Gain Capital Holdings' CEO Discusses Q4 2012 Results - Earnings Call Transcript

| About: GAIN Capital (GCAP)

Gain Capital Holdings Inc (NYSE:GCAP)

Q4 2012 Earnings Call

March 12, 2013 05:00 pm ET

Executives

Glenn Stevens - President & Chief Executive Officer

Daryl Carlough - Interim Chief Financial Officer

Analysts

Patrick O’Shaughnessy - Raymond James

Michael Adams - Sandler O'Neill

Operator

Good day, ladies and gentlemen and welcome to the Quarter Four 2012 Gain Capital Earnings Conference call. My name is Patrick, and I will be your coordinator for today. At this time, all participants are in listen-only mode. Later, we will conduct a question and answer session. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes.

During this call, the company will be providing an update on the business as well as covering relevant financial and operational information. I would like to point out that statements on this call and in the press release contain forward-looking statements concerning goals, believes, expectations, strategies, plans, future operating results and underlying assumptions, are subject to risks and uncertainties that could cause actual results to differ materially from those described.

In addition, statements during this call are based on the company’s views as of today. The company anticipates that future development may cause those views to change. Please consider the information presented in that light. The company may at some point elect to update the forward-looking statements made today, but specifically disclaim any obligation to do so. Also, please be advised that presentation is available on Gain Capital's Investor Relations website.

I would now like to turn the conference over to your host for today, Mr. Glenn Stevens, CEO of Gain Capital. Please proceed, sir.

Glenn Stevens

Thanks, Patrick, and welcome to our Q4 and full-year earnings call and recap. Pointed to a presentation deck that was mention is up on our website, use that as a backdrop to this discussion reviewing Q4 and also 2012 in its entirety and also an overview on the market and how things are going Gain and going forward.

On the first slide is, we call for year highlights. I want to focus on the item of our revenue diversification. It's important that we positioned Gain as having several underpinnings for success going forward. And in spite of a challenging environment of 2012, I think we were able to deliver on progress, if you will, on revenue diversification.

We consider diversifying on a product basis, on a geography basis and a customer segment basis. And underneath that, we consider that diversification being driven by both, organic and corporate development or M&A-type activity. If you take those five ingredients together, the goal is to position ourselves to take advantage of market as they improve, but also source revenue and source profits from varying product mixes or varying customer segments or varying geographies, because in general they don’t all track equally together, and so it's important we're exposed to the opportunities in all those different silos.

To that end, we saw some results in 2012 for overall funded accounts of 11%. More importantly, our client assets were up 44% on a year-over-year basis. While we did that, we started to be more [prospective] on our expense management, on our primary driver which is the retail OTC business and we managed north of $20 million expense decrease while driving overall 5% decrease in expenses for the business.

As I said, we invested some of those expenses towards building the other business as part of the diversification and we'll talk more about how that positioning is paying off in more recent times. Overall 2012 was a challenging year for the whole industry. We saw some pretty unprecedented cases of our lack of volatility and high trading ranges and we'll talk about that as we go into the deck as well. Most importantly here is that, even in light of what we consider some pretty strong headwinds, we positioned the company well.

On the slide is a summary of our fourth quarter and full year '12 results. A few touch points on the slide, Q4 revenue was $32.4 million. Our net revenue for 2020 was $151.4 million. Adjusted EBIT of $11.1 million and adjusted EPS of a $0.14 per share. The positive takeaways on the operating metrics, our funded accounts as I mentioned were up 11%, our client assets up to $446 million and institutional volume if you noticed more than doubled for the year, although our retail volume decreased 17%, overall trading volume was up 34% to $3.3 trillion for the year. The future opportunities bodes well given both, the uptick in funded accounts and also our client assets.

As we break apart each segment of our business, I want the takeaway to be how we look at our retail business and then look at the other businesses that we are developing and started developing pretty much in earnest in '11 with continued progress through '12, and now I'd argue kind of hitting our stride as we get into '13.

