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Parity Group Looks Ahead To A Pivotal Year

Parity Group Looks Ahead To A Pivotal Year

Parity Group plc, the UK IT Services Company, announces its audited preliminary results for the year ended 31 December 2012.

Headlines

Parity Group plc reports good growth and a return to underlying profitability

• Revenues up 7.2% at &pound85.9m (2011: &pound80.1m)

• Adjusted EBITDA1 of &pound1.27m (2011: &pound0.36m)

• Group Profit before non-recurring items and tax &pound0.28m (2011: &pound0.71m loss)

• Group loss for the year reduced to &pound1.39m (2011: &pound2.30m)

• Divisional results for 2012 -

Resources

&sect &pound4.0m divisional contribution2 (2011: &pound3.5m)

&sect Contractor numbers up 15% to 880 at year end (2011: up 10% to 772)

&sect Expanded portfolio now more balanced towards private sector

Systems

&sect &pound1.29m divisional contribution2 (2011: &pound1.86 m)

&sect Margins remained stable at 20%

&sect First TechLab IP initiative announced

Talent Management

&sect &pound0.67m divisional contribution2 (2011: &pound0.46m)

&sect 14 clients gained following entry in GB market during 2012

&sect Wins included Sheffield Hallam University, the Welsh Assembly and the National Skills Academy

Philip Swinstead, Chairman of Parity, said: "The Group's revenues have increased during 2012 and the Board is particularly encouraged by the steady improvement in profitability, which we expect to continue into 2013. In a quiet IT Services market our early moves away from slowing IT sectors have been successful we will continue to review our position in this competitive market carefully.

This is a pivotal year for our Group as we press ahead with our digital media strategy in relation to which the strong performance of Inition and positive market feedback received to date gives the Board increasing confidence. We are delighted to announce today that Stephen Whyte with his 25 years' experience in marketing communications has joined the Board to lead our digital media initiative.

Trading in the early weeks of the current year has been in line with expectations.

The Board remains confident in its ability to significantly increase shareholder value through a combination of the growth of the current businesses and its new strategic initiative in digital media."

Chairman's Statement

2012 Results

I am pleased to report that we made further good progress in 2012, returning to a Group profit before tax and non-recurring items for the first time since 2009. New growth-oriented strategies have been implemented by the Board across, all divisions and the results are apparent.

Revenues increased to &pound85.9m in 2012 from &pound80.1m in 2011 and in a challenging market for IT services Resources increased its divisional contribution as did Talent Management which won 14 clients following its GB marketing initiative. In addition the Group made its first move into the digital media market with the acquisition of Inition Limited in May 2012, which has performed well achieving its first earn-out profit target three months early.

The Group's Techlab initiative agreed in principle in January 2013, a joint venture with Royal Holloway, University of London to develop their innovative social media search algorithm.

Before non-recurring items and tax the Group returned a profit of &pound0.28m compared to a loss of &pound0.71m in 2011. A Group loss for the year of &pound1.39m attributable to shareholders compares to &pound2.30m loss in 2011.

Non-recurring items in the year were &pound1.22m including transaction costs of &pound0.84m relating to the acquisition of Inition, and other on-going and aborted acquisition costs.

During the year we sublet 8,430 sq. ft. of unused office space in Wimbledon. The Group now holds no empty office space. Divisional results and current trading are discussed in the CEO's Report.

Cash, Dividend and Investments

Cash at year end was &pound2.87m (2011: &pound5.24m) following an outlay of &pound1.5m cash for the Inition first stage payment, pension deficit payments of &pound1.0m and transaction costs. There were &pound0.46m of investment costs in 2012 (2011: &pound0.69m) which completed the two year investment programme intended to reduce costs, transition the Group into profitable work and initiate its digital media strategy. The Board decided to place shares to the value of &pound0.6m (net) in January 2013 to provide funding for the Inition payment and on-going transaction costs.

Banking arrangements with PNC have been in place since late 2010 with a maximum facility of &pound15m, which the Board believes is adequate for the Group's current and future requirements. Recently this facility was extended to December 2014.

The Board has decided not to pay a dividend for the 2012 financial year but will continue to reconsider this policy each year.

