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| 2010 | 2009 | Change | |
| Revenue | £128.5m | £116.0m | +11% |
| Adjusted operating profit(1) | £19.5m | £15.7m | +24% |
| Operating profit | £17.3m | £12.6m | +37% |
| Adjusted pre-tax profit(1) | £19.5m | £15.8m | +23% |
| Pre-tax profit | £19.5m | £12.7m | +54% |
| Adjusted diluted earnings per share(1) | 36.5p | 29.7p | +23% |
| Diluted earnings per share | 38.0p | 23.2p | +64% |
| Interim dividend per share | 11.0p | 10.0p | +10% |
| Cash | £39.8m | £25.0m | +59% |
(1)Adjusted where relevant to remove the effect of Touchpaper
gains, acquisition intangibles amortisation and notional interest charge
Constant currency growth rates for revenue and operating profit
were identical to the absolute growth rates
Highlights for the period ended 30th June 2010:
- Revenue up 11% with 81% recurring.
- Strong progress in Asia and first substantial sale into Middle East market.
- Adjusted operating profit up 24% on higher margin.
- Cash of £39.8m after payment of £14.2m special dividend.
- Customer numbers, user numbers and transaction volumes continuing to grow.
Commenting on these results, Chris Aspinwall, Chief Executive, said:
“Fidessa has delivered good growth for the first half of 2010 with progress across all regions, despite the uncertainty remaining within the financial markets. This has included a strong performance from our business in Asia and our first substantial deal in the Middle East region. Whilst the markets have been more stable during the first half of 2010, there is still significant uncertainty with regard to both the macroeconomic environment and the impact of regulation on the market. In some areas this uncertainty is creating opportunities, where the breadth of the Fidessa product set gives our customers the flexibility to respond rapidly to changing market conditions and makes Fidessa a key strategic partner across their business. However, there are also areas, particularly within smaller firms, where the uncertainty is causing them to delay before committing resources to develop their business. It is mainly within these smaller firms that we are also seeing a level of consolidation and restructuring, which has continued at similar levels to that which we saw in the second half of 2009 and we expect it will continue to be a feature of the market for some time. Overall, our ability to help our customers take advantage of new business opportunities, whilst also helping them to control their costs, has enabled us to deliver good growth for the first half. The strength of our business has been reflected in a number of key metrics, including an increase of over 20% in the volume of transactions going through our network, and has also been reflected in our cash balance which has reached £39.8 million (£25.0 million at 30th June 2009) after paying a special dividend of 40 pence per share (£14.2 million)."
Commenting on current trading, Chris Aspinwall, continued:
“Looking ahead, we believe the market will remain difficult to predict for some time to come and it is unlikely that we will know the true nature of the economic situation, or of prospective government regulation, during this year. Despite this, we are confident that we can deliver good growth for 2010 as a whole although, as previously stated, we do not believe that the overall rate of growth will be as high as that seen during 2009. Due to the current difficulty in predicting the market, we are continuing to adopt a more cautious approach and are maintaining a higher level of cost control to provide an additional level of contingency.
Looking further ahead, we believe that Fidessa will continue to play an important role in providing the solutions the industry needs at all levels within the community. We expect that as the markets develop, this will result 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
For the six months to 30th June 2010 good growth in revenue has been achieved, up 11% to £128.5 million, from £116.0 million for the same period last year. The growth in recurring and non-recurring revenue was consistent so recurring revenue continues to represent 81% of total revenue, being £103.8 million (2009: £93.9 million). The deferred revenue in the balance sheet at the end of June was £43.9 million (£47.7 million at 31st December 2009, £38.1 million at 30th June 2009). The decrease in deferred revenue during 2010 results from a change in the timing of billing for data services.
There continues to be some impact from insolvencies, consolidation and cost cutting across the sector and in the absence of these events the growth rate could have been at least eight percentage points higher. The frequency of these events has slowed from the peak and during the period it has been at a similar rate to that seen in the second half of 2009.
Looking at the breakdown of recurring revenue across our areas of focus, indicative values for the first six months are that £65 million (2009: £59 million) arose from sell-side trading, £7 million (2009: £7 million) from buy-side trading, £20 million (2009: £18 million) from connectivity and £12 million (2009: £10 million) from market data.
