Fidessa reports solid revenue growth despite market volatility
Highlights for the period ended 31st December 2015:
- Solid revenue growth despite volatile conditions in financial markets.
- Fidessa's end markets continue to improve with increasing opportunity for new services.
- Strong growth in multi-asset revenue as derivatives programme continues.
- Strengthening pipeline across the business.
- Recurring revenue increased 7% to £252.5 million (85% of total revenue).
- 61% of total revenue accounted for outside of Europe.
- Strong cash generation, with £78.3 million cash balance after dividend payments of £31.7 million.
- Final and special dividends declared, bringing the total 2015 pay out to 83.5p per share.
Commenting on these results, Chris Aspinwall, Chief Executive, said:
"During 2015, while financial markets remained volatile, we saw a continued improvement in our end markets as they entered a new phase of the recovery, with structural and regulatory changes starting to have an impact. These improvements have resulted in new opportunities and high levels of new business activity, enabling us to deliver solid revenue growth in 2015 and building on that achieved in 2014. As anticipated in the 2014 preliminary results announcement, the increased investment pipeline resulting from the new opportunities has had a small impact on the operating margin. During 2015 the restructuring within our customer base meant that we saw some further closures and consolidations, however the headwind resulting from these during 2015 remained within expectations."
Commenting on current trading, Chris Aspinwall continued:
"As we move into 2016 the recent movements in the financial markets clearly demonstrate the challenging environment in which our customers are still operating. Despite this, we still expect that the themes we have seen in 2015 will continue, with more opportunities opening up as our customers position their businesses for the future. Whilst further delays in the introduction of some of the proposed regulatory changes have recently been announced, we do not believe this will have a significant impact on the opportunities that we see and believe that the investments we have made during the downturn leave us well positioned to benefit from these opportunities. The closures and consolidations we have seen within our customer base during 2015 mean that we are anticipating a higher level of headwind in 2016, and while we expect to see some further closures and consolidations during 2016, we believe this will reduce as markets stabilise. Despite the increased headwind, we still expect 2016 constant currency growth to be at a similar level to that which we have seen in 2015 with good single-digit growth in our core equities business and continued double-digit growth in recurring derivatives revenues."
With regard to Fidessa's dividend policy Chris Aspinwall continued:
"For many years we have had the objective of providing strong returns for shareholders through both capital growth and dividend returns and this continues to be a core part of our strategy. For 2015 we are pleased to confirm both final and special dividends, bringing the total 2015 dividend pay out to 83.5p per share. Furthermore, we do not believe that our current investment programme, including any potential investment in a new fixed income platform, is likely to have a material impact on our ability to pay further special dividends in the future."
Commenting on the longer term outlook, Chris Aspinwall continued:
"Looking further ahead, we believe that we are entering a period where opportunity is returning to the markets. We expect that we will make further strong progress with our multi-asset initiative and believe we are on track to achieve profitability within our derivatives business within the next three years. We will continue to look at the possibility of extending our asset class coverage further, and will update the market as progress is made. We believe that across all asset classes, the market is moving towards service-based offerings and believe that there are increasingly few vendors capable of meeting our customers' business requirements whilst also having the scale and infrastructure necessary to handle the latest compliance demands being made by the regulators. We are committed to playing an increasingly important role in the markets as customers focus on efficiency, transparency, compliance and performance, and expect that as markets stabilise this will provide us with significant opportunities for further growth."
In 2015 Fidessa achieved revenue of £295.5 million which represents growth on a reported basis of 7% (2014: £275.0 million) and compares with a reduction of 1% in 2014. On a constant currency basis, revenue growth of 4% compares with 3% in 2014. Recurring revenue of £252.5 million (85% of total revenue) grew 7% in the year (2014: £235.0 million and 85% of total revenue). Sell-side equities grew 4% during the year and buy-side declined 3%. The sell-side derivatives business accounted for £36.0 million or 12% of total revenue in the year, up from 8% of total revenue in 2014. The ongoing revenue for the derivatives business was £20.4 million or 8% of recurring revenue in the year, up from 7% of recurring revenue in 2014.
The negative impact from consolidation, restructuring and closures across the customer base was a reduction in revenue of 2% in 2015, which compares to a reduction of 3% in 2014 and a peak of 8%. The closure of the Jefferies Group's Bache futures unit and the Standard Chartered global equities business during 2015 will result in an increased impact from consolidation, restructuring and closures on revenue in 2016.
