GAIN Capital Holdings, Inc (NYSE:GCAP)
Q2 2013 Earnings Call
August 7, 2013 5:00 p.m. ET
Glenn Stevens – President and CEO
Daryl Carlough – Interim CFO
Patrick O’Shaughnessy – Raymond James
Good day ladies and gentlemen and welcome to the second quarter 2013 GAIN Capital Earnings Conference Call. My name is Tony and I will be your coordinator today. (Operator Instructions)
During this conference call, management will make forward looking statements to assist you in understand its expectations for future performance. These statements are subject to a number of risks that could cause actual results to differ materially and I refer you to the company’s press release of August 7, 2013 and the company’s Form 10-K for the year ended December 31, 2012 for discussions of those risks. In addition, statements during this call including statements related to market conditions, the acquisition of global futures and forex, changes in regulation, operating performance and financial performance are based on management’s views as of today and it is anticipated that future developments may cause these views to change. Please consider the information presented in this slide. The company may at some point elect to update the forward looking statements made today but specifically disclaims any obligation to do so.
I will now turn the call over to GAIN’s CEO Glenn Stevens to discuss second quarter 2013 results. Please proceed.
Thanks operator and welcome everybody to our Q2 earnings call. Thank you for joining. I would like to start out by pretty much focusing on highlights, fortunately the highlights are about all we had for Q2 in a very highlight sale scenario. So this should be fairly upbeat process and once again dig into some of the specifics, we can get into some of the metrics and then follow that with some Q&A before closing remarks.
I’d draw your attention to the presentation that we have online as well as we will use it as the backdrop for here in the first slide, little bit of highlights, just reviewing because they are all positives and the overall context here is that our business has a continued to be built, to be added to by acquisitions to be set up in advance – for taking advantage of improving market conditions which we have seen throughout 2013 and continue into Q2 with the leverage of our margin and the leverage of our scale that was set up, it’s great to see the fruit of our labor.
We saw a record quarterly revenue in this quarter. We saw increased client engagement, we saw a continued growth of our futures business. We saw continued expansion of our GTX business. We saw a strong margins showing the significant operating leverage available on our business and every single key operating metric show positive results on a sequential basis, on a year-over-year basis. We ended up with a record level of client assets for future opportunity as well.
On the next page, for more specifics, the second-quarter results overview, completed our Q2 for ’13 financial summary, had net revenue of $73 million compared with 45.7 million for last quarter. And to give you some context of that, the first half of 2013 is 122 million. Our EBITDA was nearly 27 million compared with 8.9 million but it brings our total first half to 34.4 million.
Net income was 17.2 million compared with 4.4 million and our EPS was $0.44 which brings our first half to $0.56. The context there, our earnings were $0.07 for 2012, so it’s quite an improvement story and I think it’s testimony to the fact that setting the underpinning rate for an improved market condition and also more importantly building the basis of future success. We will get into some of the color behind it but I think it's important to realize that this is a multi-stream revenue story now and it’s also an opportunity for us to build underlying metrics for future growth.
On the operating metrics, our retail volume increased 36% to 462.1 billion. Our institutional volume continues to roll and increased to 141% to 1.1 trillion and our futures were up as well of 14,000. Funds accounts were up 30% to nearly 97,000 and client assets were up almost 50% to 476 million as of the end of Q2, that’s a record high for us.
It’s important to note that these financial metrics are consistent with our commitment to transparent reporting, they are all GAAP, we try to keep things standard and recent quarters we’ve moved to old GAAP and thee numbers are representative of that.
Little backdrop for market conditions, you can see that volatility continued to improve and then overall metric in Q2, we’re still below levels of kind of the 2008, 2011 range but overall in the longer period, these are improvements over last year and most importantly you can see we – only modest improvement, the ramifications into the operating results are quite dramatic and that’s something we want to rely on. We showed nearly a EBITDA margin net of trading expenses and again that’s the kind of results we want to see when the market conditions improve and when we have our other businesses kicking into support that. Overall the index has shown some increasing – the volatility index has increased if you will in terms of volatility or opportunity in the market this year, although overall if you look at the chart on the page it’s still a modest levels.
Breaking things out from business lines a little bit, retail over the counter, we had increased client engagement, we had our highest quarterly retail volumes since Q2 of 2011. Our average daily volume was up 37% to over 7 billion a day. And our active accounts increased 4%. We continue to optimize marketing spend to the highest performing regions, we want to be very nimble there, we want to be able to use our very healthy resources towards market, that show the most promise and we continue to rebalance and reallocate as appropriate.
Now the other two businesses that make up what we like to call our three pillars, the institutional business and the commission based business on the future side. The growth story there is increased participation story there is a strong one. Look on the institutional we saw volume growth of quarter over quarter every single quarter and particularly we see our increased market share from our perspective gleaning the information we can from some of our institutional peers, we continue to gain meaningful market share.
On the future side, same idea with increased starts over Q1 and ultimately these are commission based business represents about 19% of revenue for Q2 of 2013 and that trend continues, we expect that to be north of 20% for fiscal year 2013 and it’s an indication of the multistream revenue opportunity that we are trying to build and just to give a little context, the first half of 2013 saw a revenue contribution of over $25 million in these businesses, that compares to $8 million for 2012.
