March 1, 2012 / 8:01 AM / 6 years ago

UPDATE 2-Xchanging upbeat after year of change

* 2011 adj operating profit falls 23 pct to 43.2 mln stg

* CEO says more opportunities this year as changes take hold

* Shares leap after results (Adds detail, CEO, analyst quotes, share price reaction)

By Clare Kane

LONDON, March 1 (Reuters) - British outsourcing firm Xchanging said it had seen an increase in potential contracts in the first weeks of 2012, as wide-ranging changes implemented last year start to pay off.

Xchanging posted an expected 23 percent fall in adjusted operating profit, but said more opportunities were coming into the business and any improvement in profitability in 2012 would be as a direct result of the company’s overhaul.

Cost cuts at the firm, which runs back-office activities such as invoice processing and staff payments, included shedding its loss-making U.S. Cambridge workers’ compensation operation in June, reshaping management and seeking smaller, more regular contracts.

Chief Executive Ken Lever told Reuters on Thursday that Xchanging is especially well positioned in business processing for insurance companies, back-room services for financial institutions, its technology business and Indian operations.

“The level of activity in terms of opportunities coming into the business has improved quite measurably since this time last year. This year is very much about demonstrating our ability to convert those opportunities into contracts,” he said.

Lever added growth would come from companies in developed markets looking to cut costs, while emerging market firms become more interested in business processing services. Around half of Xchanging’s staff is based in India.

Its shares were up 10 percent to 94 pence at 1049 GMT, and earlier hit a near-six-month high of 97.5 pence. The share price has risen more than 30 percent since the start of the year.

“People can see the progress that they’ve made year on year,” said Panmure Gordon analyst Mike Allen, who reiterated his hold rating and has a 90 pence target.

“The share price reaction has been quite strong and the shares have been strong in the lead-up to the results, so I think what they’re doing has been priced in now.”

Lever said Xchanging is viewed as a “credible force in the market” and the firm hopes to win more lucrative contracts after securing deals with the likes of French cosmetics giant L‘Oreal in 2011.

But it faces challenges in attracting and keeping business in what Lever believes will continue to be an uncertain economic environment.

“The uncertainty is likely to lead to delays in decision-making ... Businesses are, understandably, in the difficult times, more cautious and conservative about making decisions.”

Xchanging posted an adjusted operating profit of 43 million pounds ($69 million), compared with 56 million pounds in 2010.

A consensus estimate provided by the company forecast adjusted operating profit of 40 million pounds.

The company ended 2011 with net cash of 45.2 million pounds, 35 percent more than it had at the end of 2010.

$1 = 0.6260 British pounds Editing by David Hulmes

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