Strategy

Having returned the Group to profitability the Board can concentrate on growing its Resources, Talent Management, Systems and Inition divisions whilst making strategic moves in the digital media market towards its ambition of becoming a significant early mover in the new Creative Technology sector of this market. This will be underpinned by a strong technology edge particularly in areas such as 3D, augmented and virtual reality, interactive applications and mobile App developments.

In the last quarter of 2012 we set in motion an internal de-centralisation to separate our technology businesses (Systems and Inition) from our human resources businesses (Resources and Talent management) so that they could own the central functions and services they each need to carry out their business.. The former as our embryo digital division will in future be known as Parity Digital Solutions and the latter as Parity Professionals. We expect this new structure to be more efficient and to enable further cost savings, as well as allowing a clearer focused strategy for each division.

Appointments to the Main Board

I am pleased to announce today that Stephen Whyte has been appointed a director of Parity Group plc. As CEO of Parity Digital Solutions he will lead the Group's digital media strategy. With over twenty five years management experience in marketing communications, including CEO at Acxiom Europe and McCann Erickson, he brings great experience and knowledge to our Board.

On 1st February 2013 I was also pleased to report that Suzanne Chase, a qualified lawyer and a senior executive with extensive legal and commercial experience, joined our Board as our part-time general counsel. Suzanne had previously worked with us for twelve months and her skills are very relevant to the acquisitive nature of our digital strategy..

Current Trading and Future Prospects

The Group's revenues have increased during 2012 and the Board is particularly encouraged by the steady improvements in profitability, which we expect to continue into 2013. In a quiet IT Services market our early moves away from slowing IT sectors and towards specific niche sectors have been successful but we will continue to review our position in this competitive market carefully.

This is a pivotal year for our Group as we press ahead with our digital media strategy in relation to which the performance of Inition and positive market feedback received to date gives the Board increasing confidence. With the strong management put in place over the last two years the Group is now well positioned to move forward with its plans. Trading in the early weeks of the current year has been in line with expectations.

The Board remains confident in its ability to significantly increase shareholder value through a combination of the growth of the current businesses and its new strategic initiative in digital media.

Philip Swinstead OBE, Chairman

Operating review

Overview

Over the past two years Parity has created a solid base from which to execute its expansion plans including further development of its digital marketing strategy. All divisions now return healthy margins and the cost base has been reduced.

Several new initiatives announced last year are progressing well including expansion of our Talent Management business, evolution of a Parity Technology Laboratory and our first acquisition for a number of years.

We are also consolidating our businesses into two distinct divisions. The first is focused on developing and placing skilled people (getting professional people into work). The second is focused on addressing the exciting and emerging digital media market (using new technologies for marketing purposes) as identified in our corporate strategy two years ago. From the second quarter of 2013 these two divisions will report separately to the Board under the headings of 'Parity Professionals' and 'Parity Digital Solutions'. Future reporting will be on this basis.

Adjusted EBITDA at &pound1.27m (2011: &pound0.36m) from a &pound1.98m loss in 2010 demonstrates the continued turnaround and improved profitability of the Group.

Group Operations

Parity continued to operate during the year in the IT Services market and traded exclusively in the UK from offices in Wimbledon, Shoreditch, Camberley, Sale, Edinburgh and Belfast.

In May 2012 we announced the acquisition of Inition Ltd, a specialist in 3D scanning and printing, advanced augmented reality systems and virtual reality installations operating in the UK from their offices in Shoreditch.

Much of Parity's work remains short term in nature although several contract relationships have extended over a number of years. No individual client accounts for more than 14% of Group turnover. Whilst the Group maintains a degree of exposure to Government spending, the breadth of our private sector portfolio continues to increase and it is expected that this trend will continue.

Our entry into the GB graduate development market with our Talent Management business and into the digital marketing arena with our Inition acquisition has broadened our customer base and is moving us into new and exciting sectors.

Parity Resources

Our main objective for this division in 2012 was to reverse the decline in recent years of both revenues and contribution by extending services, increasing contractor numbers, improving conversion rates and maintaining overall margins. This was accomplished against a backcloth of a depressed employment market which responded to continued economic pressures by seeking to reduce headcount, margins and utilisation wherever possible.

