29 August 2008

Parity Group PLC

Interim results for the six months ended 30 June 2008

Parity Group plc, the UK IT Services Company, announces its interim results for the six months ended 30th June 2008.

Key points:

• Revenue of £74.7M (H1 2007: £83.9M)

• Operating profit on continuing operations of £0.6M (H1 2007: £1.7M) 

• Loss before tax on continuing operations of £ 0.1M (H1 2007: £1.1M profit); Loss per share on continuing operations of 1.85p (H1 2007: earnings of 1.12p) 

• Close attention paid to cash flow in the period, and net debt reduced to £5.9M at period end (31 December 2007: £6.6M)

• Resources had very good H1, reflecting strategy of focusing on higher margin business as opposed to volume

• Solutions saw slippage on some bids ; full impact of cost saving initiatives and refocusing of sales effort will start to show through in Q3

• Training incurred significant loss in Q1, due to clients delaying decisions on training investments; cost reductions and better selling yielded good improvement in Q2 

Alwyn Welch, Chief Executive, commented:

"These results reflect weak trading in Q1 as previously reported, with evidence of client nervousness and slower decision making in the current uncertain economic climate. Against this background, we have acted quickly to reduce cost and refocus our selling efforts and the benefits started to show in Q2. 

"In Resources we have a good market share and reputation in the public sector in particular, and our priority is to continue to build a recruitment business focused on high value, scarcer skill sets. Our Solutions business has demonstrated both its depth of technical capability and its ability to manage complex IT projects and our priority now is to grow this operation. The Training business is now very lean and the next step is to increase market share whilst maintaining the strong gross margin model that has been established.

"Overall, we will continue to manage with prudence, maintaining tight cost control, focusing on areas where we can see demand and where we can differentiate, in a volatile and generally weakening market. We will also invest carefully to take advantage of market opportunities and to improve the efficiency of our operations. Having made good progress in the second quarter, following a slow start to the year, we expect to make continued progress during the second half." 

Enquiries:

Notes to editors:

About Parity Group plc

Parity Group PLC is a UK-focused IT services company, operating via three core business units - Parity Resources, Parity Solutions and Parity Training.

Parity Resources is a leading IT recruitment specialist, with over 30 years experience in providing permanent and contract technology staff, temporary staff and managed recruitment services across all markets.

Parity Solutions specialises in providing IT, Projects and Consulting, using leading edge technologies and drawing upon the depth of experience of its consultants in Programme and Project Management.

Parity Training is one of the UK's leading Management and IT training providers. In addition to a comprehensive schedule of public courses, Parity delivers tailored learning solutions and customised programmes for major clients.

Parity is listed on the London Stock Exchange, with a ticker of PTY.LN.

  CHIEF EXECUTIVE'S REVIEW

Introduction

As stated in our Interim Management Statement on 2 May 2008, despite Resources making a good start to the year, trading in the first quarter was impacted by softness in the training market and delays in signing systems integration projects within Solutions. We believe that both are evidence of client nervousness in the current uncertain economic climate: whilst spending is not being obviously reduced, clients are delaying buying decisions.

Against this background, management took immediate action which yielded a rapid improvement in performance in the second quarter as indicated in our trading statement on 23 July 2008. This involved a refocusing of sales operations and some urgent cost reductions. As a result we incurred a one-off staff cost of £270k, which should deliver annualised savings of £1.1M when the full impact is realised by the end of Q3. There was also a £130k charge related to the settlement of an employee dispute. Overall, excluding these one-off costs, a modest profit was achieved in H1 2008.

Resources had a very good first half, with strong revenue growth, up 5.6% compared to H2 2007, to £54.6M. Revenue was lower than in H1 2007, as we had exited some high volume, low margin contracts towards the end of that period, in line with our strategy of focusing on higher margin, quality business. The impact of this change can be seen in the operating profit margin, which increased to 2.6% (H1 2007 2.0%) and, excluding one-off costs, reached 2.9%. We experienced good growth in contractors during H1 2008, whilst continuing to increase our selling margin. We also kept SG&A costs under close control, reducing them by £0.2M to £3.9M before one-offs during the first half (H1 2007: £4.1M).

Solutions experienced slippage on a number of contracts in Q1, impacting revenue and utilisation. Revenue reduced by 27% to £11.7M (H1 2007: £16.2M), primarily as a result of decreased third party revenue. Operating profit margins (excluding one-off charges) were also lower, at 5.4% (4.2% after one-off charges) compared to 9% in H1 2007, due to lower utilisation rates. In light of sales slippages, costs were reduced at the end of Q1, the full benefit of which, together with the refocusing of our sales efforts, are expected to start to show through in Q3. 

Training incurred a significant loss in Q1, mainly due to clients delaying decisions on training investments, which we believe was due to nervousness over the economy. However, cost reductions coupled with more focused selling, resulted in a significant improvement in Q2 with revenues up 3% on Q2 2007 and an increase in gross margin of over £400k compared to Q1. This drove a good return to profit in Q2. The overall H1 loss in Training was £359k, or £280k before one-off costs (H1 2007: £350k profit), on revenue 8% lower at £8.5M (H1 2007: £9.2M).

Group revenue was £74.7M, 11% lower than H1 2007 although only 1.5% lower than H2 07. The loss before tax on continuing operations was £0.1M (excluding one-off costs this was a profit of £0.3M) compared to a profit of £1.1M in H1 2007, and £1.5M in H2 2007 before exceptional items.

Training Business

As announced on 23 July 2008, the Board agreed to sell Parity Training Limited to Xpertise Group PLC, an AIM-listed IT Training company, for £4.775M in cash. This was approved by Parity shareholders at the EGM held on 13 August and was due to complete on 29 August 2008.

