22nd May 2007 07:02
Innovation Group PLC22 May 2007 22 May 2007 THE INNOVATION GROUP PLC INTERIM REPORT FOR THE SIX MONTHS ENDED 31 MARCH 2007 The Innovation Group plc ("the Group"), which provides outsourcing services andsoftware solutions to insurance providers, today announces its unaudited interimresults for the six months to 31 March 2007. Highlights: • Total revenues up 26% (5% organically) to £48.4m (H1 2006: £38.5m). Growth at constant exchange rates was 42% (19% organically) • Recurring revenues increased by 39% to £37.0m (H1 2006: £26.6m) representing 76% (H1 2006: 69%) of Group revenues; one-off licence fees amounted to only 3% of total revenues. Using constant exchange rates recurring revenue growth was 59% • Adjusted profit of £6.1m* (H1 2006: £5.2m). Using constant exchange rates, adjusted profit * growth was 35% • Outsourcing business grew by 41% through new business from existing and new clients • Software solutions performed well, securing two significant UK contracts • Strong conversion of operating profits into cash • First Notice Systems and other acquisitions progressing well • Successful rights issue raising £37.9m • Board change - Paul Hemsley appointed Group Finance Director (see separate announcement) • Black Economic Empowerment ("BEE") transaction completed in South Africa (see separate announcement) *Adjusted profit is profit before tax of £3.9m (H1 2006: £4.3m) after the effectof adding back the amortisation charge of £1.7m (H1 2006: £0.4m), share basedpayments of £0.4m (H1 2006: £0.5m) and utilisation of pre-acquisition broughtforward tax losses of £0.1m (H1 2006: nil) as analysed on the face of the incomestatement. Commenting on the results, Hassan Sadiq, Chief Executive, said: "We are pleased to present a better than expected set of results for the firstsix months of 2007 reflecting a strong performance from the Group as a whole. Weremain optimistic of meeting our full year expectations and look forward to thefuture with confidence as we continue to establish our brand in internationalmarkets." Enquiries: The Innovation Group plc 01489 898300Hassan Sadiq, Chief Executive OfficerPaul Hemsley, Group Finance Director College Hill 020 7457 2049Sara MusgraveCarl FranklinBen Way Notes to editors: The Innovation Group plc (Innovation or Group) provides outsourcing services andsoftware solutions to insurers and other risk carriers. The software solutionsare designed for the handling of policy and claims administrative processeswithin the insurance industry. The solutions can be utilised in connection withthe Group's outsourcing operations or implemented on a stand alone basis. 76% ofthe Innovation Group's total revenues are now recurring with the remaindercoming from the sale and support of its software solutions. The Group providessoftware and outsourcing services on a non-branded basis and does not performinsurance underwriting functions. The general BPO market is currently forecasted to outpace other IT services. InNorth America, BPO is estimated to grow by an 8.8% compound annual growth rateto $100 billion by 2009. Gartner 2005. Innovation has over 220 global clients including the Ford Motor Company, Aviva,AXA Insurance Toyota (South Africa) and Zurich (UK). The Group processes morethan 3 million claims per year with 20% direct claims cost saving achieved. Thesoftware operates in 8 languages and the Group has approximately 2000 peopleacross offices in North America, the UK, Germany, South Africa, Australia andJapan. www.innovation-group.com RESULTS FOR THE SIX MONTHS ENDED 31 MARCH 2007 Chief Executive's Statement Our Business Model The Innovation Group provides outsourcing services and software solutions toimprove policy and claims management for the world's insurance market. Ourvision is to enable efficiencies to improve revenue generation, customer serviceand profitability for our clients. The Group is focused on this market anddelivers these two broad offerings through a single client-centric organisation. We are a global business operating in the world's largest insurance markets witha high proportion of our clients having international operations. Our 1900people across the world have extensive insurance experience and they are ablysupported by our partners. Half-Year Review The Group continues to operate to its business model, as a single client-centricorganisation. This has created an increased number of opportunities andcommitments from both new and existing clients resulting in strong growth in thefirst half of the year. In line with our strategy the majority of organicgrowth has come from the existing client base. Outsourcing continues to grow both organically and through