PARITY GROUP PLC

INTERIM RESULTS FOR THE SIX MONTHS TO 30 JUNE 2020

22 September 2020

Parity Group plc ("Parity" or the "Group" or the "Company"), the data and technology focussed professional services business, announces its half year results for the six months ended 30 June 2020.

Headlines:

·    Return to a more active market post the initial Covid related downturn in H1. Recent new business wins include:

o  Parity has been granted two new lots on the Digital and Technology Services Dynamic Purchasing System for the Scottish Government. The framework agreement covers the provision of high-end digital specialists and cyber security specialists.

o  In partnership with CyberGym, Parity has won a place on the Northern Ireland Co-Operation Overseas (NI.CO) Cyber Security Training Services Framework to provide consultancy and recruitment support.

o  The Company has also started work on various permanent roles covering data and digital specialist roles in international markets.

·    Transformation programme effectively complete with annualised gross operating cost savings achieved in excess of £4m. No material non-underlying costs anticipated in H2.

·    After £1.8m of re-investment in transformation, including IT infrastructure, recruitment and marketing, net annualised operating costs have reduced by £2.4m, the full impact of these savings to be felt in 2021.

·    Wind down of low-margin Scottish government contract still contributing to reduction in net revenue from (£6.1m in H2 2019 to £5.3m H1 2020) but adjusted operating profit now growing, £0.03m in H2 2019 to £0.25 in H1 2020

·    The Board anticipates the 2020 full year adjusted profit before tax will be similar to that achieved in 2019 of £115,000.

·    Net cash before lease liabilities as at 30 June 2020 of £0.65m compared to net debt before lease liabilities of £1.17m as at 30 June 2019.

Key Financials

For the six months ended 30 June 2020

¹ Profit before tax and non-underlying items

John Conoley, Non-Executive Chairman of Parity Group plc, said:

"We are pleased to be able to report an adjusted profit before tax in the first half year despite the impact of the Covid pandemic. Since the period end we have seen an improvement in market conditions and have converted some important opportunities into new business. The management team and staff are all to be congratulated on how they have responded to the business and personal challenges they have faced this year."

Matthew Bayfield, Chief Executive, said:

 "We are digital and data specialists and the world is becoming ever more reliant on people with the skills to manage data and to be able to do so remotely. The changes brought on by Covid have brought us opportunities as well as challenges, we have remained close to our clients and are benefitting from not having furloughed any of our staff.

"With more remote working, cyber security has become an even more critical business function and we are well placed to help our clients manage their needs in this area. Working with CyberGym we see particularly strong growth opportunities in this market segment.

"The Company is now much closer to being where we set out to be when I became CEO eighteen months ago. We are leaner and more efficient, are clearer in our market position and have recruited a team who can deliver on the business plan, our prospects are good."

This announcement contains certain statements that are or may be forward-looking with respect to the financial condition, results or operations and business of Parity Group plc. By their nature forward-looking statements involve risk and uncertainty because they relate to events and depend on circumstances that will occur in the future. There are a number of factors that could cause actual results and developments to differ materially from those expressed or implied by such forward-looking statements. These factors include, but are not limited to (i) adverse changes to the current outlook for the UK IT recruitment and solutions market, (ii) adverse changes in tax laws and regulations, (iii) the risks associated with the introduction of new products and services, (iv) pricing and product initiatives of competitors, (v) changes in technology or consumer demand, (vi) the termination or delay of key contracts and (vii) volatility in financial markets.

Financial Review

Overview

Parity has traded profitably (excluding the impact of non-underlying items) through the Covid pandemic. Having chosen not to furlough any of its staff in order to remain close to its clients, the business is now starting to see the benefit, with a returning new business market and an increase in opportunities to tender. The sudden and significant shift to more people working from home has increased the demand for digital specialists in fields such as cyber security and has emphasised the need for clients to invest in robust data management and security. This optimism is necessarily tempered by the continuing uncertainty with regard to the ongoing Covid pandemic and the potential economic impacts of a recession.

Over the last 18 months Parity has shifted its focus towards achieving net revenues that produce a higher margin. The planned reduction in gross revenues has continued during the period with the wind down of the Scottish government framework, however operating profit before non-underlying items as a percentage of net revenue has started to increase, rising to 4.6% from 3.3% in the prior year period. Our new business wins and prospects are expected to improve net margins as we offer a combination of strategic high-end recruitment and data consultancy.  

