When Graham Ferguson was brought in as FD of First Derivatives Plc (LON:FDP) in August 2008 he took up the financial controls of a business that had big plans to expand around the world. At the time, shares in the AIM listed software and consulting group were trading at around 180p. Today, they are on the cusp of breaking 430p, having surged by more than 60% in 2010 alone. For Ferguson, together with founder and CEO Brian Conlon, a series of acquisitions and constantly evolving service offering have helped to cement those international aspirations. They have also given First Derivatives a niche presence in the market for supplying complex data and trading systems to top tier investment banks and hedge funds.
While the economic downturn caused a great deal of pain for those core clients, Ferguson insists that the drive for efficiency savings that followed actually helped it build stronger ties with them during the bad times. That very fact is reflected in the company’s latest interim figures – sales to August 31 were up 56.2% to £17.7m, Ebitda was up 16% to £3.9m, pre-tax profits were up 5.9% to £3.2m and the half year dividend was raised by 5.2% to 2.9p.
But the numbers not only reflect a growing position in supplying software and consulting services to capital markets clients, they also give a nod to two years of substantial R&D investment in infrastructure. That has allowed the company to embrace a new business model – which now blends the core consultancy offering with traditional licence sales on its technology together with selling software-as-a-service. The first of a new wave of SaaS products – Delta eFX – is now in use by seven of First Derivatives’ clients and processing billions of dollars of transactions per day through its data centres. According to Ferguson, adapting the group’s products to meet client demand has created a platform to grow the group even further.
Graham, the international focus at First Derivatives has grown substantially in recent years so what does a typical day for you involve?
Now that we operate on a global basis, working in Asia, America and Europe, when you arrive first thing in the morning it tends to be pretty intense because you’re catching the end of the Asian day and also finding out what actually happened at the tail end of the American day, the previous day. So the mornings are fairly busy dealing with Europe, closing off Asia and making sure that you’re set up for what needs to happen in America. So really it is about responding to queries, making sure the information that needs to be passed out is dealt with and making sure that, if we’re working with clients or working on closing out contracts or legal agreements with clients, those are dealt with. From lunchtime it all starts again because you’ve got Europe then America back online and, in the evening Asia. So it’s a comprehensive day, making sure that each avenue of the organisation is getting its queries dealt with, making sure that there are no hold ups in the system in terms of progressing with our clients and getting new agreements signed and making sure that we run efficiently back at Head Office so that we’re ready to action and effect on the next opportunity.
How would you describe your market focus – who are your customers and how do your software and consulting services help them?
The company was founded back in 1996 by our CEO, Brian Conlon. Brian noticed an opportunity in the market where software companies were selling software to the capital markets industry and there was nobody bridging that gap between the technology and the domain expertise. So we focused in on that opportunity, providing people with both a technology background and a domain expertise – in other words knowing what an option was, knowing what a bond was, knowing how to build a yield curve. The company has grown since then and our target customers in our consulting division continue to be Tier 1 investment banks and large hedge funds.
More recently we have spent time and effort on research and development, looking to develop products that solve generic problems that are experienced within the financial markets for financial institutions. Those products are focused on dealing with large volumes of data – high performance analytics – and processing the data in real time. We are dealing with information coming from a multitude of exchanges and feeding that through and dispersing it within the organisation or taking that information and helping make trading decisions on it, actioning those trading decisions and effecting those back out again. So it is dealing with high velocity data very quickly.
Our target markets, on the software side, are again similar, Tier 1 investment banks, but also going down into the second tier of investment banks, again the hedge fund market, foreign exchange brokers and, more recently, we’re focusing in on stock exchanges as well – we have just signed a deal with Singapore Stock Exchange.
It sounds like the company has carved itself a niche but how big is the market for you and how much competition do you face within it?
I think you’re right, we have carved ourselves a niche and we are working in a global market, a very extensive global market, and the market opportunity is extensive. There is a huge amount of IT spend within the financial services.
Yes we face competition. We tend to face competition in various sectors of our business, so in our consulting business we face competition from, working on a greenfield consulting side, the likes of Accenture (NYSE: ACN), Capco or sometimes IBM (NYSE: IBM) or more boutique firms. In our software division, it really depends on the application we’re providing or the software solution we’re providing. Our reference data product is coming up against the likes of Asset Control and GoldenSource, our Delta Stream product comes up against the likes of OneTick, our algorithmic trading platform, the likes of Apama. So we do face competition but it depends on which sector of our business or which business stream we’re pushing at the time as to where that competition comes from.
