Xchanging plc. Half year report for the six months ended 30 June 2009

Xchanging plc Half year report for the six months ended 30 June 2009

Contents Highlights for the period Page 1 Key performance indicators Page 2 Business and financial review Page 3 Consolidated income statement Page 11 Consolidated statement of comprehensive income Page 12 Consolidated statement of changes in equity Page 13 Consolidated balance sheet Page 14 Consolidated cash flow statement Page 15 Notes to the consolidated financial information Page 16 Statement of Directors responsibilities Page 29 Independent review report to Xchanging plc Page 30 Shareholder information Page 31

Highlights for the period Financial highlights six months six months ended ended 30 June 2009 30 June 2008 Increase Revenue 367.1m 266.8m 38% Underlying operating profit 1 25.3m 18.3m 38% Xchanging s share of underlying operating profit (XEBIT) 1 20.3m 14.3m 42% XEBIT margin 5.5% 5.4% +15 basis points Xchanging s share of underlying profit after tax 2 14.6m 11.7m 25% Underlying EPS basic 6.2p 5.4p 14% 1 Underlying operating profit excludes exceptional items (H1 2009: 12 million, H1 2008: Nil) and amortisation of intangible assets previously unrecognised by acquired entities (H1 2009: 4.5 million, H1 2008: 0.3 million). In prior years, IFRS 2 share-based payment charges were also excluded from underlying operating profit. In the current year, IFRS 2 share-based payment charges (H1 2009: 1.3 million) are included in underlying operating profit, to align with current market practices. The prior year comparatives have been restated to enable a like-for-like comparison (H1 2008: 1.0 million). 2 Underlying profit after tax excludes exceptional items, amortisation of intangible assets previously unrecognised by acquired entities, imputed interest on put options and employee loans and the related tax thereon. Key points Revenue growth of 38% driven by strong underlying performance and Cambridge acquisition. XEBIT growth of 42% highlighting cost discipline and margin expansion (+15bps). Integration of Cambridge Solutions progressing successfully. US restructuring programme largely complete. Added over 500 new customers mainly in the US and Asia. Strong incremental customer demand despite difficult economic conditions. Over 900 million of new contract wins and renewals. Increased opportunities in the pipeline. Consolidation of German investment account administration market with FondsServiceBank acquisition (expected to complete in early 2010). David Andrews, CEO of Xchanging, commented: Despite challenging economic conditions, we have to deliver profitable growth in the first half of the year. We have good revenue visibility for the rest of the year and a growing pipeline of opportunities. The successful integration of Cambridge delivers our IPO aim of establishing a global footprint. We now have more than 1,000 customers globally and we are ideally positioned to cross sell our broad range of BPO and IT services to meet their requirements. We therefore believe that Xchanging is well placed to take advantage of the next growth phase in the global BPO market. 1

Key performance indicators Revenue Growth ( million) (2005 2009) 557.8 Full Year Half Year 468.2 350.0 393.5 367.1 266.8 187.9 222.4 2005 2006 2006 Revenue increased 38% from H1 2008 to H1 2009 2007 2007 2008 2008 2009 XEBIT (restated) ( million) (2006 2009) XPAT (restated) ( million) (2006 2009) 557.8 20.3 557.8 14.6 11.7 14.3 8.3 10.4 6.8 8.2 H1 2006 H1 2007 H1 2008 H1 2009 Underlying operating profit attributable to Xchanging shareholders (XEBIT) grew by 42% from H1 2008 to H1 2009. H1 2006 H1 2007 H1 2008 H1 2009 Underlying profit after tax attributable to Xchanging shareholders (XPAT) grew by 25% from H1 2008 to H1 2009 XEBIT margin (%) (2006 2009) Underlying basic EPS (pence) (2007 2009) 5.4 557.8 5.5 14.4 4.4 4.7 11.5 4.6 5.4 6.2 H1 2006 H1 2007 H1 2008 H1 2009 XEBIT margin has increased 15 basis points from H1 2008 to H1 2009 H1 2007 FY 2007 H1 2008 FY 2008 H1 2009 Underlying basic earnings per share grew by 14% from H1 2008 to H1 2009 2

