Fidessa reports solid growth and stability in uncertain market.
Highlights for the period ended 30th June 2016:
· Solid revenue growth, with growth across all business lines and regions.
· Good international spread, with 63% of total revenue accounted for outside of Europe.
· International spread providing stability against uncertainty as a result of Brexit vote.
· Increasing opportunity for new Fidessa services as markets enter a new phase.
· Strong growth in multi-asset revenue as derivatives programme continues.
· Recurring revenue representing 86% of total revenue.
· Strong cash generation, with £66.9 million cash balance after dividend payments of £27.0 million.
· Interim dividend increased by 9% to 14.3p.
Commenting on these results, Chris Aspinwall, Chief Executive, said:
"During the first half of 2016, despite the challenges our customers have faced, the new phase of recovery within our end markets has continued with structural and regulatory changes starting to have an impact. This has resulted in new opportunities and high levels of new business activity which, when combined with the weakness of sterling, have enabled us to deliver strong growth during the first half. As anticipated in the 2015 preliminary results announcement, we expect to see an increased headwind in 2016 as a result of consolidations and closures within our customer base. However, whilst we expect there will be further consolidations and closures in 2016, on the basis of what we can currently see, we believe that this headwind will start to reduce next year.
Moving into the second half, whilst we continue to see structural and regulatory drivers within the market, there is clearly a degree of uncertainty as a result of the Brexit vote. Although it is too early to say what the wider implications of Brexit will be and how this might affect customer activity, we are not currently expecting that there will be any impact on the changing regulatory environment. In particular, we expect that MiFID II will be introduced as planned across Europe and that, regardless of any Brexit negotiations, it will also be implemented in the UK. We continue to believe that we are well positioned to benefit from opportunities that will arise as a result of these changes in regulation. Furthermore, with over 60% of our revenue derived from outside of Europe, we remain well positioned to benefit from any weakness in sterling, providing further support for our strong cash generation and dividend policy. Overall, we expect that 2016 constant currency growth will be around the levels that we have seen in the first half, with the possibility of further headline gains if sterling remains at its current level."
Commenting on the longer term outlook, Chris Aspinwall continued:
"Looking further ahead, although it is clear that the Brexit vote will create some uncertainty for a period of time, we believe that we are entering a period where opportunity is returning to the market. We expect to continue to make progress with our multi-asset initiative and will investigate the possibility of extending our asset class coverage further. We believe that across all asset classes, the market is moving towards the increased use of service-based solutions and that few vendors have both the depth of applications and the scale of infrastructure needed to deliver these solutions. We are committed to playing an increasingly important role in the markets as customers focus on efficiency, transparency, compliance and performance, and expect that this will provide us with significant opportunities for further growth."
For the six months to 30th June 2016, Fidessa achieved revenue of £158.3 million, which represents growth on a reported basis of 9% (2015: £145.9 million and 6% growth). On a constant currency basis, revenue growth of 4% compares with 3% growth for the six months ended 30th June 2015. Recurring revenue of £136.4 million grew 8% and represents 86% of total revenue (2015: £125.9 million, 8% growth and 86% of total revenue).
Revenue for the sell-side business grew 9% and for the buy-side business grew 5%. Within the sell-side business, equities revenue of £128.2 million grew 6% (2015: £120.6 million) and derivatives revenue of £18.9 million grew 30% (2015: £14.5 million), with derivatives revenue now representing 12% of total revenue (2015: 10% of total revenue). As previously communicated, Fidessa expects sell-side derivatives revenue will grow for the year as a whole (2015: full year revenue of £36.0m) but at a much reduced level due to the drag effect of the closure of Jefferies group's Bache futures unit.
Revenue grew in all regions and 63% of total revenue was accounted for outside of Europe. The Americas grew 10% on a reported basis (5% on a constant currency basis) and was the largest region accounting for 42% of total revenue. Europe grew 4% on a reported basis (3% on a constant currency basis) and accounted for 37% of total revenue. Asia grew 13% on a reported basis (6% on a constant currency basis) and accounted for 21% of total revenue.
Foreign currency exchange rates have been significantly more volatile in the first half of 2016 than in 2015. Sterling was 7% weaker against the US dollar and currencies pegged to the US dollar and 14% weaker against the Japanese yen. This has resulted in an increased variance between headline growth rates and constant currency growth rates. During the six months ended 30th June 2016, 71% of revenue was denominated in foreign currencies, predominantly US dollars which accounted for 56% of revenue in the period.
