For the six months to 30th June 2013, Fidessa has seen a small decrease in revenue of 1% to £139.3 million (2012: £141.3 million). There has been no significant effect on revenue from changes in foreign currency exchange rates and at constant currency the reduction was consistent at 1%.
Underlying the movement in revenue was continued pressure from the difficult conditions in the equity markets which offset the strong growth achieved in derivatives revenue, which represented 4% of total revenue (2012: 2% of total revenue). Further strong growth is expected in the derivatives revenue throughout 2013.
There has been further consolidation, restructuring and closures across the customer base and the direct effect of these events on revenue for the period was an impact of five percentage points, down from the seven percentage points impact experienced in 2012. From what is currently known, the impact from these events for the year as a whole is expected to be at similar rate to that experienced in the first six months of the year. The rate at which such new events have occurred has been consistent with recent periods but has been concentrated in the smaller customers.
Recurring revenue increased slightly and represented 85% of total revenue, being £118.6 million (2012: £118.2 million). The split of recurring revenue generated by market sector was £70 million (2012: £71 million) from sell-side trading, £8 million (2012: £8 million) from buy-side trading, £27 million (2012: £26 million) from connectivity and £13 million (2012: £13 million) from market data.
On a regional basis, 57% of total revenue is now accounted for outside of Europe. The Americas showed the strongest growth with an increase of 6% and accounted for 40% of total revenue, whilst Asia was flat and accounted for 17% of total revenue. Europe decreased by 8% and accounted for 43% of total revenue. The performance in Asia consisted of a decline in Japan, mostly due to the Yen weakening, that offset strong growth in the remainder of Asia.
The deferred revenue in the balance sheet at the end of June was £50.3 million (30th June 2012: £47.0 million, 31st December 2012: £50.4 million).. The deferred revenue balance represented 18% of annualised revenue and was consistent with the level in recent results.
EBITDA (earnings before interest, tax, depreciation and amortisation) has decreased by 5% to £25.4 million (2012: £26.7 million). Adjusted operating profit has also decreased by 5% to £20.8 million (2012: £21.9 million), being an operating margin of 14.9%. Changes in foreign currency exchange rates have had a small adverse effect on adjusted operating profit in the period and at constant currency the decrease in operating profit would have been 4%. The adjusted operating profit has been measured before the amortisation of acquired intangibles. The unadjusted operating profit was £20.4 million (2012: £21.6 million), a decrease of 6%. The investment in the derivatives opportunity continued and as expected the expenditure on product development increased resulting in a 13% uplift in the value capitalised, being £14.1 million (2012: £12.5 million).
The underlying tax rate has improved to 26.7% (2012: 27.6%) due predominantly to the decrease in the UK corporation tax rate. Subsequent to the balance sheet date lower UK corporation tax rates were enacted for future years and the adjustment to deferred tax assets and liabilities that will arise from these rates is expected to result in a further reduction in the effective tax rate for 2013 of approximately one percentage point. Diluted earnings per share, adjusted to exclude the amortisation of acquired intangibles, was down 5% to 40.1 pence (2012: 42.0 pence). The directors believe this measure of earnings per share provides a better long-term indication of the underlying performance of the business. The unadjusted diluted earnings per share was down 5% at 39.4 pence (2012: 41.3 pence).
The business continued to be cash generative, closing the period with a cash balance of £50.3 million and no debt (2012: £50.7 million). During the period dividends of £25.8 million (2012: £25.6 million) were paid, which included the payment of a special dividend of £16.7 million (2012: £16.6 million).
The interim dividend has been maintained at 12.5 pence (2012: 12.5 pence) and will be paid on 16th September 2013 to shareholders on the register on 16th August 2013, with an ex-dividend date of 14th August 2013.
Whilst the equity markets have seen some improvement during the first half of 2013 when compared to the second half of 2012, overall market conditions have been changeable. The improvement, which has particularly been evident in results posted recently by some larger firms, has led to a welcome reduction in the headwind resulting from consolidations and business closures within Fidessa's customer base, with this headwind reducing from 7% to 5% of revenue. However, the changeable conditions in the market have made it difficult for Fidessa's customers to be confident in making significant investment decisions. This, coupled with slow progress in the introduction of new regulation, has meant that Fidessa has yet to see a significant change of sentiment within its customer base.
