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FXCM Inc. (NYSE:FXCM)

Q1 2013 Earnings Conference Call

May 7, 2013 08:15 ET

Executives

Drew Niv - Chief Executive Officer

Robert Lande - Chief Financial Officer

Analysts

Patrick O’Shaughnessy - Raymond James

Howard Chen - Credit Suisse

Ken Worthington - JPMorgan

Arnold Ursaner - CJS Securities

Alex Kramm - UBS

Mike Adams - Sandler O'Neill & Partners

Operator

Good day, ladies and gentlemen and welcome to the Forex Capital Markets First Quarter 2013 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. (Operator Instructions) As a reminder, this call maybe recorded.

I’ll now introduce your host for today’s conference, Jaclyn Klein, Vice President of Corporate Communications and Investor Relations. You may begin.

Jaclyn Klein - Vice President, Corporate Communications and Investor Relations

Good morning and thank you for joining us for the FXCM Inc’s first quarter 2013 earnings conference call. Joining me today are Drew Niv, FXCM’s Chief Executive Officer, and Robert Lande, our Chief Financial Officer.

A live audio webcast, a copy of FXCM’s earnings release, which was sent earlier this morning and presentation slides used during the conference call are all available at www.fxcm.com under the Investor Relations tab. A replay of this conference call will also be available later today on our website.

Before I turn the call over to Drew, I would like to remind everyone that in today’s remarks, we will refer to certain non-GAAP financial measures including adjusted pro forma EBITDA, adjusted pro forma net income and adjusted pro forma net income per share. These measures should not be considered in isolation from or as a substitute for measures prepared in accordance with Generally Accepted Accounting Principles. Reconciliations of these non-GAAP financial measures to the most comparable measures calculated and presented in accordance with GAAP are available in the earnings release on the Investor Relations portion of our website.

As usual, this call is intended for investors and analysts and may not be reproduced in the media in whole or in part without the expressed written consent of FXCM. Before we begin, we would like to remind everyone that the remarks and responses to your questions that we provide today may contain forward-looking statements.

These statements do not guarantee future performance and undue reliance should not be placed on them. These statements are based on current expectations of management and involve inherent risks and uncertainties that could cause actual results to differ materially from those indicated in any forward-looking statements including those identified in the Risk Factors section of our Annual Report Form 10-K filed with the SEC and available on our website. As such factors may be updated from time to time in our SEC filings. FXCM assumes no obligation to update any forward-looking statements.

With that, I would like to turn the call over to our CEO, Drew Niv.

Drew Niv - Chief Executive Officer

Thank you, Jaclyn. Starting on slide three, I would like to walk you through some of the highlights of our first quarter. FXCM delivered robust volume growth across all of its lines of business in the first quarter despite only a moderate pickup in volatility. FX volatility continues to remain here in its five year lows, but our investments to increase the scale and diversity of our business are resulting in better performance even in conditions, where the macro environment does not provide much of the list. This increased volume led to record revenues when combined with our expense discipline resulted in significant improvement in our margins.

In Q1, we saw strong organic growth particularly in the regions like China and Japan. In addition to our success indirect marketing, we are announcing White Label offering for optionsXpress the division of Charles Schwab and the momentum we established in Q1 has continued into April, where we have seen record or near record volumes across the board.

Moving to slide four, I would like to walk you through some of the specific highlights of the first quarter. We had revenues of $122.9 million, a 20% increase over the same quarter last year and a record for the company. Our GAAP earnings per share was $0.23 on a fully diluted basis, a 44% improvement from Q1 of last year. Our pro forma EBITDA was $43.8 million, a 76% improvement over Q1 of last year and the second highest in FXCM history. Our adjusted pro forma EPS is $0.23 a share, a 35% improvement over last year. Retail revenue per million was $88 per million, the low to low end of our range and 6% decline from last year.

On our institutional side, we had a strong quarter from Lucid with $23 million in revenues and $16.2 million in EBITDA. So, in almost every measure the company delivered near record results. While we are pleased with our quarter and in fact we’d like to set records every quarter we are particularly pleased with the results given the continued depressed levels of volatility.

Moving to slide five we can see the graph of the CIVX over to last four years. While CIVX picked up in Q1 growing 7% versus Q4 it was still below the 2012 average specific for the first half and well below the averages that we've seen over the past five years. FXCM is able to continue to grow it’s revenues and profits in these depressed market conditions due to our success in expanding our scale, geographic reach and diverse sources of revenue and if you look at that slide all the way to 2011 you can see that if we are ever going back to even that level of volatility the company would do that much better.

Moving to slide six, where you can see of the major metrics we use to measure our retail FX business. Average daily volumes in Q1 were a record for the firm and significant growth versus prior four quarters. Similarly our daily average trades are at record levels. Retail dollars per million were below end of our historic range primarily due to the mix of pairs traded the volatility was concentrated in the Yen crosses which led to higher volumes in Japan which had lower dollars per million as well as higher volumes in the Yen pairs which saw a decline in the pip conversion from prior years when the Yen was worth more money.

Now so, and finally in the lower right hand corner we see our retail volume another record for the company. We saw particularly a strong sequential growth in Asia, Europe and even in the United States which is have not had a uptake in a while. Moving to slide seven our institutional business also showed progress both in our FXCM Pro side and in our Lucid business. Our institutional volumes continue to decline form mid 2012 and are nearly back to the levels we saw at the beginning of the last year.