During the period we invested in additional sales and support staff, built upon our reputation as a value-add provider, sought new business opportunities and extended our services beyond our traditional IT base.

As a result we have increased our contractor numbers by 14% to 880 at year end (2011 - 772) and improved conversion rates to 30% (2011 26%). We have also seen increased activity with permanent recruitment and have newly established teams to focus on the engineering and digital skills markets.

The investment in staff to fuel our growth ambitions had a minor impact on second half contributions but was considered essential to reinforce team size, particularly in our London office which was established in 2011, became self funding during 2012 and is now making a positive contribution.

In total, revenues in the year increased by 10% to &pound75.3m (2011: &pound68.7m) with divisional contribution increasing by 14% to &pound4.0m (2011: &pound3.5m).

At the year end the ratio of Private/Government-Public Sector placings was 63/37 (end 2011: 48/52) reflecting our ambitions to develop a more balanced portfolio whilst continuing to recognise the importance of the Government and Public Sector markets to our overall business.

A number of existing contracts were extended and 67 new clients were signed up during the year (2011: 60). Along with our investment in new staff and sectors, these will maintain our impetus for 2013 in what remains a competitive market. This business will sit within our new Parity Professionals division going forward.

Parity Talent Management

This business was originally established 16 years ago around the successful graduate development programme for the Northern Ireland Government. It was later extended to include the prestigious Faststream graduate recruitment programme run on behalf of HMRC. Both contracts were renewed in 2012 for a further 3 years and 1 year respectively although delays in the Northern Ireland contract resulted in deferrals of expected revenues to later years.

During 2011 a strategic decision was taken to invest in this business so as to extend the portfolio and introduce a number of graduate development programmes across the UK, focussing initially on Higher Education establishments and industry. As a result we entered 2012 with an increased cost base, a unique and proven proposition, but only the two contracts referred to above.

Our mission therefore was to address this new market and build upon our established capabilities and reputation.

In the first quarter we won our first contract in the education sector with a range of graduate employability programmes for Sheffield Hallam University (SHU). This initial 18 month contract has led to a further partnership with SHU to win a graduate programme for the National Skills Academy Food Engineering Degree.

On the back of this success the division has since won similar contracts with a further 3 English Universities together with a 3 year contract for the Welsh Assembly involving initially 4 Welsh Universities.

As momentum built during the year operating margins improved from 21% in the first half to 33% in the second half, as our earlier investments began to pay off. During the year 14 new contracts were signed across GB from this standing start with &pound3.7m of new business achieved.

Having established a solid base in this market we are now seeking to invest further to extend our propositions and seek to address the equally attractive apprentice development market. Whilst investment and a contract delay resulted in a slow start to the year, subsequent successes resulted in revenues of &pound2.2m (2011: &pound2.3m) and contributions of &pound0.67m (2011: &pound0.46m). Overall divisional operating margins were also increased to 30.6% (2011: 20.25%). This business will sit within our new Parity Professionals division going forward.

Parity Systems

Over the past two years the division has been transformed from loss making to a stable operation with creditable operating margins. This has been achieved by the removal of loss making business (primarily associated with legacy fixed price contracts), reductions in operating costs and a focus on established clients. These actions, as anticipated, have resulted in revenue reductions whilst creating a stable and profitable platform with appropriate skill sets to operate within the new Digital Solutions division.

Long standing contractual arrangements with our 3 major clients continue although we anticipate work with the Charity Commission to decline as they redirect their budgets. Our close relationship with BAT has resulted in them extending their contract with us for a further year. Similarly, we continue to provide services to the MOD and are currently introducing some potentially exciting 3D and augmented reality capabilities from our Inition Ltd acquisition to them.

We have also had some success with our Business Intelligence initiative, announced last year, signing a consultancy and subsequent implementation contract with a major legal firm.

During the year Parity maintained it's Gold partner status with Microsoft and Oracle.

