Cognizant and Reuters drag Finextra50 down by 6.9%

Cognizant and Reuters drag Finextra50 down by 6.9%

The Finextra50 Financial Technology Index ended last week down at 96.2. Six months after the creation of the index we have recalibrated the constituent companies, with four firms being replaced by new entrants. One of these, Bravura, joined Broadridge and Pegasystems among the few companies to buck the downward trend last week and see a significant rise in share price.

Six months since the Finextra50 Financial Technology Index was first benchmarked, its value has dipped back into negative territory, continuing its see-saw pattern as investors swing between optimistic and pessimistic on the outlook for financial technology companies.

The methodology for selecting index constituents focuses on firms that provide technology or technology related services to the financial services industry (banks, capital markets firms and insurance companies), and derive more than 50% of their revenue from doing so. Inclusion is also based on free-float market capitalisation, and a required mix of companies from Europe, North America and Asia Pacific. See the full index methodology for more information.

New entrants to the index are:

  • Bravura, an ASX-listed provider of superannuation and pension, life insurance, investment, transfer agency, STP financial messaging and portfolio management software.
  • Polaris Software, an Indian provider of banking software, outsourcing and modernisation services and consulting.
  • Firstsource, an Indian business process outsourcing firm, with many financial services clients in call centre and transaction processing areas
  • GlobeOp, a London-listed provider of web-based middle and back-office support services and fund administration for hedge funds, fund managers, family wealth managers and institutional investors.

These replace Ingenico and Hypercom, which have been removed from the index because their payments terminal and solutions businesses derive most of their revenue from serving retail and other markets; and Statpro and FJH, which have a lower free-float market capitalisation than the new entrants.

Major gainers
Last week the index's biggest gainer was Broadridge Financial Solutions, which ended up 17.07% to $22.15 after it raised its full-year outlook on strong fiscal first-quarter results. After previously forecasting profit of $1.17 to $1.25 per share, it has now raised that to adjusted earnings of $1.30 to $1.40 per share for the year, which ends in June.

For the quarter ending September 30, it earned $36 million, or 26 cents per share, up from $28.5 million, or 21 cents per share, in the same period a year earlier. Revenue was up 3% quarter-on-quarter to $451.2 million from $440.1 million.

Australian financial technology companies Bravura and Computershare also had a good week, rising 14.94% to AUD$2.00 and 7.54% to AUD$9.41 respectively. Global shrea registrty operator Computershare upgraded its fiscal 2008 earnings per share growth forecast to over 30% compared with its August forecast for a 20% rise, citing higher margins.

Pegasystems also performed well last week, closing up 11.74% to $12.18, after posting quarterly revenue of $42 million, up 25% on the same quarter a year ago. Net income for the third quarter of 2007 was $3.5 million, compared to a net loss of $0.4 million in the third quarter of 2006.

Major losers
There was a general downturn in markets at end of last week, but a number of factors led to some Finextra50 constituents falling much further than the wider market.

Cognizant ended the week down 24.72% to $30.79 after it release Q3 earnings. Although it beat its earnings guidance for the September quarter by 14%, its revised guidance for Q4 sent negative signals to the market. In previous years the outsroucing specialist has benefited from a year-end "budget flush" of customers seeking to use up the year's budget, but Cognizant says it does not expect that this year, and its Q4 guidance remains the same as it stated back in July. This combined with ongoing concerns about a strengthening rupee and predictions of reduced IT budgets next year from US financial institutions will likely constrain Cognizan't share price in the short term.

Vasco Data Security continued its fall from a great height, dropping a further 19.93% to $19.64 last week. Previously the index's best performing constituent, it has seen a 50% price decline in the past month after its third-quarter results missed estimates. But analysts are now upgrading their rating on the stock based on valuation. One analyst at Morgan Keegan & Co. pointed out in a research note that as 85% of Vasco's revenue comes from outside of the United States, this would be a "hedge against weakness in tech spending in the U.S., which has been highlighted by a number of the larger vendors in the space."

i-flex also fell 15.85% to Rs1280.05 last week, and Actuate was down 12.35% to $7.45, paring back the gains it saw after positive earnings announcement at the end of October.

Reuters, the largest Finextra50 constituent by free float market capitalisation weighting, also fell last week, closing down 4.62% to 629p. This was the company's biggest one-week fall since the index was benchmarked just one week after the Thomson acquisition deal was announced, driving a rapid rise in the share's value.

ValueAct Capital Master Fund LP announced last week that it had sold 5 million shares to bring its stake in the Reuters down to 6.2% or about 78.88 million shares. Subsequently the share value dropped on Friday, with general market momentum compounded by speculation that Europe's competition watchdog could make things difficult for the proposed acquisition by Thomson.

EU regulators are expected to make a decision on the deal in February, while the US Department of Justice should give its input in mid-January. There is some speculation that the companies may be required to divest some divisions to push the deal through, but management of Reuters and Thomson are downplaying this potential scenario.

Index comparison

More information on the Finextra50 Financial Technology Index methodology and constituent stocks can be found here.

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