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The Costanza Complex (Or, Is FinTech Facing a Double-Dip?)

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Fans of TV’s Seinfeld will surely recall the episode in which Jerry’s friend George Costanza gets caught double-dipping his chip in the dip at a funeral reception. It’s this that immediately springs to mind when commentators suggest we are facing a double-dip recession.

But of course, there would be nothing amusing about such an outcome. As we all know, we’ve worked hard enough to get this far, three years after the decline of Northern Rock, which to me marked the beginning of it all. And as we all know, current market conditions for those building and developing trading and related technology infrastructure is very much inconclusive.

It’s far from clear that we’re out of the woods. And yet, ask anyone who is gainfully employed in pursuing this task and they’ll tell you they’ve never been busier. Alas, recent third-quarter results announcements and statements from public companies that we regard as benchmarks in our industry shed little real light on where we’re headed. In short, the results are a mixed bag, and sentiment isn’t quite the gangbusters that we’re all grasping for.

Yes, Thomson Reuters’ headline figure showed a 68% surge in adjusted earnings per share. But strip away the distractions and underneath is actually a 4% drop in operating profit on 3% gain in group revenues.

Most significantly for us, the Markets division seemed to turn a corner. Third-quarter revenues were up 1%, compared with a 3% decline in the second quarter, a 4% decline in the first quarter and a 5% decline in the fourth quarter of 2009. Enterprise stood out, with a 7% currency-adjusted improvement in revenues, while Sales & Trading was about flat and Investment & Advisory slipped a bit. Profit margin narrowed, but this was attributed to the launches this year of the Elektron hosted services platform and Eikon flagship desktop, for which Thomson Reuters says it has received orders for some 1,000 position.

Drilling down into Enterprise, this would seem to be where the action is. Highlights: “Enterprise Real Time Solutions segment grew 10%, as customers continued to invest in low-latency data feeds and hosting solutions. The Risk Management business grew 15%, aided by a favourable comparison to the third quarter of 2009. The Platform business (formerly Information Management Systems) grew 17% driven by good sales of recurring products and outright revenues.”

CEO Tom Glocer’s prognosis? “Thomson Reuters now expects its revenues to be flat to slightly up in 2010 rather than flat to slightly down, as previously forecast.” We’d call that cautiously optimistic.

Similar sentiment, it seems, continues to reign over at SunGard, which supplies technology infrastructure and applications software across a wide range of financial markets functions. President and CEO Cris Conde called the marketplace “a very challenging environment.”

For the third quarter, the US software company reported a 7% drop in revenues, to $1.24 billion, while EBITDA fell 10%. Much of the blame for the revenue decrease was assigned to “one of our trading systems businesses, a broker/dealer”, which appeared to account for 5% of the 7% decrease.

The company posted a loss from operations of $219 million, mostly due to a writedown of goodwill of some $328 million. Organic revenue was down 6%, but was flat when the broker/dealer results were excluded from the reckoning. SunGard attributed the weak performance there “primarily to the industry-wide dynamic by which active trading firms are opting to become broker/dealers and trade on their own behalf.”

Over the longer term, SunGard saw revenue decline 6% over the nine months compared with a year earlier. Again, a writedown of goodwill and weak performance of the broker/dealer were the culprits.

Conde’s prognosis: “While the business outlook showed signs of improvement in the first half of the year, our customers are still cautious about the outlook and are focused on reducing the costs of their core platforms and capturing more value from their existing systems.” Conde is hopeful that the company’s “industry knowledge, services-led approach … and mission-critical software [you’ve doubtless seen the ads…] are helping to differentiate us.”

Finally, in the third-quarter results department, NYSE Euronext reported net income of $128 million, pretty much unchanged from a year earlier, although down slightly when adjusted for extraordinary items.

A closer look at the part of NYSE Euronext that interests us most – the information services and technology solutions segment (which includes the NYSE Technologies business) – reveals that the unit generated 19% of overall group net revenue and 11% of operating profit, up from 15% and 5%, respectively. The data and technology business line saw revenues jump 20% to $113 million from a year earlier. Adjusted EBITDA soared 89% to $34 million.

Part of the revenue increase was attributed to the Nyfix acquisition and to higher revenue from SFTI network and software sales. For us, the launch of the Mahwah and Basildon data centres, or ‘liquidity hubs’, was the key achievement. The new data centres, the company said, mark the beginning of the expansion of its collocation business. The Mahwah colo pod is 97% sold out, and the Basildon rollout continues on schedule.

CEO Duncan L. Niederauer’s prognosis: “In the third quarter, we continued to execute against our multi-year strategy despite challenging market conditions.”

Being a London listed corporation, our fourth and final benchmark, Fidessa, didn’t have any results to report. But in its third-quarter interim management statement, the trading technology provider again referred to “the uncertainty with regard to both the macroeconomic environment and the impact of regulation on the market” that it noted in its first-half result announcement.

“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,” the company said.

But it’s no bed of roses.

The statement continues: “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 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, leaves us well positioned to deal with the market challenges.

CEO Chris Aspinwall’s prognosis: “Looking ahead, we believe the market will remain difficult to predict and it is unlikely that we will know the true nature of the economic situation, or of prospective government regulation for some time to come.”

As I said at the outset, there’s no clear picture. The market seems to be muddling through. Hatches remain at least half battened down. Our prognosis: “Proceed with caution.” And be careful around the guacamole at all those Christmas parties.

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