Parity Regulatory News (PTY)

Parity Group PLC

Financial Report for the six months ended 30 June 2017

Parity Group plc ("Parity", or the "Group"), the UK information technology services group, announces its interim results for the six months ended 30 June 2017.

Parity operates through two divisions, Parity Consultancy Services ("Consultancy Services"), which provides niche technology and data solutions and Parity Professionals, which specialises in the sourcing of professional staff ("Professionals").

Highlights:

Strong growth in Consultancy Services drove increased profit and debt reduction, despite IR35 changes:

§ Group revenues1 of £42.92m (H1 2016: £46.22m)

§ Reflects growth in Consultancy Services partially mitigating the impact of IR35 changes on Professionals:

§ Consultancy Services revenue up by 47.7% to £3.93m (H1 2016: £2.66m)

§ Professionals revenue2 down by 6.5% to £40.71m (H1 2016: £43.56m)

§ Operating profit1 before non-recurring costs3 up 19% to £0.92m (H1 2016: £0.77m)

§ Improved operating margin to 2.1% (H1 2016: 1.7%) with increased proportion of higher margin Consultancy Services revenues and strong cost management

o Consultancy Services' contribution4 up by 17% to £0.55m (H1 2016: £0.47m); now represents 33% of Group contribution4 (H1 2016: 29%)

o Professionals' contribution4 up by 1.8% to £1.13m (H1 2016: £1.11m)

§ Profit before tax1 increased by 143% to £0.68m (H1 2016: £0.28m) reflecting improved business mix and no non-recurring costs in H1 2017

§ Basic earnings per share 0.62p (H1 2016: 0.23p)

Strengthened balance sheet following improved cash flow performance:

§ Net debt of £2.3m (£4.4m at 31 December 2016, and £6.5m at 30 June 2016)

§ Cash inflow from operations increased to £2.2m (H1 2016: £1.1m) with positive working capital swing

Good progress with strategy to focus on Consultancy Services' growth to better align both divisions:

§ Driving opportunities in our chosen markets through:

§ A stronger salesforce focus on technology solutions to deliver business intelligence/analytics and cost modelling applications, supporting growth in our data management consultancy services

§ Investment in the sales capacity to sell our Group-wide proposition, by target market sectors with expertise across our skills verticals

§ Aligned sales and a centralised CRM across our multiple channels to market to enhance our understanding of our clients, the people and emerging technologies

§ Closer collaboration across the Group to deliver project solutions, managing the recruitment and deployment of IT teams, has generated revenues from new projects in H1 2017 of £1.6m in addition to supporting the MCOCS MoD programme

§ The Talent Management offering is refocussed to develop leadership skills supporting business change

§ The non-core Inition business is being marketed for sale and the Board is confident that the disposal will help the Group with its longer-term strategic objectives

Board and advisory appointments:

§ Industry experience of the Board of Directors further enhanced with the appointment of John Conoley as a Non-Executive Chairman

§ Change of NOMAD and broker to WH Ireland

Clear momentum in the business:

§ Successfully secured new clients, in addition to positions on a number of frameworks and contract extensions during the first half:

§ Awarded places on the Digital Outcomes and Services 2, and G-Cloud 9 frameworks for consultancy and project delivery into the Public Sector

§ Framework wins including a number of Universities, the NHS and sole supply of permanent IT recruitment to Highways England

§ Over 50 new clients across the business, with the majority in the Private Sector

§ The benefit of collaboration with cross-sales of services embedding ourselves further with 7 clients

§ An extension of the long-standing service contract with BAT

§ Since the half year end, we have also extended the MoD Business Intelligence Military Capability Output Costing System contract with the Consultancy division

1 On a Continuing Operations basis

2 Including inter-segment revenues

3 Non-recurring costs were £nil (H1 2016: £0.3m)

4 Before group costs, depreciation and amortisation, and share based payments

John Conoley, Chairman of Parity Group, said:

"The Company has delivered an encouraging first half performance. This reflects the management team's clear and deliberate focus on developing the higher margin Parity Consultancy Services division and on aligning our two core divisions more effectively to address our chosen markets. This has already delivered an improvement in profitability and cash generation as well as a reduction in debt. In addition, the new sales that have been generated through the period and into the second half further endorse our strategy, leaving us with stronger pipelines in both Divisions.