acquisition. Softwarehas performed well securing two significant contracts in the UK in the earlypart of the year. The quality of our earnings continues to improve as recurring revenues increasedto 76% of total revenues. This underpins our strategy of becoming less relianton one-off licence sales. The increase in recurring revenues is due to both theexcellent performance of our outsourcing operations and the move to licencerental fees in the software division. The effect of the above has meant that inthe first half of the year adjusted profit, excluding one-off licence fees, was£4.7m (H1 2006: £1.9m). Approximately 75% of the Group's revenue is generated outside the UK and isdenominated in currencies other than sterling. The Group therefore has exposureto exchange rate translation risk when the accounts of overseas subsidiaries areconverted into sterling. It is the Group's policy not to hedge against thistranslation risk on the grounds that we are dealing with unrealised differencesand the cost of hedging would be expensive. The US dollar and South Africanrand have both fallen in value substantially against sterling during the halfyear resulting in lower translations of revenues and profits. Using constantexchange rates, revenue and adjusted profit growth would have been 42% and 35%respectively compared to the reported growth figures of 26% and 17%. On 13 December 2006 the Group successfully completed a 2 for 5 Rights Issue of180,600,771 new ordinary shares at 21 pence per share to raise £37.9m. Thesefunds were used predominantly for the purchase of First Notice Systems ("FNS")and other acquisitions. Our acquisitions, predominantly in outsourcing, are proving successful as wegain critical mass globally in line with our strategy. In particular, we arepleased with the performance and integration of FNS. In the three month periodsince acquisition, FNS contributed £3.0m to Group revenues. We continue tointegrate all recent acquisitions and are pleased that all results are in linewith our expectations. We continue to invest into the IBM relationship, targeting US insurers. Thishas resulted in invoicing for scoping work at a specific target client. We continue to invest in developing intellectual property of high qualitysoftware within the insurance arena encompassing all the salient features fromunderwriting and policy management through to the settlement of outstandingclaims. We offer this as either a software and service implementation or as anoutsourced service. On 21 May 2007 the Group agreed to divest a 25% shareholding in its SouthAfrican subsidiary, Innovation Group (Proprietary) SA ("Innovation SA") toInthutuko Investments (Proprietary) Ltd ("Inthutuko") for ZAR132m. (approx.£9.6m) before transaction costs. This divestment to Inthutuko will secure BroadBased Black Economic Empowerment status for Innovation SA in South Africa.Inthutuko is 78% owned by an employee trust and has financed the transactionthrough a ZAR132m (approx. £9.6m) loan from Barclays Bank plc. This loan hasbeen guaranteed by the Group. The Group will use the proceeds for generalcorporate purposes. In March 2007 the Group announced the appointment of two new Non-Executivedirectors to further strengthen the Board. Dr. Kurt Lauk brings considerableglobal experience in both the automotive and technology industries, whilst JamesMorley has significant financial and operational experience in the insuranceindustry. John Sidwell joined the Board as Group Finance Director in March 2007and resigned on 21 May 2007. Paul Hemsley, who has been interim FinanceDirector since December 2006, has accepted the position with immediate effect. In view of the encouraging results the Board intends to review the Group'sdividend policy at the year end. Overall, we are pleased with the progress achieved in the first half of theyear. We continue to deliver value to our clients and this continues to be thebackbone of our growth. Financial and Operating Review Given the significant influence on the results for the half year of acquisitionsand exchange rates we have provided additional information within this report toclarify the effect of these issues. Total Group revenue and profit for the six months to 31 March 2007 are shown inthe tables below: 6 months to March 07 6 months to March 06 £'000 % of total £'000 % of total Licence 1,420 3% 3,271 8%Solution delivery 10,059 21% 8,651 23%Recurring software 4,592 9% 3,732 10%Outsourcing 32,367 67% 22,889 59% Total revenue 48,438 100% 38,543 100% Total recurring revenue 36,959 76% 26,621 69% Revenue growth 9,895 26% Growth at constant currencies - Organic 1,998 5% 19%- Acquired 7,897 21% 23% 9,895 26% 42% Total revenue for