Business and financial review Executive summary Financial overview It has been a challenging yet successful first half of 2009 for the Group. Reported revenue for the six months ended 30 June 2009 was 367.1 million, an increase of 38% on the previous half year (H1 2008: 266.8 million). Underlying operating profit attributable to Xchanging shareholders (XEBIT) grew 42% to 20.3 million (H1 2008: 14.3 million), with operating margins up 15 basis points to 5.5%. Underlying basic earnings per share (EPS) grew 14% to 6.2p from 5.4p. We completed the acquisition of Cambridge Solutions on 9 April 2009 but it has been consolidated from 1 January 2009, which was deemed to be the date of change of control. Organic growth was 8.8% compared with H1 2008 driven by additional services to the existing customer base particularly in UK insurance and Germany, and the impact of new contracts. We have also benefited from exchange rate gains, mainly against the Euro. This growth has been partially offset by lower volumes in banking and weak Business Support revenues across the board. Excluding Cambridge, XEBIT grew 17.5% and operating margins increased by 43 basis points to 5.8%. Margins improved due to revenue growth, productivity improvements and leveraging central costs. Cambridge made a contribution to the Group of 76.8 million of revenue and 3.4 million of XEBIT with an XEBIT margin of 4.4%. Underlying profit after tax attributable to Xchanging shareholders grew by 25%. The Group held 63.4 million in cash at the end of the period. Business overview During the first half of 2009, we have to see strong demand for our services despite the adverse impact on certain parts of our business arising from the economic slowdown. We have won a number of new contracts and achieved a 100% contract renewal rate. To date, the aggregate contractual value of business won has been over 900 million. Highlights have been: a five-year procurement contract with Alexander Mann Solutions a seven-year contract with Aon Benfield to provide insurance broking services in the UK an enterprise licence agreement with QBE and associated implementation services The integration of Cambridge is going well, with the major US restructuring programme successfully completed in the first half. We are actively participating in the consolidation of the investment account processing market in Germany. Our acquisition of FondsServiceBank (FSB) makes us the leading independent provider of investment account administration services in Germany. Finally, we have significantly enhanced our senior and middle management team to support our planned move to a regional reporting structure and to position the company for growth. Outlook The slow down in the economic activity has had an adverse effect on certain parts of our business, particularly in transaction processing and areas of discretionary spend such as IT. This slowdown is consistent with the trends being reported by industry commentators such as IDC. Encouragingly, today s US$120 billion global BPO market is forecast to bounce back with the market increasing by more than 50 billion over the next 4 years. We believe that Xchanging is particularly well placed to take advantage of this next growth phase in the global BPO industry. With the integration of Cambridge, we have more than 1,000 customers around the globe, a large proportion of whom are in the US, the largest BPO market in the world. We have a significant opportunity to broaden and deepen our relationships with these customers leveraging our broad range of offerings to meet their business processing requirements. We should also benefit from higher levels of transactions and discretionary spend as the global economy recovers. We have good revenue visibility for the rest of the year and beyond and we are seeing considerable interest from existing and new customers who are looking to reduce costs and minimise investment in their non-core operations. We have a well stocked pipeline with 30 opportunities each having more than 20 million of annual value: 18 opportunities are in the Interest stage*, eight opportunities in Shaping*, two opportunities in Validation* and a further two in Conclusion*. The pipeline is larger than this time last year as companies are now moving beyond tactical measures and are seeking structural solutions for their back offices. * Note: Interest stage establishing and developing initial interest by customer; Shaping agreeing the size and scope of the deal with the customer. Concludes with Memorandum of Understanding; Validation performing detailed due diligence. Concludes with Letter of Intent; Conclusion Final preparation. Concludes with contract. 3

Business and financial review Creating value for shareholders Xchanging is focused on delivering value for shareholders by leveraging our key strengths: strong competitive position sustainable growth high revenue visibility margin upside proven management Strong competitive position With the Cambridge acquisition Xchanging has enhanced its strong competitive position and we believe that we are well positioned to capitalise on the rapid growth that is forecast in the global BPO market over the next few years. First, we are one of only a handful of companies able to provide services to multinational customers on a global basis. We already have an enviable list of blue-chip customers across the globe, in a diversified range of industries including insurance, banking, retail, manufacturing, real estate and logistics. Second, we specialise in managing complex and large-scale processes where we have the opportunity to become the business processor of choice for specific industry niches, such as securities processing, claims processing and investment account administration services. The effective delivery of these services necessitates a balanced onshore/offshore model that is again difficult to replicate. Finally, we have a track record in managing processes in regulated environments. Sustainable growth IDC forecasts a $50 billion increase in the global BPO market over the next four years to $172 billion by 2013, a compounded annual growth rate of 10%. Xchanging, with a global footprint providing a full range of BPO offerings, is a recognised leader in BPO and is well positioned to capitalise on this future growth. With the Cambridge acquisition we have added over 500 new customers to the Group. This gives us a huge opportunity to provide additional services to the existing customer base where we still have a relatively small share of their back office spend. We therefore believe that sustainable growth will come from new customers in a structural growth market as well as from building deeper relationships with a broader customer base. Both of these drivers are evident in our pipeline. High revenue visibility Revenue visibility is underpinned by long-term contracts and high customer stickiness. The Group typically has well over 80% visibility of the revenues to be achieved in the year at the beginning of that year and around 90% visibility by the middle of the year. Certain segments of our business, particularly in respect of transaction volumes and asset values in the banking sector, claims volumes in the US, IT and Business Support revenues are exposed to general economic conditions. The revenues we consider to be at risk account for only around 20% of the Group s revenues. Margin upside Our focus has consistently been on profitable growth, growing XEBIT margins from 3.5% in 2004 to 5.5% in H1 2009. This has been achieved during a period of significant revenue growth resulting in significant growth in earnings per share over the period. Cambridge s margins are broadly in line with where Xchanging was in 2005. We therefore expect to be able to improve the Cambridge margins, especially following the restructuring of the US BPO business. We continue to expect to be able to grow margins at the Group level for the following reasons: adding volumes to our existing platforms ongoing consolidation of processing centres into larger hubs nearshoring and offshoring leveraging central costs as the Group continues to grow Proven management We have a strong management team with a proven track record. At its core, there are a number of individuals who have led the business since its inception ten years ago. We have also added breadth to the senior and middle management teams over the past six months. At the senior executive level we have added Matthias Sohler (Head of Continental Europe), Stewart McCulloch (Head of UK), Lori Doyle (Head of Marketing) and Daniel Kasmir (HR Director). At the next level we have added very experienced Heads of Business Development in the Americas, Continental Europe and the UK. We have also strengthened operational management. In all, we have recruited over ten senior managers to position ourselves for the next growth phase of the company. We continuously seek to identify and hire talented people. We are in the process of introducing a Global Learning Management System which will allow us to extend the development and skills of our global workforce. 4