On next slide, before we talk about each part of the business, we'd like to look back at the dark cloud that was 2012 for many financial services of businesses and I think if you look at next graph which is a JPMorgan’s G7 Volatility Index, you can see how much as the year progressed from pretty much 2008, end of 2008 towards the more recent 2012 and even back to that Q4 of 2012 volatility really, really backed off. I mean for market that has been around for a fair time of time, we are at some ebb levels that haven’t been seen in multi years. In this case, we didn’t see the low point in Q4 since mid-2007. You saw 34% by many measures the FX volatility declining for the year in 2012. On the bright side, we did finally see a pickup and a little bit of positive trading ranges and positive volatility at the back end of Q4, and we're seeing some of that follow through into Q1 of this year with the commensurate improvement in trading conditions. We are taking advantage of that. We're positioned well to take advantage of that, but more on that later. Most importantly is that even with a bounce back, if you will, in more recent times or at the back end of Q4, we're still at some pretty low levels which tells me there’s plenty of opportunity going forward, but if we can see some sustained activity and sustained volatility off these low-levels, that would be a good thing.

For the breakdown of business silos, on the next slide we talk about our retail, over-the-counter business. As we say in highlight there, we continue to evolve one of them is to manage our expenses effectively. Another one is to brining the complementary products to expand that footprint. It took some time to establish our global footprint, moving in all the key markets either through a partner or registered and regulated ourselves. We saw a continued movement towards a global derivation of our customer base and of our volume. I think as an example of that from 2010, we're 51% or more than half of our business came out of North America. That number is 28% now for '12, so that movement into other emerging markets has been a key focus of ours strategically.

There is some ramp time, there is some learning curve, but again that is by design and strategically we want to be able to source our revenue globally, particularly since people are aware the global economy is not in the equilibrium in terms of different markets going at differently rates. You can only look at certain parts of Asia-Pac, the certain parts of Eastern Europe, or Western Europe, or even the U.S. and make determination that we want to be able to be in those markets and allocate resources where there is growth or perceived growth and be able to scale back or bide your time, if you will, in some of the more mature markets as they're going through their own turmoil.

As I mention the other way to expand is through product not just geography and in that case we introduced new trading platform which expanded our product mix from about 70, more of a fivefold increased to 450 products and yet additional markets and additional product planned to add to that as we go forward. The important part was to set the template and confirm our ability to add those in very rapid fashion and we're being able to do that.

Another technology leadership position for us has been in mobile trading. We've been pretty much ahead of the curve in terms of new app for different types of devices having a very full functional or heavily featured product and that’s really going to pan out. If you look at our year-over-year volume growth in the mobile of 64% and even the high 26% of our clients trading on a mobile device in '12, I think that it's evidence of our mobile success and more importantly it's been focus of our strategically and going forward we are strong believers in particularly for this product that's saving the global market in a global time zone. Mobile will be perfect delivery mechanism for this kind of trading and for this client.

Not to take away from importance of our indirect business, it represent 37% of our volume in 2012, but key here is that the indirect business, the partner business, if you will, has always been a strong part of our overall product mix and our service mix and that hasn’t changed at all. We're able to add some new partners in a diverse geographic base in Turkey, and New Zealand, and Hong Kong, and Eastern Europe and we continue to grow that strength and I think new partners are coming on all the time and it's important part of the growth. A lot of times, we'll look at a market and an notice that maybe the best way to enter that market is with a partner and then try to develop from there. In other cases, due to certain regulatory hurdles it might be just partners you want to use locally. The point is, you have to be able to have that experience and have that skill set to pick and choose your battles and be able to either be there with just new partners or with partners or not with partners at all and we are able to do that in all three versions.

Next, product mix is our GTX institutional product. It's important here to see that we've continued our ramp up. Our volumes have doubled year-over-year. We made a key hire from Knight trading to help lead that institutional business just to solidify the efforts that have been taking place there so far. Q1 continues to show that upward trajectory. I think it's important, because this kind of brand building and relationship establishment, if you will, has the kind of the inertia, we continue to build on it. And yes, it's still subject to the challenges of volume and volatility like every product is in this sector, but these are types of customers that are very sticky. They take longer to develop, they take more effort to customize towards, but we have some really solid reliable technology that every time gets in front of the customer, they are very happy with it or rate of people of leaving once they become our customers is almost. What's most important, once they become a customer, they stay a customer, and even though there are some hurdles of inertia to overcome, we're doing that and we're seeing the results what we consider very much a value-added products, so we're really excited about the prospects of that.