the six months to 31 March 2007 increased by 26%. Growthcontinues to be in line with the Group's preferred operating model of movingtowards recurring revenues and reducing reliance on one-off licence fees.Recurring revenues increased by 39% and now represent 76% of total revenues.Outsourcing revenues grew by 41% through a combination of organic growth andacquired business. Reported organic growth has been significantly impacted by exchange ratemovements, in particular those stemming from the South African rand and USdollar (further analysed in 'Geographical Review' below). The average rates usedto translate the results from these subsidiaries were ZAR 14.12:£1 (H1 2006: ZAR11.10:£1) and US$ 1.95:£1 (H1 2006: US$ 1.74:£1). Adjusted profit has increased 17% to £6.1m. The increase in the amortisationcharge below reflects the Group's requirement under International FinancialReporting Standards ("IFRS") to amortise intangible assets acquired as part ofacquisitions, with the increase compared to the prior year relating mainly toFNS and a full year's charge on 2006 acquisitions. 6 months 6 months March 07 March 06 £'000 £'000 Adjusted profit 6,064 5,188Amortisation (1,711) (388)Share based payments (354) (507)Utilisation of brought forward tax losses (124) - Profit before tax 3,875 4,293 Adjusted EPS 0.81p 0.86pBasic EPS 0.42p 0.68p The exchange rate fluctuations identified above have also adversely affectedadjusted profit. Using constant exchange rates growth in adjusted profit was35%. At 31 March 2007 total cash was £26.8m (H1 2006: £24.0m). Total borrowingsamounted to £12.5m (H1 2006: £12.2m) leaving a net cash position of £14.3m (H12006: £11.8m). The Group continues to demonstrate strong conversion of operating profits tocash. The table below shows the operating cash inflow as adjusted for taxationpayments and movements in third party funds: 6 months 6 months March 07 March 06 £'000 £'000 Operating cash inflow 4,535 5,980Add: taxation 2,081 958 Adjusted operating cash flow 6,616 6,938 Adjusted profit 6,064 5,188 Cash conversion 109% 133% Geographic Review The majority of Group revenues are generated from outside the UK as demonstrated in the table below: 6 months 6 months 6 months 6 months March 07 March 07 March 06 March 06 £'000 % of total £'000 % of total Africa 16,273 33% 15,481 40%UK 12,306 26% 10,191 26%Germany 5,902 12% 2,915 8%America 10,540 22% 7,894 21%Asia Pacific 3,417 7% 2,062 5% Total revenue 48,438 100% 38,543 100% South Africa continues to be the template for our client-centric organisation, providing many serviceelements of the insurance value chain. Revenues for South Africa are shown in the table below: As reported In local currencySouth Africa 6 months 6 months 6 months 6 months March 07 March 06 Growth March 07 March 06 Growth £'000 £'000 % ZAR 000 ZAR 000 % Revenue 16,273 15,480 229,730 171,904 Revenue growth 793 5% 57,826 34% - Organic (507) -3% 39,292 26%- Acquired 1,300 8% 18,534 8% 793 57,826 The acquisition of the outsourcing business Holmswood and Back and Manson, inNovember 2006, contributed £1.3m of revenues in the half year. The sterling growth figures shown above are impacted by the significant movementin the South African rand over the last twelve months. Local currency figuresin rand, highlighting our real growth achieved in the region, are disclosed onthe right. We continue to be very successful in winning new business byextending the scope of our work with existing clients and by winning newclients. The overall market in South Africa remains buoyant. Germany revenues continue to grow both organically and by acquisition. Revenuesfor Germany are shown in the table below. As reported In local currencyGermany 6 months 6 months 6 months 6 months March 07 March 06 Growth March 07 March 06 Growth £'000 £'000 % •'000 •'000 % Revenue 5,902 2,915 8,796 4,256 Revenue growth 2,987 102% 4,540 107% - Organic 1,876 64% 2,884 68%- Acquired 1,111 38% 1,656 39% 2,987 4,540 In October 2006 we acquired a 60% shareholding in IFN GmbH, now InnovationParts, a motor vehicle parts company. Innovation Parts allows us to manage thesupply chain on behalf of our motor repairer network. The company contributed£1.1m to revenues in the half year. The pipeline in Germany remains strong, andwe continue to grow by increasing the volume through our existing clients. The United Kingdom business has progressed well in the half year, both in termsof reported revenues and improved pipeline and prospects. Revenues for the UKare shown in the table below: UK 6 months 6 months March 07 March 06 Growth £'000 £'000 % Revenue 12,306 10,192 Revenue growth 2,114 21% - Organic 1,754 17%- Acquired 360 4% 2,114 Two new software