As you know we are in the midst of a transition from third party platform to in-house solution. In Q1 more than 50% of our institutional volume was done on our ECN and FastMatch platforms our in-house platforms the process is taking us longer than we anticipated but we have migrated the majority of our higher volume clients, the clients were not migrated, we will require additional time and effort we still anticipate moving a higher percentage of this remaining clients to in-house platforms but it will take longer than we have expected, a small percentage (indiscernible) and we will remain on our third party platforms.

On the Lucid side revenues have returned to the levels we saw in the first half of 2012 prior to our acquisition. They continue to generate extremely high EBITDA margins of 70% for the quarter and their quarterly percentage increases in average daily volumes was at the high end of their favor.

And now I’d like to turn it over to Robert Lande our CFO to discuss in more detail our income statement balance sheet cross management and cash generation.

Robert Lande - Chief Financial Officer

Thank you, Drew. Turning to slide eight our income statement for the first quarter of 2013 versus the first quarter last year, retail trading revenues were down 2%, 6% higher volumes were offset by lower retail revenue per million. Retail dollars per million were at the lower end of our historical range primarily due to the mix of pairs traded as Drew mentioned namely the higher proportion of Yen traded in the quarter also there were two last trading days in Q1 this year versus last year.

Institutional trading revenue was up significantly as Lucid was not acquired until the end of Q2 2012. Lucid contribution to results was $23.0 million in our other institutional business contributed $4.6 million in revenues. Revenue per million in our non-Lucid institutional business was $12 per million. As Drew had mentioned Lucid had a solid quarter with 70% EBITDA margins and a 39% increase in average revenue today – average revenue per day to $361,000 the day from Q4, 2012. Lucid continues to perform well in April although down a bit form the Q1, 2013 average to $335,000 a day in April and my guess is this will be consistent with other institutional proceeds when they all report for April.

Net interest income was down $145,000 reflecting the overall low interest rate environment. Other income was up 5% to $3.4 million due primarily to a better performance at ODL’s brokerage activities. Referring broker fees were 23.4% to retail trading revenues in line with the 47% of total volume in Q1, 2013 coming from indirect sources that we already reported.

Turning now to operating expenses. Compensation and benefits were up 2% to $21.5 million. When you factor in that compensation and benefits in 2013 now has a $782,000 quarter charge due to the amortization of the value of liquidity restrictions on Lucid shares. We actually had a year-over-year decline in absolute dollars in compensation and benefits. Advertising and marketing was down 11% to $7.4 million reflecting our decision to bring marketing cost down in the cancellation of our sponsorship of the CNBC Currency Show.

Communication and technology was essentially flat Q1, 2013 versus Q1, 2012. Trading cost increased $6.6 million of which $6.0 million was due to the inclusion now of Lucid in our results as most of you know this is Lucid’s primary operating expense, the cost to trade on the various venues which it trades upon.

G&A was down $5.9 million to $12.5 million. Q1, 2012 had a number of unusual items in it, so due primarily to our Japanese subsidiary so it’s not entirely comparative, but even excluding that our control of G&A expense in the quarter had a solid performance and I will talk more about that in a couple of slides to do with our operating cost. The new lines loss on equity method investments is our equity pickup of FastMatch our joint venture with Credit Suisse and Bank of New York in the institutional space.

FastMatch is not as yet breakeven although is building critical math very nicely since it launched in earnest last September I still expect that for the next quarter we will have a modest loss along the lines of what you see here in Q1, 2013. That brings us to EBITDA which was $43.8 million for the quarter up 76% from Q1, 2012 and the second highest in our history the highest being way back in Q3, 2008. I think through a combination of cost discipline and that we’ve been able to grow our business so significantly that we were able to achieve this performance.

This equates to a net EBITDA margin of 43.1% which exceeds the target of 42% which we put out last year. Depreciation and amortization was up $5.9 million to $11.9 million for the quarter, $5.0 million of the increase is due to the amortization of intangibles related to the Lucid acquisition and $0.8 million is due to the higher capitalized software amortization.

Interest on borrowing of $800,000 for the quarter consists of $700,000 related to the credit agreement and $100,000 related to promissory notes issued in connection with the Lucid acquisition. Our effective tax rate for the quarter was 31% versus 32.2% last year as we benefited from a greater mix of UK income in our overall tax rate. That being said we still believe our effective tax rate will be more in the 33% range in the coming quarters this year.

After a Lucid minority interest net income attributable to FXCM Inc. was $17.5 million versus $12.5 million up 40%. And primarily reflecting the additional shares given to Lucid that are included in our share count average shares outstanding went up 4% from $72.7 million to $75.8 million. Borrowing any share issuances our buybacks in Q2 that should be our average share counts in Q2, 2013.

That then leaves us with earnings per share per fully exchanged diluted share of $0.23 versus $0.17 last year up 35%. In summary we’re pleased with the results of our business for the first quarter this year and we believe we positioned ourselves well to benefit from the pickup in trading condition.

I’d like to turn now to slide nine, our balance sheet, not a lot of changes in the balance sheet this quarter versus the end of last year. Operating cash went up $1 million to $273 million. We paid down $5 million on our credit facility and other assets went up primarily by the additional investment in FastMatch that we made in the quarter. Customer equity was basically unchanged in the quarter at $1.2 billion. The first quarter was a great quarter for customers but we found that many took profits out of their accounts and in addition some of our large customers starting hitting limits they had put on FXCM and also reduced exposure so that is basically the story in customer equity. I will talk a bit more about our cash position in a couple of slides when I talk about cash flow.

