5,891)Adjustment of certain non cash items: - Share based payments (59) (58) (18) (124) (259) - IFRS 3 intangible depreciation (157) (63) - - (220)Operating profit 6,913 10,791 5,470 (15,621) 7,553 Allocation of central costs: - Investment in enterprise - (748) - 748 -partnerships - Depreciation and amortisation (185) (127) (351) 663 - - Other (521) (632) (613) 1,766 -Segment result 6,207 9,284 4,506 (12,444) 7,553 Finance costs (6,109)Finance income 5,692Taxation (2,809)Profit for the period 4,327 Business Insurance Financial BPS and Total Lines Markets CorporateFor the six months ended 30 June 2006 £'000 £'000 £'000 £'000 £'000 Revenue 79,807 62,905 49,426 - 192,138 - From external customers 77,300 61,351 49,294 - 187,945 - Inter segment 2,507 1,554 132 - 4,193 Adjusted operating profit 4,963 10,756 4,825 (8,845) 11,699Adjusted operating profit percentage 6.2% 17.1% 9.8% 6.2% Exceptional items - - - (1,943) (1,943)Adjustment of certain non cash items: - Share based payments (25) (18) (8) (170) (221) - IFRS 3 intangible depreciation (159) (196) - - (355)Operating profit 4,779 10,542 4,817 (10,958) 9,180 Allocation of central costs: - Investment in enterprise - - - - -partnerships - Depreciation and amortisation (188) (24) (311) 523 - - Other (168) (622) (99) 889 -Segment result 4,423 9,896 4,407 (9,546) 9,180 Finance costs (4,192)Finance income 4,524Taxation (2,846)Profit for the period 6,666 4. Exceptional costs 6 months 6 months ended ended 30 June 2007 30 June 2006 £'000 £'000 Exceptional costs included in administrative expenses consist of: IPO costs 3,679 1,943IFRS 2 charge related to the share gift to employees by the CEO 2,212 -Total exceptional costs included in administrative expenses 5,891 1,943 Exceptional costs included in finance costs consist of: IPO costs 439 - The IPO costs relate to specific expenses incurred in listing the Group on theLondon Stock Exchange. The charge within administrative expenses consistsmainly of legal and professional advisers fees of £3,053,000. It also includeselements of staff bonuses granted to certain employees in recognition of theircontribution to the IPO process and IFRS 2 charges on early option exercises asa direct result of the IPO. Upon the successful listing of Xchanging on the London Stock Exchange, the CEO,David Andrews, gave every qualifying Xchanging employee 200 of his own personalXchanging shares. This gift falls within the scope of IFRS 2 and consequentlythe Group incurs an accounting charge equivalent to the value of the shares atthe date of the gift. The finance cost element relates to adjustments that were made to existingonerous lease provisions due to the change in the discount rate used tocalculate the present value of these provisions. This change in discount rateis a direct result of the IPO. 5. Finance costs and income 6 months 6 months ended ended 30 June 2007 30 June 2006 £'000 £'000 Finance costsImputed interest payable on convertible loan notes (291) (619)Actual interest payable on convertible loan notes - (56)Interest payable on bank loans and overdrafts (103) (5)Interest cost on defined benefit pension schemes (3,486) (3,353)Financing costs on deferred consideration for acquisitions (1,197) (136)Imputed interest on put option to acquire minority interest (267) -Foreign exchange loss on financial liabilities (119) -Other interest payable (207) (23)Total finance costs (5,670) (4,192) Finance incomeBank interest 1,743 1,214Expected return on plan assets within defined benefit pension schemes 3,565 3,183Dividends received on available-for-sale assets 177 108Imputed interest on employee loans through the share purchase plan 150 -Other interest 57 19Total finance income 5,692 4,524 Net finance income pre exceptional items 22 332 Finance costs - exceptional items (note 4) (439) - Net finance (costs)/income (417) 332 6. Earnings per share Basic earnings per share is calculated by dividing the net profit attributableto equity holders of the Company by the weighted average number of ordinaryshares of Xchanging plc. Diluted earnings per share is calculated by dividing the net profit attributableto equity holders of the Company by the sum of the weighted average number ofordinary Xchanging plc shares and the weighted average number of dilutivepotential ordinary Xchanging plc shares outstanding. Weighted average Earnings number of shares Per share amount £'000 thousands pence Basic earnings per share: - 30 June 2007 1,976 178,016 1.11 - 30 June 2006 4,275 154,157 2.77 Diluted earnings per share: - 30 June 2007 1,976 188,282 1.05 - 30 June 2006 4,275 162,635 2.63 The following reflects the share data used in the basic and dilutive earningsper share calculations: Weighted average number of shares: 6 months 6 months ended ended 30 June 2007 30 June 2006 thousands thousands Weighted average number of ordinary Xchanging plc shares 178,016 154,157for basic and