On a regional basis, 61% of total revenue was accounted for outside of Europe. The Americas grew 12% on a reported basis (6% on a constant currency basis) and was the largest region accounting for 42% of total revenue. Asia grew 16% on a reported basis (12% on a constant currency basis) and accounted for 19% of total revenue. Europe decreased 1% and accounted for 39% of total revenue.
The deferred revenue in the balance sheet at the end of the year was £54.6 million (2014: £50.0 million) and represented 19% of annualised revenue. Consistent with previous years, the accrued revenue balance was minimal.
During 2015 we have seen a continued improvement in our end markets as they enter a new phase of the recovery, with structural and regulatory changes starting to have an impact. These improvements have resulted in new opportunities and high levels of new business activity. This is the primary driver of the increase in total operating expenses for the year which grew 9% to £257.1 million (2014: £236.5 million). Of this increase, £12.0 million relates to an increase in total staff costs and £4.4 million to an increase in communications and data costs. The number of employees at the end of the year was 1,757, an increase of 5% compared to 1,670 at the end of 2014. The development expenditure capitalised of £30.3 million increased £2.7 million or 10% during the year (2014: £27.6 million) and reflected the 10% growth during the year in core development and research headcount. Net capitalisation of development expenditure increased to £2.5 million in the period (2014: £1.4 million).
The adjusted operating profit of £39.5 million is in line with the prior year, being an operating margin of 13.4% (2014:14.4%). As anticipated at the start of the year, the additional investment has had a small impact on the operating margin. Adjusted operating profit has been measured before the amortisation of acquired intangibles. Unadjusted operating profit of £38.8 million is unchanged from the prior year.
The underlying effective tax rate for the year of 24.5% has reduced one percentage point from the prior year and primarily reflects changes in the headline corporation tax rates in the UK and Japan.
Diluted earnings per share, adjusted to exclude the amortisation of acquired intangibles, have increased by 1% to 78.0 pence (2014: 77.3 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 76.5 pence (2014: 75.8 pence).
During 2015, sterling was 7% weaker against the US dollar and currencies pegged to the US dollar and 6% stronger against the Japanese yen. As a result, the constant currency revenue growth rate of 4% was lower than the 7% reported growth rate.
Fidessa continued to be strongly cash generative, closing the period with a cash balance of £78.3 million and no debt (2014: £76.8 million). During the year dividends of £31.7 million (2014: £31.2 million) were paid. The net cash generated from operating activities increased by 6% to £75.5 million (2014: £71.1 million). The ordinary dividend for the year has increased 1% to 38.5 pence (2014: 38.1 pence). The final dividend, if approved by shareholders, will be 25.4 pence and payable on 10th June 2016 to shareholders on the register on 13th May 2016, with an ex-dividend date of 12th May 2016. In addition, a special dividend of 45.0 pence (2014: 45.0 pence) is proposed and, if approved by shareholders, will be paid at the same time as the final dividend.
During 2015 the financial markets started to enter a new phase of the recovery and this has been characterised by a switch away from purely cost focused strategies within Fidessa's customer base. This change in focus has centred on three specific drivers:
· Differentiation, where firms are looking to focus their offerings to deliver unique benefits to their customers in order to secure competitive position.
· Cost efficiency, where firms are increasingly looking at outsourcing and service-based platforms as well as making broader use of their technology in order to reduce the total cost of ownership.
· Compliance, where firms are looking for ways to meet their increasingly complex regulatory and information security requirements in the most cost efficient manner possible.
Throughout the financial crisis Fidessa has invested to extend the range of asset classes it supports, expand its regional coverage and build out its global infrastructure. These investments have positioned Fidessa well in helping its customers to address the cost of non-differentiating activities through a robust, multi-asset, service-based delivery platform. During 2015 these programmes have been further extended with new applications to enhance the level of differentiating functionality customers can achieve with Fidessa whilst also broadening Fidessa's compliance offerings. These enhancements have principally been focused in the areas of trade optimisation and measurement, alongside a new partnership programme enabling carefully selected third parties to leverage Fidessa's infrastructure and bring innovative applications to the Fidessa community. Further initiatives address compliance, for both monitoring and reporting as well as information security at all levels across both buy-side and sell-side. Fidessa has also put in place initiatives to enable its customers to extend their use of Fidessa more widely across their organisations, automating more business processes and helping them to further improve efficiency. These investments, across both buy-side and sell-side, will help secure Fidessa's central position within the financial markets over the longer term and provide a strong base for further growth.
