Fidessa notches single-digit uplift in challenging markets

Source: Fidessa

Fidessa group plc: Preliminary results for the year ended 31st December 2011.

"Fidessa has continued delivering good growth throughout 2011 despite the challenging conditions that have persisted within the markets. These challenges included low volumes of trading across the equity markets, uncertainty around the stability of the Eurozone, uncertainty with regard to regulation, high levels of volatility, the earthquake in Japan as well as continued structural pressure on many market participants. Despite this, we have continued to make progress across the regions, particularly with our larger customers as they seek strategic partners with the scale, vision and resource to support their broadening needs. The investment we have been making in our multi-asset offering has started to come to fruition, with Citi selecting Fidessa to provide a workflow and trading platform to support their global listed derivatives business. This deal confirms the strength of our proposition for the derivatives markets and positions us well for significant revenue growth in this area of the business. The pressure our smaller customers have been experiencing in recent years has continued and we believe that this has further to go, with more of these firms expected to consolidate or leave the market during 2012. Within our larger customer base we have also seen some instability with the demise of MF Global and the RBS announcement that it is exiting its equities business. Whilst the situations at MF Global and RBS clearly indicate the difficulties being experienced by some of our customers, we believe that they are related to specific issues at these firms and are not representative of a general market trend among larger firms."

Commenting on current trading, Chris Aspinwall continued:

"In the short-term, given the stress that is still apparent within the financial markets, we believe that conditions will remain difficult for some time to come. However, we believe there will still be good opportunities for growth, particularly through extending our derivatives ppresence and leveraging our infrastructure to deliver greater value to our larger customers. In order to develop these opportunities we are increasing our development spend, both in terms of actual product development and also in terms of investment in the infrastructure and expertise required to support these initiatives. As a result of this investment and the ongoing market conditions, we believe that whilst we can continue to deliver growth in 2012, this growth is likely to be at levels which are lower than we have seen during 2011.

Looking further ahead, we believe that we will see stability returning to the markets and that reduced headwinds will enable us to return to more historic growth levels as our new initiatives gain momentum. Fidessa will continue to play an important role in providing the solutions that the industry needs and we will maintain our position as an important participant within the financial community. We expect that there will be a long-term, ongoing focus on efficiency within the market resulting in further significant growth opportunities, and we will maintain our strategy of investment in the business to bring the right solutions to our customers across all the regions in which we operate."

Financial Summary

In 2011, Fidessa delivered growth in revenue of 6% to £278.3 million (2010: £262.3 million). The growth rate has been constrained by the relative strength of Sterling and at constant currencies the revenue growth would have been 7%. There continues to be an impact on revenue growth from insolvencies, consolidation and restructuring across the sector and in the absence of these events the growth rate could have been more than six percentage points higher. There was a step up in the level of these events in the latter part of 2011, with the largest individual item being the closure of MF Global, which represented 1.3% of total revenue. The turbulence has continued into 2012 and the impact on the revenue growth rate in the current year from events that have already occurred is expected to be at a similar level to that seen in 2011.

The growth achieved in the year has been in both recurring and non-recurring revenue with the recurring revenue now representing 82% of total revenue, being £228.7 million (2010: £213.5 million). The breakdown of recurring revenue generated by market sector is £139 million (2010: £133 million) from sell-side trading, £15 million (2010: £14 million) from buy-side trading, £50 million (2010: £43 million) from connectivity and £24 million (2010: £23 million) from market data.

On a regional basis, the Americas showed the strongest growth with an increase of 12% and accounted for 36% of total revenue, whilst Asia grew by 8% and accounted for 15% of total revenue and Europe grew by 2% and accounted for 49% of total revenue. The tragic events in Japan have impacted the growth rate for Asia. They resulted in an immediate loss of fee-earning days that reduced revenue by £0.5 million. There has been an ongoing consequential effect through the year resulting in the revenue from Japan declining 8% in the year.

The deferred revenue in the balance sheet at the end of the year was £48.2 million (2010: £47.5 million). The deferred revenue balance represents 17% of revenue and can be recognised as such in the forthcoming months.