The Parity R&D Technology Laboratory initiative (Tech Lab) announced in January its first contract with the Northern Ireland Government to research emerging digital technologies. More recently Tech Lab has agreed in principle a joint venture with Royal Holloway, University of London to develop their innovative social media search algorithm. We will continue to use Tech Lab to establish potential sources of IP and to develop digital technology partnerships.

Our planned exit from loss making and largely fixed price systems integration work has resulted in a decline in revenues to &pound6.5m (2011: &pound9.2m). Margins, however, have been stabilised for 2 years at around 20% (2011: 20%) with a resultant contribution of &pound1.3m (2011: &pound1.9m). This business will sit within our new Parity Digital Solutions division going forward.

Inition

On 29th May the Group announced its first step in implementing the stated strategy to move into the expanding digital media market with the acquisition of London based Inition a leading 3D specialist. Inition's founders have remained with the business and have achieved their first year profit based earn out 3 months early thereby demonstrating the commercial potential of this acquisition.

The business can boast having worked on projects for a number of major corporations, including for example: Jaguar Land Rover, Gadget Show, Castrol, Guardian and Edrington Group. Project work during the period has included medical applications, augmented reality visualisation at a car launch, an immersive wing suit experience for a major manufacturer, holographic animation for advertising purposes and crowd gaming experiences for shows and exhibitions. The list goes on and on, but is specialised and addresses the emerging new digital marketing space.

Revenues for the 7 months from May were &pound1.9m with a contribution of &pound0.26m. Inition has continued to run for earn out purposes with it's separately defined overhead structure. It is anticipated that during 2013 some sharing of overheads with the remainder of the Group will occur with associated cost savings. The business will sit within our new Parity Digital Solutions division going forward.

Group Cost Savings

We continue to seek ways in which to improve operational efficiencies and in particular identified three areas for further savings:

New Finance System

The company has for some time utilised a custom built bespoke finance reporting system based on Microsoft AX. This system is expensive to maintain, difficult to modify and will increasingly become unsuitable as we extend our operations. For this reason the decision has been made to move onto a more flexible and cost effective finance platform with a roll out programme having commenced in December.

Initially our Systems and Inition businesses will be migrated onto a SAP Business By Design Cloud based solution with our Resources and Talent Management business migrating off AX during the course of 2013.

As a result of this we have written off &pound0.7m which relates to the net book value of the Micro soft AX system as at 31st December 2012. The effect of this write off will be to reduce the annual depreciation charge from the 2012 level by &pound0.2m.

Property

In June 2010 Parity Training, which was sold in February 2009, was placed in administration. The Group remained guarantor on certain leases held by Parity Training and since had to bear significant costs on those leases. During 2012, the final lease was disposed of and we no longer hold any legacy property formerly owned by Parity Training.

In our head office in Wimbledon we had just under 9,000 sq ft of unused office space which due to the economic climate and short lease term remaining we felt would be very difficult to obtain a tenant for and therefore in 2011 provided for in full the lease costs on the vacant space to the end of the term. We are pleased to report though that during 2012 we have managed to secure a sub-tenant for the remainder of the lease which will generate additional cash of &pound0.2m per year.

Parity Professionals and Parity Digital Solutions

As a result of the internal de-centralisation to separate out our technology businesses (Systems and Intion) from our human resources businesses (Resources and Talent Management), we expect that this new structure will more efficient and enable further cost savings to be made.

Investment in New Initiatives

In accordance with statements made during our May 2011 placing we have continued to invest in certain aspects of the business. In particular we have established Talent Management across the UK, expanded our Resources portfolio, created Tech Lab, and achieved our first entry into the digital media market with the part cash acquisition of Inition.

Additionally we have continued to invest in staff and advisors to research the digital technology arena and further enhance our corporate strategy in this respect.

As a result some &pound0.46m has been spent in the year which brings to and end this investment programme.

Management and Staff

Once again our team has responded to the considerable challenges involved in positioning the company for profitable growth both in its existing markets and those identified in the Group strategy, particularly relating to the digital media market. They continue to be responsive and embrace the challenges brought by change. Without their skills and commitment we could not have set a solid base for future growth and this within a continued difficult economic climate. The Board is again proud and grateful to them and wishes to express its thanks for their on-going support and loyalty.

Paul Davies, Chief Executive Officer

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