contracts announced at the start of the year are progressingwell. Due to meeting implementation milestones, £0.6m licence revenue has beenrecognised through these contracts in the half year. This licence revenue hadbeen prudently budgeted and was originally expected in the second half of theyear. There was significant growth in outsourcing in the UK as we continue to extendbusiness with both new and existing clients. The revenues for North America, the largest insurance market in the world, areshown in the table below: As reported In local currencyNorth America 6 months 6 months 6 months 6 months March 07 March 06 Growth March 07 March 06 Growth £'000 £'000 % $'000 $'000 % Revenue 10,540 7,894 20,674 13,772 Revenue growth 2,646 34% 6,902 50% - Organic (1,613) -20% (1,407) -10%- Acquired 4,259 54% 8,309 60% 2,646 6,902 NB: For the purpose of this table, the Canadian operation's results have beentranslated into US dollars at the prevailing exchange rate. The Group entered the outsourcing market in the US through the acquisitions ofFNS and Sureplan US, both of which represent the acquired growth in NorthAmerica. The integration of both of these acquisitions is progressing well andwe are pleased with their results to date. Organically, revenues have fallen by 20%. Prior to our recent acquisitions, theUS was heavily dependent on one-off licence fees, the timing of which isdifficult to predict. The acquisition of FNS and Sureplan US give us criticalmass in the US outsourcing market as well as ensuring we move more towards ourclient-centric model with reduced reliance on licence fees. This provides uswith a base of recurring revenues on which we can grow as we have done in otherregions. We continue to work closely with IBM on targeting US insurers and thishas resulted in invoicing for scoping work at one of the target clients. Asia Pacific, predominantly Australia, has grown significantly, both organicallyand through acquisition. The revenues for Australia are shown in the tablebelow. Revenue for Japan amounted to £86K. As reported In local currencyAustralia 6 months 6 months 6 months 6 months March 07 March 06 Growth March 07 March 06 Growth £'000 £'000 % AU$'000 AU$'000 % Revenue 3,331 1,918 8,275 4,554 Revenue growth 1,413 74% 3,721 82% - Organic 556 29% 1,593 35%- Acquired 857 45% 2,128 47% 1,413 3,721 Revenues from software have increased by 55% to £1.4m (H1 2006: £0.9m) as wecontinue with an implementation for one of the leading direct insurers inAustralia. Outsourcing revenues have increased both organically and through theacquisition of Sureplan Australia, which was completed at the end of the lastfinancial year. Acquisitions On 22 December 2006 the Group completed the acquisition of FNS, a leadingprovider of claim reporting outsourcing services to the insurance market in theUS. The cash consideration was $51.6m (approx. £27.1m). Integration isprogressing well and current results are in line with our expectations. In thehalf year, FNS contributed £3.0m to revenues. This acquisition was funded infull by a 2 for 5 Rights Issue successfully completed on 13 December 2006. During the first half, the Group also completed the acquisitions of IFN GmbH, inGermany, subsequently renamed Innovation Parts GmbH (60% shareholding),Holmswood and Back and Manson in South Africa (61.86% shareholding) and Sureplanin the US (51% shareholding). All of these acquisitions have been successfullyintegrated and are performing to our expectations. Our acquisition strategy is proving successful and we continue to look foropportunities to add capability to our existing regions via strategic andtactical acquisitions to further enhance our outsourcing offering. Outlook During the first half of 2007 we have achieved further progress with ourbusiness, improving the quality of earnings by growing recurring sources ofrevenue and moving away from a dependence on volatile one-off licence sales. Weaim to continue growing our outsourcing business and the acquisition of FNS inthe US will add impetus to this in the largest insurance market in the world. The world market place continues to provide our business with opportunities togrow organically as well as through acquisition. Currently, our pipeline isgrowing and we are confident about our future ability to service our clients'needs. It is becoming increasingly evident that the Innovation Group is wellplaced to provide technologically advanced solutions to all facets of theinsurance business. We remain optimistic of meeting our full year expectationsand look forward to the future with confidence as we continue to establish ourbrand in international markets. The Innovation Group plc Unaudited