Business and financial review Delivering on our strategy We have a clear three pronged strategy aimed at accelerating growth and creating shareholder value: grow existing platforms add new platforms become the lean processor Growing existing platforms UK In broking services, we have extended our relationship with Aon by taking on the processing for Aon Benfield. This is a seven year contract to provide insurance broking services in the UK. The contract commenced on 1 April 2009 and is progressing well. We have also benefited from the Cooper Gay contract which we did not have in H1 2008. A key achievement in the London Insurance Market has been the completion of the project to upgrade the Insurance Market Repository (IMR). The new IMR platform was launched in early July 2009. Xchanging, together with the London Market, has built and implemented the upgraded IMR to cope with the expected increase in volumes through to 2012 and to deliver significant improvements to the service. This is expected to generate additional revenues over the next four years. In claims processing, we have successfully concluded discussions on the future for claims processing with the London Insurance Market. We have also made significant improvements in premium processing time for underwriters through electronification and global balancing of resources within Xchanging. For instance, processing time for query free submissions has improved by 35%. Our Hosting business continues to grow strongly reaping benefits from significant investments made in the past few years. In Business Support, we have signed a service contract with CapGemini to provide UK immigration processing and compliance. Continental Europe During the period we announced our agreement to acquire the FondsServiceBank (FSB) business unit for a total consideration of 21.4 million ( 19.1 million). FSB is the investment account administration services business unit of DAB bank AG and had revenues of over 40 million in 2008. The acquisition will maximise scale benefits through the consolidation of over 460,000 accounts onto our modern, low cost platform in Hof, Germany. The acquisition will also strengthen Xchanging s market position as a high capacity, independent provider of retail investment account management services in Germany. The acquisition is expected to complete in early 2010. In Xchanging Transaction Bank, we have completed the first phase of the implementation of systems and processes relating to the German withholding tax law (Abgeltungssteuer). This has led to an increase in the scope of services delivered to our customers. Asia Pacific In Australia, we were appointed to manage the Workers Compensation claims for the Melbourne Health Network, incorporating the Royal Melbourne Hospital. This is the largest health network in the State of Victoria with 8,500 employees. Xchanging will now handle over 50% of the health market in the State of Victoria. Americas In the first six months, we have secured over ten new contracts in the US BPO business with c.$9 million aggregate contract value. We have also been very successful in renewing our contracts, achieving a 100% contract renewal rate. To date, we have renewed contracts with an expected total contract value of c.$65 million. At the same time, wherever possible, we have been successful in improving the underlying contract terms. In Insurance Software, we signed an enterprise licence agreement as well as associated implementation services with QBE. QBE have agreed to take the first front-office modules of our flagship.net insurance application platform (XIAP) and have options on the remaining modules as these are developed. We have also achieved several renewals in IT outsourcing including contracts with DHL and the Singaporean Government. 5

Business and financial review Global Procurement During the period we signed an 825 million, five year Procurement Outsourcing contract with Alexander Mann Solutions (AMS), the leading global Recruitment Process Outsourcing provider. This is the largest Procurement Outsourcing contract in Xchanging s history and one of the largest of its kind in the industry. Under the contract Xchanging will manage indirect spend on behalf of AMS across the UK, Germany and Denmark. Xchanging will also provide fully managed global procure-to-pay services including transaction processing and systems and order management. Services under the contract started in July 2009. Adding new platforms Having taken operational control on 1 January 2009, the acquisition of Cambridge completed on 9 April 2009. The strategic rationale of the acquisition of Cambridge is as valid today as it was when we decided to buy the business 12 months ago. Cambridge provides us with new claims processing platforms in the US and Australia, and has also given us scale in India and an enhanced global IT capability. Cambridge also brings a diverse customer list with over 500 new customers. We are currently pursuing opportunities with a number of these. We are pleased with the progress of the Cambridge integration which is running on schedule. Implementation teams are on the ground in the US, Australia and India. We have also strengthened the management teams, particularly in the US and Australia. The restructuring of the US BPO business has gone according to plan and is now complete. The key achievements include: 45 sites consolidated into seven regional centres of excellence and a focused group of client/regulatory specific offices filled 170 positions in the consolidated offices with a net reduction of 120 positions successfully transferred over 40,000 files moved over 100 people into a flagship Xchanging Head Office and processing centre in Chicago Becoming the lean processor We have our emphasis on standardising production and using technology to drive profitability across our businesses. Specifically, we are driving lean processing across the group through: leveraging our newly acquired IT capabilities in India to reduce external spend continuing the offshoring and nearshoring of labour-intensive work applying automated solutions for capacity management and workflow We continue to seek to reduce the number of processing centres we operate from, with the aim of concentrating production in centres with in excess of 1,000 employees. We have selected the location for our flagship US processing centre and preparations are underway to commission this in H1 2010. We are also looking to expand our operations in India by moving work to Tier 3/4 cities that offer lower costs, such as Shimoga. 6