So not only is it a growth story, but it’s actually materiality story here too. We can build a broader base from where revenues will come from. The next slide is just some pictorials and some graphs, give an overview of the net revenue, the EBITDA, net income, total expenses, and the retail trending per million, I think it’s important to show that the operating leverage continues with the dramatic increase in our EBITDA and net revenue, yet the expenses related to that were very modest indeed, the one slightly higher expense would be in the trading expense but factored that in that does include the futures commission expenses which was in the bulk of 2012.
So comparison period over period it’s important to realize that. In terms of just moving along, we did declare our $0.05 per share quarterly dividend, record date September 12, payment date September 20, really all of our previously approved 15 million remains available for us to opportunistically buyback shares, and we are an active participant in the buyback. We do believe that it’s a good opportunity for GAIN to deploy its capital and use some resources. It’s one of the way we want to be able to use our resources and use our cash and liquidity. And ultimately we try to look at hierarchy of our capital, we continue to generate very strong cash and we want to use that cash for acquisition, we want to use that cash for business expansion on our existing lines. We want to use the cash for dividend and we want to use the cash for share buyback, and almost in those orders and so in that order, so our ability to try to be opportunistic in the acquisition market whether they are tuck-in deals for assets, we did one last quarter that closing has been promising. We want to keep moving forward with those. We continue to see consolidation in this industry and so we want to be on the right side of that.
We also want to make sure that we maintain healthy cash margins so that we cash balances, so we can be flexible and if there are any kind of changes in regulatory horizons or situations where you really get extra liquidity that our buffer is automatically built in.
Just as kind of a summary before we go into Q&A, we have our closing remarks sheet here. The GFP transaction, the closing conditions lot of which have been satisfied to date. I was anticipating announcing the closing in Q3 as we previously stated but we continue to work through some issues there. I am going to provide update as they become available. The more important part of our Q2 is that the operating leverage of our business is really on display here. When you see that dramatic increase in the margin in the metrics, in the top line revenue, and profitability and most importantly in the earnings-per-share that flows right to our shareholders it’s impressive and more importantly we want it to be something we can replicate by whether it means buying other businesses to add to our existing or whether it means building other businesses through geography or through product or through customer segment, or whether it means folding in existing situations whether it be commission based business or re institutional and it doesn’t mean de-emphasizing the retail business, it means building a complementary infrastructure around it so that our ability to generate these kinds of revenues like we did in Q2 can become more like the norm than the standout.
Currency volatility is still relatively low compared to the last five-year period and the modest uptick in that being – for us being able to capitalize on is something we are very happy about and it’s why you pay your dues and do all the work leading up to these kinds of opportunities and situation. The marketing spend is something that is very important to us because with as impressive as our budget is compared to that as a resource we know that just slightly improvement in efficiency or being in a right markets at the right time and the right way can move the needle. And so we want to be very data focused and very technically advanced there whether it’s on the social side or in the staying on the cutting edge ability to use digital arena that’s out there and so that’s something that we continue as kind of NH strength that I think put us in a good position to use our marketing dollars going forward.
On the commission based business has been absolutely a bright spot in that we continue to make traction whether it’s through our peers and institutional side whether it’s through increased client engagement, we are not only seeing a strong pipeline of clients using our institutional product but we are seeing the people who already are using it increasing their usage, so that we are not just floating with the rising tide of high institutional volume that many have seen this year or actually outstripping that, and to me that’s a stronger indication of our business entering the heard and minds of the users out there, because if you are rising just with the rising tide, look that’s great, but you are fully dependent on the tide, if you are actually gaining market share then your product and your service, your reputation is turning you the stickiness and entering you the future earnings opportunity that this market provides. And so we are seeing that on all front and it’s very promising and very heartening in that respect.
So with that, I will turn the floor back to the operator for Q&A and then we can finish up with closing remarks from there.
(Operator Instructions) Your first question is going to come from the line of Mr. Rich Rippedo of Sandler O’Neill.
First question comes from, trying to forecast or understand sort of the revenue per million here again, I mean when you hit dramatic increase from the prior couple quarters, could you talk about like what made this quarter so we can understand a little bit better, what go you to a level that you are at the 124 level or so, and then how are retail volumes and sort of revenue capture in 3Q to date as well?
On the revenue capture kind of overall I think we put that chart out there just to get people some perspective in back to the sheet that has the bar charts and the RPM graph, I think on the one hand, if we were able to predict which factors would drive the 120 versus 90s, that’d be something that we replicate focused on and bottle up and maybe not sell but we will use right. But more importantly though, it does show that there is a kind of an afflation methodology to this that this doesn’t necessarily predict—that’s going to constantly stay between 120 and 80 but more importantly I think it shows some of that stability for us to say, hey loo, we have been hovering around for several – not just several quarters but years’ worth of quarters around the somewhat central value, you are going to have these ups and downs but ultimately we would consider ourselves kind of an outperform when it comes to revenue per million capture.