How were your clients affected by the economic downturn and how did that, in turn, affect you? How, as a CFO, do you respond to something like that?
There is no doubt the financial markets have gone through a very difficult time recently and we will continue to have a hard market to work in over the coming periods. Our company policy was very much to try and work with our clients through that phase and work with them in partnership. We understood the difficulties they were going through and we were flexible in our approach to working with our clients where we felt appropriate. We helped them restructure our teams, or the services we were offering to them, to meet their new demands and new needs. So it was a difficult time, there was a need for our clients to scale back in some of their operations, to look at measures to make them more efficient and we have helped them go through that process. We have been in that process with them, we’ve worked with them in partnership through that and, to be honest, I feel it has put us in stronger stead with our client base because they’ve seen how we reacted to that difficult time with them.
The financial services market has bounced back and your interim figures are very positive, so what does that say about your ability to match demand in the market and recognise what your clients want?
We’re very pleased with our interim figures, we have had strong, organic growth within those figures, our turnover was up 56%. Part of that was due to an acquisition we made at the start of year but like-on-like, organically, we’ve grown 33%, which is a very strong figure in this current environment. As the market recovers and things move forward we feel we have invested heavily in the business over the last two years, we have made those hard decisions to look at our business and, while working in what has been a difficult market, to invest heavily in our organisation to make us stronger. We feel we’ve positioned ourselves well at this minute in time to capitalise on trends that may happen in the future. We’re still small, we’re still reasonably dynamic, so as the market evolves we feel we can be flexible and move and help capture opportunities that arise.
Why has it been important for you to change the way you sell your products to clients?
You have to keep challenging yourself as an organisation to make sure that you’re doing what your clients want and you’re addressing market trends. So yes, historically, in our software division, we had looked upon our sales on a licence basis and an annual licence basis, making sure that we were building annuity as we go along. But there is a market trend towards software-as-a-service, centralising information, reducing latency because you’re co-located with the providers of the information. So we had to address that, we saw that as a particular business need and that is something we have actioned this year. We have now put that infrastructure in place within our business and feel we’re in a strong position to begin capitalising on that.
Why do you think private investors should take a closer look at First Derivatives?
We’ve been around quite a while, we floated in 2002, and at the core of our business we have kept somewhat to the grassroots of where we came from. We have a strong core consulting business, which is a strong backbone on which we’re building the rest of our organisation. The consulting business has grown this year, organically, 26%, showing our ability in a difficult market to continue to grow that core business and do what we are good at. On top of that we have our software division, which has grown this year as well, up over 150%. We have two models within that, we have our annual licence model and we’re taking a long term view in terms of growing our annual licence where we look for a smaller amount but we look for that per annum, so we’re building an annuity as we go. Secondly, on the software side, we now have this quite exciting aspect to our business as software-as-a-service where we are also able to offer other clients the potential to provide them with our software and our capabilities but hosted, where they are just the end user and they pay for what they consume. So we feel we have a broad offering, we have three avenues to attack our market, consulting, licence sales and software-as-a-service, so we feel we’re strongly positioned to move forward.
Also, we having growing revenue visibility within our organisation. On our consulting side we get involved in the complex systems of an organisation, they like us to stay around because of the detailed and complex requirements that go on there, so we tend to be in long term assignments that continue to roll. So we have a high visibility in our turnover on the consulting side and, again, because of the model we have employed on the annual licence sale and the transactional side, as that software business grows the revenue visibility that we have will continue to build and grow year on year.
Finally, what can we expect from the company over the near term – is there scope for further acquisitions?
The company has grown substantially. These last two years we have invested heavily both internally within the organisation, and through making a number of acquisitions. Those acquisitions have been strategic in terms of bringing things into our group that we feel we need to complete our offering. We are working in a very diverse market with significant opportunities and a wide range of opportunities. We wouldn’t say we’re a complete organisation, so could there be further acquisitions? Potentially. But we do have a strong base and we do have a strong launch pad for us to now push forward in our organisation.
Thank you for your time.
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