Business and financial review The Group s KPIs are detailed below: six months six months ended ended 30 June 2009 30 June 2008 Increase Revenue 367.1m 266.8m 38% Xchanging s share of underlying operating profit (XEBIT) 20.3m 14.3m 42% XEBIT margin 5.5% 5.4% +15 basis points Xchanging s share of underlying profit after tax 14.6m 11.7m 25% Underlying EPS basic 6.2p 5.4p 14% Cash generated from operations (pre-cash exceptionals) 33.0m 34.2m Cash conversion (pre-cash exceptionals) 130% 177% Profit growth Underlying operating profit (EBIT) grew 38.4% to 25.3 million (H1 2008: 18.3 million) representing an operating margin of 6.9% (H1 2008: 6.9%). Statutory operating profit declined 51.5% to 8.7 million (H1 2008: 18.0 million) after recognising exceptional items of 12.1 million (H1 2008: Nil) in relation to the integration of Cambridge. XEBIT has grown 41.5% to 20.3 million (H1 2008: 14.3 million). This represents an XEBIT operating margin of 5.5% (H1 2008: 5.4%). Financial review Group key performance indicators (KPIs) The Group s KPIs have historically been calculated after adding back a number of non-cash adjustments and exceptional charges in order to present the underlying performance of the business. In prior periods, the add backs have included the IFRS 2 share-based payment charges in relation to share and share option awards (H1 2009: 1.3 million; H1 2008: 1.0 million). Over the last few years, the market has increasingly moved towards including IFRS 2 charges in presenting and analysing underlying business performance. Therefore, management believes it is appropriate to adopt this approach and to reflect this charge in its KPIs. Correspondingly, management believes that it is appropriate to focus on basic earnings per share so as not to double count the impact of share-based payments. Historical comparatives have been recalculated for presentation in these financial statements. Revenue growth Revenue for the six months ended 30 June 2009 was 367.1 million, an increase of 37.6% over the same period last year (H1 2008: 266.8 million), of which 29% ( 76.8 million) relates to revenues acquired with the consolidation of the Cambridge Group in 2009. Organic growth was 8.8% of which 4.7% ( 12.5 million) was as a result of favourable movements in our major trading currencies, in particular the Euro. Organic growth was driven in the UK region by revenues earned on the Insurance Market Repository (IMR) in 2009 and contracts won in the second half of 2008 (Cooper Gay) and early 2009 (Aon Benfield). There was also growth in services in our German securities processing business but this was offset by lower volumes of activity and reduced asset values in our funds administration business. Revenue visibility The Group uses a revenue visibility measure which represents revenue which can reasonably be expected to arise in the year from current customers where we have in place a contractual relationship. We have undertaken a thorough review of visibility at the half year in the light of the economic climate and incorporating the Cambridge business. On this basis visible revenue for the year, at the half year, was 667.2 million which included 131.4 million relating to the acquired Cambridge business (H1 2008: 492.4 million). Xchanging s share of underlying profit after tax grew 24.8% to 14.6 million (H1 2008: 11.7 million). This represents a margin of 4.0% (H1 2008: 4.4%). Growth in profit after tax was substantially lower than growth in operating profit due to the adverse movement in finance expense compared with the previous year. Margins XEBIT margins have increased by 15 basis points to 5.5% (H1 2008: 5.4%). Operating margins have improved in the UK Region due to revenue growth (the signing of the Cooper Gay and Benfield contracts), the benefits of the UK consolidation and improvements in productivity. These positive drivers of margin have been offset by the lower margin of the acquired Cambridge business (4.2%), together with margin falls in Continental Europe and Global Procurement. Exceptional costs The Group posted exceptional charges of 12.1 million during the period (H1 2008: Nil), associated with the integration of Cambridge (see note 4 in the notes to this half year report). The majority of this was associated with the restructuring of the US BPO business, with 45 sites being reduced to 16 principal offices in the first half of the year. The table below details the adjustments to operating profit to determine XEBIT. 7

Business and financial review XEBIT six months six months ended ended 30 June 2009 30 June 2008 m m XEBIT 20.3 14.3 Underlying profit after taxation attributable to minority interests 5.0 4.0 Underlying operating profit 25.3 18.3 Less: Exceptional items (12.1) 0.0 Amortisation of intangible assets that were previously unrecognised by an entity acquired by the Group (4.5) (0.3) Statutory operating profit 8.7 18.0 Basic / diluted earnings per share six months six months ended ended 30 June 2009 30 June 2008 m m Xchanging share of underlying profit after tax 14.6 11.7 Weighted average number of shares in issue 235.0 215.1 Underlying basic earnings per share (pence) 6.2 5.4 Xchanging share of underlying profit after tax 14.6 11.7 Weighted average diluted number of shares 240.0 223.7 Underlying diluted earnings per share (pence) 6.1 5.2 Earnings per share When considering earnings per share, the Group considers it appropriate to use Xchanging s share of underlying profit after tax as described above, as it represents the underlying performance of the business. Further, management believes that it is appropriate to focus on basic earnings per share so as not to double count the impact of share-based payment charges, which are included in the underlying profit after tax. Basic earnings per share has grown 14.4% to 6.2 (H1 2008: 5.4). The improvement in earnings per share has been driven by growth of 24.8% in Xchanging s share of underlying profit after tax. At basic EPS level, this growth has been diluted by an increase in the average number of shares in issue by 9.2% to 234.9 million shares (H1 2008: 215.1 million shares). The increase in the average number of shares in issue is due to the issue of 15.2 million shares as part consideration for the acquisition of Cambridge in April 2009 and the exercise of options resulting in the issue of 0.7 million shares (0.2 million on weighted average basis). Finance cost Net finance cost (pre exceptional items, imputed interest on put options and imputed interest on employee loans) increased to 1.5 million (H1 2008: 2.8 million finance income). Finance costs include interest charges incurred in 2009 relating to the Group facility (this facility was not in place at the 2008 half year). In addition, finance costs of 1.5 million have been incurred by the acquired Cambridge entities in 2009 relating to the servicing of several debt facilities and loans held primarily in the US and India. Finance income has decreased across the Group due to the lower interest rates earned in the current economic environment on cash balances held with commercial banks. Taxation The Group s effective tax rate on Xchanging s share of underlying operating profit before tax was 26.7% (H1 2008: 30.1%). The effective tax rate improved as a result of the utilisation of tax losses in the central services entity. The Group s statutory effective tax rate, before exceptional items, was 25.6% for the period (H1 2008: 29.8%). Segmental performance Xchanging has changed its financial reporting structure from a business line to a regional basis (UK, Continental Europe, Americas and Asia Pacific) plus Global Procurement. This is to reflect the way we run the business globally. Segmental performance, based on the new regional structure is discussed below: Continental Europe Revenue in the Continental Europe region grew by 13.3% to 81.9 million (H1 2008: 72.3 million). Underlying revenue was flat with reported growth driven by the movement in foreign exchange rates between the periods. For the underlying revenues, growth from the new German withholding tax service (Abgeltungssteuer) was offset by lower volumes in securities processing and lower asset values in investment accounts. Business Support revenues were also down as our customers reduced short-term expenditure. XEBIT for the period declined by 4.7% to 5.8 million (H1 2008: 6.1 million). Margin growth from the new Abgeltungssteuer service and productivity improvements was offset by the loss of margin related to the lower securities processing volumes and Business Support revenues. The XEBIT margin therefore decreased for the period to 7.1% (H1 2008: 8.5%). 8