Turning to slide 10, I think one thing that stands out is the operating expense discipline that we have maintained. I already took you through how overall operating expenses were flat Q1, 2013 versus Q1, 2012. The table on this slide also presents recent quarters and sequentially how we have done. And as you can see that with $57.6 million in expenses excluding depreciation, amortization and recurring broker fees operating cost were down 5% sequentially.

We will be continuing with our expense discipline although I do expect that next quarter compensation and benefits will be about a $1 million higher at some of our base staff have received modest salary increases and I expect G&A will be about a $1.5 or so higher as well as we will have some costs around the acquisition of gain as well as the UK FSA has once again sent around new regulatory piece for the upcoming fiscal year. Trading cost will be dictated primarily how Lucid does in the quarter and the other cost lines are pretty good run rates we believe in looking at our expenses for Q2.

Finally I would like to turn to our cash flow on slide 11. This chart presents what you will see when we file our 10-Q as net after-tax cash flow from operation. And as you can see the after-tax cash flow was up 136% to $33 million for the quarter. Cash flow as you know is an important part of the FXCM story. You can see in the bottom box that in Q1 ’13 our income statement had a number of non cash charges depreciation and amortization with $12 million in equity based comp was $3.2 million in the quarter. So we have some $15.2 million on a quarterly basis or $60 million on an annualized basis of non cash charges in our income statements.

Our near term focus will be to reduce debt level somewhat but you can expect us to start ramping up returning capital to shareholders shortly through share repurchases and potentially dividend increases. We are reviewing currently and expect to report back to you shortly.

And with that let me turn things back over to Drew.

Drew Niv - Chief Executive Officer

Thank you Robert. The momentum pick up we saw in February in March has continued into April. On slide 12, we see our principal operating metrics all of our volume and trading statistics for April are either monthly records or in the top three. Our monthly volume of $266 billion is just short of our record of $371 billion which was set over four years ago. Excuse me, our average daily volume was a third highest in firm history and daily trades institutional volume in ADV all set company records. Our active accounts improved over March numbers to a new high for the company and now increased by 3% since the beginning of the year.

Active accounts often follow trends in currency volatility as market volatility picks up traders get more interested and more active. While there are some macroeconomic drivers impacting global currency volatility we are yet to see the conditions that could drive volatility back towards the median level over the last five years. As current trends continue obviously the central bank printing of money continues or more catalysts for increased volatility emerge we are in an excellent position to capitalize on them and see significant increases in performance.

On the other hand should conditions remain the same revert back to the depress volatility of 2012 we will continue our strategy to pursue grow via increases in scale, market share and revenue diversity. That is a good transition to our summary outlook on slide 13. If you been a listening to our quarterly calls on a past couple of years you have no doubt heard I say many times that we believe our best strategy to increase shareholder value is to increase the scale of the company and sizing geographic reach well diversifying our sources of revenue. We strongly believe this has best positions us to profit from attractive market conditions whether periods of adverse market or regulatory headwinds and gain market share by outperforming our peers. Q1 of this year was an example of how do the strategy can generate improved performance even with only modest improvements in overall macro conditions. This was evident in our record volumes and revenues.

Moving forward, we will continue to pursue this strategy seeking to increase our scale via organic growth and selective acquisitions as the number of competitor strengths in the major markets; we compete in our organic growth strategies have the opportunity to deliver more new clients. We are seeing this in a number of geographies. On the acquisition front, we will continue to actively evaluate large number of opportunities. The U.S. and European markets will continue to consolidate as brokers exit and the advantages of scale become more important. We would expect to see opportunities in those markets over next year.

As always, our acquisition strategy remains disciplined, while we are disappointed when we do not acquire our target such as our recent decision to discontinue the pursuit of Gain Capital acquisitions especially sizeable ones are now easy to pull off. In our industry, there are numerous variables above and beyond integrating the two companies, which can impact the potential value of the deal, changing regulations, whether restricted cash or cap can truly be liberated, other balance sheet issues and so on there is never a simple exercise, where things just turned out the way they look on the spread sheet. Its hard work and we take it very seriously.

After (400) plus years of active pursuing, completing and integrating acquisitions we can still say confidently that we have never regretted pulling back or being out to bid on any transaction. Our shareholders can always know that once we do - do an acquisition it will be an accretive acquisition. Accretive acquisitions are just one other ways, we seek to increase shareholder value; while we pursue them we’ll remain committed to other ways to increase shareholder value with the cash we generate including share repurchases, reduction of debt and paying dividend. And in fact, we are considering increasing our dividend later this year.

In addition to the progress, we are making in organic, new client additions, we are excited about the expanded potential for our White Label operations, the Charles Schwab going live is a significant achievement following on the hills of our E*Trade and Barclays doing last year it demonstrates that the largest retail brokerage in wealth management firms in the world are choosing FXCM as their partner to provide retail FX.

In 2013, we can still have - we still have numerous White Label opportunities in our pipeline although it is full as ever. The continuing rave of regulations resulting from Dodd-Frank – from Dodd-Frank’s market reforms has been moving through many institutional over-the-counter asset classes. And in the near future, we will be replacing single-dealer platforms with multi-dealer platforms requiring multiple price providers.