 "Despite the continued impact of IR35 on contractor volumes, the Group continues to perform in line with our expectations for the full year with the second half expected to benefit further from our investment in sales and marketing to accelerate growth in our higher margin managed service and data consultancy offerings. We, therefore, look forward to making further progress with our focus on continuing to drive profitability, cash flow and shareholder value.

"On behalf of the Board, I would like to take this opportunity to thank all the Parity staff for their continued hard work."

For further information, contact:

Parity Group PLC http://www.parity.net/

Alan Rommel, CEO 0208 543 5353

Roger Antony, GFD

WH Ireland Limited http://www.whirelandcb.com/

Mike Coe / Ed Allsopp +44 (0) 117 945 3470

MHP Communications http://www.mhpc.com/

Katie Hunt / Kelsey Traynor +44 (0)203 128 8100

About Parity

Parity Group enables people led, technology driven change.

Parity has a strong heritage in implementing technology solutions to businesses through two complementary service offerings, working together to provide trusted consultancy advice with access to the best delivery expertise. Over 45 years of experience and thousands of successful contracts provide assurance that we have both the breadth of capability across the business and the great depth of understanding in our niche technology and data services required to service our clients' and potential clients' needs.

Parity Consultancy Services:

Helping clients to improve clarity and make the best use of technology to inform better decision making

This division is focused on niche expertise driven by senior industry-experienced consultants, exploiting technology and generating compelling and significant advantage for our clients by transforming them into data guided organisations.

Parity Consultancy Services' technology experts drive benefit through a high level of engagement, a focus on results, and successful project delivery. Starting with the end in mind, we work closely with clients' existing people to identify how to gain real insights that will deliver returns to our clients.

Parity Professionals:

Helping clients to recruit the best people to deliver real benefit to your business

This division provides targeted recruitment of temporary and permanent professionals to support business change. We ensure our clients have both the capacity and capability to transform organisational performance in high growth and rapidly evolving markets.

Group:

By aligning both divisions, Parity is in a strong position for its size, as it is able to provide both niche expertise in terms of consultancy and the resources to deliver solutions. When necessary, we supplement our industry and technology specialists with access to the broader contractor market through Parity Professionals. As a client-centric organisation, this enables us to fulfil their needs with access to a broad range of services, providing the assurance of our internal expertise with the ability to scale at pace to meet their objectives.

Our success is based upon the depth of our knowledge coupled with a passion and commitment to deliver excellent results to our clients and candidates.

Parity Group PLC

Half Yearly Financial Report for the six months ended 30 June 2017

Introduction

Parity supports its clients by maximising the effectiveness of people, processes and systems through two aligned businesses - Parity Consultancy Services and Parity Professionals. We are building upon the momentum generated to date, with increased traction in the technology solutions delivered through the Consultancy division complemented by the wider recruitment services provided by the Professionals business.

Parity Consultancy Services supports our clients in the project management and delivery of their IT solutions, and in the rapidly growing data market as they need to manage vast amounts of complex data. Our services are helping the digital transformation of the Public sector, and provide competitive advantage in the private sector through improved efficiency and timely business decisions. Our success is dependent upon our in-depth knowledge coupled with the agility to scale and supplement projects that we are managing with the right skills at pace.

Parity Professionals provides niche temporary and permanent recruitment of professional and technical staff both direct to our client base, and where required, to our Consultancy division where we are delivering technology solutions and managing projects.

The closer alignment of the two businesses means we are ideally placed to provide clients with the people that they need and the technology that will enable them to drive change. The flexibility with which we are able to operate allows us to offer a truly customer-centric approach, without the need for a higher fixed cost base.

Results

Further to our trading update announced on the 17th July, we are pleased to report that we are encouraged that Parity is maintaining strategic momentum by growing revenues in its Consultancy Services division which is, in turn, driving profit growth.

Group Revenues for the period reduced by 7.2% to £42.9m, as a result of the impact of a reduction in the larger volume Professionals business which was in part countered by growth in the higher margin Consultancy Services.