Business and financial review UK Revenue in the UK region increased by 12.5% to 112.4 million (H1 2008: 99.9 million). Contracts won in the second half of 2008 (Cooper Gay) and early in 2009 (Aon Benfield) in XBS have had a favourable impact on revenue. Insurance Market Repository (IMR) has also contributed to this growth. XEBIT for the period has increased by 50.5% to 14.3 million (H1 2008: 9.5 million) resulting from new and incremental business and through the scale benefits achieved from the new regional structure. The XEBIT margin has increased for the period to 12.8% (H1 2008: 9.5%) primarily due to the increased contribution to XEBIT from XBS, productivity improvement and leveraging management overhead across the enlarged business resulting from the restructure into regions. Americas The Americas region revenue of 76.7 million includes 61.1 million relating to the acquired Cambridge business and 15.6 million (H1 2008: 15.0 million) relating to the existing Insurance Software business. The Americas revenue for the period included 1.6 million of revenue from the contract for services with Compagnie Pour Assistance Technique et Investissements S.A. announced on 12 January 2009. XEBIT of 2.3 million includes an operating profit of 0.2 million from the Cambridge US BPO and IT businesses with the existing Insurance Software XEBIT growing by 19.8% to 2.0 million (H1 2008: 1.7 million) due to improved revenue mix. The XEBIT margin for the region has dropped to 2.9% (H1 2008: 11.2%) primarily due to the historic underperformance of the acquired US BPO business which is currently showing a loss for the period, together with lower margins in the acquired IT business. Following the restructuring of the US BPO business, we expect margins to turn positive in the second half of the year. The underlying operating margin for the period has decreased to 3.0% (H1 2008: 11.2%). Asia Pacific Revenue in the Asia Pacific region of 23.2 million includes 20.0 million of revenue from the Cambridge Australian and Indian BPO businesses and 3.2 million (H1 2008: 2.9 million) of revenue related to the Business Processing Services (BPS) unit which has grown 12.2% due to increased offshoring by the Insurance and Continental Europe businesses. XEBIT of 3.7 million includes 3.2 million of profit from the acquired Cambridge business and 0.5 million (H1 2008: 0.4 million) from the BPS business. The XEBIT margin for the region has increased to 16.0% (H1 2008: 12.8%) as a result of the acquired Australian BPO and Indian BPO businesses which operate at higher margins. The adjusted operating margin for the period has increased to 20.2% (H1 2008: 12.8%). Global Procurement Global Procurement revenue has increased by 3.4% to 88.0 million (H1 2008: 85.1 million) due to growth in revenue with BAE Systems, partially offset by declines in some volume-related revenues. XEBIT has decreased by 26.0% to 4.2 million (H1 2008: 5.7 million). Margins have been adversely impacted by a mix change associated with the revenue profile of the business and reduced Business Support revenues from our operations in France. Global Procurement s XEBIT was further impacted by costs incurred in expanding the business into the US and Australia. The XEBIT margin has decreased to 4.8% in the period (H1 2008: 6.7%) reflecting the impact of the pressure on margins described above. There are no minority interests within the segment hence XEBIT is the same as adjusted operating profit. Corporate Corporate costs have increased for the period by 11.1% to 10.1 million (H1 2008: 9.1 million). This is primarily due to additional resources required to support the enlarged Group post the acquisition of Cambridge and the inclusion of Cambridge corporate resources. Corporate costs as a percentage of revenue reduced from 3.4% to 2.7% due to tight management of costs and the benefits of scale. 9