If U.S. and European regulators have just committed to ensuring that institutional trading takes place on an agency like multi-bank basis, how long will they allow the principal single-dealer model to continue in the retail FX for retail clients? The retail FX is the only retail asset category, where a single-dealer principal model is currently permitted without any of the benefits of multiple (court rule) as with over the counter trading in SEC regulated environment.

If regulators move towards requiring agency multi-bank platforms in the U.S. Japan and Europe the market disruption will be material for the principal dealers, who dominate the market in the retail FX in both numbers and share volume. This could provide extraordinary opportunity for FXCM to capture significant market share from competitor.

Lastly, the regulators are imposing new requirements on other retail asset classes but catered to the same Active Trader based that we do. In Europe and in tougher regulations for Retail Futures in the United States both of these initiatives will impact competitors offering products in those spaces, while generally increasing the attractiveness of retail FX to investors.

In Europe, just to remind people the financial transaction tax will impose higher trading costs on especially on Active Traders and in the U.S. in the Futures business essentially new CFTC rules may impose much higher margin requirement that are effectively being used on an into day basis by many futures traders today and that will also make Futures far less attractive for the active trading community.

In 2013, we are happy to have Lucid on board for the entire year as opposed to two quarters that they are able to contribute to our business last year. To sum all this up, four months into 2013, we are very pleased with our performance so far and extremely optimistic about the potential to continue our growth throughout the balance of the year. Thank you very much.

I’ll now turn it over back to Jaclyn.

Jaclyn Klein - Vice President, Corporate Communications and Investor Relations

Okay. Operator, we are ready for questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question is from Patrick O’Shaughnessy of Raymond James. Your line is open.

Patrick O’Shaughnessy - Raymond James

Hey, good morning guys. First question is on your retail pricing I think, Drew you gave some pretty good commentary around kind of what were the factors that drove it this quarter as a model and pricing going forward and I guess maybe you can comment on what you’ve seen so far in April should we expect some sort of returning to your normal range kind of low 90s or do you still see kind of a lot of trading on the Yen driving that down in the near term?

Drew Niv

So, April is a Yen driven month so we don’t have the exact calculation to dollar (indiscernible) going to disclose that but it is the Yen driven month, we should assume it’s the low end of the range similar to Q1. The - and as long as the Yen continues to dominate trading that will be the case. But if volatility comes in Euro or in Sterling, most of the Yen then obviously we’ll see it going back to the middle of the range of last year.

Patrick O’Shaughnessy - Raymond James

Hey, great. That’s helpful. Second from me, I guess, EBS is talking about making some real changes to disadvantage high speed traders, kind of what’s your view of that and what sort of potential impact do you think that could have on Lucid?

Drew Niv

So, I know, there are a lot of people referring about changes last year to pricing and if you just look back to the presentation I believe it is slide number seven. We’ll see that Lucid had a 43% up tick in the trading volume on EBS in the Q1, 31% up tick in the Thomson Reuters trading and I think that this is kind of the two venues everybody was afraid that things were currently changing and obviously this has proved that they did not.

I think about the - the essentially the speed Lucid is not and we said when we announced it, it’s not the fastest and you can see it in their CapEx numbers and essentially the thing they do not spend tens of millions of dollars on microwave powers and others sort of really speed demon type spending that needs to happen and now you can probably see that in the numbers looking at projector or historical figures of how much they spent on CapEx versus Lucid. Lucid is not in the speed business.

We think that any sort of going back deploying market making, while requiring changes in everybody’s and will take – may take some time to transition maybe not and we don’t know that yet but depending on the exact changes. But overall a slowdown of trading is better for Lucid not worse and that’s something that because Lucid can’t compete on speed with the likes of the ejectors (indiscernible) of the world and the virtues of the world and those people because they just don’t spend that kind of money.

Patrick O’Shaughnessy - Raymond James

That’s helpful. And last one from me before I turn back into queue. Drew you kind of made references to the average CVIX level in the past five years. I think it’s probably fair to say that we experienced almost an unprecedented level of volatility during that period and if you look at the CVIX let’s say from 2005 to 2007 it kind of range between five and 10. So, at what point, do you start planning like this is the new normal for CVIX the range that it’s been right now and what would that do to your planning?

Drew Niv

Well I want to kind of comment on that. So, 2005 and 2007 were if you will the time before the storm of 2008 so volatility was overly - was overly low right. The, if you look at that as a, if you go back and say okay let’s use a fair number, you kind of go back 10 years, 15 years average CVIX is higher than it is today. The other thing about prior to 2007, 2008 is that we had interest rates at far higher level than we have today. So if the market gets back to a normal quite run rate because economies aren’t more normalized, then interest rates are normalized and obviously FXCM will be doing far, far better in other highest rate environment that it could ever do in a (call).

Patrick O’Shaughnessy - Raymond James

Okay, great. Thank you.

Operator

Thank you. Our next question is from Howard Chen of Credit Suisse. Your line is open.

Howard Chen - Credit Suisse

Hi good morning everyone.

Drew Niv

Good morning.

Robert Lande

Good morning.

Howard Chen - Credit Suisse

Drew I want to come back to the current environment and specifically on the yen activity. Just given the improvement in the first quarter and the further pickup in April, is your best guess that client activity continues to accelerate even more stay at these levels or is it a big currently heightened and then tapers if as this works through this system?