Group Operating Profit before non-recurring items from continuing operations for the first half has grown by 19% to £0.92m from £0.77m in the equivalent period last year.

Continuing profit before tax was £0.7m (H1 2016: £0.3m) reflecting the improvement in business mix, and the absence of non-recurring costs.

Earnings per share for the period has improved to 0.62p versus 0.23p in H1 2016.

Cash generated from operations was £2.16m (H1 2016: £1.12m). The Professionals division experienced a reduction in working capital requirements resulting from the reduced contractor volumes, which was complemented by excellent cash collections. Debtor days as at 30 June 2017 were 21 days (31 December 2016: 29 days). The strong cash performance led to an improved net debt position at the period end of £2.3m (31 December 2016: £4.4m). The Group has a confirmed £15m finance facility with PNC, which is in place until 31 December 2018.

The cash performance was also supported by the reduced contributions to the defined benefit pension scheme negotiated with the Trustees in 2016. The scheme deficit had decreased slightly to £1.75m at 30 June 2017 (31 December 2016: £1.85m).

Dividend

In order to ensure funds are available to provide further investment in Parity's growth, the Board is recommending that no dividend will be paid in relation to the first half of the current financial year. The Board intends to keep the policy under review.

Parity Consultancy Services Division - 33% of Group contribution (H1 2016: 29%)

Parity Consultancy Services develop, implement and support technology solutions for our clients. A combination of industry specialism and IT solution expertise provide our clients with assurance that we understand their needs and can provide the right systems to support them. We have the flexibility to manage and staff longer-term IT projects, provide strategic advice on the IT and systems architecture they need, or utilise our expertise to simply meet deadlines.

Parity consultants work closely with the clients and have a methodology to provide a clear understanding of their needs to determine the best technology solution. For example, we have developed a strong understanding of the data solution market, delivering the architecture required and the master data management which provides the foundation for insightful analytics and reporting. Our consultants understand the business needs and are able to support this with the latest software developments to provide market leading solutions.

Our strength in effective project management and the assurance we provide on successful delivery has also led to some long-standing client application support relationships and new managed projects. Our strategic relationships with Oracle and Microsoft ensure our consultants remain at the forefront of the latest developments and, as part of the wider Group services, we can access additional expertise when required through close alignment to Parity Professionals. This ability to leverage additional support within short timescales means we don't need to maintain a large bench of available staff, delivering cost savings which allow competitive pricing.

Divisional revenues on continuing operations have grown by 47.7% to £3.93m (H1 2016: £2.66m) with an improvement in segmental contribution from £0.47m to £0.55m over the same period. Margins have been held back due to our deliberate push to build the consultancy division, with an increase in sales headcount and higher utilisation of external contractors on new projects. As scale builds in our core capabilities and we have more repeat work from the new clients to ensure high utilisation, we will be able to build our permanent capacity and improve margins.

In the period, Parity Consultancy Services have been awarded frameworks for both Digital Outcomes and Services 2, and G-Cloud 9 in the public sector and have been successful in winning orders in the private sector. With strong client relationships, we continue to benefit from repeat business and have recently been awarded an extension to the British American Tobacco application support contract and secured additional funding on the Military Capability Output Costing System (MCOCS) Business Intelligence contract with the MoD.

Parity Professionals Division - 67% of Group contribution (H1 2016: 71%)

Parity Professionals provides targeted recruitment of temporary and permanent professionals with the niche skills required to ensure our clients have both the capacity and the capability to deliver their projects. Our clients' success depends on the efficiency and competency of their people and, over 45 years, Parity has developed a strong reputation for recruiting the best talent across many industry sectors and locations. Our core strengths are in high growth IT skills relating to Digital, Data and Information Security which also supports the Consultancy Services division, though we have broader capability in the provision of interim staff to deliver business change programmes.