Growth in EBITDA (earnings before interest, tax, depreciation and amortisation) and operating profit has also been achieved. EBITDA has increased by 6% to £52.7 million (2010: £49.6 million). The adjusted operating profit was up 8% to £42.9 million (2010: £39.8 million). The growth rate has been constrained by the relative strength of Sterling and at constant currencies the growth in adjusted operating profit would have been 9%. This represents an operating margin of 15.4% for the year, up slightly from the 15.2% achieved in 2010. The adjusted operating profit has been measured before the amortisation of acquired intangibles. The unadjusted operating profit was up 13% to £42.1 million (2010: £37.3 million). Staff numbers have increased in the period and the average headcount for the year was up 10% at 1,681 (2010: 1,532).

The underlying tax rate has improved to 29.5% (2010: 31.9%), benefiting from the lower UK tax rates and the mix of earnings from overseas operations. This measure excludes from the 2010 calculation the effect of the majority of the Touchpaper gains being non-taxable. The effective tax rate including these gains is 29.5% for 2011 compared to 30.1% for 2010. The cash tax rate continues to be lower than the charge in the income statement and was 26.2% (2010: 27.9%).

Diluted earnings per share, adjusted to exclude the amortisation of acquisition intangibles and Touchpaper gains, was up 11% to 82.4 pence (2010: 74.4 pence). The directors believe this measure of earnings per share provides a better indication of the underlying performance of the business. The unadjusted diluted earnings per share was up 7% at 81.0 pence (2010: 75.6 pence).

The business continues to be strongly cash generative, closing the period with a cash balance of £70.9 million and no debt. During the year dividends of £28.8 million (2010: £25.3 million) were paid, which included the payment of a special dividend of £16.4 million (2010: £14.2 million). The net cash generated from operating activities was £70.5 million, representing an operating cash conversion rate of 166%.

The ordinary dividend for the full year is being increased by 11% to 36.5 pence (2010: 33.0 pence). The final dividend, if approved by shareholders, will be 24.5 pence, to be paid on 28th May 2012 to shareholders on the register on 27th April 2012, with an ex-dividend date of 25th April 2012. In addition, a special dividend of 45.0 pence (2010: 45.0 pence) is proposed and, if approved by shareholders, will be paid at the same time as the final dividend.

Market Review1


Conditions in the financial markets during 2011 were generally more difficult than many of our customers were anticipating, with a widely expected uptick in the second half failing to materialise as the Eurozone crisis deepened. Trading volumes across most of the main equity markets in 2011 were at their lowest levels for many years and there were also high levels of volatility. These conditions had an inevitable impact on Fidessa's customer base, with more companies looking at reducing their expenditure and increased levels of consolidation and corporate failure. As expected, the pressure was most keenly felt by the smaller firms whilst larger firms have generally been able to maintain their position, although there is clearly a strong focus on cost within this segment as well. Against this backdrop Fidessa has continued to make good progress through a programme of helping its customers reduce their costs, extending the range of asset classes it supports, extending its regional coverage and providing increasingly sophisticated infrastructure and data services. This has been demonstrated by the continued strength of the consultancy revenue and contracts for 81 new buy-side or sell-side platforms across the regions. These have included significant sales in North America and Europe as well as Asia, Latin America, the Nordics and Australia. During 2011 almost the entire headwind experienced by Fidessa has been due to market conditions and Fidessa has continued to win market share from its competitors, whilst losses of existing customers to competitors remained negligible. Overall new customer wins have offset the losses due to consolidation and business failures so that the number of customers using Fidessa services has remained stable, although the overall number of users has reduced slightly to just over 26,000.

1 The Market Review addresses the structure of the marketplace and therefore differs from the IFRS segment reporting which reflects the structure of the business operations focused on the method of delivery to the marketplace.