I think what's important here also is that we had a very consistent approach with our service and institutional side. We're able to offer a combined voice execution and platform execution, so it's a very diversified even within institutional services is a very diversified product delivery, and so I think that helps the audience, the customer to be able to assist them in various manners.

The next product is our futures effort. I think what's key here is that, we made an acquisition that closed in late Q3 when we acquired Open E Cry, which was a unit of Schwab. From the inception that was designed to come in and help our top line and our bottom line and also provide a larger breadth of products for our existing customers and a cross-sell opportunity and we're seeing all of those touch points occur. Matter of fact it's trending significantly higher in '13 than even when we took it over in '12. We believe that the futures market in the U.S. is still highly fragmented and is a very much in opportunity for consolidation. Some of the well documented increased, regulatory costs and hurdles for small firms which maybe could be defined as having less than $100 million in assets, we also considered an opportunity for us.

There isn't a clear market leader there, we have some excellent technology. Most importantly, we're able to back to this idea of having a complementary add, right? We don't want to bring in a silo. We don't want to bring in something that's standalone. We want to be able to leverage the success we already have, so whether it'd be on boarding or customer service or enhanced experience for the customer, the OEC technology in the futures market fits very well with our current offerings. And in this case it’s a two-way, because in the U.S., we're able to offer an exchange-based products in which some customers gravitate towards and also those customers like that would trade CFDs aren't able to in the U.S. market. Conversely, outside the U.S. there is an affinity by a subset of customers who even though they had access to CSVs, still want to trade on an exchange, and not only are we able to offer access to their U.S. futures market, but our subsidiary OEC offers access to international exchange as well over 50 global exchanges provide that access. So we think the opportunity for cross [polarization], if you will, for both, product, customer and distribution makes a lot of sense for us and we think that's going to be a very significant contributor to us overall as that business continues to build.

The last part which is, a skill set I think that you develop over time is our growth through M&A, and in this case we’ve been pretty consistent about trying to identify opportunities whether they come to us or resource them, we have a dedicated internal team that has consistently delivered an analysis process and frankly and an ability to be smart about evaluating these situations, and with that also comes pretty solid reputation, we like to use the work fair counterparty and that’s important, because many sellers aren’t necessarily kind of hanging up their plates to get out of the business and so there is a vested interest that if they do the old scheme, they don’t have to worry about any kind of negative repercussion from doing the game whether it's how their customers are treated, how we follow-up, how we deliver on the promises that we make when we announce those kind of transition, so unlike a provider that's exiting a market entirely who may or may not care about the lasting impact. A lot of the deals we do are not that case and it positions us very well, so we're trying to become the counterparty of choice

To that end, we've been able to continue to post some deals. More recently, we've done six asset deals in the last three years. And in the last three months, we did a deal with the GFT in the U.S., we did a deal with FX solutions in the U.S., and as I mentioned we did a deal with Schwab and OEC in late '12, so that should be testimony for our ability to it with multiple products and with multiple partners and no I don’t see that ebbing at all. As a matter of fact, I would probably argue that that pipeline probably accelerates or even gives us the ability to adjust our scale, so that we continue to be a strong position balance sheet-wise and reputation-wise and most importantly being able to look at situations we say hey if we can integrate well as we've shown that we can if we can position complementary products as we've have shown as we can that gives us the ability to create more value with potential partners, with potential sellers, or even what other kind of deal structure that comes up, so I wouldn’t be surprised to see continued progress there at all. As I said, it's not a sitting stock for us. It's an ongoing focus and what I would consider a competency that we continue to develop.

Next piece is on the financial review. I think what is important on this page is just a couple of takeaways. If you look at the numbers, you can see that I would argue we had a less than stellar Q4 and overall for the year, I think our takeaway is that we made a lot of progress as a company in terms of positioning ourselves. We are starting to see the fruits of those efforts there, particularly in Q1. Ultimately, we want to be able to be positioned to take advantage of market's trading conditions as they improve. We're seeing that, we're doing that and we're in the right spots. We have to be very mindful of our cost basis and we do that by keeping a lot of what we do variable from a cost perspective and we can be pretty nimble in terms of those spends and how they line up there, so it's important to see that we've made that headway on the retail side. We did reinvest and then we want to see the benefits from reinvestment and we are, so that's a good thing.

