LSEG announces interim results
Announcement of interim results for the six months ended 30 september 2009
Nov 25 2009 - 12:00
London Stock Exchange Group plc (“the Group”) today reports results for the six months ended 30 September 2009.
-Revenue of £310.9 million (H1 FY2009: 342.5 million), down four per cent sequentially on H2 last year and nine per cent on the corresponding period last year reflecting continuing competitive and difficult markets in cash equity trading
-Underlying operating expenses1 of £180.2 million (H1 FY2009: £165.6m); down eight per cent against same period last year and down four per cent on H2 last year in constant currency and excluding £20.4 million of non-recurring costs following acquisition of MillenniumIT
-Operating profit1 of £134.8 million (H1 FY2009: £181.0 million), partly reflecting inclusion of £20.4 million (of a total £31 million) non-recurring MillenniumIT related costs
-Profit before tax of £79.4 million (H1 FY2009: £127.0 million)
-Basic EPS of 18.5 pence (H1 FY2009: 30.3 pence) and adjusted basic EPS of 29.0 pence (H1 FY2009: 39.3 pence); the £20.4 million non-recurring MillenniumIT related costs equate to 5.5 pence of EPS dilution in both cases
-Interim dividend of 8.4 pence per share, unchanged from last year’s interim payment
-Strong net cash flow from operating activities of £106.8 million; net cash generated after return to shareholders of £37.6 million – gross drawn debt of £608 million, with £950 million of committed borrowing facilities through to 2012 or beyond
1before impairment, amortisation of purchased intangibles and exceptional items
- Capital Markets (47 per cent of Group revenue): £43.5 billion of new capital raised by companies on or coming to the Group’s primary markets, continuing the trend of re-equitisation. In secondary markets activity trends were mixed reflecting the Group’s diverse portfolio of products:
- average daily UK equity value traded declined 16 per cent vs H2 last year;
- average daily equity trades in Italy grew five per cent over the immediately preceding six months; and
- the volume of trading in the Group’s fixed income (cash) and derivatives markets increased 37 and 15 per cent respectively over the immediately preceding six months
- Post Trade Services (19 per cent of Group revenue): resilient performance with revenue up 16 per cent over the corresponding period last year albeit down slightly on H2 last year due to lower interest spreads, with continuing sequential increases in clearing and settlement contract volumes (up 14 and 11 per cent respectively on H2 last year)
- Information & Technology Services (33 per cent of Group revenue): demand for the Group’s real time data by professional users declined as expected, but mostly offset by growth in other information and technology products, particularly reference data products and FTSE, where revenues were up ten per cent compared with corresponding period last year
- Benefits starting to flow from actions taken to meet market challenges and position for growth:
- management structure streamlined and total headcount reduced by 12 per cent to give annualised cost savings of £11 million
- business increasingly client focused
- Millennium Information Technologies Ltd (“MillenniumIT”) acquired in October to provide a competitive, high performance trading system, which will also deliver at least £10 million annual cost savings from FY 2012
Commenting on the six months, Xavier Rolet, Chief Executive said:
“Despite testing markets, there are some encouraging elements within our first half results. Both the Post Trade and the Information & Technology divisions performed well and in our primary markets business there was a continued flow of capital raising activity. The overall Group performance reflected market conditions depressed by the fall out from turmoil in financial markets last year and increased competition, particularly in UK cash equities trading which, as expected, resulted in a weaker performance in the Capital Markets division.
"The Group is taking a number of actions to diversify, strengthen and grow the business. The acquisition of MillenniumIT is a strategically important first step. As well as providing a high performance trading platform to enable us to compete more effectively, it will help to lower our cost base as part of an ongoing focus on cost reduction and provide further growth opportunities through technology sales in the global exchange market.
“Throughout the Group we are focusing on projects to leverage our considerable asset base and to drive efficiency as we operate in highly competitive and still somewhat uncertain market conditions.”
As expected, over the past six months the Group encountered testing market conditions and increasing competition in its Capital Markets business, most notably in UK cash equities, with the overall effect of lower revenues and profitability in the period. However, there were good performances in both the Post Trade and Information & Technology Services divisions, which recorded increased revenues over H1 last year and in aggregate comprised 53 per cent of Group revenues.
Equity markets staged a recovery in the period in terms of growth in both the FTSE 100 (UK) and the FTSE MIB (Italy) indices, which has benefited the Group to some extent, though values traded still significantly lagged the equivalent period last year which featured heightened volatility and trading levels related to the turmoil in financial markets. The Group has continued to fulfil a vital function in providing capital raising facilities for companies, with record levels of money raised in the first quarter, and the flow of secondary issues continuing right through the half year and beyond. Conditions for IPOs remained difficult, though there was an uplift in new issue activity on our Main Market compared with H2 last year. Lower trading levels, together with intense competition from new trading venues with aggressive pricing, have contributed to lower equity trading revenues, the main area of decline for the Group. Derivative and fixed income trading performed more robustly in terms of trading volumes, although derivatives revenues were impacted by the mix of trading and changes to tariffs to promote market growth.
Across the Group a series of projects are underway to meet market challenges, position us for growth and to diversify revenues. In broad terms, the process can be characterised as:
- getting in shape by retaining a focus on cost reduction, ensuring we are fully client focused and accordingly improving our competitiveness;
- leveraging our core assets, particularly in post trade, non-real time information and technology products, derivatives and fixed income; and
- developing the business through selected partnership opportunities in their various forms.
