UPDATE 1-Xchanging H1 profit up, outsourcing growth continues

(Adds details, background, company, analyst comment, shares)

By Rhys Jones

LONDON, July 31 (Reuters) - British outsourcing group Xchanging Plc (XCH.L) posted a 44 percent rise in operating profit on Thursday and said it continues to benefit from the global economic downturn as more companies look to reduce costs.

Xchanging, which floated on the stock exchange last April and which provides a range of outsourcing services to the financial services industry, said full-year revenue rose 20 percent to 266.8 million pounds ($528.9 million), while adjusted operating profit rose to 15.3 million.

The sales figure was better than expected by analysts at UBS, who had forecast revenue of 258 million.

Chief Executive David Andrews told reporters the group's growth was driven by particularly strong performances from its insurance, banking and procurement units and said "the longer the downturn goes on, the better it is for us".

A poll of analysts by Reuters forecast Xchanging will deliver 2008 pretax profit of 50 million pounds. Andrews said the company is "happy with the forecasts" but added "there could be some upside" to the numbers.

Shares in the company, which have lost more than a fifth of their value since the turn of the year, were up 3.2 percent at 242-1/4 pence at 0915 GMT, valuing the business at about 518 million pounds.

The group said it had free cashflow of 21.6 million pounds at the end of the first half compared with 12.7 million in the same period last year, which UBS analyst Mark Shepperd believes Xchanging "will utilise to undertake opportunistic acquisitions".

After recent moves into the German, Italian and French banking sectors, Xchanging plans to expand further in continental Europe over the next year through partnerships and acquisitions.

"We'll look at investing in banking and insurance in continental Europe and we also feel we have to invest in USA and Asia Pacific," said Andrews, who reiterated that Xchanging was in early discussions about a possible deal with India's Cambridge Solutions (CAMB.BO).

The company, which already has partnership deals with insurance broker Aon AOC.N and Allianz (ALVG.DE), won a number of new contracts during the period including one to provide broker back office services to Copper Gay during the period.

Xchanging also signed a number of business support contracts with new and existing customers such as ACE and Lloyd's of London [LOL.UL].

The company said it has high levels of revenue visibility and remains confident in the outlook for the full financial year. (Editing by David Holmes)