Parity Regulatory News (PTY)

Parity Group PLC

Unaudited Financial Report for the six months ended 30 June 2018

Parity Group plc ("Parity", or the "Group"), the UK information technology services group, announces its unaudited interim results for the six months ended 30 June 2018.

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").

Financial Headlines:

Encouraging progress with over 30% growth in Consultancy Services revenues

§ Group revenues1 of £43.2m (H1 2017: £42.9m)

§ Consultancy Services revenue up by 30.8% to £5.1m (H1 2017: £3.9m)

§ Professionals revenue2 up by 2.2% to £41.6m (H1 2017: £40.7m) despite a strong Q1 2017 comparative, prior to IR35 implementation

§ Operating profit1 up 12.0% to £1.03m (H1 2017: £0.92m)

§ Improved operating margin to 2.4% (H1 2017: 2.1%) with growth in Consultancy Services revenues and robust cost management enabling sustained, measured investment

o Consultancy Services' contribution3 up by 12.7% to £0.62m (H1 2017: £0.55m); now represents 35.2% of total segmental contribution3 (H1 2017: 32.5%)

o Professionals' contribution3 up by 0.9% to £1.14m (H1 2017: £1.13m)

§ Profit before tax1 increased by 25% to £0.85m (H1 2017: £0.68m)

§ Basic earnings per share 0.74p (H1 2017: 0.62p)

§ Net debt of £1.9m (£1.6m at 31 December 2017, £2.3m at 30 June 2017) due to the working capital requirement associated with the growth in contractor volumes in the Professionals division

1  On a Continuing Operations basis

2 Including inter-segment revenues

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

Strategic and Operational Headlines:

§ Invested to develop Consultancy Services' growth through the appointment of a Managing Director with extensive data experience and recruitment of personnel to improve our sales and marketing capability

§ New frameworks in our target markets, including:

o Crown Commercial Service G-Cloud 10 framework

o Northern Ireland Water Agency Temporary Staff and Permanent Recruitment framework

o Ordnance Survey framework for Recruitment Services (permanent, temporary, contingent and fixed term)

o NEST (National Employment Savings Trust) Recruitment Services framework

o Award of the Primark managed service for IT recruitment announced in March 2018

o Since the period end we have also successfully tendered for the Crown Commercial Service Management Consultancy 2 framework for consultancy and project delivery into the Public Sector

§ Enduring customer relationships which provide a high level of repeat business, including significant contract extensions for Consultancy Services with BAT and ESFA

§ 38 new clients across the business, with the majority (23 of the 38) in the Private Sector

§ Exit from loss-making, non-core activity Inition marked the final major milestone in shifting the Group to a more focussed, aligned and profitable business

§ Inter-segment revenues have more than doubled to £3.50m (H1 2017: £1.73m) demonstrating the synergies from joint account management and the increased use of contractors for Consultancy Services managed projects

John Conoley, Chairman of Parity Group, said:

"It is pleasing to see the sustained progress that the Group is making; delivering growth at a revenue and profit level whilst having also rationalised, rebalanced and invested to support future growth in line with its exciting strategic objectives.

"Parity's consulting business is well positioned to continue broadening its client base, as clients increasingly look for a solution which combines a deep understanding of analytics and underlying technologies with the ability to deploy up to date experts in the fast-evolving data capture and management field. As a result, we have targeted further investment in senior experienced operational management, and sales and marketing to drive continued growth.

"We have also successfully exited the last of the legacy operations from the previous strategy, leaving the business leaner and stronger. The Group is demonstrating the synergies achievable by aligning the consulting and recruitment functions, and further developing its strong client relationships through delivering broader capabilities. We expect that our proposition will benefit further from the increased focus on data analysis and data management enabled by the new expertise which we have now appointed to help drive the next stage of growth.