The recruitment industry was subject to a change in the way the taxation regulations are applied to workers in the Public Sector in April 2017 under IR35. The uncertainty leading to this and the change to income for the workers has impacted contractor volumes for Parity Professionals, and is largely responsible for a reduction in Divisional revenues of 6.5% against the same period last year to £40.71m (H1 2016: £43.56m). Pleasingly however, segmental contribution has increased by 1.8% to £1.13m (H1 2016: £1.11m) as a result of managing the cost base and a change in the mix of revenues. We have increased the sales activity to the private sector which represented 57% of new clients that were opened in the half. We increasingly work with clients in the SME sector as well as the larger volume clients that provide longer-term visibility.

Despite the uncertainty generated by IR35 and the resultant higher churn rate in the contractor base, our activity has driven an increase in the key sales KPIs of number of placements made, the deal turnover value and deal margin value compared to the first half of 2016. This would have typically resulted in growth in revenues from our contractor base were it not for the lower retention rates due to IR35. We are also encouraged by the 59.8% increase versus H1 2016 in permanent fees generated of £315,000, albeit this remains a smaller part of our overall gross profit. In the period, we have made a modest investment to increase the sales headcount, improving our sales and delivery capability in targeted skills verticals.

Importantly, Parity Professionals has worked closely with Parity Consultancy Services to provide interim staffing on their managed projects where they have needed to scale quickly, or where they need access to specific expertise to supplement their permanent capability. This has generated inter-segment revenues to £1.7m in the period (H1 2016: £nil).  

People and Board

On 23 March 2017 we were pleased to announce the appointment of John Conoley as Non-Executive Chairman. John Conoley brings over 30 years IT industry knowledge and significant executive and non-executive Board level experience of AIM listed technology software and services businesses. John joined the Board on 27 April 2017.

Current Trading and Future Prospects

We are pleased to report that there is clear evidence that we are maintaining momentum in our stated objective of growing the Consultancy Services division, which has generated significant growth in its revenues, and is running ahead of management expectations. The new sales that have been generated through the period and into the second half give us confidence that we are undertaking the right activities to drive growth.

Within Parity Professionals, contractor volumes were impacted at the end of March with the change in the IR35 legislation, and whilst the extension ratios show signs of improvement, we are still experiencing a lower than usual extension rate on our contracts. Even though sales KPIs remain positive and client demand has held, the growth in our contractor volumes is slower than we would have expected. We have invested in the sales capacity and in training to support our sales and management internally to counter the impact whilst this churn rate recovers to normal levels.

Despite the effect of the IR35 changes, the Group has delivered a strong profit performance in the first half, demonstrating the underlying strength of the wider Group and our strategy to focus on building our Consultancy Services division. This offers higher margins and longer-term revenue visibility. We have invested in building the sales capacity to target the growing data solutions market and to support our managed project teams. There will be further opportunity to increase permanent headcount in project delivery as repeat revenues build in our core services which will enhance margins.

We have undertaken the steps necessary to restructure the business, rebalance the divisions and maximise the opportunities as we undergo change despite any change in market conditions. Parity has built momentum in the Consultancy Services division with higher margins and improved visibility of longer-term project-based revenues which will support our progress to the next stage of growth. The improved financial results, with increased profitability and reducing debt, demonstrate that the Group has a strong and resilient base from which it can continue to build our Professionals division and invest in our exciting Consultancy Services division. Overall, the Group continues to perform in line with our expectations for the full year, with the second half expected to benefit further from our investment in sales and marketing to accelerate growth in our higher margin managed service and data consultancy offerings. We, therefore, look forward to making further progress with our focus on continuing to drive profitability, cash flow and shareholder value. 

Principal Risks and Uncertainties

Pursuant to the requirements of the Disclosure and Transparency Rules the Group provides the following information on its principal risks and uncertainties. The Group considers strategic, operational and financial risks and identifies actions to mitigate those risks. These risk profiles are updated at least annually. The principal risks and uncertainties detailed within the Group's 2016 Annual Report remain applicable for the final six months of this financial year. The Group's 2016 Annual Report is available from the Party website www.parity.net. The Board has set up a Brexit Working Group to monitor and respond to any emerging risks as and when the implications of Brexit unfold.