adjusted earnings per shareDilutive potential ordinaryshares: - Unexercised warrants 1,502 1,471 - Employee share options 8,764 7,007Weighted average number of ordinary Xchanging plc shares 188,282 162,635for dilutive earnings per share Adjusted basic and diluted earnings per share In addition to the above, an adjusted earnings per share value is disclosed toprovide a better understanding of the underlying trading results of the Group,which is in line with the KPIs as used to measure the Group's performance: Weighted average Earnings number of shares Per share amount £'000 thousands pence Adjusted basic earnings per share: - 30 June 2007 8,374 178,016 4.70 - 30 June 2006 7,002 154,157 4.54 Adjusted diluted earnings per share: - 30 June 2007 8,374 188,282 4.45 - 30 June 2006 7,002 162,635 4.31 The adjusted earnings per share figures are calculated based on the Xchangingadjusted profit after tax (XPAT), divided by the above basic and dilutedweighted average number of shares. The XPAT is calculated as follows: 6 months 6 months ended ended 30 June 2007 30 June 2006 £'000 £'000 Net profit attributable to Xchanging plc equity holders 1,976 4,275for basic earnings per shareExceptional items (net of 5,777 1,825tax)Employee share options (net of tax) 181 221IFRS 3 intangible asset depreciation (net of 154 248tax)Imputed interest on historical debt (net of 204 433tax)Imputed interest on put options (net of tax) 187 -Imputed interest on employee loans through the share (105) -purchase plan (net of tax)Adjusted net profit attributable to Xchanging plc equity 8,374 7,002holders for adjusted basic & diluted earnings per share 7. Acquisition of minority interests During the six months ended 30 June 2007, the Group purchased BAE Systems' 50% interests in two of the enterprise partnerships giving the Group full ownership of these. (i) HR Enterprise Limited With effect from 1 January 2007, the Xchanging Group acquired the remaining 50% minority holding in the HR Enterprise Limited enterprise partnership from BAE Systems plc. This 50% interest was acquired by HR Holdco, a subsidiary of Xchanging plc. Details of the minority interests' share of the book and fair value of the assets of HR Enterprise Limited acquired, consideration paid and the resulting goodwill are set out below: Book and fair value £'000 Costs of acquisition - consideration 10,085 Costs of acquisition - fees 97 Minority interests' share of net assets acquired (374) Goodwill 9,808 (ii) Xchanging Procurement Services (Holdco) Limited With effect from 1 January 2007, the Xchanging Group acquired the remaining 50% minority holding in the Xchanging Procurement Services (Holdco) Limited enterprise partnership from BAE Systems plc. This 50% interest was acquired by XUK Holdco (No. 2) Limited, a subsidiary of Xchanging plc. Details of the minority interests' share of the book and fair value of the assets of Xchanging Procurement Services (Holdco) Limited acquired, consideration paid and the resulting goodwill are set out below: Book and fair value £'000 Costs of acquisition - consideration 46,651 Costs of acquisition - fees 458 Minority interests' share of net assets acquired (2,790) Goodwill 44,319 The consideration has been discounted using the effective interest rate at the time of the acquisition which mirrors that of a similar instrument in the market place. 8. Borrowings 30 June 2007 30 June 2006 £'000 £'000 CurrentObligations under finance leases - 143Deferred consideration on acquisitions 3,192 5,778Total current borrowings 3,192 5,921 Non-currentConvertible loan note - 12,607Obligations under finance leases - 108Deferred consideration on acquisitions 788 -Total non-current borrowings 788 12,715 The Group's finances were restructured prior to the listing of Xchanging plc onthe London Stock Exchange, with the full amount outstanding under theconvertible loan note being converted into shares in Xchanging B.V. andsubsequently included in the share for share exchange with Xchanging plc. 9. Movements in shareholders' equity Share Share Merger Reverse Other Retained Minority Total capital premium reserve acquisition reserves earnings interests equity reserve £'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000 At 1 January 199 68,163 - - (974) (15,696) 17,226 68,9182006Profit for the - - - - - 4,275 2,391 6,666periodRevaluation of - - - - (1,624) - (455) (2,079)investmentsDeferred tax on - - - - 193 - 185 378revaluation ofinvestmentsActuarial gains - - - - 7,538 - 940 8,478on definedbenefit schemesDeferred tax on - - - - (2,228) - (250) (2,478)actuarial gainsConvertible debt - - - - 206 - - 206- equity elementDeferred tax on - - - - 1,178 - - 1,178convertible debtExchange - - - - (128) - 18 (110)adjustmentsShare options- proceeds from 4 1,389 - - - - - 1,393shares issued- value of - - - - - 221 - 221employeeservicesExercise of 4 1,480 - - (1,484) - - -warrantsExchange of 13 