Innovation Group

Global provider of enterprise software and business process outsourcing solutions to the insurance, financial services, motor and fleet industries world-wide.

The main aims throughout the first half of this financial year have been to restructure the underperforming divisions of our business, improve client relationships in our key geographies and continue to re-shape our technology investment programme.

Making significant and important changes to our operational teams in the UK, US and our Technology division; by entering into numerous proof of concept agreements with leading insurance and motor organisations and by rolling out our Enterprise platform as planned in both France and Spain.

There is more work to be done in the second half, but I am pleased with our operational progress so far.



In the six months to 31 March 2010 Group revenue and adjusted profit before tax are £76.9m and £2.5m respectively (H1 2009: £75.5m and £4.9m). Reported revenue for the six months has increased by 2% (decrease of 3% at constant currency).

Organic outsourcing revenues grew by 2% at constant currency, whilst software revenues declined by 26% in line with our intention to focus more heavily this year on driving profitable outsourcing business. Adjusted profit before tax has decreased to £2.5m (H1 2009: £4.9m), again due primarily to the reduction in high margin software license revenue as we continue to evolve with our customers towards a Software-as-a-Service ("SaaS") model.



We have made significant changes to key management in the UK, US and Technology divisions and management reporting lines have been restructured to drive greater efficiency. As highlighted in the Interim Management Statement ("IMS") of 18th February, the Group has taken an exceptional restructuring charge of approximately £3.1m in the first half of this financial year, with a further £0.5m expected in the second half. After making some required new hires the Board anticipates net annualised cost savings from these actions will be approximately £2.8m.

Gross cash at 31 March 2010 was £41.1m with a net cash balance of £22.3m. In December 2009 the Group raised approximately £20.0m for specific future margin enhancing projects as well as for some fundamental restructuring, particularly in the under-performing regions of the UK and North America, as described above.

In the first instance, these funds have been applied to the business as follows: -

• Working capital for the German rapid payment initiative. This is progressing well with approximately 70% of garages/body repair centres already having signed up to the improved terms;

• Funding proofs of concept in our key geographies; and

• Repayment in full of our £5.7m short term credit facility.

Funds will also be used to re-pay approximately £4.5m (ZAR 50.0m) of the high interest bearing Black Economic Empowerment loan in South Africa at the end of May 2010.

The Management team is confident that, collectively, these initiatives will generate substantial future margin enhancement in 2011 and beyond.

Since the start of the year, the Group has embarked從事，開始 on numerous proofs 檢驗of concept in the UK, North America and South Africa. As advised at the time of our IMS, these proofs of concept, which create additional costs in the short term, are an important part of our goal to increase both the number of customers we work with and the volume of claims handled by our platform.

As the Group moves towards securing larger outsourcing contracts, customers are increasingly requiring these three to six month pilots航線指南 to provide them with the necessary outcome data upon which to base their decision to proceed with a full-term contract.

In North America and South Africa, two of these pilots have already resulted in full-term contracts being signed which have been recently announced and the remainder are still ongoing. The contract that we have been awarded in South Africa with revenues totalling approximately £31.0m over a five year period, is the largest contract win in the Group's history.

The Group continues to progress with several more proofs of concept globally and remains confident that some of these will convert to full-term contracts before the year end generating profit for the Group in 2011 and beyond. In addition to new contract wins, the Group has also been successful in the first half in securing significant sizeable contract renewals with long standing customers in all regions.
In December 2009 the Group stated that the level of software revenue, in particular one-off licence fees, would be significantly reduced in 2010 as the business model gradually moves more towards SaaS. This move will ultimately increase the quality of our earnings but it is not clear in discussions with current potential customers how quickly this migration to the SaaS model will be adopted.

Our enhanced technology platform, Enterprise, has been implemented in both France and Spain. Having seen the positive effects of this roll-out in these regions, the Group has made a strategic decision to change the order of the remaining regional roll-out. It is now our intention to roll-out next in Germany - a region that requires the greatest functionality and a move that will give the largest cost benefit to the Group in 2011. The UK, which will now include significant enhancement for a new customer revenue stream will follow Germany. The full cost benefit from implementation in these regions will be seen in 2011.