Against this backdrop, Fidessa has continued its programme of investment, extending the range of asset classes it supports, expanding its regional coverage and building out its global infrastructure. Fidessa's sophisticated infrastructure and data services, coupled with its growing 24 hour global support capability, allow it to operate complex platforms for its largest customers in a very cost effective manner. Fidessa believes that this ability is becoming increasingly compelling to both buy-side and sell-side firms and expects that more customers will look to Fidessa to operate their platforms on this basis.
Overall, across the business, new customer wins have offset the losses due to consolidation and business failures so that the number of customers using Fidessa services has remained broadly stable, with the overall number of users standing at just under 25,000.
2 The Market Review addresses the structure of the marketplace and therefore differs from the segment reporting which reflects the structure of the business operations focused on the method of delivery to the marketplace.
Although there are signs that market conditions for buy-side firms are improving, with assets under management reaching their highest level since the beginning of the financial crisis, it is too early for this to be meaningfully reflected in buy-side sentiment. As a result, during the first half, there has been little appetite for new, large-scale investment management deployments. However, against this backdrop there is an openness to explore operating models that will allow firms to enhance their existing systems, improve efficiencies and reduce costs. Fidessa's history of providing service-based solutions, along with its global technology infrastructure and consulting services, are consequently particularly important assets and allow it to engage with clients looking at these new ways of working.
Fidessa has continued to work closely with its existing customers, using its business expertise to help them implement best practice throughout their workflows and easing the burden of regulatory compliance, as well as rolling-out additional services. This work included the completion of a substantial deployment of Fidessa's latest buy-side enterprise suite, and also incorporated a delivery of Fidessa's new global trading service (see below) as part of this project. Fidessa's core investment management product suite remains highly regarded and widely used across the industry, and this was recognised at the Markets Media Choice Awards in February when it won the Best Buy-side Order Management System award.
Fidessa has been evolving the solutions it offers to the buy-side, leveraging its investment and capabilities in delivering service-based solutions, so that it can address the growing cost-control and efficiency needs the buy-side is facing. During the first half of 2013, Fidessa has signed a number of new clients for its buy-side global trading service. This service-based solution enables firms to take much greater control over how and where they trade, without the need to maintain any technology or connectivity infrastructure. Fully integrated with Fidessa's global network, the service provides access to a broad range of venues and broker services around the world covering foreign exchange, fixed income, futures, options and equities, as well as providing a suite of analytics and performance benchmarking tools. Accessing a wide range of trading venues, dark pools and crossing networks across multiple asset classes worldwide is now essential to most buy-side firms, and Fidessa believes that the only way it can be achieved efficiently is by leveraging an independent, venue-neutral managed trading service.
Compliance has also remained a key area of focus for the buy-side, as firms prepare for the anticipated flow of new regulations such as MiFID II and Dodd Frank, as well as cope with more complex mandates and instructions from their own customers. These customers are also far more aware of regulations, and often require that their fund managers can demonstrate that they are meeting their compliance obligations in a timely and accurate manner. Increasingly, compliance is no longer seen as simply a burden, but also as a key part of winning and maintaining business as well as creating competitive edge. Fidessa's multi award-winning solution, Sentinel, has continued its track record of being a market leading product in this area. Available on a software licence basis for many years, it is now available as a fully service-based solution, providing global regulatory rule analysis, coding and monitoring, for both pre- and post-trade compliance.
Many buy-side firms are also challenged by the increasingly broad range of multi-asset broker services, crossing engines and post-trade systems around the world that they need to connect to, and the complex technology and connectivity that is required to achieve this. Fidessa's ability to leverage its existing data centre and network infrastructure, and so look after the hosting, operation and management of its customers' technology and connectivity needs, has enabled firms to combat this challenge. This provides buy-side firms with a simple, cost-effective solution which operates globally across multiple asset classes and removes the cost and management overheads of looking after and maintaining their own systems.
The buy-side business is a fundamental and integral part of the Fidessa community and an important strategic area for the Group as a whole. With the challenges that still face the industry, the ability to offer new delivery models allows Fidessa to address the key challenges that buy-side firms face, enabling them to reduce their total cost of ownership for investment management solutions and do more with the assets that they have in place.
Global Connectivity and Market Data
Fidessa's global, multi-asset community includes not only the clients that take its platform solutions, but also an increasingly broad universe of buy-sides, sell-sides, trading venues and partners who need to link to one another across the world. Providing connectivity between participants to facilitate routing of order flow to markets, as well as handling a wide range of pre- and post-trade activities in support of the electronic trading process, has enabled the Fidessa network to become an indispensable service for firms operating in the financial marketplace.