Income Statement For the six months ended 31 March 2007 Unaudited Unaudited Audited 6 months to 6 months to Year to 31 March 31 March 30 September 2007 2006 2006 Note £'000 £'000 £'000 Revenue 2 48,438 38,543 79,651 Cost of sales (25,520) (20,942) (41,892) Gross profit 22,918 17,601 37,759 Operating expenses (19,823) (13,525) (30,389) Operating profit 3,095 4,076 7,370 Finance income 756 583 1,160Finance costs (491) (270) (632)Share of profit/(loss) of associate 515 (96) 568 Profit before tax 2 3,875 4,293 8,466 UK taxation (25) (217) (129)Overseas taxation (1,193) (467) (1,513) Total taxation 3 (1,218) (684) (1,642) Profit for the period after tax 2,657 3,609 6,824 Attributable to:Equity holders of the parent 2,349 3,370 6,407Minority interests 308 239 417 2,657 3,609 6,824 Adjusted profit: Profit before tax 3,875 4,293 8,466Amortisation of acquired intangibles 1,711 388 1,295Share based payments 354 507 928Utilisation of pre-acquisition broughtforward tax losses 124 - 258 Adjusted profit for the period 2 6,064 5,188 10,947 Earnings per share (pence)Basic 4 0.42 0.68 1.28Diluted 4 0.41 0.67 1.25Adjusted 4 0.81 0.86 1.77Adjusted diluted 4 0.79 0.84 1.74 All amounts relate to continuing operations. No dividends have been paid or proposed in respect of any of the above periods. The Innovation Group plc Unaudited Balance Sheet As at 31 March 2007 Unaudited Unaudited Audited 31 March 31 March 30 September 2007 2006 2006 (restated) Note £'000 £'000 £'000ASSETSNon current assetsProperty, plant and equipment 11,855 11,053 10,497 Goodwill 5 55,124 36,366 33,372 Other intangible assets 5 21,143 - 7,114 Investments accounted for using the equity 2,738 1,673 2,146methodFinancial assets 303 63 32Deferred tax assets 507 865 746 91,670 50,020 53,907Current assetsInventories 31 - -Trade and other receivables 6 20,959 11,630 20,548Prepayments 1,915 938 1,451Other financial assets - - 685Cash and cash equivalents 26,793 23,971 18,999 49,698 36,539 41,683 TOTAL ASSETS 141,368 86,559 95,590 EQUITY AND LIABILITIESAttributable to equity holders of the parentEquity share capital 12,749 8,982 9,030Share premium 35,901 2,088 2,706Merger reserve 561 561 561Foreign currency translation (2,664) 670 (2,523)Retained earnings 39,130 32,969 36,427 85,677 45,270 46,201Minority interests 1,313 646 795 TOTAL EQUITY 86,990 45,916 46,996 Non current liabilitiesTrade and other payables 7 2,437 501 1,000Deferred income 2,919 1,886 1,419Interest bearing loans and borrowings 8 8,269 9,207 7,624Deferred tax liabilities 2,272 1,527 2,174Provisions 692 869 550 16,589 13,990 12,767Current liabilitiesTrade and other payables 7 19,236 11,708 17,346Deferred income 12,164 10,142 12,141Interest bearing loans and borrowings 8 4,258 2,956 3,373Income tax payable 2,131 1,847 2,732Provisions - - 235 37,789 26,653 35,827 TOTAL LIABILITIES 54,378 40,643 48,594 TOTAL EQUITY AND LIABILITES 141,368 86,559 95,590 The Innovation Group plc Unaudited consolidated statement of changes in shareholders equity As at 31 March 2007 Attributable to equity holders of the parent Issued Share Merger Retained Other Total Minority Total capital premium reserve earnings reserves interest equity £'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000 At 1 October 2005(restated) 8,793 75 - 29,092 642 38,602 407 39,009 Profit for the - - - 3,370 - 3,370 239 3,609periodCurrencytranslationdifferences - - - - 43 43 - 43Issue of share 189 2,013 561 - - 2,763 - 2,763capitalShare based - - - 507 - 507 - 507payments At 31 March 2006 8,982 2,088 561 32,969 685 45,285 646 45,931 Profit for the - - - 3,037 - 3,037 178 3,215periodCurrencytranslationdifferences - - - - (3,208) (3,208) (29) (3,237)Issue of share 48 618 - - - 666 - 666capitalShare based - - - 421 - 421 - 421payments At 30 September2006 9,030 2,706 561 36,427 (2,523) 46,201 795 46,996 Profit for the - - - 2,349 - 2,349 308 2,657periodCurrencytranslationdifferences - - - - (141) (141) - (141)Issue of share 3,719 33,195 - - - 36,914 - 36,914capitalShare based - - - 354 - 354 - 354paymentsMinority interestacquired withsubsidiary - - - - - - 210 210 At 31 March 2007 12,749 35,901 561 39,130 (2,664) 85,677 1,313 86,990 The Innovation Group plc Unaudited Cash Flow Statement For the six months ended 31 March 2007 Unaudited Unaudited Audited 6 months to 6 months to Year to 31 March 31 March 30 September 2007 2006 2006 £'000 £'000 £'000 Cash flows from operating activitiesOperating profit 3,095 4,076 7,370Adjustments to reconcile group operating profit tonet cash inflows from operating activitiesDepreciation of property, plant and equipment 1,034 1,048 2,167(Loss)/profit on disposal of property, plant and (11) - 6equipmentAmortisation of