Drew Niv

It’s sort of unfortunately traders if you will are not to be (purgative) by like essentially all ADD right. So it’s issue of the as long as volatility continues right then you will have continued engagement by the trading community and you will see a rise even further think of all lot of stuff also being relative if volatility picks up in other asset classes not just in FX that’s actually a negative for most other asset classes because most investors are not good with volatility and other asset classes. So we get a better FX having a liquidity premium of our other asset classes does better when everything is more volatile. So – those answers as usual I don’t have as to what’s going to happen but for us the best thing would be that not only FX volatility continues but volatility in general picks up in equities which should not happen obviously yet.

Howard Chen - Credit Suisse

Great. And then just as a follow-up I know it’s still very early but with Australia cutting rates and the recent actions that results from ECB, do you think either of those is a surprise enough or meaningful enough to sort of sustain the momentum and maybe tilt some of the product mix?

Drew Niv

We haven’t see that as of yet, but the Australian dollar has been here for around this level for like two years and given that kind of one of the only big currencies with an interest rate it’s everyone is longer than currency because of that positive carry. So is that ever broke that would be a big event but it hasn’t even broken as of few years ago that I’ve seen. But that would be a big pretty big even if it did. And I think that’s something obviously there is lots of things I think the biggest sort of catalyst for coming volatility is actually a stabilization – stabilization in our outlook for the U.S. economy or a more positive outlook for the U.S. economy which essentially puts the debate over QE back on again whether it should continue, when it should stop obviously the end of QE is the most important thing that for us as a – from a volatility perspective because obviously that will bring massive reallocation of money between asset classes as you guys would know better and that would drive enormous amount of FX business.

Howard Chen - Credit Suisse

Great. Thanks for that color, Drew. And then just switching gears Robert we saw a meaningful amount of positive operating leverage this quarter and as you noted you hit the EBITDA margin you laid out last year. Is your best thought that margin should stay around this sort of 40, low 40 level or just given the combination of what you’re seeing with somewhat accelerating organic growth and some of the continued pay off from the other expense initiatives you have in place. Should we consider this sort of a new floor that you can build off of?

Robert Lande

Well yeah I think we are probably I gave you the guidance on the individual expense line, there isn’t – there is going to be some movement in Q2 on G&A going up a little bit and comp and everything else is pretty good. So if revenues can hang in there this absolutely would be a floor. We’ll have to wait and see April obviously was very strong month, let’s see how May and June turn out and then as you can expect we’ll continue to be grinding away on the individual cost lines. And so I’m hopeful now we put out the target of 42% but that wasn’t we weren’t going to start ratcheting up expenses if we started to hit that. So if we can achieve higher margin levels we will absolutely do so. But right now we’re just kind of at the root level working on each individual line item doing the best we can, trying to keep it down as best as we can and let’s see where revenues go.

Howard Chen - Credit Suisse

Okay, great. And just final question on capital return it sounds like more details to come, but I’m hearing a couple of different things, one, just a near term desire to reduce debt and you’ll come back to us on dividends and share buyback, but then second still keeping a watchful eye and thinking that some deals will come down the pipe in the next year. So can you just help reconcile like what are sort of the parameters of the discussion as we think about this over the next few months?

Drew Niv

I think Howard the way you think about it is that because we have a credit facility that we can draw upon it anytime. We essentially and because of the gain thing we are blasted out from buying shares last time. I think one of the things we decided between buying shares and mainly obviously at higher price levels or distant higher price levels, it’s mostly repaying debt. It’s the more we sort of pay back that down the more we can pull it off at anytime when we have an acquisition coming up, there is no need to start of kind of store it in case of. And while we do have stuff in the pipeline and I’m not either one to call an end to our acquisition strategy because it is not an end at all and there is given all the headwinds for the industry regulator wise we believe that there is loads of opportunities going forward. But right now if we’re going to sit here and wait for deals to close and not do anything we don’t consider that a good strategy at all and so we’re going to be we’re definitely going to be doing some of this stuff and we will give you more details as we kind of firm up those plans.

Robert Lande

And then I guess Howard it’s fair to say from the cash flow side you could see that obviously there is a meaningful pickup in our cash flow. So just because of that alone we can do more than we were initially intending.

Howard Chen - Credit Suisse

That makes sense. Thanks for that additional color.

Operator

Thank you. Our next question is from Ken Worthington of JPMorgan. Your line is open.

Ken Worthington - JPMorgan

Hi good morning. Maybe first on White Label so congratulations on optionsXpress. But can we get an update on some of the other more recent White Label relationships and if you can give us some color in terms of are they contributing is it lot, is it still really small. So I was thinking E*Trade, Barclays and GVC maybe there is others I should focus on as well, but those came to mind?

Drew Niv

We can’t give you stats on individuals ones simply because of the kind of up to the client to do that. So but we can tell you that some are beginning to contribute but small but they are contributing. So when we say where we sort of dismissed that from before it wasn’t dismissed and not contributing at all but it was just to say that they are not game-changing as of yet, but they are contributing. We are yet at the levels of integration with those entities that will enable them to easily and logistically offer this product to the majority of their client base. So that is not yet the case, but it is being worked on as an end goal to be there and I think in the coming quarters that will start to pickup the pace because of that integration. The positive about the optionsXpress deal is that integration was done a long time ago so from a technological integration perspective that relationship is ahead of all the other relationships by a mile from a - if you will a lot an actual launch that is been beta testers which are live clients of optionsXpress on for over a year and I think they’re going to fully launch live in the third quarter sometime that’s one of the latest we will hear and that’s something that we expect to have a faster pickup but we still don’t have any color as to how big that can be sometime because of the issue of – we don’t control the marketing and the – how aggressive those people will get with their clients.