Business and financial review Operating cash flow Cash flows from operating activities (pre exceptional cash items) decreased by 4% to 33.0 million (H1 2008: 34.2 million). Cash performance is measured using a cash conversion ratio, calculated as cash generated from operations divided by the Group s underlying operating profit. Cash conversion decreased to 130% (pre cash exceptional items) (H1 2008: 177%). The drop in cash conversion is attributable to absorption of working capital, particularly in the acquired Cambridge businesses. This is predominantly due to the current economic climate with an increase in debtor days. In addition, in the US BPO business there are a number of cash based provisions recognised in the acquisition opening balance sheet. 7 million of the 12 million exceptional items were cash expenses. Capital expenditure, depreciation and amortisation The Group invested 16.2 million (H1 2008: 12.8 million) on tangible and intangible assets during the period, representing 4.4% (H1 2008: 4.8%) of revenue. The investment has mainly been in the Insurance business. We have to invest in developing products, technology and infrastructure for the electronic handling of policies and claims in the London Insurance market. 1.7 million (10.5%) of the total capital expenditure for the period related to the integration of Cambridge including premises fit out, IT infrastructure, and implementation. The depreciation and amortisation charges of 13.6 million (H1 2008: 8.2 million) represented 3.6% (H1 2008: 3.1%) of revenue. The Group capitalised 1.2 million (H1 2008: 0.2 million) as pre-contract costs, which are disclosed as trade and other receivables in the half year report. Costs directly attributable to winning a contract are capitalised when it is virtually certain that the contract will be awarded. These costs are amortised over the life of the contract; the amortisation charge for the period was 0.7 million (H1 2008: 0.6 million). Cash Cash held by the Group at the period end was 63.4 million (H1 2008: 106.1 million), of which 21.6 million (H1 2008: 59.3 million) was centrally controlled (excluding cash held by Enterprise Partnerships). As at 30 June 2009, the Group had a 90 million debt facility of which 40.0 million was available to draw down. On 31 July 2009, the Group completed all necessary steps to syndicate its debt facility and increased the total amount to 110 million. The debt facility expires in October 2012. Group risk factors As with all businesses, the Group is exposed to certain risks, which could have a material impact on the Group s longterm performance and could cause actual results to differ materially from forecast and historic results. Apart from the risk associated with the integration of Cambridge as outlined below, the principal risks and uncertainties facing the Group have not changed from those set out in the Annual Report and Accounts 2008. These include the risks associated with attracting new customers, implementation of large contracts, continuation of efficient processing, exposure to complex and technical contractual terms, successful retention of key employees, continuity and security of IT systems, and regulatory and legislative changes. For a full discussion of the risks to our future business performance, please refer to page 29 of our Annual Report and Accounts 2008 a copy of which can be found on www.xchanging.com. Poor re-alignment of Cambridge could impact customer service levels, profitability and our reputation. Management have undertaken several actions to mitigate this risk including: application of the standard approach we apply to the implementation of large new partnerships using experienced employees with strong project, change and people management skills to ensure continuity of service and retention of key employees rigorous monitoring of Cambridge integration through the monthly Xchanging Performance Committee Presentational change to the income statement The Group has made a presentational change to the income statement now presenting it in a three-column format. Exceptional items, amortisation of intangible assets previously unrecognised by an acquired entity and imputed interest on put options are presented separately in the middle column of the income statement. This allows a better understanding of the elements of financial performance in the period. The left hand column of the income statement therefore represents the underlying performance of the business in line with the Group s KPIs. 10

Consolidated income statement Unaudited six months ended 30 June 2009 six months ended 30 June 2008 Exceptional items, Exceptional items, amortisation of amortisation of intangible assets intangible assets previously previously unrecognised by an unrecognised by an acquired entity and acquired entity and imputed interest imputed interest on put options Underlying on put options Total Underlying and employee loans Total Note 000 000 000 000 000 000 Revenue 3 367,065 367,065 266,822 266,822 Cost of sales 4 (331,673) (16,591) (348,264) (239,873) (266) (240,139) Gross profit 35,392 (16,591) 18,801 26,949 (266) 26,683 Administrative expenses (10,060) (10,060) (8,645) (8,645) Operating profit 3 25,332 (16,591) 8,741 18,304 (266) 18,038 Finance costs (6,405) (632) (7,037) (4,443) (313) (4,756) Finance income 4,897 4,897 7,260 199 7,459 Profit before taxation 23,824 (17,223) 6,601 21,121 (380) 20,741 Taxation (6,098) 5,524 (574) (6,297) 113 (6,184) Profit for the period 3 17,726 (11,699) 6,027 14,824 (267) 14,557 Attributable to: equity holders of the Company 14,582 (9,316) 5,266 11,687 (267) 11,420 minority interests 3,144 (2,383) 761 3,137 3,137 17,726 (11,699) 6,027 14,824 (267) 14,557 Earnings per share (expressed in pence per share) basic 5 6.21 2.24 5.43 5.31 diluted 5 6.08 2.19 5.22 5.10 Notes 1 to 12 form an integral part of this condensed consolidated half year report. 11

Consolidated statement of comprehensive income Unaudited six months six months ended 30 June ended 30 June 2009 2008 Note 000 000 Other comprehensive income Actuarial (losses)/gains arising from defined benefit pension schemes (3,440) 950 Movement on deferred tax relating to defined benefit pension schemes 823 (331) Revaluation of available-for-sale financial assets (919) (2,075) Deferred tax on revaluation of available-for-sale financial assets 9 105 Transfer of foreign exchange movement on hedged item to cost of acquisition (3,208) Currency translation differences (8,610) 2,132 Other comprehensive (loss)/income, net of tax (15,345) 781 Profit for the period 3 6,027 14,557 Total comprehensive (loss)/income for the period (9,318) 15,338 Attributable to: equity holders of the Company (8,380) 12,587 minority interests (938) 2,751 (9,318) 15,338 Notes 1 to 12 form an integral part of this condensed consolidated half year report. 12