Buy-side Trading

Despite the challenging economic conditions experienced by many buy-side firms, Fidessa's buy-side business delivered good growth during 2011. Economic conditions, along with an increasing regulatory burden, meant that market sentiment within the buy-side remained mixed and continued cost controls at many firms meant that moving ahead with new, large investment management deployments remained difficult. However, firms did look to leverage their existing investments for further asset classes, regions or users in a cost-effective manner and this presented a number of opportunities to expand the usage of Fidessa software and to extend service based solutions. Compliance and regulation also remained key areas of opportunity, and compliance systems spearheaded Fidessa's new sales to larger buy-side firms including the company's first roll out to a domestic Japanese buy-side institution. Fidessa also won Buy-side Technology's 'Best Buy-side Compliance Product' award for the fourth year running, cementing Fidessa's position as the vendor that sets the standard in this space.

Over the year Fidessa has continued to evolve its buy-side business such that it has now become a high quality, strategic partner for its clients, with a robust delivery methodology to match its heritage and pedigree on the sell-side. Fidessa has now forged long-term relationships with its larger buy-side clients that broaden the scope of its activities and allow it to take increased ongoing responsibilities. In 2011, over 25% of existing clients signed up for significantly expanded levels of service from Fidessa, covering a range of services including software, consultancy, connectivity and hosting activities. This included one of the largest global asset managers, State Street Global Advisors (SSgA), who have extended their use of Fidessa's buy-side investment solution to cover fixed income and compliance. In one of SSgA's largest upgrades to its front office systems, the firm now benefits from a single platform covering connectivity, trading workflow and pre-trade compliance for all asset classes.

Market execution capabilities were a key area of growth in the buy-side segment and Fidessa's Buy-side Workstation, with its software as a service (SaaS) based delivery model and broad coverage of trading venues, brokers and asset classes, proved popular. A number of new customers signed globally, including a deal covering users in London and Hong Kong and providing connections to over 40 remote brokers. The Buy-side Workstation's integrated transaction cost analysis (TCA) tools were an important element of this sale and these, combined with its basket trading functionality and handling of allocations, made it the compelling choice in this competitive market segment. During the year the capabilities and breadth of coverage of the Buy-side Workstation were extended still further, including the addition of FX trading functionality and access to FX trading venues.

Fidessa's portfolio of buy-side products and services is now firmly established within the industry and Fidessa is recognised as a market leader in this space. Going forward, Fidessa plans to continue to evolve its buy-side business model and build on the success it has had with its existing clients to grow the business further. Investment in the product set will continue, particularly with regard to leveraging its hosting, delivery and connectivity capabilities, and expanding further the range of services it can offer on a SaaS basis. This work, along with its close partnerships with key clients, positions Fidessa well to build on the sound foundations that have been established and leverage the opportunities that will arise as market conditions improve.

Global Connectivity and Market Data
The Fidessa community not only includes clients that use its trading software solutions, but also the broad range of buy-sides, sell-sides, venues and partners that connect to its global connectivity network to send, receive, trade and service order flow. With the increasing globalisation of markets, the growing desire of many firms to play on the global stage and the ever more complex trading strategies employed, resilient high-performance connectivity to the world's financial markets is now a vital necessity.

Fidessa's multi-asset network operates across the globe and now connects around 2,900 investment firms to 700 brokers facilitating trading on over 200 exchanges and other trading venues. As well as handling order and trade flow, it also supports a broad range of other functions, including pre-trade indications of interest (IOIs) and trade adverts, post-trade confirmations and allocations, and comprehensive real-time market prices and reference data as well.

With the challenging economic conditions that prevailed during 2011, the financial markets remained volatile with reduced trading volumes across most markets. Usage of Fidessa's global network continued to increase over the year, but the value of transactions handled by the network was broadly flat at around US$800 billion per month, reflecting the conditions in the marketplace. The increased usage has come from expansion of the community of brokers using the network, particularly from the emerging regions, increased use by buy-side firms as they adopt Fidessa as their network of choice for their connectivity, as well as from more broker to broker flow. This broker to broker flow is created when smaller niche players leverage the capabilities of their larger counterparts, in terms of reach, scale and advanced trading tools, thus enabling them to offer new services to their clients in a highly cost-effective and efficient manner. Another important feature of the Fidessa network is its multi-asset capability and as Fidessa builds on its success in the derivatives space, this positions it well for further expansion of the supporting connectivity solutions.