Fidessa's connectivity network has maintained its central position within the market with flow of around $1.7 trillion per month. However, the continued pressure on headcount within the finance industry has seen the total number of users drop slightly to around 23,000.
Across its sell-side business Fidessa has seen increasing opportunity as customers react to the changing environment. Whilst both the volatility and the changes within the markets are putting Fidessa's customers under pressure, Fidessa believes the overall impact of the changes creates an opportunity as firms seek a partner who can provide the complex trading infrastructure they need, as a cost effective service. This enables them to deal with the upcoming regulatory challenges and focus on the unique elements of their business model whilst keeping a tight control on costs. This effect has already been a key driver in the establishment of Fidessa's derivatives platform and is now also noticeable within Fidessa's existing equity business. Within this business there has been a marked increase in interest for larger service-based equity platforms and this has led to new deals for large equity platforms being signed across Europe, the Americas and Asia during 2015.
Within the regions, growth has been particularly strong across Asia, driven by a more dynamic market and interest from super-regional brokers looking to provide services across the region rather than on specific markets. In particular, Fidessa has continued to make progress within the ASEAN region with the expansion of its office in Singapore and deliveries to large regional brokers such as Maybank Kim Eng and RHB Investment Bank. These deliveries have demonstrated the ability of Fidessa's expanded coverage and infrastructure to support the risk checks and local compliance rules required in this region, which currently has some of the most stringent regulations anywhere in the world. Progress in Asia has also continued in the mature Asian markets with a number of new deals signed in Japan, including for a large service-based equity platform. This has further strengthened Fidessa's position in Japan with six of the top eight domestic brokers now using Fidessa for agency trading, as well as many of the country's mid-tier brokers. Fidessa has also signed additional deals with Chinese brokers operating out of Hong Kong, further strengthening its position in this segment.
Whilst Asia has seen the strongest growth, Fidessa has also seen good growth across the Americas. There has been further expansion in Latin America, particularly with opportunities in Mexico and Chile, but there has also been good growth across North America. In this region Fidessa has been able to expand its relationship with existing customers as well as win new customers. Moving into 2016 Fidessa is seeing a more forward looking approach developing within its North American customer base and this is expected to lead to continued opportunity within this region.
During 2015, Fidessa announced its new low touch, low-latency Direct Market Access (DMA) platform which provides brokers with high-performance, scalable and consistent access to global equities and derivatives markets. The platform insulates customers from the ever-changing global trading landscape, allowing them to focus on innovation in their own business. This type of platform is fast becoming a commodity that firms have to be able to offer, with their customers expecting them to "own their execution" so they are in full control of the execution service they offer. Besides low-latency market access, the service also includes frameworks around smart order routing, internalisation, algorithmic trading and risk management. This platform is an ideal area for Fidessa, utilising its core strengths of ability to handle global scale combined with strong technical performance alongside proven delivery. As a result, this is a particularly exciting area for Fidessa and one in which the pipeline is developing rapidly.
Across all regions the overall theme of a market in transition is strongly in evidence with more focus around service differentiation and execution quality. With this background Fidessa has continued to expand its equity offering with the development of tools for optimised trading, including the Order Performance Monitor and Fidessa Prospector tools. These tools shift the whole process of monitoring and achieving best execution from a post-trade activity into real-time, exception based monitoring. This is something which traditional transaction cost analysis (TCA) tools cannot do as they are not integrated into the real-time workflow.
To further assist customers to differentiate, Fidessa has also established a new partnership programme. This programme enables carefully selected third parties to integrate their innovative applications within the Fidessa environment, while Fidessa maintains control over the client experience both technically and commercially. In this way Fidessa is able to offer a route for innovative companies to access the Fidessa community and to meet the complex compliance and information security requirements mandated by regulators. For Fidessa's customers they are able to benefit from an even greater diversity of applications within their Fidessa platform helping them to differentiate their business. The first partner for this programme went live during 2015.