The business has been restructured to allow it to bring in the skills required to build a more profitable, higher margin business model. The benefits to the company's net profitability of this restructuring are beginning to become apparent. The end of the transformation programme and the underlying costs associated with it will allow future net operating profit to flow through to profit before tax.

Impact of transformation programme

2020 was planned as a year of transition for Parity with the completion of the business transformation, further investment in the business and the expectation of closing new business opportunities during the year. The transformation of the business has continued as planned, investing in a new operating model and moving the business towards higher margin business in the key sectors of data, digital transformation and cyber security. However the Covid pandemic has had a huge impact upon our clients in both public and private sectors, with the private sector clients being hit the hardest. This resulted in a sudden and sharp downturn in new business opportunities and many existing projects being affected as the lockdown came into effect during March 2020.

Despite these unprecedented events Parity's longstanding relationships with its clients (particularly in the public sector) and the fact that it had already started to realign its cost base in 2019 has meant that even with lower than predicted revenues during the period the Group has navigated H1, remaining financially strong and delivering a modest adjusted profit before tax.

As part of the business transformation the directors have reviewed the key performance measures used to manage the business and this has been reflected in changes to the presentation of the financial statements.

Net revenue (as defined in Note 1 to the 2019 Report and Accounts) more accurately reflects the income generated by the Group for the services that it delivers and will be used as the key performance measure for income.

The directors recognise that it is important to track the operational performance of the business and that costs and revenues not part of the underlying operating model should be disclosed separately to allow a fair comparison of performance between periods. In addition to reporting on statutory profit measures the directors also track profit/(loss) adjusted to exclude items classified as non-underlying. By their nature, items that the Group had previously classified as non-recurring would now all be included within the definition of non-underlying.

With the business now client focused, the Group no longer operates recruitment and consultancy as separate divisions, instead segmenting its business by public sector and private sector reflecting the different attributes of clients in these two distinct sectors. Segmental reporting for the business going forward will be on this basis.

Net Revenue

Net revenue in the six months to 30 June 2020 of £5.3m was 29% lower than prior year (H1 2019: £7.5m). The majority of the reduction in net revenue is directly attributable to the planned wind down of the Scottish Government framework (originally announced in early 2019). The impact of the Covid-19 pandemic has been to significantly reduce new placements within existing projects, the duration of contract extensions, and limit new business opportunities that the Group had expected would replace natural contract completions.

In the immediate aftermath of the lockdown some clients took the decision to pause or slow down projects, impacting extension rates for contractors in April and May. Since June, the Group has started to see a recovery in both extension rates and new placements as clients have been able to again focus on the key data and digital transformation projects that we are supporting.

Result Before Tax    

The Group reported a loss before tax for the six months of £0.4m (H1 2019: loss of £0.5m) and an adjusted  profit before tax (excluding non-underlying items) of £0.1m (H1 2019: £0.2m).

During H1 2020 the £2.2m reduction in net revenue year on year was offset by a £2.0m reduction in operating costs before non-underlying items during the same period. The largest component of the reduction in operating costs is attributable to the realignment of the cost base with a £1.5m saving against the same period in 2019. This has enabled the business to invest £0.5m back into the business during the period (H1 2019: £0.2m). The investment has been in both key new hires and infrastructure including the implementation of new digital technologies across the Group.

Non-underlying items of £0.4m in the period (H1 2019: £0.7m) consisted primarily of costs related to employee changes. The Group does not currently anticipate any further material non-underlying items related to the business transformation in the second half.

Cash and Net Debt

Net cash, excluding adjustments for IFRS 16 lease liabilities, as at 30 June 2020 was £0.65m (30 June 2019: net debt of £1.17m).

During H1 2020 the Group took advantage of the government VAT deferral scheme, delaying Q1 VAT payments of £0.3m. This was offset by the payment in the period of non-underlying costs totalling £0.4m and normal working capital variations resulting in a net cash outflow during the six months of £0.7m (H1 2019: £0.1m).

Despite the disruption caused by Covid-19 the Group has benefited from its decision not to furlough staff and keep a close relationship with all its clients thus maintaining its strong performance on the conversion of income to cash with debtor days remaining exceptionally low at 14 days (H1 2019: 16 days).

The Group continues to have access to a £10m credit facility with PNC that will remain in place until at least May 2021.