However, on 22 August Xpertise received a hostile bid that was supported by over 45% of their shareholders and which was conditional on their acquisition of Parity Training not proceeding. As a result the acquisition was not approved by Xpertise shareholders at their EGM on 26 August. Whilst this was clearly a frustrating outcome, Parity Training remains a high quality business for which there are significant opportunities.

Business Focus and Strategy

Over the last three years, Parity has concentrated on returning its operations to profitable growth. This has included the disposal of overseas operations and significant changes within the company itself. We have also given close attention to improved cash management and tight cost control.

By strengthening and streamlining the operations, we have been able to gain some protection from the recent negative trends in our markets, as demonstrated by our quick reaction and recovery from a weak first quarter.

The priority for the Group will remain improving our operations to maximise performance in the prevailing challenging market conditions. This will now include a full review of our back office operations.

In Resources we have a good market share and reputation in the public sector in particular, where we have grown revenue by over 10% and have won several new clients, including the Land Registry and Ministry of Defence. Our priority is to continue to build a recruitment business focused on high value, scarcer skill sets. This focus will allow us to sustain and improve margins in the medium term. We will also increase our sales efforts outside the public sector, evolve our portfolio of related skills and increase the volume of activity in our permanent recruitment division. We do not intend to become a generalist supplier as we are determined to maintain our low level of exposure to any general tightening in the jobs market.

Solutions has demonstrated both its depth of technical capability and the ability to manage complex IT projects during the last three years. Our main priority now is to grow this operation, especially in terms of the scale of our own delivery team. This growth will be in the areas of Microsoft and Oracle technology, as well as in project and programme management capabilities and associated consulting skills, with a primary focus on the Public Sector and Utilities industry. We believe that, in due course, we will need to increase the size of this operation significantly to achieve critical mass. 

The Training business is now lean, having focused resolutely on margin improvement over the last twelve months, and the next step is to increase market share. We believe there are significant opportunities available for a provider of quality, tailored learning solutions such as Parity Training and we will build our client base while maintaining the strong gross margin model that has been established over the past year. Once we have overcome the inevitable trading impact of the distraction caused by the aborted sale of this division, we believe it is well-placed to make good progress.

Management Team

We made one change to the Executive team during the first half of 2008, promoting Alan Rommel to Business Unit Head of the Resources operation in February. Alan has worked at Parity for most of his career, working in our recruitment business for all of that time. We also recruited a number of individuals to strengthen our senior management team across the Group.

Alastair MacDonald, our senior independent non-Executive Director, has decided to step down after years on the Board. He has played a very significant role in helping to steer the Group through times of considerable change and we will miss his wisdom and experience. 

Alastair will be succeeded in this role by John Hughes, whose role as Deputy Chairman will become non-Executive.

People

This has been a challenging period for the people who work for Parity, as we have needed to take some tough decisions to reduce costs which have inevitably affected some individuals. 

Despite this, the quality of the work we deliver to our clients remains of the highest standard, and morale across the Group remains good. On behalf of the whole Board I would like to thank all those who work for Parity, especially our employees, for their hard work and continued strong support. 

Cash Flow and Net Debt

Close attention was paid to cash flow in the period. Good progress was made in improving working capital, and debtor days reduced from 35 days at the end of 2007 to 31 days at the period end. Although, we continued to have a cash outflow due to contributions to our pension fund (£0.5M in H1 2008) and the impact of vacant property (£0.4M in H1 2008), the profit impact of which was recorded in prior periods, we reduced net debt by £0.7M in the period to £5.9M as at 30 June 2008. We will continue to focus on reducing our borrowings through prudent cash management.

Tax

The Group recorded a tax charge of £562k on a loss on continuing operations before tax of £142k. The deferred tax assets in Resources and Solutions were reduced as they were used to offset tax charges. The deferred tax asset in Training has been written down by £500k to reflect the expected increase in the time needed to recover the asset given the current economic conditions and the first half performance.  

Exceptional Items and Discontinued Operations 

Although we made no exceptional charges during the period, as noted above we did incur one-off charges of £400k. Of these, £270krelated to restructuring costs to reduce our cost base (mainly people) in response to the trading conditions being experienced in Q1, and £130k related to the settlement of a long standing employee dispute.

We continue to work to complete closure of the residual elements of discontinued operations in the US and Continental Europe. Discontinued operations had a minimal impact on the group result for the period.

Dividend

No interim dividend is proposed in respect of the year ending 31st December 2008 (2007: final dividend £nil: interim dividend £nil).

Market Conditions and Outlook

We are experiencing varied conditions in the markets in which we operate. While demand in Resources for higher value skills, especially in the public sector, has remained robust, some clients are delaying buying decisions for projects, and others are reducing the scale of some investments within Solutions and Training. However there is much variation in demand and investment depending on the organisation and the market sector.

Within the prevailing economic climate Parity will continue to manage with prudence, maintaining tight control of costs and making reductions where and when appropriate, whilst focusing on those areas of the market where we can see sustained demand and where we can differentiate well. We will continue to invest carefully to take advantage of market opportunities and to improve the efficiency of our operations.

Having made good progress in the second quarter, with trading in line with management's expectations following a slow first quarter, the Board expects continued progress during the second half.

Alwyn Welch

Chief Executive

Financial summary

  Divisional performance - continuing operations

Geographical performance - continuing operations

  Consolidated income statement

For the six months ended 30 June 2008

  Consolidated statement of recognised income and expense

For the six months ended 30 June 2008

  Consolidated balance sheet

As at 30 June 2008