Ken Worthington - JPMorgan

Okay, great. Maybe move on the balance sheet, can I maybe hit both cash items. So for the cash held by customers you noted that was basically flat quarter-to-quarter but you are seeing a couple of things, I love you to flush about like what is it mean when customers are exceeding limit towards FXCM. And then I think you said that customers were taking money out, is it seasonal does it – do you think it had like what would your guess, do you have anything to do with maybe other asset classes perking up could it be taxes in different regions of the world, how would you guess or what would you attribute this to?

Drew Niv

Generally speaking surplus downfall on cash so we have some institutional customers are essentially via labels who don’t revolt some money with us to when they – to clear their own customers trade, those are mostly larger financial institutions, in on Korea, Turkey and others and mostly brokerage firms are owned by banks. Those people have limits as to because of our lack of a credit rating and the size of our firm they cannot hold more than X amount with us so even though their trading activity of customers increased and they – their customers made money with us they’d still have to repatriate majority of that so that if you will the balance that don’t grow.

Same time our retail customers specifically our Japanese retail customers were pretty stayed down profitable in the quarter but generally what we see in a environment such as ours is that our peoples get a lot of – make a lot of profits they generally tend to withdraw them simply because of the safety of funds concerns is not but that’s seasonal thing of withdraws and moving out their assets classes much of its people don’t trust FXCM with so much money right so they hold a certain amount and they own hold anymore obviously that kind of changes from customer to customer but now those averages that you’ve seen in the past have gone up so ever since the IPO those averages are more in double but the – their still as people make a lot of money because this level of training when they make they make a lot just like when they lose they lose a lot that they generally will withdraw that money. So we aren’t seeing – you’re not seeing a meaningful pick up in account balances but the actual flows because that’s profits to customers is actually a good thing and not a bad thing kind of pretends very well for continued volumes.

Ken Worthington - JPMorgan

Does this mean your – like are you kind of capped here it sounds ridiculous no I'm not sure I believe it but is there a….

Drew Niv

Well think about as recap from on a total customer basis to some degree as long as our credibility in balance sheet to remain where it is right so additional customers remain additional funds as well as our credibility grows as it has grown in the past few years and you can see kind of average balances are now is about $7000 for client up from if I remember correctly those like 3000 or so for clients few years back so we are talking about meaningful average increase as we are continuing to see those increases you will see that will be – improve well kind of the cap goes up but we definitely have - do hit some sort of a wall proclaim.

Ken Worthington - JPMorgan

Okay.

Robert Lande

Well Ken I mean last year we were up 14% in the year and I don’t think you should – we don’t see anything in our business that would indicate that you’re not going to see a nice continued increase in customer equity I mean but there are obviously things that Drew said that, that can limit this sometimes but the overall trend is still healthy.

Ken Worthington - JPMorgan

Okay. And then lastly from me, can you give us a break down of the standard in the micro accounts for 1Q and you have a I’ll call the newest principal program for this micro accounts, are they growing hopefully or they – or taking you up on kind of that principal offering?

Drew Niv

So on first on the micro accounts so we ended back half vacation and moved everything to standard so we only offering standard accounts now. So that’s for the micro sword. The in terms of the cheaper giving best offering it is going slower than we expected, it is not doing our brand primarily is not a dual brand so people are coming to us primarily for their agency trading still over 9 to 1 so I would say even 18 out of 20 and it’s something that for the dealer offering has not picked up but the good thing is that overall accounts have picked up and overall accounts have continued to pick up every month this year our new accounts are higher and meaningfully up from last year.

Ken Worthington - JPMorgan

Okay, great. Thank you very much.

Operator

Thank you. Our next question is from Arnold Ursaner from CJS Securities. Your line is open.

Arnold Ursaner - CJS Securities

In your balance sheet and the priorities for cash flow, could you just remind us what’s your CapEx expectations are for this year and to the extent you have balance sheet or leveraged targets, could you comment on what those might be?

Robert Lande

Sure Arnie. We spent $5 million in CapEx in Q1, last year we did $27 million, I think so that last year was a bit elevated because we spent about $5 million on a data center in Japan so I think we’re targeting around $22 million $23 million this year for capital expenditures borrowing any acquisitions and what that might do to CapEx and stuff. In terms of leverage we right now have $80 million under drawn under our credit facility, we have a 22 note payable $22 million note payable to Lucid at the end of the year it’s obviously we have another $75 million still we could draw to the credit facility.

So we’re pretty comfortable with this level of leverage that company obviously with this kind of EBITDA can support very higher levels. But I don’t think it’s been our style to really push things on leverage, we have enough cash flow that I think we can return healthy amounts to shareholders but they would also increasing leverage. So I don’t think we have a explicit target in terms of debt to EBITDA ratio that we would want, I wouldn’t envision us really going over one-time debt to EBITDA and must be really had a very attractive acquisition that we wanted to do. And I think we’re probably would like debt levels absolute debt levels down a little bit from where we are right now but not going down to zero.

Arnold Ursaner - CJS Securities

One is a mechanical question on the optionsXpress relationship with Schwab will be accounts reside at Schwab or will any of those impact your metrics?