Fidessa has continued to make good progress with its derivatives platform delivering strong growth within this segment. New derivatives platform deals announced during 2015 included a global platform for the Royal Bank of Scotland and a new platform for CIMB in Asia. These firms joined Barclays in rolling out the derivatives platform during 2015. Across the market Fidessa is seeing growing demand for platforms to support exchange based derivatives trading and Fidessa is also broadening into further segments of this market by providing platforms for Commodity Trading Firms (CTFs). Fidessa has continued its investment in the derivatives platform, with extensions into the middle office and further extension into hedge management is planned for 2016. Fidessa has continued to receive accolades for its innovative derivatives platform, winning Futures and Options World's (FOW) sell-side trading system of the year for both their International awards and also their Asia awards, both wins for the third time in a row. Citi, a Fidessa customer for the derivatives trading platform, was also named 'Best Bank of the Year' at the same FOW awards. The level of investment Fidessa is making in the derivatives platform is now starting to normalise as it achieves scale, and Fidessa's derivatives business is currently on track to achieve profitability within three years. In addition to being a valuable business in its own right, the derivatives business also provides Fidessa with a natural entry point into further asset classes within the sell-side.
With the changing market conditions, Fidessa has been investigating the potential of further extensions to the asset classes it supports and during 2015 has been looking specifically at the rates segment of the fixed income market. This research is continuing, with the delays to MiFID II allowing some additional flexibility in the approaches that can be taken. Fidessa expects to continue its investigation into this area during 2016.
Whilst 2015 saw a gradual improvement in market conditions, sentiment within the buy-side remained relatively muted. Fidessa saw a slightly higher headwind from consolidation, restructuring and closures within the buy-side than was seen within the sell-side and there were also some instances where mid-tier buy-side firms looked to outsource their operations to larger buy-side firms. Whilst these factors resulted in a 3% drop in buy-side revenues during 2015, Fidessa expects that they will reduce during 2016 resulting in an improved performance. During 2015 Fidessa has maintained its buy-side investment, focusing this into specific areas to address particular challenges seen within the industry.
Compliance has always been a key area within the buy-side workflow, and the increasing regulatory focus on buy-side firms means this is becoming an ever-stronger theme. Fidessa's Sentinel portfolio compliance solution is already established as a leading product in helping buy-side firms ensure that they are managing their portfolios correctly against their strict mandates. Recent enhancements include a new Analytic Builder which empowers business users to directly introduce new data and calculations, and an Auditing Workbench which provides internal and external auditing tools. These additions have helped win new customers for both enterprise and service-based solutions in 2015, and were also recognised by the industry when Sentinel won best buy-side compliance solution at the Compliance Register Platinum Awards, and best compliance product at the Buy-side Technology Awards.
During 2015, Fidessa also delivered against a significant compliance development agreement with a tier-one investment firm. This agreement has seen Sentinel extended into the 'trading compliance' space to address the evolving needs of asset managers who are increasingly focused on trading control and operational risk, driven by the cost of unwinding trading errors and the reputational damage caused by adverse publicity associated with poor trading practices. Sentinel Trading Compliance operates at a transaction level, rather than a portfolio level, and can monitor regulations, tax rules and client instructions as trading activity occurs. It also provides a uniform, single, centralised control framework that imposes a consistent approach, regardless of the system being used or the region or asset class involved.
The roll-out of the latest version of Fidessa's Investment Management System continued over the year, with the majority of clients now either upgraded or actively engaged in the process. This version incorporates a range of new tools operating across all stages of workflow, from intelligent modelling to smart order routing and maintains Fidessa's strong position in the centre of the buy-side workflow for larger firms.
With its significant coverage of the post-trade affirmation process on both the buy-side and sell-side, Fidessa is uniquely positioned to drive forward the adoption of new open standards within the industry. In the same way that the FIX standard has transformed the order routing process, Fidessa's Affirmation Management Service (AMS) is looking to do the same in the post-trade space. AMS was launched into production in the second half of 2015 and is already processing thousands of transactions between a number of firms across North America, Europe and Asia. This level of activity is expected to build as more firms use the system to process their post-trade affirmations and as adoption within the buy-side community expands.
The AMS service was also recognised as the best new post-trade solution for buy-side firms at the FTF News Technology Innovation Awards. The service currently supports global equity and fixed income instruments, with further asset classes planned for 2016.
