Lombard Risk – Interim results show revenue up 20%
Lombard Risk Management plc (LSE:LRM) (“Lombard Risk” or “The Company”), a leading global provider of collateral management, liquidity and regulatory reporting and compliance solutions for the financial services industry, is pleased to announce its interim results for the six months ended 30 September 2012.
- Revenue up 20% on same period last year at £7.7m (2011: £6.4m)
- EBITDA of £2.0m (2011: £1.9m)
- EBITDA after fully expensing all development costs was £0.1m (2011: £0.6m) profit before tax of £1.3m (2011: £1.8m)
- Cash at period end of £1.5m (2011: £1.3m) with £2.0m debt (2011: £nil
- Successful equity placing to raise £1.5m completed in June 2012
- Investment in the development of COREP, COLLINE® modules and REFORM™
- New transaction reporting platform, REFORM™, launched and sold as the foundation of solutions to satisfy Dodd-Frank and EMIR transaction reporting requirements
- Interim dividend of 0.025 pence (2011: 0.020 pence) per Ordinary Share to be paid on 16 November to shareholders on the register as at 2 November 2012.
Current trading and outlook
- Twenty COREP contracts signed to date for a mix of existing and new customers
- Continuing trend towards greater regulation necessitating mandatory spend
- Increase in reporting requirements around derivatives reform (e.g. Dodd-Frank and EMIR) creates opportunities to sell solutions using REFORM™
- Additional modules increase the breadth of COLLINE, including a CLEARING (CCP) module which satisfies a mandatory requirement of many financial institutions
- The Board is cautiously optimistic about the outlook and prospects of the business for the second half of the year
Report of Philip Crawford, Non-executive Chairman
The fact that revenues have increased by 20%, despite the continuing uncertainty in the macroeconomic environment, is particularly encouraging as revenues are expected to be second half weighted this year and the result is measured against a strong comparative. This has been achieved through organic growth as well as a contribution from the prior year’s acquisition.
The decision made nearly a year ago to invest in technology to satisfy market needs has started to bear fruit in sales but not so much as yet in revenue.
Our European Banking Authority Common Reporting solution has been purchased by twenty banks, being a mix of current customers and new. An initial version of the product has been developed and the development team continues to make modifications in line with the regulator’s updates.
Towards the end of the half year we signed contracts for our regulatory solution for Dodd Frank and EMIR, culminating with a significant deal signed at the end of the half year, which has bolstered the Company’s increasing revenue backlog and positions us well for this regulatory regime.
These contracts have supported our judgment in identifying market opportunities. The funds raised from institutional investors in the half year allowed development to accelerate and the sales effort to be ramped up.
The momentum of regulatory initiatives and risk mitigation supports our confidence in our product development and market positioning strategies. The Board is quietly confident that the future will bring a sustained period of growth for Lombard Risk.
Chief Executive Officer’s statement
The half year to 30 September 2012 saw record revenues and 20% revenue growth over the same period last year. Due to the timing of UK and other regulatory deadlines, and the basis on which we are required to recognise revenue in the first half, the business this year continues to be weighted to the second half. We were nevertheless encouraged that our revenues in the first half were slightly ahead of our management forecast underpinning our budget for the full year. It is particularly encouraging that this result was achieved despite recognising no revenue at all from a large Dodd-Frank/EMIR deal concluded at the very end of the period and which we announced on 4 October.
The highlight of the half year was the signing of contracts for the European Banking Authority’s COREP regulations, and as at last week we had already successfully contracted with twenty UK banks of which three were won from our competitors. The COREP regulations are due to come into force in 2013 and most of the revenue from this programme has yet to be recognised. It now looks increasingly likely that the EBA’s FINREP regulations will also be introduced into the UK and this gives us good visibility of new regulatory revenue into 2014 and beyond.
We continue to exercise tight cost control and maintain appropriate cash reserves. Following our share placing in June 2012, we are recruiting additional high quality senior management and sales personnel. We have also continued to make significant further investment in software to ensure that we are well placed to take advantage of the new regulatory regimes.
The outlook remains promising, with a market environment favouring the Company’s product positioning in regulation and risk management despite a tough budgetary environment in the financial sector.
Revenue increased to a record £7.7m (2011: £6.4m) with licence revenue increasing by 6% to £3.5m (2011: £3.3m). Annually recurring revenues totalled £3.6m (2011: £2.6m), being 46% (2011: 41%) of total revenues.
Operating profit before depreciation and amortisation (EBITDA), increased to £2.0m (2011: £1.9m).
Cash at the end of the period was £1.5m (2011: £1.3m) with £2.0m debt (2011: £Nil). The debt arose as a result of the acquisition made in December 2011. The Company raised £1.4m (net) in the period by issuing new shares and used £0.4m (2011: £Nil) to service and repay debt and paid a dividend of £0.1m (2011: £0.1m). In line with expectations, trade and other receivables reduced by £0.7m in the six month period.
Capitalised development costs totalled £1.9m (2011: £1.3m), representing 70% (2011: 73%) of total research and development costs. The increase reflects the drive to develop new products, including a module for European Banking Authority’s Common Reporting (COREP) and REFORM™. The COREP module has been sold to twenty customers to date and REFORM™ has been used as the underlying technology in the Company’s Dodd Frank and EMIR transactional reporting sales, including the significant contract announced on 4 October, for which no revenue has been recognised to date.