Drew Niv

See, it’s a it was a what took very long time to do is this almost two years ago was done as a White Label contract and intuition broker contract so the accounts will be on our books but as of the E*Trade relationship we are not going to be disclosing those accounts and counting them in our metrics because of the issue of the ability of customers to move to instantaneously move money back and forth between their equities and their FX accounts so we perceive there’s going to be lots of volatility in the activity levels and balances and things of those accounts so I’ll just create a lot in those kind of numbers particularly as those relationships grow and that I know that kind of eliminate the tracking mechanism for investors but it is I think a prudent thing to do because that could overwhelm all our other metrics by other organic metrics and we would just be constantly putting out numbers of excluding this excluding that.

Arnold Ursaner - CJS Securities

Final question from me, you over the last six quarters I think my perception is you’ve talked about a normalized range of 92 to a 100 revenue per million and obviously this quarter because of the Yen was below that, are there any other structural issues that would cause the range that you spoken about in the past to be more permanently lowered?

Drew Niv

Currently our pricing in many of our CFD instruments for example our largest one is spot mails we kind of in the CFD base now really so in spot mails we make more than a $100 per million if we were forced to lower those prices that would impact the average, right now we don’t see a reason to – we’re not getting a lot of pressure so we should be good there. The – and actually if this mails volume go up for example the other CFD volumes go up there is a lot of upside in those – in the range. In terms of downsize yeah if CFDs either even though they’ve been on an upsurge head downed and yes we would have downside in – some downside in the 90 to 200 range and I would say if Yen continues Japanese business and Yen continue to dominate the thing to a much greater degree than it is today then there is some more downside but there is not a lot if you look at this is – Japan for us is so like Achilles Heel and dollars per million and you’ve seen an environment where Japan has really kind of picked up and this is extent of the damage I don’t want to say that’s limited to $88 in absolute but we’re generally speaking we don’t think that there is a lot of room for now to decrease it.

Arnold Ursaner - CJS Securities

Thank you.

Operator

Thank you. Our next question is from Alex Kramm of UBS. Your line is open.

Alex Kramm - UBS

Hey, good morning.

Drew Niv

Good morning Alex.

Alex Kramm - UBS

Just couple of follow-ups I guess at this point in the call, first of all on the expenses, thanks Robert for laying this all out. But you said there was a one-time or in the second quarter where you said there were going to be some related to gain and also some FSA charges. Now is most of that adjustment in second quarter I think you said $1.5 million.

Robert Lande

Yeah.

Alex Kramm - UBS

Or how much of that is on going and then staying on the expenses I think you also mentioned that your third-party on the – the current institutional side is going to stay around a little bit longer so maybe you can just lay out again how the expense that going to be impacted by that and if there is still going to be a drop to come later this year at some point.

Robert Lande

Yeah, current X will continue to come down I won’t – we’ve got to zero because there are clients they are going to be rest on it. If I had to guess by Q3 probably you would see another probably $450,000 a quarter lower communication and technology due to lower current X and integral bills, I don’t know somewhere in between that for Q2. So I think that’s where current X goes. In terms of the G&A I think probably about half of the $1.5 million increase would probably be on the permanent side due with higher regulatory piece in the UK. And about 750,000 would a one-timer in Q2 that should not repeat in Q3.

Alex Kramm - UBS

Okay, very helpful. Thank you. And then just coming back to the White Label line of questioning I think at some point last year you kind of laid out there is a couple in the pipeline in the U.S. one is not disclosed one will be disclosed now I don’t know what options best fits in that is that the disclosed one or is that the – was that the one that was not supposed to be disclosed but nowadays. So just remind us where we are in terms of the pipeline if there are any specific things that you’ve called out in the past that are either done or not materialized anymore or still going to come.

Drew Niv

Sure. The optionsXpress is supposed to be non disclosed and is really signed and done as non-disclosed and then Charles Schwab when they bought it decided to turn that around and make it disclosed so it is now disclosed but that - that’s the one. So, those are the Barclays, E*Trade and Schwab are the three that we announced a while back and in terms of non-naming but the industry so that - those are the ones are signed sealed delivered. We’ve a pipeline that is maybe inside firms and some other pretty big firms as well but those that pipeline well pretty much full of prospects and people and various digits they are not signed, sealed and delivered like this do.

Alex Kramm - UBS

Yeah. Just lastly this will be quick hopefully but on Ken’s line of questions throughout the whole like being cap tier obviously we see the average per accounts and then how does that has moved up but can you give us any more color in terms of maybe account mix changing or quality of account that you are attracting I think a while ago you made some comments about how larger account are coming - coming through here increasingly and people sticking on longer because they are - they are trading differently and they are not its called blowing up as much anymore so. Obviously with a lot of the volatility recently it’s very hard just feel like what kind of new accounts you’re attracting and so forth. So, any incremental color would be helpful that’s it from me? Thank you.

Drew Niv

Yeah and I didn’t want to suggest to Ken’s question to that we’re kept somehow and compounds so we’re not, we’ve seen sort of, while we’ve been saying all of last year on almost every call exactly what you’re saying Alex is that our average account balances are growing up because we’re attracting a bigger caliber of client. We think that this is a continuing trend or still the case and we‘re very hopeful and still pursue that there is lots of room to go up on customer assets and FXCM I mean we’re just starting.

I’ll give you another example, there is something for example, if you look at the regulatory changes we spoke about and there is in certain jurisdictions there is already talk about making the agency mentor in certain jurisdictions not yet but we think that it’s a virtual certainty legally given the trend of where everything else is going and essentially the retail FX is sort of being principle its kind of a loophole if you will in many jurisdictions I’ll not think about loophole will be extinguish.

