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Parity Group plc announces its interim results

Parity Group plc, the UK IT Services Company, announces its interim results for the six months ended 30 June 2010.
Headlines:
Group revenues down 16% at 52.59M (2009: 62.79M)
Parity Resources operating profit* of 1.10M (2009: 1.35M)
Parity Solutions operating loss* of 1.12M (2009: 0.13M)
Exceptional costs due to restructuring of 1.02M
Provision for potential property costs on discontinued business of 0.83M
Group loss for the period of 3.65M (2009: 0.37M)
Net borrowings at period end of 5.02M (2009: 6.30M)
New Chairman and CEO both appointed 1st June 2010
Major cost-cutting and restructuring started in June continues into the
second half
New market focus being implemented for 2011
Renewal of Cabinet Office Fast Stream graduate selection contract
Creation of Talent Management division

Operating profit / operating loss in this narrative statement refers to the segment profit / loss before tax and exceptional items.STATEMENT BY THE CHAIRMAN & THE CHIEF EXECUTIVE
Overview:
It was clear to us when we arrived in early June that urgent action was required to reverse an unexpected decline in performance in the first half of 2010. In our trading update in July 2010 we made this clear and indicated cost-cutting actions and revised expectations, with which these reported results are in line. We have since made a second round of cost-cutting as flagged therein, involving further redundancies.
In the projects area of Parity Solutions, there has been a decline in revenues both from the public sector generally and also due to a lower win rate and increased competition. The other two thirds of Solutions remained stable in the period. We have now withdrawn from the increasingly competitive large fixed-price projects market and adjusted the cost base appropriately. We have also taken a revised view of a project dispute in this business.
Exceptional costs reflect decisions taken in the first half with respect to both excess property and staff and directors leaving the company. The sale of the Parity Training business in early 2009 has proved to be expensive with a potential further property cost resulting from this business going into administration as announced in July 2010. The Group's excess property is being marketed aggressively. All central costs are under review to ensure they are at the appropriate level for our new reduced size.
Net borrowings, which are all in the form of invoice discounting, have reduced to 5.0M. As further described below, we are already taking a number of steps intended to address the negative cash impact in the coming months of the revenue decline and consequent restructuring costs.
Alongside these actions the Board is developing a new market-focussed strategy for the business centred on our particular skills and the growth markets that require them, including the creation of a new Talent Management division.
Parity Resources:
PerformanceA decline in public sector business resulted in revenues down 15% on the same period last year at 44.50M (2009: 52.60M). Operating profit* at 1.10M was 2.5% of revenues compared to 2.6% in the same period last year.
Compared to the second half of 2009, average contractor numbers fell by 3% while average gross margin held up well at 8.3% compared to 8.4%.
Strategy
It is important to continue to win government business and therefore pleasing to be selected again as a Tier One supplier under all four relevant categories of the Buying Solutions non-permanent staff framework agreement.
Private sector business is growing and now represents some 25% of revenue. We expect this to increase further with a new sales proposition being launched shortly.
Parity Solutions:
Performance
Overall, divisional revenues were down 21% on the same period last year at 8.09M (2009: 10.21M) and are expected to fall further in the second half. The projects business, which has represented a third of Solutions revenue, had a very poor six months. One project over-ran resulting in significant extra costs in this period. A number of larger projects were bid for which, with hindsight, Solutions were unlikely to win. The consequence was a low win rate and a very significant reduction in revenues in this one area in the last three months of the period. The application management and graduate selection and development business units continue to perform well, whilst defence remains stable.
Actions to reduce costs were taken in July, and again more recently following an internal review, to better align divisional costs to the revenue now expected in the second half of 2010. There was also a need for simpler business processes and better management information.
Strategy
We conducted a thorough review of the division's capabilities and were encouraged. We have concluded that we need to focus on a few well-defined offerings, with a greatly improved sales and commercial capability, and with the more agile processes needed for smaller projects.
Parity Solutions will be renamed Parity Systems and will add to its established business units a new focus as a Microsoft Gold Partner on their Cloud and Sharepoint businesses, where we have established capabilities and will recruit additional talent. A reorganised sales capability will be focussed on the exciting growth prospects ahead particularly with Microsoft switching the great majority of future R & D to its Cloud offering as announced this year.
We are also forming relationships with external partners small companies with particular skills in mobile internet devices and visualisation technology. The increasing use of iPads and smartphones in the workplace and the trend to visual rather than text communication are both important to our future Systems business.
Having reduced the business to a solid base in the second half of 2010 we look to a sharper Systems division to resume a growth path next year focussed on growth market sectors.
The coming months will see the launch of a new graduate Talent Management division alongside Parity Resources and the renamed Parity Systems divisions. Talent Management will be based round our successful businesses in graduate development at our Belfast centre and the renewal announced today of the Cabinet Office Fast Stream graduate selection contract. This is an exciting market for Parity and we are well-placed to take advantage of current government and industrial interest in the selection and development of new graduates.
