Fidessa H1: Sterling strength offsets modest recovery
04 August 2014 | 911 views | 0
Fidessa group plc interim results for the period ended 30th June 2014
Highlights for the period ended 30th June 2014:
· Return to underlying growth with increases of 4% on revenue and 5% on adjusted profit at constant currency.
· Continuation of improvement in market conditions.
· Multi-asset revenue doubles as derivatives programme bears fruit.
· New derivatives signings continue and strong pipeline.
· Increased interest in service-based solutions from both the buy-side and the sell-side.
· Good international spread, with 57% of total revenue accounted for outside of Europe.
· Recurring revenue maintained at 85% of total revenue.
· Strong cash generation, with £57.8 million cash balance after dividend payments of £26.3 million.
Commenting on these results, Chris Aspinwall, Chief Executive, said:
"The first half of 2014 has seen a welcome return to underlying growth as we have continued to make progress across the business against a backdrop of slowly improving market conditions. As expected, the improving market conditions have resulted in a reduction in the headwind we have been suffering in recent years from consolidations, restructurings and closures in our customer base. This has allowed some of the growth we are generating through sales of our derivatives platforms, our service-based platforms and our regional expansion to flow through into overall growth rather than being masked by the decline in equities. Whilst the return to underlying growth is welcome, the exceptional strength of sterling during the first half has more than offset this growth and has affected the reported numbers. Whilst we expect this effect to be transient, we believe it is likely to be a factor for the remainder of the year."
Commenting on current trading, Chris Aspinwall continued:
"As we move into the second half, we are seeing improvement across the markets in which we operate and this is reflected in our current deal pipeline. In particular, we are seeing increased interest in new functionality withn new functionality within our core markets as well as strong demand for our derivatives and service-based offerings. Due to the depth, longevity and severity of the financial crisis, we expect that the improvement we are seeing will be gradual and this combined with the effect of our recurring revenue model means that we expect modest constant currency growth for the year as a whole.
Looking further ahead, we believe that as stability and opportunity return to the markets, the headwind reduction, coupled with further openings as our multi-asset initiative gains momentum, will enable us to return to growth levels closer to those we have seen in the past. We remain excited by the potential of our service-based offerings across all asset classes and segments of our market and believe that we will continue to play an important role as customers focus on efficiency, transparency, compliance and performance."
For the six months to 30th June 2014, Fidessa has seen an increase in underlying constant currency revenue of 4%. However, the currency movements caused this to be a reduction of 2% on a reported basis to £137.1 million (2013: £139.3 million). Recurring revenue increased by 3% on a constant currency basis with the sector mix being sell-side derivatives doubling, sell-side equities down 1% and buy-side increasing 1%. The strong growth for derivatives means that it now accounts for 6% of recurring revenue, up from 4% for 2013 as a whole. In addition, overall consultancy revenue improved in the period with underlying growth of 6%.
The revenue impact from consolidation, restructuring and closures across the customer base has continued although at a lower rate than previously seen. The direct effect of these events was a reduction in revenue of 3%, which compares to a reduction of 5% in 2013 and a peak of 8%. From what is currently known, the impact from these events for the year as a whole is expected to be at a similar rate to that experienced in the first six months of the year. The rate at which such new events have occurred has been slower than that in recent periods indicating that the impact from consolidation, restructuring and closures may continue to fall.
On a regional basis, 57% of total revenue was accounted for outside of Europe. Asia showed the strongest growth with a constant currency increase of 11% (0% on a reported basis) and accounted for 17% of total revenue, whilst the Americas increased by 6% (down 2% on a reported basis) and accounted for 40% of total revenue. Europe decreased by 2% and accounted for 43% of total revenue.
The deferred revenue in the balance sheet at 30th June 2014 was £45.1 million (30th June 2013: £50.3 million). The deferred revenue balance represented 16% of annualised revenue with the majority of it expected to be recognised as revenue during the second half of the year.
The investment in the derivatives opportunity has continued at a consistent level to that in 2013. However, due to the time lag effect, the product development amortisation reflected the rate of growth in capitalisation in recent years and increased by 12%. Across the business the costs have continued to be carefully managed throughout the period.
The constant currency adjusted operating profit has increased by 5%. However, the currency movements caused this to be a reduction of 4% on a reported basis to £19.9 million at an operating margin of 14.5% (2013: £20.8 million, operating margin of 14.9%). The adjusted operating profit has been measured before the amortisation of acquired intangibles. The unadjusted operating profit was £19.5 million (2013: £20.4 million).
The headline tax rate for the year is estimated to be 25.9% (2013: 26.3%), with a decrease in the UK corporation tax rate being offset by an increase arising from the regional mix of growth rates. Diluted earnings per share on a constant currency basis and adjusted to exclude the amortisation of acquired intangibles have increased by 7%. However, the currency movements caused this to be a reduction of 3% on a reported basis to 38.7 pence (2013: 40.1 pence). The directors believe the adjusted measure of earnings per share provides a better long-term indication of the relative performance of the business period to period. The unadjusted diluted earnings per share were 38.0 pence (2013: 39.4 pence).