Defined Benefit Pension

The final salary pension scheme deficit was £0.5m at 30 June 2020 (30 June 2019: £1.1m; 31 December 2019 £0.9m). Despite the disruption to markets caused by the Covid-19 pandemic the investment strategy followed by the Trustees has contributed to a reduction in the calculated deficit of £0.4m since the 2019 year end.

As part of its short term actions to provide maximum financial flexibility during the initial stages of the Covid-19 pandemic the board and Trustees agreed a three month deferral of planned contributions by the Group starting in June and totalling £0.1m. The continued resilience of the Group through the pandemic to date has enabled it to reinstate contributions and in September 2020 the Group will catch up on the deferred payments. The Group is forecasting that it will meet its overall target for contributions in the year of £0.3m.

Outlook

Recent new contracts provide a level of confidence that the business will trade profitably in the second half of the year, the Board anticipates the 2020 full year adjusted profit before tax will be similar to that achieved in 2019 of £115,000.

The majority of the Group's net revenue continues to come from the UK Government's core IT frameworks,  GCloud and DOS (2019 spend £1.5bn) and with the Company's investment in people, marketing and technology, the business is well placed.  These factors, combined with the full year effect of a lower cost base, allows the Board to anticipate a significant uplift in net profitability in the 2021 financial year.

Whilst uncertainties remain as to the macro economic impact of the pandemic in 2021 the comprehensive transformation programme that is now complete has significantly improved the company's operational gearing. Future net revenue growth will therefore have a more significant impact on profitability.

About us:

Consolidated condensed income statement

For the six months ended 30 June 2020

All activities comprise continuing operations.

¹ Adjusted profit before tax is a non-IFRS alternative performance measure, defined as profit before tax and non-underlying items.

Consolidated condensed statement of comprehensive income

For the six months ended 30 June 2020

Consolidated condensed statement of changes in equity

For the six months ended 30 June 2020

Six months to 30.06.20 (Unaudited)

Six months to 30.06.19 (Unaudited)

Year to 31.12.09 (Audited)

Consolidated condensed statement of financial position

As at 30 June 2020

Consolidated condensed statement of cash flows

For the six months ended 30 June 2020

Notes to the interim results                                                                                                                                                                                       

1              Accounting policies

Basis of preparation

The condensed interim financial statements comprise the unaudited results for the six months to 30 June 2020 and 30 June 2019 and the audited results for the year ended 31 December 2019. The financial information for the year ended 31 December 2019 herein does not constitute the full statutory accounts for that period. The 2019 Annual Report and Accounts have been filed with the Registrar of Companies. The Independent Auditor's Report on the Annual Report and Financial Statements for 2019 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 2020 have been prepared in accordance with the Disclosure and Transparency Rules of the Financial Services Authority and with IAS 34 'Interim Financial Reporting'. The information in these condensed financial statements does not include all the information and disclosures made in the annual financial statements.

The condensed financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) in a manner consistent with the accounting policies set out in the Group financial statements for the year ended 31 December 2019 except as detailed below. IFRS are subject to amendment and interpretation by the International Accounting Standards Board (IASB) and there is an ongoing process of review and endorsement. Several amendments and interpretations apply for the first time for periods beginning on or after 1 January 2020 and those that had an impact on the condensed interim financial statements are listed below. Any standards, amendments or interpretations that have been issued but not yet effective have not been adopted early by the Group.

Going concern

The interim financial statements have been prepared on a going concern basis as the directors are satisfied that the Group has sufficient resources to continue in operational existence for the foreseeable future. The directors have reviewed the Group's cash flow forecasts for the period to 31 December 2021, taking account of reasonably possible changes in trading performance, including potential downsides from the ongoing impacts of Covid-19. The Directors acknowledge the significant ongoing uncertainty caused by the Covid-19 pandemic and continue to closely monitor the outlook for the Group, however having considered trading performance during the pandemic to date and having greater visibility over the severity of its impact so far, the Directors do not consider this to cause material uncertainty on the Group's going concern.

Financial instruments

Unless otherwise indicated, the carrying amounts of the Group's financial assets and liabilities are a reasonable approximation of their fair values.