During 2011, Fidessa has continued to build the breadth and depth of its data coverage with around 20 new markets added. This growth is driven primarily by the need to provide high quality market data to Fidessa's trading platform clients and, as part of this, Fidessa has already extended its coverage to include many of the derivatives markets around the world. This expansion has meant that Fidessa's capability to offer high quality market data has become an increasingly valuable asset for the business in its own right. As a result, Fidessa is now able to offer pure data-feed services whether this is to trading system clients or other types of user. In 2011 ten such deals were signed and, because data from this type of service is often used across a large number of users, third party systems or in-house services within an organisation, the size of these deals tends to be larger than would normally be seen with a typical workstation transaction.

Fidessa believes the trading landscape will continue to change, fuelled by new regulations, new technology and the drive for competitive edge. This will result in the emergence of more new trading venues as well as new interfaces at existing trading destinations. These, coupled with the ever-increasing levels of data and the drive for faster and faster performance, mean that Fidessa will continue to invest in the network infrastructure and the development of connectivity software as a key element of its business. During 2011, Fidessa continued to enhance its offering with new data centre locations, the launch of a new, high-performance market data collection and dissemination architecture, and upgraded technology within its network infrastructure providing higher capacity with lower levels of latency. During 2012 Fidessa will continue these investments ensuring that it remains at the forefront of this key area of trading infrastructure, and creating new opportunities for Fidessa to deliver new services to the financial community.

Sell-side Trading

Fidessa's sell-side customers continued to face challenging market conditions during 2011. Fidessa has responded by supporting its clients' aspirations as they diversify their operations across more regions and asset classes, and look for a supplier with the scale and integrated global platform capabilities they need. This has resulted in further expansion of Fidessa's footprint with systems now live across the Nordics, Brazil, Mexico, Australia and a number of Asian countries. The expansion of Fidessa's footprint has also been accompanied by an expansion of Fidessa's global infrastructure capability adding new regional data centres, increased network capacity and new facilities in São Paulo and Sydney. In total over 20 new trading venues were added to Fidessa's platform during the year. These investments are enabling Fidessa to offer all its customers, regardless of size, a greater breadth of services which help them to rationalise their infrastructure and reduce their overall operating costs and maintain Fidessa's position as a class leader.

Fidessa has continued to work hard on the development of its multi-asset sell-side strategy focusing on the addition of support for the derivatives markets. Increasing market coverage and building better execution tools combined with industrial strength workflow remain the cornerstones of this development. During 2011 this initiative has been rapidly gaining momentum, with over 40 customers now using elements of Fidessa's derivative offering within their workflow. This progress was underlined in October when Fidessa signed an agreement with Citi to provide it with a class leading workflow and trading platform for the bank's global listed derivatives business. This partnership will see Citi leverage Fidessa's scale and distribution to deliver a fully managed service that satisfies its listed derivatives needs around the world. As part of this solution Fidessa will be providing Citi with a global order management and distributed low latency execution platform along with Fidessa's integrated algorithmic trading engine. The Fidessa solution will also deliver next-generation risk management functionality, comprehensive market data and a global order routing service. As Fidessa maintains its investment in this area it is continuing to work with some of the leading firms in the derivatives markets and expects to further expand its franchise in this important area.

With trading becoming more global and cost pressures increasing, fragmentation of liquidity has remained a universal issue and, despite lower volumes, Fidessa has continued to see an increase in the level of fragmentation as liquidity venues have set up regional operations. This included Australia, where regulatory changes have allowed trading of equities to become multi-market, opening the market to competition in a similar way to that seen in the US, Canada and Europe. In 2011 Fidessa signed a deal with the Australian Stock Exchange (ASX) to provide a new breed of smart workstation which provides smart order routing and enables the ASX's customers to trade efficiently in the newly fragmented market. Fidessa has now established data centres and office facilities in Australia to support its growing presence in this market and expects to extend its Australian customer base during 2012.