Costs of Restructuring and Property:
Exceptional costs in the period amounted to 1.02M of which 0.52M was staff-related and 0.50M in respect of future costs of additional vacant property. We expect further staff reduction costs of around 0.50M in the second half.
The full effect of the cost-cutting actions will not be felt until 2011 with an anticipated annualised saving of over 2.5M. Some improvement will show through at the operating level in the second half of this year.
In addition the mid-year administration of the former Training business, which had been sold in February last year, left our Group exposed to guarantees on two property leases, with a total possible exposure over the next two years of 1.36M. Provisions of 0.83M have been made in the period in this respect, reflecting sub-let expectations.
Cash:
Net borrowings were 5.02M at the end of the period (2009: 6.30M). The borrowing facilities available to the Group are currently all in the form of invoice discounting facilities. The decline in revenue reduces the facilities available to the Group. In addition, there is expected to be further cash outflow in the second half of 2010 from the ongoing restructuring programme. We are therefore taking the necessary action which we believe will ensure that adequate working capital facilities are available to the Group to fund the expected cash outflows until all the restructuring costs have been taken later in the year.
Our People:
It is a difficult time for our managers and staff as we make essential cuts in central and divisional costs in order to bring costs and revenues back into balance. Many redundancies have been required including highly qualified professionals, which is not pleasant in a people business and can be distracting. Fortunately there is a clear understanding inside the business that these moves were overdue, as was the overhaul of the Solutions offerings and sales front-end. We thank all our people for facing up to difficult decisions and their continued determination to get Parity back to where it should be in our industry - an IT services leader focussed on today's market demand.
Principal Risks and Uncertainties:
There are a number of potential risks and uncertainties that could have an adverse impact on the Group's long-term performance. Risk management is seen as an important element of internal control and is used to mitigate the Group's exposure to such risks. The key risks facing the business and how they are addressed are outlined below.
Resources
The Resources business continues to focus on higher level, higher margin skills in order to mitigate the impact of pricing pressure in the market. The recent success in being reappointed to the public sector Buying Solutions non permanent staff framework as one of four suppliers, where previously there were ten, is important to maintaining this revenue in a reducing market, whilst commercial business grows in a better market.
Solutions
The Solutions business will continue to operate in areas where Parity has market presence and established capabilities, enhanced by new initiatives in cloud computing, mobile internet devices and visualisation. The business will exit from the large fixed-price projects arena. The second half of 2010 will see significant restructuring, a focus on a few key growth areas and a new sales strategy.
Cash
The sharp decline in revenue and the costs of restructuring the business and reducing the cost base will have a negative impact on the facilities available to the Group and cash flow in the coming months, which will require careful cash management. Steps are being taken which we believe will ensure adequate facilities exist to cover this short term situation.
Human Resources
Our people are an important element of our service and having appropriately trained staff helps us mitigate the risk of poor service delivery. Our performance management system ensures that staff have clear objectives and are appropriately rewarded for the outcome, while also identifying training and development needs.
Technology risk
We rely on our IT, telecommunications and infrastructure systems to perform and manage the services we provide to clients. The Company engages with its service providers and reviews its own disaster recovery systems regularly in order to minimise the risk of prolonged disruption to systems.
Property
The Group has excess property, due to its reduced size, which is normally leasehold and which the business seeks to sub-let wherever possible to reduce the future impact on performance.
Regulatory and legal
The Board takes corporate governance compliance seriously and details of how we comply are included in our Annual Report. The Board recognises that non-compliance with relevant laws and regulations can result in substantial fines or penalties. Suitable controls are built into our service delivery processes.
Future Prospects:
The second half of 2010 will be difficult as the cost reductions are completed and the new focussed business divisions prepare their sales offerings and professional staff for a new start in 2011. Whilst the cost reductions will improve the operating performance through this period, the Group will clearly not be profitable in the period. As noted above, the securing of further facilities is in active discussion already and cash will need to be managed tightly.
We are determined to start next year in good shape with an efficient business focussed on future growth markets with the needed latest technology skills. The Board believes that this new market focus will provide a base for improved performance from next year, in line with our commitment to improving shareholder value.
This is not the first time that your new directors have been brought in to a turnaround situation and we are setting about the task at hand with enthusiasm and confidence. Parity has an excellent reputation, prestigious customer base and high quality professionals all of which will stand us in good stead as we move forward.

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