Benefits from executing this strategy are already evident, with a more streamlined management team, a 12 per cent reduction in Group headcount from the position at the start of the year which will give annualised cost savings of £11 million, an increased client focus and a new technology road map.
Securing a low cost, flexible and high performance trading technology is key to being able to fully compete, and in the acquisition of MillenniumIT we now have an in-house ability to implement a new system towards the end of 2010 that will provide a high performance trading platform and result in lower development costs. It will also allow us to develop related market services and enhance MillenniumIT’s third party technology sales business.
Unless otherwise stated, all figures below refer to the six months ended 30 September 2009. Comparative figures are for the previous six months ended 31 March 2009 (“H2 last year”) to better illustrate recent trends, although comparison is also made to the corresponding H1 period last year. The basis of preparation is set out at the end of this report.
The Group’s performance in the first six months of the financial year reflects underlying market conditions, with revenue of £310.9 million, down four per cent on H2 last year, and down nine per cent on the comparable period (H1 FY2009: £342.5 million). Operating profit for the period, before impairment, amortisation of purchased intangibles and exceptional items, declined to £134.8 million from £159.7 million in H2 last year and £181.0 million in H1 last year. In constant currency, compared with H1 last year, revenues for the period were down 13 per cent and operating profit, before impairment, amortisation of purchased intangibles and exceptional items, declined 28 per cent.
Operating expenses, before impairment, amortisation of purchased intangibles and exceptional items, increased to £180.2 million from £167.2 million in H2 last year and from £165.6 million in H1 last year. Included in operating expenses in the current period is £20.4 million, of a total £31 million, of non-recurring accelerated depreciation and other IT costs relating to the existing TradElect platform, which will be replaced next year as a result of the acquisition of MillenniumIT. Excluding these costs, operating expenses in constant currency were eight per cent lower than the same period last year and four per cent below H2 last year. An additional £5 million of associated non-recurring costs will be taken in H2 this year, and £6 million in FY2011. The MillenniumIT acquisition (for US$30 million/£18 million) is expected to result in estimated annual cost savings of at least £10 million from FY2012.
Exceptional items of £13.6 million principally relate to costs associated with the reduction of 133 in Group headcount announced in the period. At 30 September 2009, headcount fell to 1,006, down from 1,135 at year end, with the final staff leaving under this programme in the third quarter.
Net finance costs reduced to £18.8 million from £27.2 million in H1 last year (which included a £6.8 million exceptional loss related to a gilt lock interest rate contract), reflecting cash generation and lower interest rates. The underlying Group tax rate of 31 per cent (H1 FY2009: 32 per cent), compared with the standard UK tax rate of 28 per cent, reflects the mix of profit between the UK and Italy and the confirmation with HMRC of the deductibility of certain prior year costs.
Basic earnings per share were 18.5 pence (H1 FY2009: 30.3 pence). Adjusted basic earnings per share decreased 26 per cent to 29.0 pence, reflecting the lower revenues and the effect of the £20.4 million of non-recurring costs associated with the MillenniumIT acquisition, equivalent to 5.5 pence per share.
Net cash flow from operating activities was £106.8 million (H1 FY2009: £145.4 million). Capital expenditure in the period amounted to £22.4 million, and full year spend is expected to be broadly in line with the prior year (FY2009: £56.4 million). Net cash generated after dividends was £36.9 million (H1 FY2009: £74.3 million).
The Group retains its prudent financial structure. At 30 September 2009 adjusted net debt was £581 million (after setting aside £125 million of cash for regulatory purposes) while drawn borrowings amounted to £608 million (31 March 2009: £625 million). A new £250 million, ten year bond was issued in June to replace a £180 million bridge facility due to expire in April 2010. Committed credit lines available for general Group purposes total £975 million, of which £950 million extend to 2012 or beyond, providing comfortable headroom.
The Directors have declared an interim dividend of 8.4 pence per share, holding the dividend unchanged from the level at the interim stage last year.
The interim dividend will be paid on 5 January 2010 to shareholders on the register on 4 December 2009.
Current Trading and Outlook
Underlying market conditions remain uncertain, at least in the near term, and competition in cash equities trading is expected to remain intense. During October daily average equity value traded in London increased eight per cent compared with September, while average daily equity volumes were up 13 per cent in Italy, although trading on both markets in November to date has fallen below October levels. In terms of equity capital raising, significant further issues are still taking place, and the pipeline for IPOs appears promising for 2010 although there is no certainty regarding the timing of new issues. In the Post Trade division, increased trading volumes will help drive post trade activities, although with more settled debt market conditions returning, lower interest spreads on margins held will weigh on clearing revenues. Demand for real time data by professional users is likely to remain under pressure in the second half, however the number of terminals remained unchanged in October, while other parts of the Information & Technology Services division remain robust.
The Group is pursuing a range of initiatives and opportunities to grow, diversify and further strengthen the business, while operational efficiency through the ongoing control of costs remains a key priority. These actions will make the Group a more competitive and structurally stronger business.
For further information:
Luca Grassis – Media +39 02 72426 212
Anna Mascioni – Media +39 02 72426 211
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