intangible assets 1,782 388 1,295Impairment of goodwill and financial assets - - 111Share based payments 354 507 928Utilisation of pre-acquisition brought forward tax 124 - 258lossesincrease in inventories (4) - -Decrease/(increase) in receivables 22 1,397 (9,020)(Decrease)/increase in payables 220 (478) 8,256Income taxes paid (2,081) (958) (1,393) Net cash flows from operating activities 4,535 5,980 9,978 Cash flows from investing activitiesSale of property, plant and equipment 22 - -Purchases of property, plant and equipment (985) (588) (1,365)Purchase of subsidiary undertakings (36,749) (7,443) (11,027)Sale of subsidiary undertakings - - -Cash acquired with subsidiaries 1,858 1,261 626Net cash disposed of with subsidiaries - - -Purchase of associated undertaking (219) (979) (1,079)Purchase of fixed asset investments (116) - -Sale of fixed asset investment - 55 55Sale of current investment 685 - -Interest received 755 550 1,160 Net cash flows used in investing activities (34,749) (7,144) (11,630) Cash flows from financing activitiesInterest paid (394) (165) (780)Repayment of borrowings (1,797) (828) (3,106)New bank loans 3,000 6,848 8,148Repayment of capital element of finance leases (372) (257) (269)Proceeds from issue of shares 36,952 21 87 Net cash flows from financing activities 37,389 5,619 4,080 Net increase in cash and cash equivalents 7,175 4,455 2,428Cash and cash equivalents at beginning of period 18,999 19,756 19,756Effect of exchange rates on cash and cash 619 (240) (3,185)equivalents Cash and cash equivalents at the period end 26,793 23,971 18,999 The Innovation Group plc Notes to the Unaudited Results For the six months ended 31 March 2007 1. BASIS OF PREPARATION The interim statement has been prepared on the basis of the accounting policiesset out in the annual report and the financial statements for the year ended 30September 2006 and in accordance with those accounting policies expected to befollowed in the year end financial statements. The Group has chosen not to adoptIAS 34 "Interim Financial Statements" in preparing the interim statement sincethe adoption of this standard is not mandatory. The financial information contained in this interim statement does not amount tostatutory financial statements within the meaning of section 240 Companies Act1985. The financial information contained in this report is unaudited but hasbeen reviewed by Ernst & Young LLP. The financial statements for the year ended30 September 2006, from which information has been extracted, were preparedunder IFRS and have been delivered to the Registrar of Companies. The report ofthe auditors was unqualified in accordance with section 235 Companies Act 1985and did not contain a statement under section 237 (2) or (30) Companies Act1985. The interim financial statements were approved by the Board of Directorson 21 May 2007. On finalising conversion to IFRS at 30 September 2006, Guardrisk, a SpecialPurpose Entity, previously accounted for as a fixed asset investment has beendeemed to be an associate. Investments accounted for using the equity methodand retained earnings at 30 September 2005 have been adjusted by £641,000 toreflect this 2. SEGMENT INFORMATION The Group is organised into two primary reporting segments, namely outsourcingand software. These are the Group's primary reporting format for segmentinformation. Secondary segment information is reported geographically. Primary basis - business segments Six months ended 31 March 2007 Outsourcing Software Total £'000 £'000 £'000 External segment revenue 32,367 16,071 48,438 Segment results 1,366 1,729 3,095 Finance income 557 199 756Finance costs (254) (237) (491)Share of profit of associate 515 - 515 Profit before tax 2,184 1,691 3,875Tax expense (1,218) Profit after tax (before minority interest) 2,657 Adjusted profitProfit before tax 2,184 1,691 3,875Amortisation of acquired intangibles 1,667 44 1,711Share based payments 71 283 354Utilisation of pre-acquisition brought forward tax losses 124 - 124 4,046 2,018 6,064 Central costs have been allocated on a 70:30 basis between outsourcing andsoftware (2006: 50:50 between outsourcing and software). The change in theallocation for 2007 reflects the increasing activity in outsourcing. Primary basis - business segments Six months ended 31 March 2006 Outsourcing Software Total £'000 £'000 £'000 External segment revenue 22,889 15,654 38,543 Segment results 2,244 1,832 4,076 Finance income 427 156 583Finance costs (39) (231) (270)Share of loss of associate (96) - (96) Profit before tax 2,536 1,757 4,293Tax expense (684) Profit after tax (before minority interest) 3,609 Adjusted profitProfit before tax 2,536 1,757 4,293Amortisation