Presentation of income statement

During the period, the directors undertook a review of the financial statements of the Group and this resulted in a change to the presentation of the income statement. The revised presentation, which involves moving from a classification of expenses by nature to a classification of expenses by function, was deemed to be more appropriate and provides information that is more reliable and relevant to users of the financial statements. In particular, presenting net revenue gives a better understanding of the income generated by services provided by the Group. For recruitment services provided by the Group, net revenue is defined as the margin earned on the placement of contractors, and for other services provided by the Group, net revenue is defined as the total fees earned. In accordance with IAS 1 'Presentation of Financial Statements', the Group has re-presented the income statements for comparative periods.

Alternative performance measure

The Group uses the alternative performance measure of adjusted profit before tax to report its results. This is a non-IFRS alternative performance measure, defined as profit before tax and non-underlying items.

Non-underlying items

The presentation of adjusted profit before tax excludes non-underlying items. The directors consider that an underlying profit measure better illustrates the underlying performance of the Group and allows a more meaningful comparison of performance across periods. Items are classified as non-underlying by nature of their magnitude, incidence or unpredictable nature and their separate identification results in a calculation of an underlying profit measure that is consistent with that reviewed by the Board in their monitoring of the performance of the Group.

In previous periods, the Group's results separately presented non-recurring items as a separate section of the income statement. The directors consider that all items previously classified as non-recurring are non-underlying and have reclassified these costs as such for all comparative periods in accordance with IAS 8 'Accounting Policies, Changes in Accounting Estimates and Errors'.

Accounting policies: new standards, amendments and interpretations

IFRS 16 'Leases'

IFRS 16 was amended effective 1 June 2020 to provide a practical expedient for lessees accounting for rent concessions that arise as a direct consequence of the Covid-19 pandemic. This practical expedient means the lessee does not need to assess whether the rent concession meets the definition of a lease modification. The Group has elected to use the practical expedient retrospectively for all rent concessions that meet the criteria in the period ended 30 June 2020, meaning that the Group is not required to remeasure the lease liability at a revised discount rate and the effect of a reduction in the lease liability is reflected in profit or loss, rather than recorded against the right-of-use asset. The reduction in the Group's lease liabilities recorded in profit or loss for the period ended 30 June 2020 is £11,000.

2              Segmental information

During the period, the Group changed the structure of its organisation to be based around a combined operating model targeted on finding the right solution or combination of solutions to each clients' needs by way of a single account management function. As such the previous reporting segments based on the service lines of Recruitment and Consultancy are no longer the basis on which the Group is managed and resources are allocated. The basis by which the Group is now organised and its operating model is structured is by customer sectors, being the public sector and the private sector. The reporting of financial information presented to the Chief Operating Decision Maker, being the Group board of directors, is consistent with these reporting segments. As these reporting segments are supported by a combined back office, there is no allocation of overheads.

In accordance with IFRS 8 'Operating Segments', segmental information from comparative periods has been restated.

3              Revenue

The Group's revenue from external customers disaggregated by pattern of revenue recognition is as follows:

The Group's revenue from external customers disaggregated by primary geographical market is as follows:

4              Non-underlying items

Items are classified as non-underlying by nature of their magnitude, incidence or unpredictable nature and their separate identification results in a calculation of an underlying profit measure that is consistent with that reviewed by the Board in their monitoring of the performance of the Group. In previous periods, the Group's results separately presented non-recurring items as a separate section of the income statement. The directors consider that all items classified as non-recurring in previous periods are non-underlying and have reclassified these costs as such.

Non-underlying items during 2020 include costs related to the ongoing restructuring of the Group, including employee termination payments and fees for professional services.

5              Finance costs

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

6              Taxation

7              Earnings per ordinary 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 2020 the number of ordinary shares in issue was 102,624,020 (30 June 2019 and 31 December 2019: 102,624,020).

8              Pension commitments

The Group provides employee benefits under various arrangements, through defined benefit and defined contribution pension plans, the details of which are disclosed in the 2019 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 April 2018.

The following estimates have been applied to the IAS 19 valuation:

The deficit has reduced by £395,000 since 31 December 2019 despite a fall in discount rates. The improvement was partly due to an increase in the value of scheme investments and partly as a result of actions taken by the board and the Trustees to reduce scheme risk.

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.

There were no other related party transactions during the period (2019: none).

10           Events after the reporting period

There are no events after the reporting period not reflected in the interim financial statements.

Statement of directors' responsibilities

The directors confirm, to the best of their knowledge:

·           The condensed set of financial statements has been prepared in accordance with IAS 34 'Interim Financial Reporting';

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

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

By order of the Board

John Conoley

Non-Executive Chairman

22 September 2020