I think also is positioning all these businesses such that it's certain unless we don’t pan out, again we are able to make adjustments going forward. You don't want to have knee-jerk reaction by the same token you want to get stock too long, if you will, once market conditions are cooperating, or if they are you also don't want to leave upside on the table, so it's a delicate balance I think that happens in both sides, but in terms of the overall numbers there, as I said, we could see that that we weren't happy with the results for fourth quarter or for the year, but I think most importantly, we want to be positioned to take advantage of the opportunities that are in front of us.

Daryl Carlough

Glenn, I am going to talk about our quarterly dividend and share buyback program. Turning to slide 13, you can see the details. We're going to issue a $0.05 dividend with a [record] as of today versus '12, which seems to be of course 21st. On the repurchase share program, we spent $8.7 million since inception and we have spent approximately [4 million] and that was quite [$2.45] for the fourth quarter and we continue to repurchase shares pursuant to the program.

Glenn Stevens

Thanks, Daryl. Before we get on to Q&A, I'll wrap up with the 2013 kind of forward-looking or opportunities here, and there has been a fair amount of dialogue about regulatory headwinds or Peter mentioned credit card funding or what the oversights are in different markets, and in that case again, we are very well positioned, because number one, in some of the mature markets for the regulation have already come to place and created a higher hurdle for the smaller players they end up in a challenged situation where a counterparty of choice again you're having situations where you can help hasten consolidation and more importantly create a scenario where you want to partner with somebody and build true value.

So you have another shop that's in a particular market and they can size of the situation with Gain, it will be end up creating more value than without, and so that ends up for a much more symbiotic and kind of positive experience than what I would consider in a more volatile scenario which is not the way we think. They ultimately achieve the best value here.

In terms of the credit card funding, that represents less than 10% and kind of a declining mode as well of our deposits for 2012, so for those companies that rely more heavily on that it may also be a situation for us to have a meaningful conversation. In some of the more likely regulated markets like Cyprus and Malta, those kinds of the places we are not a big participant. We haven't been a participants to rely on those, but I’d argue kind of tangential, or peripheral situation there to build revenue, so for us if there is a tightening of the new in some of those markets that's only going to work to our strength. That's not something we rely on.

In terms of emerging markets like Asia-Pac in the Middle East, for us there's plenty of upside available. We have continued to diversify into those growing economies, we continue to build a product set, we continue to build our sales opportunities and even local presence, so all those point to positive gains in those markets. Ultimately, when you look at the way the Q1 is developing, I think that it's evidence of our positioned properly and we want to be able to stay on top how this market is emerging if you will and that means managing cost effectively, that means investing where there are revenue opportunities and I size out, this presentation it means that we have multiple sources of growth and that includes the product. That includes customer segment growth and includes geographical growth. And all those touch points, I think we've achieved some success, but ultimately success will come in the quarters from there.

I think I think with that, I'll turn it over to some Q&A and take the questions.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from the line of Patrick O’Shaughnessy with Raymond James. Please proceed.

Patrick O’Shaughnessy - Raymond James

First question I am guessing you can predict is going to be about the revenue capture for the quarter. It was down back down to where it was in the first quarter. Can you kind of just talk a little bit more about some of the factors that cause revenue capture deal a fair amount lighter this quarter than where it's in last two?

Glenn Stevens

I think that alone the same line, where Q1 looked like, you can see that our volume for Q4 was lower than it had been for the previous two quarters. You can see that we ended up at the lowest level of average trading range. We're also at the lowest level were all overall volatility and I think that those are all kind of the standard things that kick in and say as a market maker, as a principle model that says you want cross-trading between customers, you want high levels of activity and you want high levels of movement that’s the scenario for us that is least favorable.