of acquired intangibles 185 203 388Share based payments 51 456 507 2,772 2,416 5,188 Primary basis - business segments Year ended 30 September 2006 Outsourcing Software Total £'000 £'000 £'000 External segment revenue 48,327 31,324 79,651 Segment results 5,030 2,340 7,370 Finance income 875 285 1,160Finance costs (261) (371) (632)Share of profit of associate 568 - 568 Profit before tax 6,212 2,254 8,466Tax expense (1,642) Profit after tax (before minority interest) 6,824 Adjusted profitProfit before tax 6,212 2,254 8,466Amortisation of acquired intangibles 925 370 1,295Share based payments 113 815 928Utilisation of pre-acquisition brought forward tax 258 - 258losses 7,508 3,439 10,947 Secondary format - geographical segments The following table presents an analysis of revenue. Revenue by origin and destination Unaudited Unaudited Audited 6 months to 6 months to 12 months to 31 March 2007 31 March 2006 30 September 2006 £'000 £'000 £'000 Africa 16,273 15,481 31,140Europe 18,208 13,106 28,107Americas 10,540 7,894 15,256Asia Pacific 3,417 2,062 5,148 48,438 38,543 79,651 The following table provides disclosure of the Group's revenue analysed by the type of service. Revenue by type of service Unaudited Unaudited Audited 6 months to 6 months to 12 months to 31 March 2007 31 March 2006 30 September 2006 £'000 £'000 £'000SoftwareLicence 1,420 3,271 6,774Solution delivery 10,059 8,651 17,431Maintenance and other recurring 4,592 3,732 7,119 16,071 15,654 31,324Outsourcing 32,367 22,889 48,327 Total revenue 48,438 38,543 79,651 3. TAXATION The effective tax rate for the six months ended 31 March 2007 has beencalculated at 20%. The anticipated effective tax rate for the group for the yearending 30 September 2007 is expected to be 20% (six months ended 31 March 2006:13%, year to 30 September 2006: 15%) but will be dependant on the location oftrading profits in the remainder of this year. Unaudited Unaudited Audited 6 months to 6 months to Year to 31 March 31 March 30 September 2007 2006 2006 £'000 £'000 £'000Current taxationUK taxation 25 217 138Overseas taxation 921 718 1,886Adjustments in respect of prior periods 197 (324) (46) Total current tax 1,143 611 1,978 Deferred taxationOrigination and reversal of timing differences 73 75 (336) Total tax charge 1,218 684 1,642 4. EARNINGS PER SHARE Unaudited Unaudited Audited 6 months to 6 months to Year to 31 March 31 March 30 September 2007 2006 2006 pence pence pence Basic earnings per shareAdjustment for dilutive potential ordinary shares 0.42 0.68 1.28- add share options (0.01) (0.01) (0.03) Diluted earnings per share 0.41 0.67 1.25 Basic earnings per share 0.42 0.68 1.28 Adjustments- amortisation 0.31 0.08 0.26- share based payments 0.06 0.10 0.18- utilisation of pre-acquisition brought forward tax 0.02 - 0.05losses Adjusted basic earnings per share 0.81 0.86 1.77 Adjustment for dilutive potential ordinary shares (0.02) (0.02) (0.03) Adjusted diluted earnings per share 0.79 0.84 1.74 Earnings per share is calculated as follows: Number of shares (thousand)Average number of shares in issue used to calculatebasic and adjusted basic earnings per share 559,286 496,205 500,283Dilutive potential ordinary shares- add share options 12,690 9,509 10,375 Shares used to calculate diluted and adjusted dilutedearnings per share 571,976 505,714 510,658 Basic and diluted earnings (£'000)Basic and diluted earnings for the period 2,349 3,370 6,407- add amortisation 1,711 388 1,295- add share based payments 354 507 928- add utilisation of pre-acquisition brought forwardtax losses 124 - 258 Adjusted and adjusted diluted earnings for the period 4,538 4,265 8,888 The average number of shares in both March and September 2006 has been adjustedto reflect the shares issued during the rights issue completed on 13 December2006. 5. INTANGIBLE ASSETS On 1 October 2006 the Group acquired 60% of IFN GmbH for a cash consideration of£95,000, including acquisition costs. In addition a loan of £244,000 was alsoadvanced to IFN GmbH for working capital purposes. The company has subsequentlybeen renamed to Innovation Parts GmbH. The acquisition resulted in the creationof goodwill of £90,000. During the period Innovation Parts GmbH contributed £1,111,000 to revenue and£53,000 to profit before tax. On 25 October 2006 the Group acquired 100% of Sureplan International, anAustralian based holding company which owned a 51% controlling interest inSureplan USA, for a cash consideration of £3,541,000, including acquisitioncosts. The acquisition resulted in the creation of intangible assets, includinggoodwill of £3,508,000. During the period Sureplan US contributed £1,220,000 to revenue and £135,000 toprofit before