As anticipated in the preliminary results announcement in February, the strength of sterling relative to the primary currencies in which Fidessa operates has had a significant influence on headline performance for the first half of 2014 when compared to the first half of 2013. Sterling was 7% stronger against the US dollar and currencies pegged to the US dollar, 18% stronger against the Japanese yen and 16% stronger against the Canadian dollar.
Fidessa continued to be strongly cash generative, closing the period with a cash balance of £57.8 million and no debt (2013: £50.3 million). During the period dividends of £26.3 million (2013: £25.8 million) were paid, which included the payment of a special dividend of £17.0 million (2013: £16.7 million).
The interim dividend has increased 5% to 13.1 pence (2013: 12.5 pence). It will be paid on 15th September 2014 to shareholders on the register on 22nd August 2014, with an ex-dividend date of 20th August 2014.
The first half of 2014 has seen a slow and steady improvement in the financial markets. Whilst volumes across the main markets have been somewhat patchy, with low volatility hitting secondary market activity, Fidessa's customers are now starting to cautiously position themselves for expansion and growth. In particular, customers are looking at the regions that they cover and at extending the services they can offer to their customers. Underlying this more optimistic outlook there is still a strong focus on cost, with most firms believing that there has been a fundamental structural change in the market which will put pressure on their margins for the foreseeable future. This pressure on cost means that firms are looking for operating efficiencies, whether this is through scaling their operations, focusing on niche opportunities or reducing their costs through more efficient use of technology. Many of these are areas in which Fidessa can assist its customers through its scale, its service-based offerings or its extended product suite.
The regulatory environment continues to be uncertain with the majority of proposed changes slow to materialise. The rules for MiFID II are now expected to be phased in from 2016 with some rules having a transition period of up to three years. Despite this, some areas of regulation are starting to take shape and Fidessa also sees that there may be the opportunity to develop in front of this regulation as firms move to position themselves for when the changes come into effect.
Fidessa's investment programme to extend the range of asset classes it supports, expand its regional coverage and build out its global infrastructure continues to position it well for the recovery. As conditions continue to improve Fidessa is also looking to extend the services it can offer between the buy-side and sell-side, particularly in areas where there is the opportunity to improve the workflow and efficiency in the buy-side/sell-side relationship.
Despite the market conditions Fidessa's market share has continued to hold up well with total users remaining flat at around 24,000, whilst the total value of business going through Fidessa's connectivity network has continued to increase to well over $1 trillion per month.
Within its sell-side business Fidessa has started to see some improvement in line with market conditions. In particular, there has been a reduction in the number of consolidations, restructurings and closures within Fidessa's customer base and more firms are beginning to look at a potential expansion in the services they take. In addition, firms are starting to consider a longer term approach to investment decisions, and this makes service-based solutions increasingly attractive as the initial investment in deployment offers substantial long-term cost benefits. As a result, Fidessa is seeing an increase in the pipeline of service-based opportunities which cover both the equity and the derivatives platforms.
As firms review the services they offer, they are increasingly looking at expanding the regions they are able to service and Fidessa is particularly well placed to assist with this requirement. As a result, Fidessa has seen good constant currency growth across both Asia and the Americas as it brings in both new customers and also provides additional regional platforms to existing customers. In the Americas this has resulted in further progress in Canada and Latin America, whilst in Asia there have been additional deals with both foreign and domestic firms. In Asia there has also been significant interest in the new Shanghai-Hong Kong Stock Connect service which was announced by the Chinese regulatory authorities earlier this year. This link, which is due to be available in October of this year, will enable some Shanghai stocks to be traded directly from Hong Kong and vice versa. Removing barriers in this way to make it significantly easier for investors in both regions to trade, clear and settle certain stocks offered in the other region is seen as another sign that the Chinese securities market may be starting to open up.
Fidessa's derivatives programme has continued to make good progress in the first half with revenue doubling and more firms taking elements of the solution. This has included a further US investment bank which has signed to take the platform to support its global derivatives operation alongside its existing Fidessa equity platform. Fidessa has also continued to expand the functional line of its derivatives offering across a number of areas including the addition of support for US Treasuries. This expansion into US Treasuries also includes intelligent connectivity to BrokerTec and NASDAQ OMX eSpeed, immediately offering access to deep liquidity venues for these instruments. Fidessa's derivatives offering continues to generate great interest across the sector resulting in a strong and growing pipeline and, accordingly, Fidessa expects that it will continue to see very strong growth in this area.
Fidessa has continued to invest in its ability to deliver connectivity across all the regions in which its customers operate. Fidessa's global network now serves around 800 brokers, 4,000 buy-sides and over 200 trading venues worldwide, with the value of activity going across the network growing to well in excess of $1 trillion per month. During the first half, Fidessa has expanded its network to bring on new derivatives and equity liquidity venues, and has also continued to invest in more low latency and co-location solutions as it builds out its market leading execution service. This investment included a deal to co-locate at the Singapore Exchange's (SGX) data centre which will provide Fidessa's customers across Southeast Asia with sub-millisecond access to the SGX matching engine, as well as improved trading links across the region. Fidessa expects further expansion in Singapore as part of its Asia growth strategy with additional facilities and resources on the ground.