Just the Q4 in light of the whole year, again, Q4 was demonstrative version of the soft whole year, so it wasn't a standout by itself. I think a little bit of the takeaways is to say, if you look at the whole year and not had ourselves in the back for making what we would consider subpar results it does mean that even in what one might argue kind of an outlier year when it comes to volatility and trading ranges, we still managed to be profitable and be cash flow positive and be able to more importantly invest going forward, so I think if you were to look at the gamut and how do you perform under different scenarios, well, this is pretty negative scenario dreamed up for year end and for the quarter and say okay that's pretty challenging, but it doesn't knock us on our you know what in terms of that.

So, just in terms of that revenue per million, as I said it's an output not an input, I think the key here is to say look, we already know that in scenarios of low vol, tight ranges and overall light customer engagement, we are going to have a headwind and we did and that's exactly Q1 look like as well and the plus side is, as we get into what's more like Q1, where you have increased volatility, increased customer engagement, guess what? Improved trading conditions generally lead to improved results, so I think that none of this is surprise for us it's important to reposition. The one thing I’ll add is that we had those other products starting to kick in a little bit and look a lot of times market don't always diverge, if you like them to. I think it was a long time ago that a balanced portfolio of, (Inaudible) you can figure out and we all found out that that's not the case, and so the same thing here I am not saying that just because we had institutional and add futures that we're going to have this perfectly balanced scenario, but the reality is you do have it some offset that when FX doesn't seem to be quiet as being in the doldrums you have other opportunities, so we expect to see the direct impact of these really tough environmental quarters be muted by having revenue comes from other sources and other geographies and products and things like that.

So, it's a scenario where more of the same in terms of top Q1 looks a lot like Q4 for a reason. I guess the takeaway if you look at the longer period of revenue per $1 million kind of finding some stability at this lower level, it wasn’t just key free flow that went from 141 and continued down. I won't call it a rounding bottom yet, but I certainly wouldn’t say it’s exhibiting a secular downward trend.

Patrick O’Shaughnessy - Raymond James

Okay. That's fair. Moving onto the institutional side of things, you’re showing a really nice growth in institutional volumes, but at the same time your instructional revenue kind of has flattened out little bit during 2012, because your revenue capture has come in. Can you talk about where you think revenue capture might go over the next couple of years as you hope to continue to grow those volumes?

Glenn Stevens

I think that's another case of kind of a maturing market or maturing position in the market. When you start out and you start to grow, as you start to take on the larger players who are less likely to move quickly into the new kid on the block, they command better pricing, they command high-volume and lower margin that’s just the nature before you get the bigger boys to the table.

At some point that finds an equilibrium, where I believe we are now and we start to add those additional players you don't necessarily start to increase your margins, but you do start to stabilize those margins and just increase your top line, and so ultimately if this isn't a supercharged high-margin business, that’s okay when we will continue to scale it.

I had also mentioned that once you build critical mass, you start to pull in some more marginal players that actually are willing to pay a little bit more, so they say gee, I need to be in that party and so a little more, so I would say that over the lifespan you kind of start out with relying on some relationships, relying on some early adopters and then you start to build the more of a stayed or established parties who drive it down and then you actually get a little bit of an uptick.

So, in terms of predicting where it goes, again I would probably use the curve that's a like a smile where it decreases and then starts to increase over time as our position in the market becomes a more substantial.

Patrick O’Shaughnessy - Raymond James

That sounds more like a smirk than a smile to me. Last question for me, so obviously as we look at the first quarter this year foreign exchange volatility picked up a lot and I think a lot of that spend around the yen. Can you remind me what percentage of your customers are based in Japan or percentage of your trading comes to Japan typically? And, I guess to the extent that you are seeing customers from other regions trade yen as well as that would be positive for you as well.

Glenn Stevens

I think [domicile] aspect little less than 10% is Japan based from a volume perspective. It doesn’t always tell you who is trading what since it's not like rich British pound, Canadian traded Canadian dollar, you know those things like that. Foreign exchange customers and traders like to trade with moving, so although the euro always dominate volume, absolutely we've seen yen and yen-related crosses like euro, yen, sterling yen, all the yen, move up in terms of that, because you are right finally broke out of the doldrums.