As anticipated, the revenue impact from consolidations and closures across the customer base has continued and Fidessa is expecting an increased rate of 4% for 2016, which compares to 2% in 2015 and a peak of 8%. During the first half of 2016 there have continued to be further consolidations and closures, but Fidessa's current expectation is that these will have a reduced impact on revenue in 2017.
The deferred revenue in the balance sheet as at 30th June 2016 was £56.6 million or 18% of annualised revenue (30th June 2015: £47.0 million, 16% of annualised revenue) with the majority of it expected to be recognised as revenue during the second half of the year. Consistent with previous years, the accrued revenue balance was minimal.
Total operating expenses for the six months ended 30th June 2016 grew 8% to £136.5 million (2015: £126.8 million) reflecting the phasing of increased investments during 2015 and the impact of foreign currency exchange rate movements. The £9.7m increase primarily relates to a £5.4 million increase in total staff costs and a £4.5 million increase in communications and data costs.
Development expenditure capitalised of £15.6 million grew 6% (2015: £14.8 million) and net capitalisation of development expenditure of £1.1m was consistent with 2015.
Fidessa has implemented the research and development expenditure credit regime ('RDEC') during the period. As a result, research and development tax credits previously offset against income tax expense are replaced by research and development grants that will be offset against operating expenses. The new treatment has been adopted with effect from 1st January 2015 and in the six months to 30th June 2016, operating expenses have been reduced by grants totalling £0.8 million.
Operating profit has increased 15% to £22.0 million (2015: £19.2 million), being an operating margin of 13.9% (2015: 13.2%). The operating profit growth benefits from the positive impact of foreign currency exchange rate movements and from the RDEC grants noted above.
The effective rate of tax for the six months ended 30th June 2016 is 28.9% (2015: 25.6%) and the movement in the effective rate of tax is primarily attributable to the implementation of the RDEC rules. The overall impact of RDEC in the six months ended 30th June 2016 is to reduce profit after tax by £0.3m. From 2017, we anticipate adoption of RDEC will have a net benefit on profit after tax and will reduce cash tax payable.
Diluted earnings per share have increased by 9% to 40.9 pence (2015: 37.5 pence).
Fidessa continued to be strongly cash generative, closing the period with a cash balance of £66.9 million (2015: £61.6 million) and no debt. During the period, dividends of £27.0 million (2015: £26.7 million) have been paid.
An interim dividend of 14.3 pence (2015: 13.1 pence) has been declared. It will be paid on 14th September 2016 to shareholders on the register on 19th August 2016, with an ex-dividend date of 18th August 2016.
The first half of 2016 was a challenging time for many of Fidessa's customers as they experienced one of the slowest starts to a year since the beginning of the financial crisis. Despite this market backdrop, Fidessa has continued to see a new phase of recovery within its customer base, characterised by a switch away from purely cost focused strategies towards a more strategic approach. This strategic approach, which involves Fidessa's customers reviewing their positioning for the longer term, can result in customers restructuring some areas of their business whilst also strengthening their commitment in other key areas. During 2016 this will result in an increase in the headwind that Fidessa sees from consolidations and closures as a result of customers restructuring, but in the first half it has also resulted in higher levels of new business activity where customers are committing to and investing in other areas. Where Fidessa has seen this additional investment, the focus has tended to be 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 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.
The investments Fidessa has made to extend the range of asset classes it supports, expand its regional coverage and build out its global infrastructure have positioned it well to help its customers to address the cost of non-differentiating activities through a robust, multi-asset, service-based delivery platform. Fidessa has continued to win awards for this core platform and has seen further customers adopting this approach. The value of this core platform, and the importance of Fidessa's multi-asset strategy, was illustrated during the first half of 2016 with a new deal signed with ABN AMRO Clearing which is described later in this report.
In addition to investing in its core platform, Fidessa has also worked to help its customers achieve higher levels of differentiation. One area in which these enhancements have been focused is in trade optimisation and measurement, where Fidessa's Optimized Trading initiative and Fidessa Prospector have been quick to win awards for innovation. Further initiatives address compliance, for both monitoring and reporting, as well as information security at all levels across both the 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 marketplace and now has a flow of around $1.8 trillion per month, while the total number of Fidessa users has remained at around 23,000.