Strong growth in EBITDA (earnings before interest, tax, depreciation and amortisation and adjusted for capitalised product development) and operating profit has been achieved. EBITDA has increased by 22% to £24.7 million (2009: £20.2 million), representing an EBITDA margin of 19.2% (2009: 17.4%). The adjusted operating profit was up 24% to £19.5 million (2009: £15.7 million). This represents an operating margin of 15.2%, up from 13.5% in the first half of 2009 and consistent with that achieved for the whole of 2009. The adjusted operating profit has been measured before the amortisation of acquired intangibles. The unadjusted operating profit was up 37% to £17.3 million (2009: £12.6 million). Staff numbers have increased in the period but at a slower rate than the revenue growth. The average headcount for the period was 1,504, up 6% from 1,420 for the same period in 2009.
Currency movements had minimal effect on these results and the constant currency growth rates for revenue and operating profit were identical to the absolute growth rates reported.
In 2008 the disposal of the investment in Touchpaper resulted in a material one-off gain. The disposal incorporated retentions for potential claims against indemnities and warranties in the sale agreement. The period for such claims has expired without any material claims being received and results in a gain of £2.1 million in the period.
The underlying tax rate was 33.1%, being a small improvement from the 33.3% for the whole of 2009. This measure excludes the effect of the Touchpaper gains, which are non-taxable. The effective tax rate including these gains is 29.6% compared to 32.2% for the 2009 year.
Diluted earnings per share, adjusted to exclude the amortisation of acquisition intangibles, Touchpaper gains and notional interest charge, was 36.5 pence for the period, an increase of 23% from 29.7 pence for the first half of 2009. 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 64% at 38.0 pence (2009: 23.2 pence).
The business continues to be strongly cash generative, closing the period with a cash balance of £39.8 million and no debt. This is a step back from the £45.5 million balance at the end of 2009 as a result of dividend payments of £21.3 million during the period. The cash generation in the period was helped by strong collections and relatively low capital expenditure. As previously reported, the market conditions had impacted cash collections and the improving trend seen in the latter part of last year has continued through the period. The net cash generated from operating activities was £25.4 million, representing an operating cash conversion rate of 146%.
The interim dividend has been increased by 10% to 11.0 pence and will be paid on 27th September 2010 to shareholders on the register at the close of business on 27th August 2010, with an exdividend date of 25th August 2010.
Market Review1
Introduction
Whilst the stability of the markets has improved considerably from the situation during the financial crisis, the current conditions mean they are still very difficult to predict. Negative news flow surrounding debt levels across Europe and North America and a rapid switch from fiscal stimulus to austerity measures across a wide economic area are all without precedent and make the future direction of the markets unpredictable. In addition, whilst regulation has been talked about at length and some legislation has been approved, very little has come into effect and the shape of actual regulations and the timing of their introduction is still very unclear. As a result there is a general level of uncertainty across Fidessa's customer base, particularly within smaller firms, and it is expected that conditions will be more volatile than normal with the potential for rapid swings in sentiment. The first half of 2010 has also seen further consolidation and restructuring of firms within the financial markets, which has continued at a similar level to that which we saw in the second half of 2009 and is expected to be a continuing feature of the markets whilst conditions remain unpredictable.
Despite this economic backdrop, Fidessa has continued to make good progress in the first half of 2010 as customers have looked at how best to position their business whilst also controlling their operating costs. In particular, there have been growing opportunities in the new regions, especially Asia and Latin America, where customers believe that these regions will provide long-term opportunities and can provide a hedge against potential volatility in the primary markets. Fidessa has also made progress in the Middle East with the signing as a customer of Saudi Arabia's NCB Capital, the investment banking arm of National Commercial Bank, the largest bank in Saudi Arabia. This represents the first substantial deal Fidessa has signed with a local client in this region. Throughout the business there has also been growing use of Fidessa’s derivatives capability, an on-going shift towards electronic trading and a continued increase in the fragmentation of liquidity. The number of customers using Fidessa’s services has continued to increase with almost 900 customers taking solutions from Fidessa with nearly 26,000 users.
As some of Fidessa’s services mature into valuable assets, opportunities are also developing to leverage them in combination with other services. For example, the comprehensive connectivity network when taken in tandem with the electronic trading components and integrated market data forms a compelling proposition for many firms enabling them to quickly develop a successful electronic business.
Looking ahead, it seems clear that the pressure for new integrated cross asset class services, combined with increased compliance requirements and higher levels of global trading, will continue to grow. Fidessa believes that the range of services it can provide in these areas is unique, so that despite the short-term uncertainty in the market, it is well positioned for long-term growth.