"The improving financial results to date and the Group's pipeline of opportunities underwrite the Board's confidence in the Group's longer-term growth prospects. Whilst we are experiencing a short-term client-side delay on one large contract, the rest of the Group is performing in line with Board expectations. Without any further delays, we expect a stronger second half, in line with the Group's traditional seasonality, and to deliver on current expectations for the year as a whole. Our investment in the Group continues to drive revenue and profit growth, supporting cash flow improvement and generating further shareholder value."

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 drives business value and digital transformation through consultancy, technology and people solutions. It helps customers transform the way they deliver their services to improve speed, efficiency and effectiveness. Its distinctive, integrated offering combines:

· the consulting business which has secured large ongoing contracts at higher margins and is now focussed on high growth services in fast-moving fields which are a challenge for clients to keep abreast of; and

· the recruitment business which provides access to high-calibre and hard-to-find expertise direct to clients and for Parity managed projects.

Parity Consultancy Services

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

This division is focussed on successful project delivery driven by senior industry-experienced consultants who can take a client's data and deliver the analysis required to achieve clear business goals. They also work closely with clients to diagnose and clarify specific strategic data requirements to guide development of data strategy. Parity's consultants, supported by world-leading associates, advise on every aspect of data management and deliver data solutions which generate competitive advantage by closing the gap between information and insight, enabling more effective decision making which enable organisations to transform their performance.

Parity Professionals

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

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 which delivers technology solutions and manages projects. This ensures end clients have both the capacity and capability to transform organisational performance in high growth and rapidly evolving markets.

Group

By aligning both divisions, Parity provides an attractive combination of trusted consultancy advice with access to the best delivery expertise. When necessary, we supplement our industry and technology specialists with access to the broader contractor market through Parity Professionals. Parity's approach is both client-centric and highly responsive, fulfilling client needs with our internal expertise and best practice approach supplemented with niche contract expertise. We are able to reduce risk and get results for our clients whilst ensuring flexibility, speed to scale up for new opportunities, and cost-effective delivery.

www.parity.net

www.parityprofessionals.co.uk

www.parityconsultancyservices.co.uk 

Introduction

Further to our trading update announced on 18 July, we remain encouraged by the robust first half performance with a further period of revenue and profit growth in both business divisions. Parity is maintaining sustained organic growth at the top line whilst continuing to invest across the business with faster growth observed in its Consultancy Services division which is in line with our strategic goal of targeting the high growth data solutions markets.

We have successfully undertaken the necessary steps to restructure and rebalance the business, exiting from legacy and non-profitable operations to focus on building upon our core strengths, where we can align our capabilities to deliver more effectively to our clients and thereby be more efficient. The Group has again delivered like-for-like growth in both divisions at both revenue and profit levels, managing organic growth through measured, self-funded investment whilst maintaining strong working capital controls which in turn protects us from potential interest rate increases. We are reassured by the growing evidence of the cross-sell and up-sell opportunity presented by closer alignment of the businesses and the synergies that this demonstrates. Our pension liabilities have reduced and our repayment schedule is both affordable and is built into our outlook. This will enable further organic investment to drive customer led profitable growth.

Results

Group revenues for the period grew by 1% to £43.2m in comparison to H1 2017, reflecting recovery against a strong Q1 2017 before the implementation of IR35 reforms which significantly reduced contractor volumes in our largest market, the Public Sector.

The continued improvement in the business mix supported growth in operating profit from continuing operations for the first half of 12% to £1.03m from £0.92m in the equivalent period last year. Group overheads increased slightly to £0.59m (H1 2017: £0.57m), mainly due to necessary additional compliance and advisor costs in relation to matters such as the new GDPR legislation.

The relatively small cash outflow from operating activities of £0.24m is mainly as a result of the growth in contractor volumes in the Professionals division and the associated working capital requirement. Debtor days at 30 June 2018 increased slightly to 20 days (18 days at 31 December 2017, excluding Inition). The increase reflects the change in business mix with an increase in the proportion of turnover from the Private Sector. As a result, net debt was £1.9m (£2.3m as at 30 June 2017), up from £1.6m as at 31 December 2017.