Consolidated statement of changes in equity Attributable to equity holders of the Company Reverse Share Share Merger acquisition Other Retained Minority Total capital premium reserve reserve reserves earnings Total interests equity 000 000 000 000 000 000 000 000 000 At 1 January 2008 10,740 73,715 409,672 (312,238) 11,032 13,661 206,582 15,336 221,918 Total comprehensive income for the period 1,172 11,415 12,587 2,751 15,338 Transactions with owners: Premium on issue of warrant 124 124 124 Share-based payments share options 923 923 923 Deferred and current income tax on share options 281 281 281 Shares issued employee share-based payments 49 695 744 744 Dividends payable (4,297) (4,297) (3,930) (8,227) At 30 June 2008 10,789 74,410 409,672 (312,238) 12,204 22,107 216,944 14,157 231,101 At 1 January 2009 10,973 76,647 409,672 (312,238) 16,492 41,042 242,588 15,792 258,380 Total comprehensive income for the period (13,646) 5,266 (8,380) (938) (9,318) Transactions with owners: Arising on acquisition (17,183) (17,183) Share-based payments share options 1,137 1,137 1,137 Deferred and current income tax on share options (335) (335) (335) Shares issued in respect of Cambridge acquisition (net of issue costs) 762 27,355 7,779 35,896 35,896 employee share-based payments 34 620 (31) 623 623 Dividends payable (5,487) (5,487) (4,296) (9,783) At 30 June 2009 11,769 104,622 409,672 (312,238) 10,625 41,592 266,042 (6,625) 259,417 Movements in the period 1 January 2008 to 30 June 2008 and the period 1 January 2009 to 30 June 2009 are unaudited. Notes 1 to 12 form an integral part of this condensed consolidated half year report. 13

Consolidated balance sheet as at 30 June 2009 Unaudited 30 June 2009 31 December 2008 Note 000 000 Assets Non-current assets Goodwill 7 228,441 95,558 Intangible assets 7 67,100 58,478 Property, plant and equipment 7 35,345 24,486 Available-for-sale financial assets 25,368 26,782 Trade and other receivables 5,736 5,586 Retirement benefit assets 304 407 Deferred income tax assets 24,586 20,043 Total non-current assets 386,880 231,340 Audited Current assets Trade and other receivables 137,502 112,451 Cash and cash equivalents 63,390 117,798 Total current assets 200,892 230,249 Liabilities Current liabilities Trade and other payables (169,504) (117,598) Current income tax liabilities (7,603) (4,443) Financial liabilities borrowings 8 (5,736) (276) other liabilities 8 (850) (974) Provisions 9 (7,356) (6,617) Net current assets 9,843 100,341 Total assets less current liabilities 396,723 331,681 Non-current liabilities Trade and other payables (12,571) (13,215) Financial liabilities borrowings 8 (40,406) other liabilities 8 (21,115) (23,145) Deferred income tax liabilities (13,220) (5,666) Retirement benefit obligations (22,564) (18,587) Provisions 9 (27,430) (12,688) Net assets 259,417 258,380 Shareholders equity Ordinary shares 11,769 10,973 Share premium 104,622 76,647 Merger reserve 409,672 409,672 Reverse acquisition reserve (312,238) (312,238) Other reserves 10,625 16,492 Retained earnings 41,592 41,042 Total shareholders equity 266,042 242,588 Minority interest in equity (6,625) 15,792 Total equity 259,417 258,380 Notes 1 to 12 form an integral part of this condensed consolidated half year report. 14

Consolidated cash flow statement Unaudited six months six months ended 30 June ended 30 June 2009 2008 000 000 Cash flows from operating activities Cash generated from operations 26,038 34,212 Income tax paid (5,791) (2,561) Net cash from operating activities 20,247 31,651 Cash flows from investing activities Acquisition expenses (3,512) (391) Acquisition cost of subsidiaries (48,803) (5,944) Cash and cash equivalents acquired with subsidiaries 3,946 627 Repayment of put option (894) Purchase of available-for-sale financial assets (454) Purchase of property, plant and equipment (9,981) (4,585) Purchase of intangible assets (5,398) (8,238) Pre-contract expenditure (1,250) (235) Proceeds from sale of property, plant and equipment 73 207 Interest received 1,409 3,391 Net cash used in investing activities (64,864) (15,168) Cash flows from financing activities Proceeds from issue of shares 636 744 Proceeds from borrowings 40,259 Repayment of borrowings (30,961) Proceeds from issue of warrants in subsidiary 124 Repayment of finance lease creditor (654) Interest paid (1,910) (424) Dividends paid to minority interests (4,296) (3,930) Dividends paid to equity shareholders (5,487) (4,297) Net cash used in financing activities (2,413) (7,783) Effects of exchange rate adjustments (7,378) (972) Net (decrease)/increase in cash and cash equivalents (54,408) 7,728 Cash and cash equivalents at 1 January 117,798 98,366 Cash and cash equivalents at 30 June 63,390 106,094 Notes 1 to 12 form an integral part of this condensed consolidated half year report. 15