Consolidated condensed income statement

For the six months ended 30 June 2017

Consolidated condensed statement of comprehensive income

For the six months ended 30 June 2017

Consolidated condensed statement of changes in equity

For the six months ended 30 June 2017

Consolidated condensed statement of financial position

As at 30 June 2017

Consolidated condensed statement of cash flows

For the six months ended 30 June 2017

Notes to the interim results

1 Basis of preparation

The condensed financial statements comprise the unaudited results for the six months to 30 June 2017 and 30 June 2016 and the audited results for the twelve months ended 31 December 2016. The comparative results for the six months to 30 June 2016 have been restated to show the Inition business unit as discontinued operations in accordance with the Group's discontinued operations accounting policy. The financial information for the year ended 31 December 2016 does not constitute the full statutory accounts for that period. The Annual Report and Financial Statements for 2016 have been filed with the Registrar of Companies. The Independent Auditor's Report on the Annual Report and Financial Statements for 2016 was unqualified, and did not contain a statement under 498(2) or 498(3) of the Companies Act 2006.

The condensed financial statements for the period ended 30 June 2017 have been prepared in accordance with the Disclosure and Transparency Rules of the Financial Services Authority and with IAS 34 'Interim Financial Reporting' as adopted by the European Union. The information in these condensed financial statements does not include all the information and disclosures made in the annual financial statements.

Accounting policies

The condensed financial statements have been prepared in a manner consistent with the accounting policies set out in the group financial statements for the twelve months ended 31 December 2016 and on the basis of the International Financial Reporting Standards (IFRS) as adopted for use in the EU that the Group expects to be applicable as at 31 December 2017. IFRS are subject to amendment and interpretation by the International Accounting Standards Board (IASB) and there is an ongoing process of review and endorsement by the European Commission.

None of the new standard amendments or interpretations that have become effective in the period has had a material effect on the Group. The Group is reviewing the impact of on the financial statements of the relevant forthcoming standards, including IFRS 15: Revenue from Contracts with Customers (effective 1 January 2018), IFRS 16: Leases (effective 1 January 2019) and IFRS 9 Financial Instruments (effective 1 January 2018).

Whilst substantially all the Group's revenue will be classed as revenue from contracts with customers under IFRS 15, the new standard is not expected to require material changes to the timing of revenue recognition.

Under IFRS 16 the Group's operating leases will be accounted for as right of use assets, which will be largely offset by equivalent lease liabilities. The assets will be recognised as property, plant and equipment and the lease liability will increase net debt. The impact to profit before tax is not expected to be material.

It is not anticipated that there will be a material impact in respect of IFRS 9, as the Group has minimal financial assets (except for trade debtors).

2 Segmental information

3 Non-recurring items

There were no non-recurring items in H1 2017.

The continuing operations non-recurring charge for 2016 included:

• The write down of assets in the GPSeer joint venture. GPSeer was an initiative under the previous digital strategy to develop a cutting-edge internet search engine. Since the change in strategy, no further development work had been performed by the Group.

• Restructuring costs including compensation payments incurred to downsize the Talent Management service offering in Northern Ireland, the cost of Board changes aligned to the Group's strategy, and residual expenses incurred to close the Golden Square service offering.

• Transaction costs relating to professional services incurred to implement the Board's strategy to focus on core business.

• Property provisions represent empty property costs incurred as a result of centralising the London office.

• The insolvency dividend related to a one-off payment received in 2016 from the administrators of a legacy overseas subsidiary.

4 Finance costs

Bank interest payable is in respect of the Group's invoice financing facilities.

5 Tax

6 Discontinued operations

The loss from discontinued operations relates to the Inition cash generating unit and expenses associated with its planned disposal.

7 Earnings per share

The calculation of earnings per share is based on profit after tax from continuing operations of £628,000 (30 June 2016: £236,000, 31 December 2016: £884,000).

The calculation of loss per share from discontinued operations is based on loss after tax from discontinued operations of £430,000 (30 June 2016: loss of £73,000, 31 December 2016: loss of £78,000).

The weighted average number of shares used in the calculation of the basic and diluted earnings per share are as follows:

Basic earnings / (loss) per share is calculated by dividing the basic earnings / (loss) for the period by the weighted average number of fully paid ordinary shares in issue during the period.