If you think of what that does to customer compounds is today, many of our customers sort of doubt that we’re because we’re in anomaly in our industry and most of our - most of our competitors are in the principle business. Customers know that you make more money on trading against the customer than trading on agency basis with a customer. So, a lot of customers are somewhat suspicious and other outright don’t believe us that we’re in agency business.

We think that making that a mandatory, a legal thing in certain jurisdictions and all in all especially in all the major ones, we’ll give a lot of customers the confidence to educate and I think we’ll grow those balances pretty significantly when that happens. So, I think there is enormous amount of room to do that not to mention obviously does regulatory changes do come the amount of decreased competition in the major jurisdiction should be pretty substantial. I don’t see most of our principle competitors while some will convert and will be fine with it the bigger ones I don’t see a lot of the other surviving.

Alex Kramm - UBS

Very good. Thank you again.

Drew Niv

Thank you.

Operator

Thank you. Our next question is from Mike Adams of Sandler O'Neill & Partners. Your line is open.

Mike Adams - Sandler O'Neill & Partners

Good morning guys.

Drew Niv

Good morning.

Robert Lande

Good morning.

Mike Adams - Sandler O'Neill & Partners

Quick question for you on the institutional business I think, I think, when the migration began a couple of years ago you would guided to a revenue capture of I think, it was low to mid teens similar to the retail business, where we’ve seen it sort of breakthrough the low end of that guidance range. And just trying to figure out if there is any additional factors that are impacting the capture rate there on top of customer mix and currency mix maybe something to do with the percentage of volume its coming through FastMatch?

Drew Niv

Yeah. So, the institutional business is a different story than the - our retail business. And then if you think about the retail business, in the retail business we are a big franchise, we have a lot of pricing power, where our brand is one of the biggest brands in the business, we’re dominant, we’re the dominant player in many of the jurisdictions that we compete for clients in outside of Europe we dominate North America, we dominate most of Asia in our business. So in the retail business we see a lot of room to hold the line on prices even though we charge a premium to many of our competitors we still get a premium growth if you will and a lot of customers come here anyway because we do have a far superior service and a far superior execution than most of our competitors.

Now on the institutional business it is a little bit different, we are a small player in a big pond, our competitive advantages are not as big competitively as they are in the retail business obviously our brand is almost non-existent in the institutional business. There is a lot more slippage there now. In the beginning we are not shooting to be number one so it did not feel the need to slit our own throat to get to that level from a pricing perspective. But as we’ve said in prior quarters the institutional business is structurally if you will taking on a massive hit in the past year, year and a half simply because of the de-leveraging in a banking sector specific the second tier banks and had a tremendously difficult time with this obviously not just de-leveraging but de-risking.

So the primary players in the FX market, institutional FX market have had a lot of pullback, a lot of FX funds in the flag volatility markets don’t do well so people take money out of their allocations. So FX in general, the institutional FX business has really suffered so obviously that has permanently brought down the not permanently excuse me that has brought down the entire industry if you will go back to the comps or some of our biggest institutional competitors going back three, four years you will see a massive decline in their trading volumes specifically for the market leading venues so you can kind of trace it from there. So I think that while all that being said I think that’s temporary and I think that’s something that even though it’s structural today will not continue and as I said in previous things I do think the FX volumes are going to recover.

Right now and they are very soft obviously we are very likely to be at the very low end of our range maybe breached a range more often in the institutional business that kind of keep it where it is today and to grow it from here. The – but as the market recovers as we think it will as Dodd-Frank essentially steers more volume away from complicated capital intensive instruments to vanilla instruments. They are less capital intensive and that being Basel III, Dodd-Frank and all those other similar initiatives from various sources we think that FX volumes recover, we think the pricing power recovers somewhat for us as well but I think for the near term pricing power will be weak in the institutional side.

Mike Adams - Sandler O’Neill

Okay. And then staying on capture and just looking at the retail business. Is there someway to quantify the impact on the capture from the elevated activity we are seeing in the Dollar Yen. Like for example could you give us the percentage of volume that you are seeing in the Dollar Yen payer maybe in 1Q versus 3Q, 4Q of last year?

Drew Niv

I can tell you that – I don’t know the numbers 100% and we can maybe give it to you later, but like – because I don’t but I know for example that if you look at last year Euro versus Dollar was nearly 40% of trading in FXCM. If you look at all three of the major Yen payers Sterling versus Yen Euro versus Yen Dollars versus Yen, I believe that’s over 50% of volumes in Q1 maybe even 60% of volumes in Q1. So that is a big, big change in the business than what it used to be. And so for example if I remember correctly it’s not 100% scientific but Sterling Yen and Euro Yen were like number seven and eight payers in 2012 most traded because they are definitely number two and number three today, Dollar Yen was number four, it has been our most days it’s number one in Q1. So I mean you can see a massive shift in volumes so we’re not talking about a trivial shift at all.

Mike Adams - Sandler O’Neill

Got it. That’s helpful, Drew. Thanks.

Drew Niv

Yeah.

Operator

Thank you. I’m not showing any further questions in the queue. I’d like to turn the call back over to management for any further remarks.

Drew Niv - Chief Executive Officer

So thank you very much everybody for listening in and we hope to continue to update you in the next quarter on all our plans and thank you.

Operator

Ladies and gentlemen thank you for participating in today’s conference. This concludes today’s program. You may all disconnect. Everyone have a great day.

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