The regulatory environment around the world remains complex, with significant amounts of detailed regulation still under discussion and subject to change. However, despite the delays there is an increasing consensus across the markets about the areas that will be affected and the changes that firms will have to make to accommodate them. As this is happening, Fidessa is working closely with its customers to develop a comprehensive programme which will support the new rules and help them maintain their compliance across all regions.
In Europe, despite a level of uncertainty around the rules and the European Commission's proposal for a further one year delay to the MiFID II timeline, Fidessa is seeing market participants press on with their MiFID programmes. Firms have already started to understand the extent of the changes that are likely to be required and are taking advantage of the delay to progress some of these areas. From what Fidessa understands so far, it is clear that MiFID II will have widespread implications for many market participants. Emphasis is being placed across firms on having risk checks at a number of different levels within their workflow along with new requirements around algorithmic trading and algo identification. In addition, across the board, information security is becoming an increasing focus and the EU Network and Information Security (NIS) Directive, which aims at improving national cyber security capabilities, reached political agreement in December 2015. It is clear that firms will remain under increasing pressure to have tighter integration of all their electronic flow for risk and compliance, and to ensure that workflow across all the regulated asset classes is well managed. Despite the delays, liquidity venues are starting to share their upgrade plans for MiFID II, requiring changes from all the firms that connect to them.
In the US, additional compliance continues to be focused mainly around new reporting and functionality requirements associated with the Tick Size Pilot along with initial preparations for the Consolidated Audit Trail (CAT) NMS plan. The Tick Size Pilot, created as a result of the Jumpstart Our Business Startups Act ("JOBS Act"), is a programme aimed at improving liquidity in smaller quoted companies. At the end of 2015 a proposal to move forward with Regulation Automated Trading (RegAT) was unanimously approved by the Commodity Futures Trading Commission (CFTC). Once finalised, RegAT seeks to create a more defined risk and trading regime for all futures contracts traded algorithmically on exchanges in the US.
The Asia Pacific region saw a surge of regulatory scrutiny in 2015, especially around pre-trade risk checks in relation to electronic trading. This is forcing many sell-sides and buy-sides to re-evaluate their existing workflows and risk management, pushing for a more integrated trading infrastructure with centralised risk view and kill-switch functions.
Throughout all regions the increasing focus on regulatory scrutiny and management of risk will put significant pressure on in-house developments, as well as raising the bar for all firms looking to provide solutions to the markets. As this happens, Fidessa expects to benefit as firms look to move away from their in-house developments and identify Fidessa as one of the increasingly few vendors with the scale and infrastructure necessary to handle these compliance demands.
Looking into 2016, Fidessa believes the recent movements in the financial markets clearly demonstrate the challenging environment in which its customers are still operating. Despite this, Fidessa still expects that the themes it has seen in 2015 will continue, with more opportunities opening up as its customers position their businesses for the future. Whilst further delays in the introduction of some of the proposed regulatory changes have recently been announced, Fidessa does not believe this will have a significant impact on the opportunities that it sees and believes that the investments it has made during the downturn leaves it well positioned to benefit from these opportunities. The closures and consolidations Fidessa has seen within its customer base during 2015 mean that it is anticipating a higher level of headwind in 2016, and while it expects to see some further closures and consolidations during 2016, Fidessa believes this will reduce as markets stabilise. Despite the increased headwind, Fidessa still expects 2016 constant currency growth to be at a similar level to that which it has seen in 2015 with good single-digit growth in its core equities business and continued double-digit growth in recurring derivatives revenues.
Looking further ahead, Fidessa believes that it is entering a period where opportunity is returning to the markets. Fidessa expects that it will make further strong progress with its multi-asset initiative and believes it is on track to achieve profitability within its derivatives business within the next three years. Fidessa will continue to look at the possibility of extending its asset class coverage further, and will update the market as progress is made. Fidessa believes that across all asset classes, the market is moving towards service-based offerings and believes that there are increasingly few vendors capable of meeting its customers' business requirements whilst also having the scale and infrastructure necessary to handle the latest compliance demands being made by the regulators. Fidessa remains committed to playing an increasingly important role in the markets as customers focus on efficiency, transparency, compliance and performance, and expects that as markets stabilise this will provide it with significant opportunities for further growth.