Expansion of intangible assets
The Company has continued to focus on developing its own software products rather than selling the products of third parties. With significant investment over time in our products like REPORTER, REG-Reporter, COLLINE® and OBERON®, and more recently in REFORM™, REPORTER MIS and other software for our future regulatory products, we have a valuable foundation of IP from which to build. Moreover our modern products are being designed with reusable common libraries of software or web services, meaning that we should be able to achieve quicker time to market and leverage our development effort more.
Our main brands at present are:
REPORTER – Regulatory Reporting in multiple jurisdictions. REPORTER is the biggest market brand for FSA and now EBA regulatory reporting in the UK, and an important brand in various Asian and European countries as well as the USA.
REG-Reporter® – Regulatory Reporting in the USA, Canada and other jurisdictions. REG-Reporter is the biggest brand used by foreign banks in the United States with more clients than all our international competitors’ products combined.
COLLINE® – Collateral Management, Clearing and Optimisation for OTC Derivatives, Repos, Securities Lending and Listed Derivatives. COLLINE® is one of the top brands in these markets.
REFORM™ – Pre and post trade solutions and transactional reporting for the derivatives reform initiatives such as Dodd-Frank and EMIR. Other modules of the REFORM™ engine provide connectivity and message transformation, for example enabling COLLINE® to connect to exchanges and to messaging systems.
OBERON® – Financial instrument valuation and related risk reporting. OBERON® has been a very durable system over many years.
REPORTER MIS – Flexible web based reporting tool allowing reporting to be produced from, for example, COLLINE® in conjunction with another third party system.
We regard our client base of around 300 financial institutions including 30 of the top 50 banks in the world as one of our most valuable assets, and in many cases we are seen as a trusted provider rather than only as a vendor. Our rate of client loss for all of our products continues to be at a very low level, while we have gained a number of prestigious new clients in the period.
The acquisition of REG-Reporter® from SOFGEN in late 2011 added 70 clients to our portfolio, some of who were already clients elsewhere, and made us the leading player in regulatory reporting among foreign banks in the United States. This built on our existing position as the market leader in regulatory reporting in the UK and some other countries.
Investment in software product development
During the period we invested heavily in the development of our software product, primarily in the areas driven by regulation and by regulatory and market initiatives around derivatives reform. This meant gearing ourselves up for the European Banking Authority’s COREP regulations and for the regulatory requirements of the Dodd-Frank and EMIR programs. While COREP has been developed as a new module of the existing REPORTER product, the other initiatives have been developed through our new REFORM™ product which has required appreciable expenditure. In addition, we have continued to invest in R&D for other products. For example for COLLINE® we continued to develop our offering for Clearing and invested in ensuring that COLLINE® is compliant with new Dodd-Frank regulations. We also enhanced COLLINE® by delivering a superior module for Repos, and made good progress in building an API for COLLINE® which allows COLLINE® to be used as a web service.
We have over 150 staff in our development and testing centre in Shanghai. Having this capability has allowed us to take on much more work than we could have done a few years ago.
Very little of our R&D is speculative. We have struck a prudent balance between innovation and other investment required to take advantage of opportunities in our core regulatory and collateral businesses.
Driving profitable organic growth
The Company has continued its trend of double digit growth in the period, with revenues 20% higher than the revenue number for the comparable period last year, making for a compound revenue growth rate over the last three years of 21% as against 8% in the previous three years. Even excluding the acquisition of REG-REPORTER in December 2011, the organic compound revenue growth rate over the last three years is 16%. To an extent this step up in growth is a reflection of how beneficial regulatory change has been for the Company, but it also reflects the success of the product strategy and a more effective sales force. A particularly strong performance was recorded by the EMEA regulatory business through sales of REPORTER for COREP.
We believe we have reached the point where the business is becoming highly scalable and where an increasing proportion of incremental revenue will go straight to the bottom line. This clearly involves a constant focus on efficiency and on ensuring that our growth comes from a small number of very successful products rather than from many sub-scale products.
We expect to see the proportion of sales through alliance partners increase over the next few years, which in turn will add a level of scalability to the Company over and above the level of profit growth achievable through a direct sales force alone. We are already talking to a number of possible partners for different products in different geographies, and the scale of this has reached the point where we have hired a senior person to act as our Alliances Director.
We have excellent opportunities available to us and a strong foundation to execute from. Our customer base of 300 financial institutions in regulation and risk is an impressive one, which on its own gives us a very strong platform for growth. We have good recurrent revenues and further predictable revenues from fixed-term licence renewals and contractual backlog. The next year has all the makings of a very busy year for us, and we can see that carrying on for several years.
The regulatory market background remains favourable to the Company. We are less than half way through an increase in the depth and breadth of regulation that banks and financial institutions face worldwide, and at the same time there is a major regulatory driven reform of the derivatives industry underway through legislation like Dodd-Frank in the United States or EMIR in the European Union and equivalents in other countries. While the macroeconomic situation is the worst for 80 years and the unresolved issues of the Eurozone are matters of continuing concern which could affect the timing of deals, certainly for now we see those negative factors as being outweighed by the positive factors of increased mandatory spend on regulation and regulatory driven change in the derivatives market.
The Board remains cautiously optimistic about the prospects for the Company in the short to medium term and believes we are on track for the current year, with the obvious cautionary note that big events such as a meltdown in the Eurozone or a longer than expected postponement of European regulatory deadlines could affect the timing of the Company’s revenues.
I would like personally to thank the many staff in London, New York, Shanghai and elsewhere who have really gone the extra mile for us in the last few months. It is much appreciated as is the excellent support of our shareholders, bankers and advisors.