I don’t have the percentages in terms of the currency break down on hand to me, but I can tell you there’s been a material move. If you wanted to break it into a pie in terms of the yen and yen cross, it's taken a much bigger pie than it normally has normally had for the last two years. Although some degree, that's not saying much because it was so flat line for good 16 months that it's rebounding from a very low level, but in terms of where the customers from Dubai, we get a will get a little bit of [two] from Japan. That is one market, but somewhat insulated and like to their own product or their local product and so they have been even more demonstrative in terms of trading above their rate if you will in terms of amount of volume, but for us it's about 10%.

That's a tricky market to go, because the competition there is so heated that the increased volume doesn’t always merely translate into increased margins and revenue as well. I think what's more important for us is that that product is moving and brings in a lot of participants when we get that following for say gee yen broken out let’s get people involved.

Patrick O’Shaughnessy - Raymond James

Got you. Well, thanks for those questions answers and I'll jump back in the queue.

Operator

(Operator Instructions) Your next question comes from the line of Michael Adams with Sandler O'Neill. Please proceed.

Michael Adams - Sandler O'Neill

So, I just wanted to followed up quickly on Patrick’s last question. Just provide some of the conditions in 1Q to-date, I know you talked about volatility picking up in December and continuing here in the first quarter, but when I look at that G7 Volatility Index, it's still at relatively low absolute levels. And given some of your commentary on the mix of lower margin. business from Japan picking up, I just trying to get a sense of what the revenue capture is doing here in the first quarter, is it above that last 12-month average like 98 per $1 million, or are we back above that level or how is it trending?

Glenn Stevens

I think that we are not yet producing metrics on a monthly basis or releasing them, but I think it's safe to say on a market condition basis that the trends are above where they were certainly in Q4 and commensurate more with previous quarter there. The yen is one example, but as I said it also pulls in other participants. It pulls within trading crosses, the crosses can provide some other opportunities that wouldn't normally be there for people getting in and out of your yen or yen not just dollar yen. So, yes, shorter answer is absolutely seeing a positive trends overall absolutely seeing a return whether it’s smirk or smile, compared to Patrick, I think it's an increase and it’s a reversion of regression back to levels that we haven't seen in a while.

I think you made the point though that I was saying this isn't like we're back baby in terms of the quality volatility and the levels of activity. The good news here is that we're seeing positive results, so I would still argue a very depressed levels, and so you right. From a G7, G10 volatility basis of trading range basis maybe there's a little bit of be happy what you have right now, because it’s not on the bottom bouncing along doldrums five-seven year lows, but we have plenty of room and so I think what's helpful here it’s kind of like watching interest rates move.

If we go back to 2.5% 10-year, myopic people will say, goodness that's a huge bounce on 2%, but historical basis there's still barely off the bottom and so one that's who have been around on them might say that's nothing compared to 8 or 10. So for us, I would like the headroom that's available. I am not saying I wouldn't mind having fever pitch activity here, but the truth is that there is a sweet spot and we are not at that yet where there's levels of activity that are kind of comfortable for people to trade in.

There was a period in early Q1 of '08, where volatility was really just moving around so much that you ended up with customers even whether with equities or FX or fixed income, didn't know what to do if we got chased out of the market, so there is that kind of channel, the good news is we are barely even scratching the bottom of that channel, which tells me there's a lot of headwind there for improvement.

Michael Adams - Sandler O'Neill

Okay. Got it. Maybe if there is one negative to higher volatility improved March conditions is that just in terms of M&A you might have higher seller expectation, so I mean would you just mind commenting just are you getting a little bit more aggressive with some of the pricing here given the better market environment? I know you still got a couple of deals done in the last three months and how is that impacting the pipeline?

Glenn Stevens

Good point, Michael. I am glad to have guy is that said that the silver lining of such a difficult according an 18 month or past several four, five quarters, it did and has presented some opportunities that may be weren't as meaningful of conversations as they could have been and would that go away if the market was to improve. I think that in the short-term could be right and in certainly instances for business that's really watching how things progress week-to-week that could matter, but I think longer-term and for the more substantial deals, we can get done with partners and if the opportunity to create value on a bigger scale, I think that those owners do see the benefits of combinations and do see the benefits of the economy of scale, because even without volatility coming back just hurdle rates for regulation, capital required, infrastructure to be regulated in seven continents, all of those won’t go away and so there’s just more logic. If you think go back three years, five years, seven years, a lot of start ups. Everybody had a niche. I made the point in my presentation that even some of these regional providers that could evolve in their own market are now even [coming to the ] the fact that this is a global marketplace and it's truly cross-border and I think ultimately the sub 10 or sub 5 that cross are going to be ones that have a present a material presence in all regions.