The defined benefit pension scheme is currently in the process of a revised actuarial valuation as at 5 April 2018 and we expect to provide an update in our 2018 Annual Report and Accounts. The accounting valuation disclosed in this Interim Report has decreased as a result of an increase in the applicable discount rate.

Overall, the continued improvement in the Group's financial performance vindicates our strategy of rebalancing the business towards the higher margin Consultancy Services, which represented 35% of Group contribution from 12% of external revenues in the period (an increase from 9% of revenues H1 2017).

Discontinued Operations

We sold the Inition business to Digital Communication Group Limited on 20 April 2018. The Inition business was sub-scale and considered non-core due to its lack of synergy with the Group's strategy. The trading loss of the Inition business for H1 2018 up until the date of disposal is included under 'Discontinued Operations' in the Income Statement, together with the loss on disposal.

Dividend

In line with our previous statements on dividends, we are not declaring a dividend at this time, with funds being retained to continue to support our investment in growth but we look forward to restoring a dividend in the medium term. As the Group has continued to deliver an improving performance, the Board is now taking advice on the steps required to put in place sufficient distributable reserves to enable the payment of a dividend at the appropriate time.

Parity Consultancy Services Division - 35% of Group contribution (H1 2017: 33%)

Parity Consultancy Services develops, implements and supports technology solutions for our clients through three core service offerings:

· We provide consultancy support to help clients understand and interpret their data

· We work closely with our clients to determine their data needs to help them develop their strategy, and we deliver the data management and analysis toolsets

· We deliver data projects for our clients using a combination of our expertise, underpinned by the best available skills in the market

Our combination of industry specialism and IT solution expertise provide our clients with the assurance that we understand their needs and can provide the right systems to support them. We are technology agnostic, delivering the most appropriate solution to a client's specific needs, de-risking Parity from over-reliance on specific technologies and isolating ourselves from the volatility in a rapidly evolving solution market. We have the flexibility to provide strategic advice on their IT and systems architecture requirements and provide the niche expertise to deliver their longer-term IT projects without needing to maintain a large bench of available staff, enabling cost savings which allow competitive pricing.

We have invested to build our expertise and capability in the high growth data market. Matthew Bayfield joined the senior management team of Parity Group plc as the Managing Director of Parity Consulting in May 2018 to drive the development of the sales, marketing and consultancy propositions. He is an acknowledged expert in his field, recognised as one of the 50 most influential people in data by DataIQ. Matthew has been on the Group Board for Ogilvy & Mather as their Head of Data for EMEA, as well as founding and leading a number of data strategy, research and insight businesses, taking three to successful commercial exit. 

Parity Consultancy Services made solid progress with further growth in divisional revenues on continuing operations of 30.8% to £5.1m (H1 2017: £3.9m) with an increase in segmental contribution from £0.55m to £0.62m over the same period. Margins reflect the necessary further investment in sales and senior data expertise, coupled with the faster revenue growth being reliant upon contracted delivery staffing which generates lower margins than internal staff. Nevertheless, Parity staff fee days increased by 18.1% compared to H1 2017, whilst associate fee days increased by 40.3%, underwriting the benefit of rapid scaling enabled by aligning with Parity Professionals, helping to deliver timely, demand-driven support to client projects.

Parity Consultancy Services continued its success with 7 new clients in the period (4 public sector and 3 private sector), two of which were generated by cross-selling in to existing Professionals clients. In addition to the new framework award for G-Cloud 10 in the public sector, the business secured a framework with a further Health client for business intelligence and data related project work. Our key relationships with British American Tobacco, the Ministry of Defence and the Department for Education form a strong foundation, driving additional opportunity and extensions to current projects.