Although there continue to be signs that market conditions are improving for buy-side firms, these firms are still facing a challenging environment with increased market complexity across a broad range of asset classes, on-going pressures from regulatory reform and reduced margins. Consequently sentiment remains somewhat mixed, as firms focus on finding ways to address these as well as streamline processes and improve efficiency. Fidessa's comprehensive range of investment management solutions, along with its capabilities in the provision of service-based solutions and global technology infrastructure, mean it is well positioned to work with customers to help them meet these challenges.
Fidessa's Investment Management System (IMS) provides customers with portfolio management, position management, compliance, order management and execution facilities that operate across business lines, geographies and asset classes. During the first half of 2014 Fidessa launched the latest version of this workflow platform with key new features including enhanced compliance functionality, expanded reporting and a new set of tools operating across all stages of workflow from intelligent modelling to smart order routing. Fidessa has also completed the implementation of its first service-based IMS platform, which successfully went live during the first half and is now being expanded across further asset classes.
Compliance remains a key focus for the buy-side and as firms see more complex mandates and instructions from their customers, so the requirement for comprehensive and flexible compliance systems remains strong. The latest version of Fidessa's award-winning Sentinel compliance system introduces Active Compliance, providing a suite of real-time, pre-trade compliance checking controls that operate across the entire order lifecycle, as well as new features to assist compliance staff to create and maintain complex rule sets more easily. Additionally, the first customers are now live with the new service-based version of Sentinel, for the first time leveraging Fidessa's Software as a Service (SaaS) capability in this field.
With its valuable knowledge of both the buy-side and sell-side communities, Fidessa is ideally placed to deliver innovative services that allow them to work together in new and more effective ways. Fidessa has done this for some time within the connectivity space, where it offers a managed global trading service that gives buy-side firms access to a broad range of venues and broker services around the world. Another area where Fidessa is now starting to leverage its expertise is in the post-trade space. Last year Fidessa launched its Post-trade Hub which allows larger asset management firms to connect their existing post-trade systems to the sell-side using the industry standard FIX protocol. This enables them to exchange allocation and confirmation instructions with their brokers via this open protocol, thereby removing the need for expensive, proprietary alternatives. Fidessa has now announced its new Affirmation Management Service (AMS) that delivers the same benefits experienced by the larger firms using the Post-trade Hub to the mid and lower tier communities. This new service will provide these firms with the business workflow they need to interact directly and seamlessly over FIX with the global broker community allowing affirmations to be processed more quickly and efficiently.
The regulatory environment continues to be uncertain with the majority of proposed regulatory changes slow to materialise. Having passed through the European Parliament, MiFID II has entered its consultation phase with a complex document covering 800 questions. Although the consultation is still in progress, there is a general view that the rules will be phased in from 2016 with some rules having a transition period of up to three years after this. Despite this, Fidessa is already starting to see some areas where opportunities may be created as a result of new regulation. One such example is around the area of Central Counterparties (CCP) where it is proposed that firms will be able to keep their margin with one counterparty while trading related products across multiple venues, rather than having to maintain multiple clearing relationships as at present. In some ways this is analogous to the situation post MiFID I where, within the equity markets, trades could be settled in a single Central Security Depository, regardless of the trading venue. In the equity market this was a major driver of fragmentation, as it meant that liquidity venues could compete on a level playing field and drive cost out of the system. If a similar effect was to occur as a result of the CCP change, this could see much greater competition between derivatives venues and greater fragmentation of liquidity, requiring a range of tools to help take advantage of the cost benefits on offer.
Fidessa will continue to keep a close watch on all the areas of regulatory change as they progress and expects that these will gradually create significant new opportunities.
As Fidessa moves into the second half, it is seeing improvement across the markets in which it operates and this is reflected in its current deal pipeline. In particular, Fidessa is seeing increased interest in new functionality within its core markets as well as strong demand for its derivatives and service-based offerings. Due to the depth, longevity and severity of the financial crisis, Fidessa expects that the improvement it is seeing will be gradual and this combined with the effect of its recurring revenue model means that it expects modest constant currency growth for the year as a whole. Whilst Fidessa anticipates that the exceptional strength of sterling it has seen during the first half of the year will be a transient effect, Fidessa believes it is still likely to be a factor for the remainder of the year.
Looking further ahead, Fidessa believes that as stability and opportunity return to the markets, the headwind reduction, coupled with further openings as its multi-asset initiative gains momentum, will enable it to return to growth levels closer to those it has seen in the past. Fidessa remains excited by the potential of its service-based offerings across all asset classes and segments of its market and believes that it will continue to play an important role as customers focus on efficiency, transparency, compliance and performance.