Across its sell-side business, Fidessa has seen further development as its customers react to a difficult trading environment. The challenges for Fidessa's customers come from several different directions, including new regulation and reporting requirements, increased capital requirements and cost pressures within their own customers. More recently, some additional uncertainly has also been added to these challenges as a result of the Brexit vote. These challenges mean that many firms are reviewing their business models in order to identify how their business needs to be shaped to respond to future demand. Despite this difficult market backdrop, Fidessa continues to believe that these challenges will create opportunities 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.
During the first half of 2016 Fidessa has seen continued progress with its service-based platform across Europe, the Americas and Asia. New deals have included two sales of large/global platforms as well as a number of sales of smaller regional platforms. The large deals included a substantial contract with ABN AMRO Clearing to provide a cross-asset execution service allowing ABN to offer its customers low-latency access to more than 110 futures, options, equities and FX markets worldwide. The platform will be delivered out of eleven key locations around the world. This deal represents another sale of Fidessa's 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 core service 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 service they offer. Besides low-latency market access, the service also includes frameworks around smart order routing, internalisation, algorithmic trading and risk management. The deal with ABN illustrates the strength of Fidessa's global reach and infrastructure and also the growing importance of multi-asset platform capabilities within the sell-side, leveraging Fidessa's investment in both its equity and derivatives platforms. Recognising the lead that Fidessa has established in this space, Fidessa was voted Best Front Office Execution Platform for the second year running at the Waters' sell-side technology awards, which was the seventh award for Fidessa's sell-side platform in a twelve-month period.
Within the regions, Asia has continued to deliver the strongest growth, with further Chinese brokers signed out of Hong Kong and additional platforms delivered in Japan. During the first half, Fidessa has also seen all regions deliver constant currency growth, with EMEA strengthening with growing market share and additional derivatives implementations. Across all regions the overall theme of a market in transition is strongly in evidence, with more focus around service differentiation and execution quality. Fidessa's Optimised Trading initiative, which provides a range of tools, aimed at helping brokers to work more effectively and efficiently is targeted directly at this space. These tools include the Order Performance Monitor, which gives brokers insight into their orders and executions in real time, and Fidessa Prospector, which monitors a range of live and historical data to provide context and help in identifying liquidity. These tools, which have been well received, were quick to win awards for innovation and are already rolling out to customers across the regions.
To further assist customers to differentiate, Fidessa established a new partnership programme during 2015. This programme aims to enable carefully selected third parties to integrate their innovative applications and technology within the Fidessa environment, while Fidessa maintains control over the customer 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. During the first half of 2016, the number of partners within this program has extended to three, including the first partners within the buy-side space. The first sales under the partnership programme have also been made and Fidessa hopes to bring on further partners during the second half.
Fidessa has continued to make good progress with deliveries of its derivatives platform with strong growth in this area of the market. Although there is currently considerable pressure on FCMs (Futures Commission Merchants), Fidessa is seeing growing demand for platforms to support exchange-based derivatives trading and electronic execution, and this is illustrated by the deal with ABN which includes significant elements of derivatives functionality. Fidessa is also broadening into further parts of this market by providing platforms for Commodity Trading Firms (CTFs) with another deal signed in this area during the first half. 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 remains on track to achieve profitability within three years. In addition to being a valuable business in its own right, the derivatives business is also providing 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 for further extensions to the asset classes it supports, 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 approach that can be taken. Additional resource has been brought in to assist with this research and Fidessa expects to continue its investigation into this area during 2016. This additional resource is not expected to have any material financial impact.
Sentiment within the buy-side has remained relatively subdued during the first half of 2016 as market conditions remained challenging for buy-side firms. However, as anticipated in the 2015 preliminary results announcement, Fidessa's buy-side business experienced a reduced impact from consolidations and closures compared to 2015, allowing the business to return to growth. During the first half, Fidessa has continued its investment in its buy-side solutions, focusing on specific areas to address the particular challenges being seen within the industry.