11,665 - - (1,255) - - 10,423convertible debtinto sharesDividends paid - - - - - - (10,222) (10,222)At 30 June 2006 220 82,697 - - 1,422 (11,200) 9,833 82,972 At 1 January 221 82,589 - - 1,251 (10,209) 11,778 85,6302007Profit for the - - - - - 1,976 2,351 4,327periodRevaluation of - - - - 1,157 - (283) 874investmentsDeferred tax on - - - - 123 - 115 238revaluation ofinvestmentsActuarial gains - - - - 9,900 - 2,172 12,072on definedbenefit schemesDeferred tax on - - - - (3,028) - (707) (3,735)actuarial gainsDeferred tax on - - - - - 47 - 47put optionExchange - - - - 105 - 9 114adjustmentsShare options- proceeds from 308 11,583 - - - - - 11,891shares issued- value of - - - - - 365 - 365employeeservicesDeferred and - - - - - 5,470 - 5,470current incometax on shareoptionsValue of - - - - - 1,969 - 1,969employeeservicesattributed toCEO's share giftDiscounting of - - - - - (581) - (581)employee loansthrough sharepurchase planExercise of 5 1,546 - - - - - 1,551warrantsConversion of 9 13,572 - - (249) - - 13,332loan note intosharesBuy-out of - - - - - - (3,165) (3,165)minorityinterestsDividends paid - - - - - - (1,825) (1,825)Proceeds from 1,563 73,437 - - - - - 75,000new sharesissuedTransactional - (4,279) - - - - - (4,279)costs of sharesissuedIFRS 3 reverse 8,470 (105,797) 409,672 (312,345) - - - -acquisitionconversionAt 30 June 2007 10,576 72,651 409,672 (312,345) 9,259 (963) 10,445 199,295 With effect from 30 April 2007, Xchanging plc became the legal parent company of the Xchanging Group byexchanging 174.3 million shares for 100% of the shares of Xchanging B.V., a privately held, UK based and Dutchincorporated company. This has been accounted for as a reverse acquisition in accordance with IFRS 3, 'Businesscombinations', using the purchase method whereby Xchanging B.V. was considered the "acquirer" and Xchanging plcthe "acquiree". Comparative financial information for 2006 is that of Xchanging B.V. Independent review report to Xchanging plc Introduction We have been instructed by the Company to review the financial information for the six months ended 30 June 2007 which comprises the consolidated interim balance sheet as at 30 June 2007 and the related consolidated interim statements of income, cash flows, statement of recognised income and expense for the six months then ended and related notes. We have read the other information contained in the interim report and considered whether it contains any apparent misstatements or material inconsistencies with the financial information. Directors' responsibilities The interim report, including the financial information contained therein, is the responsibility of, and has been approved by the directors. The Listing Rules of the Financial Services Authority require that the accounting policies and presentation applied to the interim figures should be consistent with those applied in preparing the preceding annual accounts except where any changes, and the reasons for them, are disclosed. This interim report has been prepared in accordance with the basis set out in Note 1. Review work performed We conducted our review in accordance with guidance contained in Bulletin 1999/4 issued by the Auditing Practices Board for use in the United Kingdom. A review consists principally of making enquiries of management and applying analytical procedures to the financial information and underlying financial data and, based thereon, assessing whether the disclosed accounting policies have been applied. A review excludes audit procedures such as tests of controls and verification of assets, liabilities and transactions. It is substantially less in scope than an audit and therefore provides a lower level of assurance. Accordingly we do not express an audit opinion on the financial information. This report, including the conclusion, has been prepared for and only for the Company for the purpose of the Listing Rules of the Financial Services Authority and for no other purpose. We do not, in producing this report, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing. Review conclusion On the basis of our review we are not aware of any material modifications that should be made to the financial information as presented for the six months ended 30 June 2007. PricewaterhouseCoopers LLP Chartered Accountants London 30 July 2007 Notes: (a) The maintenance and integrity of the Xchanging plc web site is the responsibility of the directors; the work carried out by the auditors does not involve consideration of these matters and, accordingly, the auditors accept no responsibility for any changes that may have occurred to the interim report since it was initially presented on the web site. (b) Legislation in the United Kingdom governing the preparation and dissemination of financial information may differ from legislation in other jurisdictions. This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
XCH.L