Diluted earnings per share is calculated on the same basis as the basic earnings per share with a further adjustment to the weighted average number of fully paid ordinary shares to reflect the effect of all potentially dilutive ordinary shares.

8 Post retirement benefits

The Group provides employee benefits under various arrangements, including through defined benefit and defined contribution pension plans, the details of which are disclosed in the 2016 Annual Report and Accounts. At the interim balance sheet date, the major assumptions used in assessing the defined benefit pension scheme liability have been reviewed and updated based on a roll-forward of the last formal actuarial valuation, which was carried out as at 5 April 2015.

The following changes in estimate have been applied to the IAS19 valuation as at 30 June 2017:

9 Movement in share capital and other reserves

In May 2017, a capital redemption reserve of £14,319,000 was created when the Directors resolved to cancel the deferred shares of Parity Group plc. Prior to the resolution, this amount was recognised as deferred share capital.

The deferred shares were not listed on the London Stock Exchange, had no voting rights, no rights to dividends and the right only to a very limited return on capital in the event of liquidation.

10 Commitments and contingencies

The Group leases various buildings which operate within all the segments. The leases are non-cancellable operating agreements with varying terms and renewal rights. The Group also has various other non-cancellable operating lease commitments and a small number of assets that are held under finance leases. The finance leases have varying terms and renewal rights.

11 Related party transactions

Transactions between the Company and its subsidiaries, which are related parties, have been eliminated on consolidation and are therefore not disclosed in this note.

There were no other related party transactions during the period (2016: none).

12 Post balance sheet events

There are no post balance sheet events to report

 Statement of directors' responsibilities

The directors confirm, to the best of their knowledge:

· The condensed set of financial statements has been prepared in accordance with IAS 34 'Interim Financial Reporting', as adopted by the European Union;

· The interim management report includes a fair review of the information required by DTR 4.2.7R of the Disclosure and Transparency Rules of the United Kingdom's Financial Services Authority, being an indication of important events that have occurred during the first six months of the financial year and their impact on the condensed set of financial statements, and a description of the principal risks and uncertainties for the remaining six months of the year, and gives a true and fair view of the assets, liabilities, financial position and loss for the period of the Group; and

· The interim management report includes a fair review of the information required by DTR 4.2.8R of the Disclosure and Transparency Rules of the United Kingdom's Financial Services Authority, being a disclosure of related party transactions and changes therein since the previous annual report.

By order of the Board

John Conoley

Non-Executive Chairman

14 September 2017

 INDEPENDENT REVIEW REPORT TO PARITY GROUP PLC

We have been engaged by the company to review the condensed set of financial statements in the half-yearly report for the six months ended 30 June 2017 which comprises the consolidated statement of comprehensive income, consolidated condensed statement of changes in equity, consolidated condensed statement of financial position, consolidated condensed statement of cash flows and the related explanatory notes.

Based on our review, nothing has come to our attention that causes us to believe that the condensed set of financial statements in the half-yearly report for the six months ended 30 June 2017 is not prepared, in all material respects, in accordance with IAS 34 Interim Financial Reporting as adopted by the EU and the AIM Rules.

Scope of review

We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410 Review of Interim Financial Information Performed by the Independent Auditor of the Entity issued by the Auditing Practices Board for use in the UK. A review of interim financial information consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. We read the other information contained in the half-yearly report and consider whether it contains any apparent misstatements or material inconsistencies with the information in the condensed set of financial statements.

A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK) and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

The half-yearly report is the responsibility of, and has been approved by, the directors. The directors are responsible for preparing the half-yearly report in accordance with the AIM Rules.

As disclosed in note 1, the annual financial statements of the group are prepared in accordance with International Financial Reporting Standards as adopted by the EU. The directors are responsible for preparing the condensed set of financial statements included in the half-yearly financial report in accordance with IAS 34 as adopted by the EU. 

Our responsibility

Our responsibility is to express to the company a conclusion on the condensed set of financial statements in the half-yearly report based on our review

The purpose of our review work and to whom we owe our responsibilities

Kelly Dunn (Senior Statutory Auditor)

for and on behalf of KPMG LLP

Chartered Accountants

15 Canada Square

London

E14 5GL

14 September 2017