Increased regulatory scrutiny and the likely impact of new regulations, such as MiFID II, mean that compliance has remained a key focal point for buy-side firms. Fidessa's Sentinel portfolio compliance solution is already established as a leading product in helping firms ensure that they are managing their portfolios correctly against their strict mandates. Recent enhancements to Sentinel include enriched counterparty exposure, which addresses the increased complexity in identifying whether an acceptable level of risk is being taken when dealing with a specific counterparty. Historically a good credit rating was sufficient to establish a counterparty's fitness as a trading partner, but regulators now expect buy-sides to aggregate their counterparty exposure across asset classes and also include a myriad of additional holdings where the counterparty is in any way affiliated. Coupled with Sentinel Trading Compliance, which was announced last year and addresses asset managers' increased focus on trading control and operational risk, these new capabilities have resulted in a number of customers looking to expand their use of Sentinel across further business areas. This has resulted in further sales and a growing pipeline, especially in North America. Sentinel was once again recognised by the industry, winning Hedge Fund Manager's Best Compliance Product award earlier in the year.
Buy-side dealing desks continue to pursue the twin goals of best execution and maximum efficiency so they can take advantage of new markets, while demonstrating tight operational controls. Fidessa's buy-side Investment Management System (IMS) allows firms to achieve this by implementing a global, consistent, integrated workflow across all asset classes and regions, whilst at the same time delivering powerful functionality to allow them to maximise returns and enforce controls. Fidessa launched the latest version of its IMS in the first half of the year which delivered enhanced order handling capabilities across futures, options and swaps, comprehensive support for Latin American interest rate futures, more sophisticated fixed-income trading functionality and support for market specific practices in Korea and Japan. Adding to the system's already comprehensive functionality and capabilities, these new features reaffirm IMS's position in the marketplace and help buy-sides identify all crossing opportunities across dealing desks and so deliver the best possible service to their customers.
Fidessa has continued its investment in post-trade services, with more customers signing up to take advantage of its new capabilities and partnerships in this space. The Fidessa Affirmation Management Service (AMS), which was launched last year, has continued to grow with over 50 firms across the world now contracted to use the utility and over 20,000 transactions a month being processed. Fidessa expects to double the volume of transactions going through AMS by the end of the year as the service starts to gain traction, and also expects to make significant progress in expanding the service to cover further asset classes.
Under Fidessa's partnership programme, Fidessa is working with other firms operating in the post-trade space to increase distribution. One of these is a partnership with Alpha Omega, who have an established base within the asset management community providing affirmation processing across multiple third party order management systems. Through the Fidessa partnership programme, Alpha Omega is able to gain access to Fidessa's normalised global network of AMS brokers, expanding their reach while putting more flow across Fidessa's network. Another partnership has seen Fidessa working closely with Commcise around some of the new MiFID II regulation that requires firms to not only unbundle the fees paid by buy-sides to brokers for research, but also to implement a new affirmation process to confirm these fees trade by trade. Leveraging Fidessa's distribution is a natural way to enable this process to be implemented in a cost effective and seamless way.
Regulation continues to be a very active topic around the world, with significant amounts of detailed regulation still under discussion and subject to change. However, despite the delays there is increasing clarity across the markets about the areas that will be affected and the changes that firms will have to make to accommodate them. Fidessa has been 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, the timeline for MiFID II has now been confirmed, with the rules coming into effect on 3rd January 2018. Fidessa is expecting that the MiFID II regulations will apply to all firms in the UK regardless of the outcome of Brexit negotiations, and is continuing to develop its programme on this basis. The scope of Fidessa's MiFID II programme is wide ranging and covers:
· Enhanced controls including pre-trade risk checks.
· Increased transparency including enhanced trade reporting.
· Support for downstream record keeping & transaction reporting including additional order and trade data.
· Enhanced compliance monitoring, including market abuse, best execution and algo monitoring
It is clear that in order to meet the new regulations, firms will be under increasing pressure to have tighter integration of all their electronic flow and to ensure that workflow across all the regulated asset classes is well managed. To support its customers through MiFID II, Fidessa is planning a number of major software releases during 2017 with some elements offered as additional services.
In the US, additional compliance continues to be focused around the new requirements associated with the Tick Size Pilot, along with initial preparations for the Consolidated Audit Trail (CAT) NMS plan, for which the comment period recently closed. The CAT plan is expected to be approved by the end of the year. The Tick Size Pilot, created in part as a result of the Jumpstart Our Business Startups Act ("JOBS Act"), is a programme aimed at studying whether liquidity in smaller companies can be improved by widening the quoting increment, thereby incentivising market makers. It also includes a "Trade-at" provision, the purpose of which is to encourage the routing of orders to "lit" markets.
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). Work on the definition of RegAT continues, with a current plan that the regulation will be finalised before the American election in November and come into effect in the latter half of 2017.
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.