| 1. FD has a track record of acquiring niche capital markets technology companies. Can you expand on this philosophy by providing some insight into the other acquisitions the firm has made in the past two years?
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It’s safe to say that if you looked at this company three years ago, we were a capital markets service provider primarily focussed on the UK and to a certain extent, North America. We made a strategic decision around three years ago to have a product offering as well as a services offering. We could go one of two ways – grow organically, building our own software or we could acquire companies. We have a hybrid model. We acquired Hologram in Australia, for example, which gave us a presence in a market where we didn’t have one before, so that improved our global reach in terms of our ability to service markets in North America, Europe and Asia Pacific. So Hologram was like a geographical acquisition. In terms of our other acquisitions, we have been very strong in market data, so we acquired Reference Data Factory, which has a reference data offering that sits side by side in our data arena. We also acquired a niche data consulting firm about six months ago, LakeFront Data Ventures, to increase our expertise and presence in the data market.
So now we have a very strong presence in the data market, we have a very strong market data offering, a very strong reference data offering, and a very strong data consulting operation. Everyone needs data – volumes are growing and now we’ve got the software to deal with the data and the expertise to advise people on how to better organise, store, access and analyse it.
The other main acquisition was on the Cognotec side. Now we have a better focus and expertise on the FX side and can provide our software as a service, because of Cognotec’s expertise in hosting. We didn’t have that before, so now all our software is available as a hosted service. Historically, the markets we’ve been offering have essentially been on the investment banking side, now we have a market on the retail, brokerage and buy sides. So it’s a combination in terms of our strategy, to determine small niche companies that can accelerate our overall strategic goals. Along the way, we also picked up an increased interest in Kx Systems, which has a high-performance and time series analysis database, Kdb+.
In 2010 we completed the acquisition of Market Resource Partners (mrp). MRP are instrumental in facilitating targeted lead generation and marketing campaigns in support of our global product and consulting businesses.
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| Who is MRP and what do they do?
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Market Resource Partners LLC (MRP) is a very successful US technology marketing company headquartered in Philadelphia, PA. Its major customers are a roll call of the world's largest technology companies. More information can be found on their website (www.marketresourcepartners.com).
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| Why does the company have such a large property portfolio?
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The majority of our consultants are working on assignments in large financial centres such as London and New York. As such they need accommodation. They have expressed a strong preference for staying in serviced accommodation rather than constantly moving from hotel to hotel.
The company has decided to purchase apartments as opposed to renting. This is logistically much easier as it removes the need to deal with multiple landlords and leases.
The properties are purchased in historically strong markets with easy access to banking districts such as Mayfair and The City in London and Chelsea and The Village in New York.
From a financial perspective the P/L impact should be broadly neutral. Interest expense is substituted for rental or hotel expenses.
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| Why does the company have such large borrowings?
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The borrowing is purely to finance the acquisition of property used to house consultants on temporary onsite assignments.
In general the company is cash generative and indeed last year generated a cash surplus of more than £4m through its operating activities - the prior year figure was close to £3m ( See the cashflow statement on Page 17 of the 2008 Report & Accounts). This surplus cash is used in the payment of dividends, to part finance the acquisition of additional property and to pay down loans aggressively.
As at 29th. February 2008 total borrowings were £9.799m against an estimated resale value of £19.3m ( and a balance sheet carrying/holding value of £16.8m). This represents a loan to value ratio of only 50.7% and gives us significant headroom for regearing.
The loans are on 3 year and 10 year term loans respectively. The interest expense on these loans is in effect a substitute for rental expense and the P/L impact is broadly neutral.
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| What is the company's depreciation policy for its property assets?
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Our property portfolio consists of a mixture of long leasehold and freehold property. Each property is depreciated on a 2% straight line basis to its residual value.
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| Why does the company not revalue its property portfolio?
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If property assets are revalued they must be looked at individually rather than on a portfolio basis. Any increase in value for any individual property is taken to reserves. The treatment for writedowns on any individual property is asymmetrical - the writedown is taken to P/L.
On balance the current policy of depreciating our property assets is considered to be more prudent. The portfolio is revalued formally by professional valuers annually and the impact of this vis-a-vis book or carrying value is disclosed in the Chairman's statement. As at 28th. February 2008 the property portfolio had an estimated resale value of £19.3m and a balance sheet/carrying value of £16.8m - a surplus of £2.5m. In other words the current balance sheet valuation understates the market value by £2.5m.
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| What is the company's dividend policy?
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The company has in recent years paid a dividend of approximately 1/3 of post tax profits.
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Congratulations on your previous results, which show further progress in the evolution of your business. I am the beneficial holder of over 133,000 shares in your company and my only disappointment is the lack of communication.
I would have liked to attend the company's AGM, however as there was no formal notification of when the AGM was to be held. All my shares are held in a nominee account so I did not get notice via the accounts. Could you please release a RNS stating when the AGM is to be held to enable investors who have nominee accounts to attend.
Kind Regards
Andrew Burgess
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This is the first email externally submitted question and company response under the new Investor Relations initiative.
We acknowledge that this lack of alternative notification for investors with nominee accounts was an oversight for the 2008 AGM. We will post details of the 2009 AGM prominently on our Website and if necessary issue an RNS.
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I have read your interim report with interest. The Pre-tax figures continue to be good but this has not been shown in the EPS growth due to the significant increase in the tax rate. From the 2008 annual report note 9 you say "The directors are not aware of any issues that will significantly impact on the future tax charge".
Please can you explain why the tax charge has increased so much and what your expectations are for the full year and thereafter for this rate.
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The main reason for the fluctuation in the tax charge is a technical issue related to the treatment of deferred tax on employee share options (IFRS 2 - Share Based Payments). The move to reporting under IFRS rules at the previous interims is the first time this treatment was introduced. As the share price moves and new shares are issued,options are exercised and options lapse the deferred tax charge to the P/L moves. The percentage effective tax rate is difficult to estimate precisely as an element of it is a function of the share price at the reporting date but the charge for the current interims is probably at the upper end of the scale.
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I note that the acquisition of MRP has a deferred consideration, which according to the release was as follows
"An additional deferred consideration of up to a maximum of $14m (£7.9m) (will be payable, subject to MRP achieving certain profit goals during the two years ending 31 August 2010"
This translates into a effective exchange rate of $1.77 : £1.00.
With the depreciation of the £ against the $, this now translates to a deferred consideration due of £9.46m (at a rate of $1.48). Did the company hedge its position against the $?
I appreciate that profits translated from $'s to £'s will benefit from the depreciation of the £, however, the effective price of the acquisition has just gone up by £1.5m if the position had has not been hedged. Is the company comfortable that it has not overpaid for the Aquisition
Best Wishes
Andrew
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The Group operates on a multi currency basis and has a natural hedge in place for expenditure. This position ensures the Group is not exposed to exchange movement and consequently the Company is comfortable it has not overpaid for the Acquisiton.
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