tax. On 1 November the Group acquired 61.86% of Holmswood and Back and Manson for acash consideration of £4,526,000, including acquisition costs. In additionthere is deferred consideration of £2,052,000, relating to a put option over30.58%, exercisable at the discretion of a minority shareholder. Theacquisition resulted in the creation of intangible assets, including goodwill,of £6,120,000. During the period Holmswood and Back and Manson contributed £1,300,000 torevenue and £429,000 to profit before tax. On 27 December 2006 the Group completed the acquisition of First Notice Systemsfor a cash consideration, including acquisition costs of £28,339,000. The cashwas raised by way of a 2 for 5 rights issue. The acquisition resulted in thecreation of intangible assets, including goodwill, of £26,702,000. During the period First Notice Systems contributed £3,039,000 to revenue and£698,000 to profit before tax. 6. TRADE AND OTHER RECEIVABLES Unaudited Unaudited Audited 31 March 31 March 30 September 2007 2006 2006 £'000 £'000 £'000 Trade receivables 12,089 7,077 14,509Other debtors 2,312 1,248 1,877Accrued income 6,558 3,305 4,162 20,959 11,630 20,548 7. TRADE AND OTHER PAYABLES Unaudited Unaudited Audited 31 March 31 March 30 September 2007 2006 2006 £'000 £'000 £'000 CurrentTrade payables 4,646 2,534 2,942Other payables 7,905 4,299 7,378Accruals 5,147 3,695 5,208Social security and other taxes 1,538 1,180 1,818 19,236 11,708 17,346 Non currentOther payables 2,437 501 1,000 8. INTEREST BEARING LOANS AND BORROWINGS Unaudited Unaudited Audited 31 March 31 March 30 September 2007 2006 2006 £'000 £'000 £'000 CurrentBank loans and overdrafts 2,492 1,735 1,730Other loans 1,148 800 1,148Obligations under finance leases and hire purchaseagreements 618 421 495 4,258 2,956 3,373 Non currentBank loans and overdrafts 4,973 4,771 3,962Other loans 2,578 2,600 3,152Convertible loan notes - 1,181 -Obligations under finance leases and hire purchaseagreements 718 655 510 8,269 9,207 7,624 Independent Review Report to the Innovation Group plc Introduction We have been instructed by the company to review the financial information forthe six months ended 31 March 2007 which comprises the Consolidated IncomeStatement, Consolidated Balance Sheet, Consolidated Cash Flow Statement,Consolidated Statement of Changes in Equity, and the related notes 1 to 8. Wehave read the other information contained in the interim report and consideredwhether it contains any apparent misstatements or material inconsistencies withthe financial information. This report is made solely to the company in accordance with guidance containedin Bulletin 1999/4 'Review of interim financial information' issued by theAuditing Practices Board. To the fullest extent permitted by law, we do notaccept or assume responsibility to anyone other than the company, for our work,for this report, or for the conclusions we have formed. Directors' responsibilities The interim report, including the financial information contained therein, isthe responsibility of, and has been approved by, the directors. The directorsare responsible for preparing the interim report in accordance with the ListingRules of the Financial Services Authority which require that the accountingpolicies and presentation applied to the interim figures should be consistentwith those applied in preparing the preceding annual accounts except wherechanges, and the reasons for them, are disclosed. Review work performed We conducted our review in accordance with guidance contained in Bulletin 1999/4'Review of interim financial information' issued by the Auditing Practices Boardfor use in the United Kingdom. A review consists principally of makingenquiries of group management and applying analytical procedures to thefinancial information and underlying financial data, and based thereon,assessing whether the accounting policies and presentation have beenconsistently applied unless otherwise disclosed. A review excludes auditprocedures such as tests of controls and verification of assets, liabilities andtransactions. It is substantially less in scope than an audit performed inaccordance with International Standards on Auditing (UK and Ireland) andtherefore provides a lower level of assurance than an audit. Accordingly we donot express an audit opinion on the financial information. Review conclusion On the basis of our review we are not aware of any material modifications thatshould be made to the financial information as presented for the six monthsended 31 March 2007. Ernst & Young LLP Reading RG1 1YE 21 May 2007 This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
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