Although market volumes have reduced over the last few years, the global marketplace remains fragmented and complex, with new dark and lit trading venues, as well as partnerships between and changes within existing markets, creating an evolving trading landscape. Coupled with regulations which create obligations to search venues for liquidity and the inevitable focus on managing risk, this continues to drive demand for fast, reliable electronic connectivity solutions to a broad range of global markets.
During the first half of 2013, Fidessa's global network continued to grow and now serves around 775 brokers, 3,600 buy-sides and 200 trading venues across the globe. The value of activity going across Fidessa's global network grew by about 5% reaching around $1 trillion per month. Increasingly the Fidessa network is being used to handle new asset classes which are fuelling this growth and this is a trend which is expected to continue. Fidessa's recent successes in providing global derivatives trading solutions to brokers, as well as enhanced fixed income and foreign exchange connectivity solutions to the buy-side, have been significant contributors to driving these new flows.
Fidessa's network continues to extend its foothold into emerging regions of the world supporting both local and global firms who need to connect to and participate in these markets. In support of this, Fidessa announced a partnership with six Asian brokers to provide a simple, immediate one-stop-shop trading service for the Fidessa community across the ASEAN region. The ASEAN region covers a group of high-profile established and emerging South East Asian markets that are proving increasingly attractive to international investors.
Fidessa's community of buy-side and sell-side firms places it in a unique position to work across the financial marketplace and help drive strategic discussion. During the first half, Fidessa has continued with various initiatives that leverage its community, including looking at ways to remove complexity and reduce costs in post-trade processing. As a result of this, Fidessa is now offering a new FIX-based service allowing buy-sides and sell-sides to perform post-trade confirmation and allocation processing in a more efficient and cost-effective manner. The solution operates through a central hub utilising Fidessa's widely used post-trade workflow software and, through using the FIX open and free protocol, removes the need for proprietary alternatives that typically charge on a per message basis. This initiative, which can significantly reduce operating costs for Fidessa's customers, is another example of how Fidessa is able to add centralised services to its network to benefit its community.
Fidessa's coverage of real-time and reference data for global markets was expanded further, in line with its trading venue expansion, with a number of new derivatives markets coming on stream. Fidessa's suite of bespoke, value-added information services also continued to expand. These are typically web delivered as well as being integrated into its trading solutions and have proved popular with a wide range of market participants. Subscribers to these web-based services have now reached over 4,0003. These initiatives help create valuable proprietary information and strengthen the value members get from being a part of the Fidessa community.
3 Not included in overall Fidessa user numbers
Fidessa's sell-side customers have experienced changeable market conditions during the first half of 2013. Whilst there has clearly been some improvement when compared to the second half of 2012, volumes have still been relatively low compared to historic levels and there has been continued pressure on commissions coupled with ongoing regulatory uncertainty. As a result, Fidessa's sell-side customers continue to be heavily focused on cost and are taking a cautious approach to new developments whilst waiting to see whether markets become more stable.
Against this backdrop, Fidessa has continued to invest and progress in a number of key areas. In expanding its multi-asset solution Fidessa has been rolling-out the first deliveries of its large-scale global derivatives platform, whilst continuing to sign new deals including one with a large US bank. Fidessa has continued to invest in its ability to deliver service-based solutions to all tiers of its client base and is seeing increased interest in this delivery model from larger customers. In addition, Fidessa has maintained its regional expansion, particularly in Asia with the extension of its product set in Japan to support proprietary trading and strong growth throughout the rest of the Asia region.
In support of its multi-asset class expansion, Fidessa has been focused on the delivery of its first large-scale global derivatives platforms. These platforms, which are already supporting 1.7 million tradable instruments across hundreds of end users while also handling substantial electronic flows, represent a major step forward in the products available to service this market, and create what Fidessa believes will become a new industry standard. Whilst accepting that any programme of this scale will see some issues, these roll-outs have been very well received with extremely positive feedback from both Fidessa's customers and importantly from the customers of Fidessa's customers who access the platform as part of the service they receive. During the first half Fidessa has increased its level of investment in the derivatives programme in order to strengthen its position in this new sector. This investment has been focused in the areas of increased support levels across the globe, strengthening Fidessa's infrastructure, improving data quality and bringing forward the development of new components of software. Fidessa's revenue from the derivatives platform has continued to grow very strongly, and a good pipeline of prospects interested in this new and innovative platform has developed.