Financial Review

Total revenue for the six months was £76.9m of which £67.6m, representing 88% is outsourcing revenue (H1 2009: 83%). On a constant currency basis, overall revenue has declined by 3%. The decline in constant currency terms is due to the reduction in software related revenues which fell 26% at constant currency. Outsourcing revenues at constant currency increased by 2%. There is no acquisition related revenue in either period.

Adjusted profit before tax has decreased to £2.5m (H1 2009: £4.9m). This reduction is due primarily to the reduction in high margin software revenue and H1 2009 also included a significant foreign exchange gain of £1.2m (H1 2010: £0.3m).

Adjusted profit for H1 2010 includes a one-off gain of £0.8m relating to a change in accounting estimates in relation to administration fees recognised in the Group's property subsidence 減退 division. Management believe this change is necessary to better reflect revenue in line with service delivered over the lifecycle of a claim. Substantial growth is anticipated in this area over the next twelve months and hence the change now will better reflect the timing of future profits in line with accounting standards. This is detailed under critical accounting estimates and judgements in note 1. Included within finance income is £0.8m relating to the write back of a loan which was waived放棄 in the period.

The reported loss before tax of £1.0m (H1 2009: profit £1.4m) includes amortisation of acquired intangible assets of £1.8m (H1 2009: £2.0m), a share-based payment credit of £1.3m (H1 2009: charge £1.6m) and exceptional costs of £3.1m (H1 2009: £nil). Adjusted EPS is 0.17p per share (H1 2009: 0.46p) and basic loss per share is 0.29p (H1 2009: 0.01p). The Group full year effective tax rate is expected to be approximately 35% depending on the location of trading profits in the remainder of this year. The tax rate is higher than previous years due to the increase in profits expected from Germany and South Africa, both of which are tax paying regions with no tax losses available for offset against profits.



The share-based payment credit arose due to the number of options forfeited喪失 following the departure of the former CEO and several members of the senior Management team in the subsequent restructuring.

Exceptional restructuring costs are £3.1m (H1 2009: £nil). These costs relate primarily to redundancy costs in the Group's underperforming BPO regions of the UK, North America and Technology and are attributable to those regions as follows: UK (£1.2m), North America (£1.1m) and Technology (£0.5m). In addition the Group closed its loss making operation in the Netherlands at a cost of £0.3m. The Group expects to take a further exceptional charge of approximately £0.5m in the second half as final restructuring is completed. The total annualised gross cost saving is approximately £4.0m with the Group benefitting from a net saving on an annualised basis of £2.8m from the end of Q3.

In light of the rapid progress made in restructuring the business, the Board is now in a position to consider the Group's reduced property requirements in both the US and the UK. Though plans have yet to be formalised, we have identified annualised potential cost savings of up to £1.0m from 2011 relating to two leases. Should we pursue this strategy, the Company will incur a one-off exceptional charge in the second half of the current financial year of approximately £4.5m with the cash impact being spread over the remaining terms of the leases.

The gross cash balance at 31 March 2010 was £41.1m (H1 2009: £25.6m) with net cash of £22.3m (H1 2009: £1.6m). Operating cash outflow of £4.6m includes payment of prior and current years exceptional costs of £3.4m as well as a significant working capital injection into Germany of approximately £4.5m for the new payment process, as detailed at the time of the fund raising. After accounting for these items, cash to EBITDA conversion is approximately 85%.

In December 2009, the Group raised approximately £20.0m from shareholders. This cash has already been invested as planned to facilitate the new payment process in Germany, fund proofs of concept for large outsourcing contracts across our key geographies and to restructure the Group's underperforming divisions. At the end of May 2010, the Group will repay capital of ZAR 50m (£4.5m) from the Black Economic Empowerment loan. In addition, the Group has currently repaid in full, the £5.7m rolling credit facility although this facility remains available until July 2011.

Board Change

11 February 2010 I was appointed as Chief Executive Officer and David Thorpe assumed the role of Non-Executive Chairman.

Outlook

The Group's performance is historically weighted towards the second half of the year and this trend will be greater in the current financial year. The Board is pleased with the number of new proofs of concept already underway this year and with the conversion rate thus far. The restructuring program has also given the Group a lower cost base for the second half and beyond.
As a result, the Board remains confident that, unless there is further deterioration in economic conditions in our markets, full year results (before exceptional restructuring costs) will be in line with our expectations