Buy-side Trading
During the first half of 2010 the markets have remained challenging for many buy-side firms with an unpredictable investment climate. There has, however, been a gentle improvement in sentiment and an expectation of more favourable market conditions. A number of Fidessa’s larger customers are therefore looking for long-term strategic relationships which can deliver cost effective, cross asset solutions. Broadening the scope of the relationship and implementing cross asset solutions in this way both increases the effectiveness of the end solution whilst also significantly reducing the total cost of ownership. This trend has resulted in increased demand for upgrades within our client base as well as the development of closer relationships between Fidessa and a number of its larger buy-side customers.
There is anticipation of additional regulation of the financial markets across the buy-side with potential impact from the financial reform act in the US and UCITS IV in Europe. This has generated increased interest across all regions for solutions to assist with compliance and operational control, particularly in structured audit of the trading workflow and fund composition. Compliance is an area in which Fidessa has continued to make progress and, in addition to sales in its main regions, has also achieved the first sale of its Sentinel compliance product in the Japanese market.
The focus on total cost of ownership has also driven buy-side firms to consider outsourced solutions as an alternative to owning and operating their own technology. At the end of 2009 Fidessa launched LatentZero as a Service, giving customers the opportunity to access a comprehensive workflow solution at a very attractive price. The solution leverages the infrastructure, data centres, network and high quality data services that Fidessa already has in place for its sell-side operations. Since its launch, this pioneering new service has attracted considerable interest and during the first half of 2010 Fidessa secured its first customer for this service. Fidessa is now focusing on the successful delivery of the service into a full production environment and is expecting to sign further customers for it.
The Fidessa execution management workstation (EMS), which provides order routing and execution tools for non-member firms to trade financial markets, has continued to expand with the addition of new functionality and new customers. In particular, the addition of program trading functionality and improved Asian data coverage has made the EMS product applicable to a wider audience, with 25 customers added during the first half.
Global Connectivity
Fidessa’s connectivity service provides a vital tool for participants in the world’s financial markets, connecting buy-side investment firms to sell-side brokers, brokers to global markets and providing a range of other connectivity tools in support of the trading process. Instant communication of electronic order flow is an imperative of today's trading and the desire of firms to embrace global strategies, as well as the on-going fragmentation of liquidity across multiple venues, mean that a fast, reliable, comprehensive connectivity service is a key requirement.
Despite the challenging economic environment, the Fidessa community has continued to grow with more firms joining the connectivity network and more transactions taking place across it. Fidessa now supports around 12,000 connections across the network and in the first six months of this year, activity has increased by over 20%. The total value of business transacted across the network has also risen to around $700 billion per month. Advanced trading strategies such as algorithmic and high frequency trading have also helped drive network activity, as well as increase demand for the fastest trading links.
Although already providing a global footprint to clients, new alternative venues are always appearing and interest in emerging regions continues to grow. As such, Fidessa has continued to expand its network coverage both for more established regions and for emerging markets. In 2010, new venues and brokers have been added across North and South America as well as across India, South East Asia and Japan. In total the number of broker connections across the network actively handling Asian order flow has increased by almost 30%. In support of this expansion, and the geographic broadening of the client base generally, Fidessa continues to invest in its network infrastructure and has opened its latest network hub in Singapore. For the first time, alternative trading venues are appearing in new regions, such as Asia. This further fuels the need for broader market connectivity in these regions as orders are routed through to the right destination in order to achieve the best price.
As well as providing access to traditional equity markets, the Fidessa connectivity network also supports other exchanges and instrument asset classes. In the US an increasing number of brokers are joining the network to receive derivatives flow such as US equity options, and the interest in trading derivatives contracts within the Fidessa community continues to increase.
Alongside comprehensive connectivity comes the need for fast and accurate market data, and Fidessa has continued to expand its capabilities in this area. New markets and data sets are always being added and the technology upgraded as data volumes increase. With global data collection “ticker plants” located in key financial centres, the power and sophistication of the data service Fidessa can now offer has made it a valuable asset in its own right. In 2010 Fidessa signed its first pure data-feed client, taking a data only solution which they then process for themselves. This clearly demonstrates the independent value that Fidessa’s investment in data collection can provide.
Fidessa’s connectivity and data services remain key and integrated parts of the total solution that Fidessa offers the community, as well as being standalone services in their own right. The value of this Fidessa community is now clearly evident, with an increasing number of firms now connected so that they can receive the order flow available, or get fast, resilient access to the entire global financial marketplace from one place.