Parity Professionals Division - 65% of Group contribution (H1 2017: 67%)

Parity Professionals provides targeted recruitment of temporary and permanent professionals with the skills required to ensure our clients have both the capacity and the technical capability to deliver their projects. Our clients' success depends on the efficiency and competency of their people and, over the last 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 to support our clients in the provision of interim staff to deliver business change programmes.

Parity Professionals demonstrated a steady recovery from the impact of IR35 which was implemented at the end of Q1 2017, reducing contractor headcount in our largest market, the Public Sector. Divisional revenues improved by 2% from £40.7m to £41.6m (H1 2017 to H1 2018) with a 1% increase in divisional contribution to £1.14m against the same period last year. We have continued to invest in building sales capacity reflected in improving key sales metrics, with an increase of approximately 10% in both requirement volumes and placements, and permanent fees increasing by 16% compared to H1 2017.

The Professionals business opened 33 new client relationships in the first half. The private sector represents over 60% of new clients that were opened in the half; many of these are SMEs in the Digital space. The greater volume is with multiple hires, more typical where we have a strong reputation in the Public Sector which continues to form the backbone of opportunity for the Professionals business. We have successfully won places on a number of new frameworks including Ordnance Survey, NEST (National Employment Savings Trust) and Northern Ireland Water. In addition, Parity Professionals has strengthened the relationship with Scottish Water who have reduced their suppliers from 5 to 2 for their new framework covering the next 5 years. In the private sector, we have been awarded frameworks with a number of housing associations such as the Radian Group, broadened our client base in utilities, and completed the successful migration of contractors from other suppliers as part of the Primark managed service award. These volume opportunities, typically agreed over a 3+ year duration, provide better long-term visibility and aid our internal resource planning.

Parity Professionals continues to work closely with the Consulting Services business, increasing the number of clients where they collaborate to ensure successful supply, increasing inter-segment revenues to £3.5m from £1.7m in H1 2017, and providing internal permanent recruitment services to support both back-office operations and client delivery. 

Our Market

Market reports (Report on Jobs published 8 August 2018 by IHS Markit and the Recruitment and Employment Confederation) indicate that IT and Computing was the most in-demand category for permanent recruitment, and demand continues to build for contract positions against a backdrop of reducing supply of skilled workers. This continues to drive demand for both project delivery and staff augmentation services despite some uncertainty surrounding Brexit and potential interest rate rises. This market activity coupled with our framework success has increased the volume of opportunity whilst retaining our enduring customer relationships as a strong foundation from which to sustain growth.

Current Trading and Future Prospects

The Consultancy Services business has recruited new sales and marketing leadership, with early signs of success targeting data consulting and analysis. So far they have been able to demonstrate clear evidence of positive impact for the client, giving confidence in the approach we are taking to build our service proposition in target markets. In addition to these new and exciting service offerings, we continue to drive our project delivery and managed services projects winning a number of smaller opportunities with both established and new clients. Whilst revenue growth in Consultancy Services has been strong, there remains plenty of opportunity for accelerating growth in the consulting and project delivery service lines as we invest to further develop our propositions.

Within Parity Professionals, our improving sales metrics have driven recovery from the drop in contractor volumes experienced in Q1 2017 which resulted from the change in the IR35 legislation. Nevertheless, recovery has taken longer than we would have anticipated with a sustained higher level of contract worker churn. In response to this we have invested in measured headcount growth to deliver permanent recruitment services, and continued to support sales growth targeting higher demand skillsets. We are encouraged by the impact of the new staff to support revenue growth in our traditionally stronger second half.

Post close, we have successfully tendered for the Crown Commercial Service Management Consultancy 2 framework for consultancy and project delivery into the Public Sector. We have also secured additional new project work with the Department for Education for the Education and Skills Funding Agency. The Professionals division has a growing pipeline of larger framework opportunity for IT recruitment and managed services.