During 2011 Fidessa has been expanding its range of "Fidessa Intelligence" services. These services are designed to help customers understand and analyse trading performance, identify and leverage trading opportunities, provide better and timelier information to their clients and to better understand cost and revenue dynamics. A range of consistent tools enables firms to leverage the wealth of information within Fidessa to identify client opportunities and then flow seamlessly into their best execution policies. Comprehensive post trade analysis and industry standard analytics then support their actions enabling them to tangibly demonstrate to their clients the quality of service provided. These services bring together many of the disparate elements that are already being used in the industry including TCA, execution cost analysis (ECA) and fragmentation analysis, as well as some additional services which enable customers to provide a better service to their clients and gain a better understanding of the profitability of each client. In a cost conscious market, Fidessa expects the use of these services will continue to expand during 2012 and plans further investment in the offering.

As expected, the new regulation that was proposed following the financial crisis in 2008 has not materialised within the published timelines. The proposals for both US and European regulation are running significantly behind plan, with the proposals for MiFID II, which had already been pushed back to Q4 2011, now slated for Q1 2012 at the earliest. The rule making on OTC derivatives in the US resulting from the Dodd-Frank Act has been delayed until Q2/Q3 2012; however there remains a commitment made at the recent G-20 meeting that "all standardised OTC derivatives contracts should be traded on exchanges or electronic platforms, where appropriate, and cleared through central counterparties by end 2012 at the latest". It therefore remains unclear, at this time, the extent to which tangible progress will be made in implementing new regulatory compliance rules during 2012; however Fidessa expects that the regulatory environment should gradually start to get clearer and that this will create opportunities.

2011 Important Events

During 2011 the key event in the Group's development has been the implementation of the Group's business plan against the background of challenging markets and an unstable macroeconomic environment. The unpredictable nature of the markets has increased the level of risk faced by the Group compared to prior years. Despite this environment, the Group has continued to deliver good growth through focus on market requirements, delivering lower cost of ownership whilst still allowing customers to maintain their position in the market. In particular, the Group has expanded its multi-asset class offerings, provided solutions allowing its customers to participate within the more fragmented liquidity environment, expanded its data services, provided increased connectivity to electronic trading flows and extended its support within new regions.

Other important events are as noted elsewhere in this results announcement.

Risk Factors

As with all businesses, the Group is affected by certain risks, not wholly within its control, which could have a material impact on the Group's performance and could cause actual results to differ materially from forecast and historic results.

The principal risks and uncertainties facing the Group include: the current state of the world's financial markets, regulatory issues affecting Fidessa and/or its customers, customers' financial stability and ability to pay, M&A activity within the customer base and within the technology sector, dependence on Fidessa's core technology, competition, levels of operational spending versus revenue, other economic and market conditions, volatile exchange rates, continued service of executive directors and senior managers, hiring and retention of qualified personnel, product errors or defects, lawsuits and intellectual property claims.

In addition to the foregoing, the primary risk and uncertainty related to the Group's performance for 2012 is the challenging macroeconomic environment caused by the global financial crisis and its impact on Fidessa's customers, which could have a material impact on the Group's performance over the year and could cause actual results to differ materially from expected and historical results. A continued downturn in buy-side trading or in company market valuations, or an increase in discount rates, could result in an impairment to the carrying value of goodwill from the LatentZero acquisition.


Fidessa expects that, in the short-term, conditions will remain difficult for some time to come given the stress that is still apparent within the financial markets. However, it believes there will still be good opportunities for growth, particularly through extending its derivatives presence and leveraging its infrastructure to deliver greater value to its larger customers. In order to develop these opportunities Fidessa is increasing its development spend, both in terms of actual product development and also in terms of investment in the infrastructure and expertise required to support these initiatives. As a result of this investment and the ongoing market conditions, Fidessa believes that whilst it can continue to deliver growth in 2012, this growth is likely to be at levels which are lower than those seen during 2011.

Looking further ahead, Fidessa believes that it will see stability returning to the markets and that reduced headwinds will enable it to return to more historic growth levels as its new initiatives gain momentum. Fidessa will continue to play an important role in providing the solutions that the industry needs and will maintain its position as an important participant within the financial community. Fidessa expects that there will be a long-term, ongoing focus on efficiency within the market resulting in further significant growth opportunities, and will maintain its strategy of investment in the business to bring the right solutions to its customers across all the regions in which it operates.

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