Sell-side Trading
Fidessa has continued to make good progress with its sell-side offerings during the first half of 2010 as customers have looked to develop new services and expand into new niches. Demand has been split, with many smaller firms looking to focus on providing specialised services and reduce costs whilst larger firms have been expanding into new regions and driving their electronic trading capability. The regional expansion has particularly focused on Asia and Latin America, which have looked more attractive against the backdrop of uncertain economic conditions in Europe and the US. Demand has also been increasing in Canada where recent developments have allowed the market to adopt some of the sophisticated trading tools traditionally seen in the US markets. Fidessa has responded to these opportunities by developing and enhancing its market connectivity and broker network coverage, as well as extending its trading and compliance functionality. Fidessa has also opened a point of presence in Singapore giving trading firms in this country direct, high speed access to its network and is planning to open data centres to support the Canadian market in the second half of 2010. These developments are allowing Fidessa to provide a more functionally rich and complete solution to its clients across both the new and existing regions.With the successful introduction of arrowhead in Japan (the new central market system operated by the Tokyo Stock Exchange) and the performance benefits this has brought, demand has increased for electronic trading solutions which can take advantage of the speeds of the new service. This includes new requirements for high frequency trading where extremely fast (low latency) trading systems are required. The advanced architecture of Fidessa’s trading products makes them ideal for this kind of requirement and Fidessa is already providing a high frequency trading system operating at the leading edge of the ultra low latency industry metrics.
As well as the demand for high frequency trading, there is also a growing requirement for complete electronic trading solutions. This requires the combination of high speed trading functionality, world class connectivity and integrated market data. With a complete set of solutions, this is another area where Fidessa is ideally placed to provide a fully integrated solution. Fidessa’s connectivity network is already one of the most comprehensive in the world and during the first half Fidessa has invested in an advanced connectivity portal which enables trading firms to control and manage their own connections across Fidessa’s network. When combined with the latest versions of Fidessa BlueBox (Fidessa’s algorithmic trading solution) and Fidessa’s full DMA trading capability, this provides a unique solution in this important and growing area of the market.
Whilst it is widely expected that significant new regulation will be introduced following the financial turmoil in 2008, it is still unknown exactly what the nature of this regulation will be. Nevertheless a number of Fidessa’s customers are moving quickly to ensure that they are covering some of the key areas that are likely to be of concern. One specific example of this is in the area of market abuse, where firms need to be able to monitor trading activity to ensure that potentially suspect transactions can be identified and investigated quickly. This is a natural extension to some of the services that Fidessa already provides, particularly Fidessa’s compliance solution for MiFiD and RegNMS which involve bringing together a number of Fidessa’s unique assets to provide an overall best of breed compliance monitoring solution.
The extension of Fidessa’s asset class support to include derivatives remains a key objective. During the first half this has continued to develop with over 25 customers now signed to make use of Fidessa’s support for derivatives markets. During the coming years it is expected that regulation will lead to more control over derivatives trading, and this is likely to result in more of the trading in these instruments moving on exchange. It is anticipated that this trend will increase demand for Fidessa’s services in this area and Fidessa plans to continue its investment in derivatives support.
Fidessa expects that many of the key drivers seen during the first half will continue throughout 2010, with the focus on regional expansion, advanced trading tools, continued fragmentation and multi-asset class support. It is also expected that competition between execution venues will continue to drive development of the core exchange platforms and a number of major upgrades are planned, including an upgrade of the London Stock Exchange’s TradElect system to a new MillenniumIT platform. As these develop Fidessa expects to see further opportunities for expansion and requirements for new products across its customer base.
First Half Important Events
During the first half of 2010 the key event in the Group’s development has been the implementation of the Group’s business plan against the background of uncertainty in the world's financial markets. 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 provided solutions allowing its customers to participate within the more fragmented liquidity environment, increase their connectivity to electronic trading flows and develop their operations 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 2010 is the challenging macroeconomic environment caused by the global financial crisis, 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.
Outlook
Fidessa believes that the market will remain difficult to predict for some time to come and it is unlikely that the true nature of the economic situation, or of prospective government regulation, will be known this year. Despite this, Fidessa is confident that it can deliver good growth for 2010 as a whole although, as previously stated, it does not believe that the overall rate of growth will be as high as that seen during 2009. Due to the current difficulty in predicting the market, Fidessa is continuing to adopt a more cautious approach and is maintaining a higher level of cost control to provide an additional level of contingency.
Looking further ahead, Fidessa believes that it will continue to play an important role in providing the solutions the industry needs at all levels within the community. As the markets develop Fidessa expects that this will result in further significant growth opportunities and it 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.
Please click here to view a Condensed Consolidated Interim Income Statement
1The 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.