We will continue to invest in senior consulting expertise, sales and marketing, and in permanent delivery headcount as repeat revenues build, driving utilisation and enhancing long-term operating profit. We are confident in our ability to sustain organic growth through controlled investment in capacity and capability, evidenced by the progress made to date and the market opportunities that we have identified. We will also consider opportunities to build this business should the right opportunity arise to accelerate growth.

The improving financial results to date and the Group's pipeline of opportunities underwrite the Board's confidence in the Group's longer-term growth prospects. Whilst we are experiencing a short-term client-side delay on one large contract, the rest of the Group is performing in line with Board expectations. Without any further delays, we expect a stronger second half, in line with the Group's traditional seasonality, and to deliver on current expectations for the year as a whole as our investment in the Group continues to drive revenue and profit growth, supporting cash flow improvement and generating further 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 2017 Annual Report remain applicable for the final six months of this financial year. The Group's 2017 Annual Report is available from the Parity 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 2018

Consolidated condensed statement of comprehensive income

For the six months ended 30 June 2018

Consolidated condensed statement of changes in equity

For the six months ended 30 June 2018

Six months to 30 June 2018 (Unaudited)

Six months to 30 June 2017 (Unaudited)

Year to 31 December 2017 (Audited)

Consolidated condensed statement of financial position

As at 30 June 2018

Consolidated condensed statement of cash flows

For the six months ended 30 June 2018

Notes to the interim results

1 Basis of preparation

The condensed financial statements comprise the unaudited results for the six months to 30 June 2018 and 30 June 2017 and the audited results for the year ended 31 December 2017. The financial information for the year ended 31 December 2017 does not constitute the full statutory accounts for that period. The Annual Report and Financial Statements for 2017 have been filed with the Registrar of Companies. The Independent Auditor's Report on the Annual Report and Financial Statements for 2017 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 2018 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.

Going concern

The directors are satisfied that the Group has sufficient resources to continue in operational existence for the foreseeable future. Accordingly, they continue to adopt the going concern basis in preparing these 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 year ended 31 December 2017 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 2018. 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. IFRS 9: Financial Instruments and IFRS 15: Revenue from Contracts with Customers were adopted from 1 January 2018. As stated in the Annual Report and Accounts for the year ended 31 December 2017 these have not had a material impact on the financial statements.

The Group is reviewing the impact of on the financial statements of the relevant forthcoming standards, including IFRS 16: Leases (effective 1 January 2019). 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.

2 Segmental information

3 Finance costs

The interest expense on financial liabilities represents interest paid on the Group's asset-based financing facilities.

4 Taxation

Continuing operations

5 Discontinued operations

In April 2018 the Group sold Inition Limited. As such, Inition's operating result for the current and comparative periods, as well as the loss on disposal of Inition and impairment of goodwill associated with the Inition cash generating unit is presented as discontinued.

The post-tax loss on disposal of Inition Limited was determined as follows:

5 Discontinued operations (continued)

The post-tax result of discontinued operations was determined as follows:

The discontinued operations revenue in both 2018 and 2017 related entirely to Inition Limited. The debtor insolvency dividend represents a one-off payment received from the administrators of Atraxis AG and relates to a bad debt previously written off by a former Group subsidiary registered in Switzerland. The discontinued operations tax credit of £173,000 for the six months to 30 June 2018 is a research and development tax credit claimed by Inition Limited.

The cash flows related to discontinued operations are as follows:

Net proceeds received upon the disposal of Inition Limited were as follows:

6 Earnings per share

Basic earnings per share is calculated by dividing the basic earnings 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 dilutive potential ordinary shares.

As at 30 June 2018 the number of ordinary shares in issue was 102,624,020 (30 June 2017 and 31 December 2017: 102,124,020).

7 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 2017 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 IAS 19 valuation as at 30 June 2018:

8 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.

9 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 (2017: none).

10 Post balance sheet events

There are no post balance sheet events to report.