Notes to the consolidated financial information 1 Basis of preparation (i) General information Xchanging plc is a limited liability company incorporated and domiciled in the UK. The address of its registered office is 13 Hanover Square, London, W1S 1HN. The Company s ordinary shares are traded on the London Stock Exchange. This condensed consolidated half year report was approved for issue on 3 August 2009. The information in this half year report has been reviewed, but not audited. (ii) Basis of preparation This condensed consolidated half year report for the half year ended 30 June 2009 has 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. This condensed consolidated half year financial information should be read in conjunction with the annual financial statements for the year ended 31 December 2008, which were prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union. (iii) Accounting policies Except as described below the accounting policies adopted in the preparation of this condensed consolidated half year report are consistent with those followed in the preparation of the Group s annual financial statements for the year ended 31 December 2008. The accounting policies are drawn up in accordance with International Accounting Standards (IAS) and IFRS as endorsed by the European Union. The Directors, having carried out a review of the Group s 2008 financial statements, have made a presentational change to the income statement in this half year report. The Group has opted to present its income statement for the six months ended 30 June 2009 and 30 June 2008 in a threecolumn format. Such presentation allows exceptional items, amortisation of intangible assets previously unrecognised by an acquired entity, imputed interest on put options and on employee loans, and the related taxation to be presented separately in the middle column of the income statement. The various line items of the income statement are therefore shown both before and after these items in the first and last columns, respectively. This allows shareholders to understand better the elements of financial performance in the current period, so as to facilitate comparison with the prior periods. Taxes on income in the interim periods are accrued using the tax rate that would be applicable to expected total annual earnings. The following new standards, amendments to standards or interpretations are mandatory for the first time for the financial year beginning on 1 January 2009 and impact the consolidated half-yearly financial information as described: IAS 1 (Revised), Presentation of financial statements : The revised standard prohibits the presentation of items of income and expenses (that is non-owner changes in equity ) in the statement of changes in equity, requiring non-owner changes in equity to be presented separately from owner changes in equity. All non-owner changes in equity are required to be shown in a performance statement. Under the revised standard, entities can choose whether to present one performance statement (the statement of comprehensive income) or two statements (the income statement and statement of comprehensive income). The group has elected to present two statements: an income statement and a statement of comprehensive income. IFRS 8, Operating segments : IFRS 8 replaces IAS 14, Segment reporting. It requires a management approach to be adopted, under which segment information is presented on the same basis as for internal reporting purposes. This new standard, combined with the management organisational and reporting restructuring exercise undertaken following the acquisition of Cambridge Solutions Limited, has resulted in a new segmental format being presented by the Group. Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision-maker. The chief operating decision-maker has been identified as the Xchanging Management Board (XMB), the primary executive body responsible for all strategic decisions. Comparatives for 2008 have been restated under the new segmental format. The following new standards, amendments to standards or interpretations are mandatory for the first time for the financial year beginning on 1 January 2009, but are not currently relevant to the Group or have not had a material impact on the Group: IFRS 1 (Revised), First-time adoption of IFRSs IAS 23 (Revised), Borrowing costs Amendments to IFRS 1 and IAS 27, Cost of an investment in a subsidiary, jointly controlled entity or an associate Amendment to IFRS 2, Vesting conditions and cancellations Amendment to IFRS 7, Improving disclosures about financial instruments Amendments to IAS 32 and IAS 1, Puttable financial instruments and obligations arising on liquidation 16

Notes to the consolidated financial information Amendment to IAS 39, Eligible hedged items Annual improvements to IFRS IFRIC 14, IAS 19 The limit on a defined benefit asset, minimum funding requirements and their interaction IFRIC 15, Agreements for the construction of real estate IFRIC 16, Hedge of a net investment in a foreign operation The following new standards, amendments to standards or interpretations have been issued, but are not effective for the financial year beginning 1 January 2009 and have not been early adopted: IFRS 3 (Revised), Business combinations IAS 27 (Revised), Consolidated and separate financial statements Amendment to IFRS 5, Non-current assets held for sale and dis operations IFRIC 17, Distributions of non-cash assets to owners IFRIC 18, Transfers of assets from customers The directors anticipate that the future adoption of those standards, interpretations and amendments listed above will not have a material impact on the Group s financial statements. 2 Financial information The financial information included in this condensed consolidated half year report does not constitute full financial statements within the meaning of section 434 of the Companies Act 2006. Statutory accounts for the year ended 31 December 2008 were approved by the Board for issue on 2 March 2009 and delivered to the Registrar of Companies. The auditors report on those accounts was unqualified, did not contain an emphasis of matter paragraph and did not contain any statement under section 237 of the Companies Act 1985. 3 Segmental reporting Following the acquisition of Cambridge Solutions Limited, the segments previously reported under Business Lines, Financial Markets, Insurance and BPS and Corporate have been restructured. The Group has determined the new operating segments based on the current management organisational structure and monitoring of performance by the Xchanging Management Board (XMB), the chief operating decision-maker. Six reportable operating segments have been identified, which form the basis of the segmental reporting note. These are the UK, the Americas, Continental Europe, Asia Pacific, Global Procurement and Central. A brief description of each segment is as follows: UK is a cross-industry sector providing insurance BPO services, human resources, finance and accounting, and technology. Services provided in the Americas segment comprise the provision of cross-industry IT products and services, alongside both workers compensation and other specialist insurance claims processing services for customers across the USA. Continental Europe is an industry specific sector in which the Group provides BPO services to Financial Markets customers. Asia Pacific contains the Group s offshore business processing services function, which provides accounting, pension administration and broking services to a range of crossindustry customers. It also includes the Australian workers compensation claims processing services business. Global Procurement is a cross-industry sector in which the Group provides procurement services to a range of customers across geographical borders. Central provides the infrastructure, resources and investment to sustain and grow the Group, including sales and commercial, performance management, implementation and business management functions. Management uses Xchanging s share of underlying operating profit/(loss) (XEBIT) as a measure of segment result. XEBIT represents underlying operating profit/(loss) attributable to equity holders of the Group. Underlying operating profit/(loss) excludes the effects of non-recurring expenditure from the operating segments such as restructuring costs. The measure also excludes the amortisation of intangible assets previously unrecognised by an acquired entity and imputed interest on put options issued to minority interests and imputed interest on employee loans. Interest income and expenditure are not allocated to segments, as this type of activity is driven by the Group treasury function, which manages the cash position of the whole Group. Management makes regular use of this measure to evaluate performance in the operating segments, both in absolute terms and comparatively from period to period, and to allocate resources among its operating segments. Management believes that this measure provides a better understanding, for both management and investors, of the operating results of its business segments for the period under review. 17