Fidessa has continued to build on its global infrastructure enabling it to offer its customers a cost-effective, service-based multi-asset platform. Much of the core infrastructure is now in place and Fidessa has been focusing its investment on increasing capacity and coverage and building out its multi-asset support offering to allow it to provide 24 hour support on a global basis. The development of the support offering involves the deployment of a global service desk with capability to pass calls and issues seamlessly between all regions. This capability is used throughout Fidessa's service-based solutions but is particularly important in the derivatives area where many regional markets operate around the clock in order to capture business from all areas of the world. Fidessa is seeing continued demand for its service-based solutions, particularly with the current focus on cost efficiency and potential regulatory change, and continues to believe that this model will prove the most compelling model for firms in all tiers of the market.
Across the regions Fidessa has continued to make progress, with the first deployment of its new service-based proprietary trading platform in Japan, and strong growth across the rest of Asia. The Japanese market has seen a difficult period with firms under long term pressure as a result of many years of stagnation. However, the recent changes resulting from "Abenomics" have seen a revival in segments of the Japanese financial markets. In particular this has provided a boost to the proprietary trading operations within a number of Japanese firms and Fidessa has been able to benefit from this by offering a service-based Japanese proprietary trading platform alongside its agency platform and one that can compete very successfully against domestic built competition. Outside of Japan, Fidessa has seen very strong growth across the Asia region with significant new wins in the Chinese banking sector, extensions into Indonesia and the development of an ASEAN market trading service in partnership with a number of key Asian regional brokers.
Fidessa's customers are still facing an uncertain regulatory situation with much of the new regulation that was proposed following the financial crisis in 2008 being delayed. There are, however, some areas where it is clear that regulation will play a larger role. This is particularly around the areas of reporting and transparency with over-the-counter (OTC) instruments being a focus for increased reporting requirements and the introduction of Swap Execution Facilities (SEFs) which will make trading standardised contracts more transparent. Trading through dark pools is also seeing increased regulation and greater transparency requirements. Whilst these changes are likely to result in more requirements for automated workflow, in most cases it is still too early for Fidessa to develop products to support them until the details of the regulations have been finalised. The regulatory bodies are still making slow progress with defining new regulations, but Fidessa is hopeful that the coming months will see tangible progress in a number of areas.
In a further area of regulatory change, there is some evidence that the Chinese market may be starting to open up further to foreign firms. The limit on foreign investment under the Qualified Foreign Institutional Investor (QFII) programme has almost doubled and changes are being made allowing foreign firms to invest more easily. Proposals are also in place to make it easier for foreign banks to set up subsidiaries in mainland China.
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.
First Half Important Events
During the first half of 2013 the key event in the Group's development has been the implementation of the Group's business plan against the background of difficult 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 perform 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, invested in the infrastructure required to deliver service-based solutions, provided solutions allowing its customers to participate within the 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.
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, delivery risk of complex platforms, 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 2013 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.
Whilst the first six months have clearly seen an improvement in market sentiment, it is still too early for Fidessa to know whether a turning point has been reached. However, the headwind that Fidessa has been seeing from closures and consolidations in the industry has reduced during the first half and Fidessa has a strong pipeline giving an indication that improving conditions may be starting to filter through. Fidessa continues to believe that a floor will be reached in the decline of equity markets which will allow its core end markets to return to a more stable state. This will enable the growth it is generating through sales of its derivatives platforms, service-based platforms and regional expansion, to flow through into overall revenue growth rather than being masked by the decline in traditional equities. As indicated before, it is not clear that this process will start this year and, combined with Fidessa's continued investment programme, means that Fidessa expects performance in second half of 2013 to be similar to that seen in the first half.
Looking further ahead, Fidessa expects that it will see stability and opportunity returning to the markets and believes that it may already be starting to see both of these develop. This will reduce the headwinds Fidessa is currently experiencing and, coupled with further openings as its multi-asset initiative gains momentum, will enable it to return to growth levels closer to those that have been seen in the past. Fidessa remains excited by the potential of its service-based offerings across all asset classes and believes that it will continue to play an important role as the markets focus on efficiency, transparency, compliance and performance.
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