So, all of those factors tell me that yes in certain conversations all I might say everything is back to normal and what am I doing having this discussion, but overall the landscape has changed and I think that makes a lot of sense to do these combinations, and so I would argue no it has not caused the pipeline to dried up and does not create tension necessarily except in those scenarios, where someone is playing so close to the each day's P&L.

Michael Adams - Sandler O'Neill

Okay. That makes sense. Last one here, I mean frankly if there's two partners, so maybe the last two questions, but looking at the Open E Cry business, I think when the deal closed you told us the run rate revenues were in the neighborhood of like $15 million or so and in the fourth quarter I mean, you annualized your results there and you are looking more in the $17 million to 18 million range, what's driven that significant pick up just in the first four months you've had that property is it just general market, is there anything that you are doing yourselves. Then second part of the question is, what are the margins look like in that business. I think they were 15% to 20%, but given the significant top line growth, have you seen expansion there?

Glenn Stevens

Okay, so two pieces. First piece first and let me provide a bit backdrop, as we mentioned as we get into '13, our expectations are above the run rate that you quoted as we improved run rate and so we are excited about backdrop and that's a good thing on why. Well, part of it will take credit for product that we won't. Similarly through ForEx volatility and just market engagement through June has increased. Interest rates moving a little bit, equity indices is moving a little bit, some of the underlying sauce and [ebbs] and things like that have made sense for people to get engaged, so we've caught with some examples of spreading the basis underpinning a little bit and say don't just we use cellular line in our FX volatility and opportunity, there's a good example of that.

I think the other part is a little bit to do with our team able to super impose fee business on some of the things that we do well already, which is on boarding, which is distributing the product, which is tuning up some of the edges. I mean, we always see, we fairly had to compete within resources inside of the travel organization and I think for us it's a little bit more of a maybe a little bit of a favorite sign until we are able to shower some resources with some attention on it. the team that we have proud of I think it's a combo like combination or compilation of improved market conditions, being able to kind of nurture their efforts and being able to cross-sell and not thinking so much about trying to get FX customers to trade futures and vice versa, because we are working on that, but more about just saying, hey, the processes involved, we have these fairly refined on-boarding, KYC, get customers opened quickly things that I think fit very well with that, so I think it's just shortening the time for the growth that was going to be there. it's just shortens the time with that curve to actually occur. So, it's a stuff that I am not going to tell you it's going to happen by itself, but will it happen over a longer period of time, we're causing it to happen it over the shorter period of time, so, so far so good.

Now second part of your question is about the margins. Futures, because of its design with the central exchange and commission and the fair amount of competition amongst providers, I'd probably initially back-off from the 20% margin that you mentioned at the top end of your range and probably try to dive you or steer you onto the lower end of your range just because from what we've seen when there are secondary payments for introducing broker when there are other kinds of payments through affiliated parties we're rather have. I think it's one of those things that it could grow and scale that has to really drive the margin, because you're going to have a basis cost, whether it's technology, regulatory office expense, whatever it is and as you layer on top of that not just similar to FX, as you build the scale your margins come with it, so part of the beauty of building the top line in the futures business that we expect it to sit out additional margin as we go forward.

I don't think we're at that inflection point yet, but that's also why I would consider an active participant in trying to build scale not just organically, but by [corporate] as well, so futures we're in the mix and not of the mix now. That's part of our presence after evaluated radar as we speak if you will.

Michael Adams - Sandler O'Neill

Got it. Thanks, Glenn. I appreciate your thoughts.

Operator

At this time, there are no additional audio questions. I would now like to turn the call back over to Mr. Glenn Stevens for closing remarks. Please proceed, sir.

Glenn Stevens

Thanks, operator. I'd just close by saying thanks for joining the call today. We look forward to delivering next update in the coming months and we appreciate your interest in Gain Capital. Take care.

Operator

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great afternoon.

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