To your point, what drove that the higher one, to say what about Q2 look like, Q2 of ’12 or looked like Q2 of ’11, it’s not that – because I wish it was calendar driven but I think what’s important here is that there is a couple things, number one, the higher volume is helpful, you want to have that client engagement, you have to have customers getting involved because the reality is – when the volumes are higher you will put yourself in a situation to do better because as the market maker everybody knows when more volumes go through same finite gap of time, market makers will do better, so that’s – how do you get client engagement, part of it is volatility, outside of our control, but something that – you try to look over time and say increase volatility will certainly increase client engagement.
The other one is stuff that is in your control. Have the best, third-party service out there, have learning tools, and customer service and super low latency and tremendous reliable uptime. Other things you hopefully can control so that your client experience is really rewarding and you get this coming into you and you get the people following your products and your policy. We have almost no peers frankly when it comes to our pricing when it comes to our roles, when it comes to our services and our liquidity. So as the trader gets more engagement in this market and does their own homework, we put ourselves in a good position there. On the stuff that’s hard to control like volatility then you just want to make sure you are doing everything you can to capture what’s there. However on the stuff that you can’t control just make sure that your product and services are without peer.
I think if you look at our metrics and look at the number of active accounts and look at the higher assets and you look at the lot of the numbers that indicate to me and I think externally that clients like what we have to offer that helps a lot. The other piece of this is I think important to say that the type of market that trades you could have volatility where you get big price – and mathematically you ended up with quite a bit of volatility but in reality as the market maker I think these kinds of scenarios where we had multiple products moving. You saw British pound move, you saw gold move. So the subset of volatility which made up this type of market was a good one. I think what was key here is that it was kind of a segment in volatility, broad based volatility that came from multiple areas. It was a great upside quarter for us and I think it was important we were able to take advantage of the opportunity that was presented.
The last part of your questions how things trending, and I think putting out our metrics and going there, we are seeing some continuation of that in terms of the year continuing if you will with those kinds of market and trading conditions.
From a trading perspective friendly is what I hear you saying it. And my follow up would be – I know you are somewhat limited on what you can say, but could you just give us the – the stuff with GFT, is it because of the regulatory obstacles –
I can’t comment not necessarily from a negative way but just how that is, it’s not closed yet and so I can’t –
Your next question will come from the line of Patrick O’Shaughnessy [Raymond James].
Patrick O’Shaughnessy – Raymond James
Expenses, so they are up sequentially how much of that was due to higher revenue environment – and how much is due to I guess more structural investments you are making in the business. What’s the kind of run rate to look for to the back half of the year?
Futures business as well as our institutional – and also we pay as we go. So we have really good results. So we will look at it but to try to model it, it roughly 30% I think or 29% for –
Higher engagement higher activity generally equates to higher opportunity. Essentially it’s flat, I mean if you back out the trading expenses which are variable and if you look at that, the only thing that – and I would still argue that our – pretty modest, had relative basis for financial services.
Patrick O’Shaughnessy – Raymond James
As I am looking in the G&A line that was about 1 million sequentially first quarter, was that also – comp accrual in that line as well? Question on the share gains, Glenn, talked about repurchases and your share count grew I think about 1.4 million shares quarter over quarter – lot of that is just stock based compensation that you are giving – do you want to try to offset stock based compensation with repurchases?
We generally want a four year vest for our stock based compensation, so I think that you see that – to answer your question, I would definitely say that our repurchasing is designed – not designed around any other primary motive other than to say this is a good use of cash and so the reason we wanted to preapprove a larger amount was to be willing and able to take advantage of – so in those situations, we are not looking into that as an offset we are looking at as opportunity.
Patrick O’Shaughnessy – Raymond James
On your revenue cash, do you think on an annual basis, -- reasonable expectation over the longer term?
I would think that the reason we put the 12 month trailing in there is so that for that reason, that’s a clearer version or somewhat uncluttered metric for planning purposes and yes, over short term you can already see.
Next question will come from the line of Jamie Yakalub of Moiba Partners.
You guys have 99 million of free cash available – how you guys look at the optimal cash balance?
We are probably going to regularly be sub-optimal and I say because to be perfectly optimal you have to have perfect efficient, Number one you can act quickly, we did a tuck in deal with FX solutions in Q1, couple of seven figures available. Or you look at some institutional business that might need some balance sheet because it’s a customer maybe want to use GAIN in-house PV service. The problem is I don’t know when we will need a portion of that. So at some point when you go higher you use the cash for higher dividend it’s interesting there were questions about dividend in the past and I think one of the things we certainly want to do is continue to scale the business and that undoubtedly is going to need capital so to me it’s kind of an advanced use cash. I actually think we want to continue to spend and build mode, so having that cash handy is something that you consider as a tool.
The M&A landscape can you comment a little bit about the pipeline that you are seeing, are there other GFT type size deal out there?
I think there is a whole gamut, there is the small deals which sometimes are content related or technology related. I think there is still enough disparity between different geographies and different product sets and for us as we continue to establish these emerging business lines, like futures it opens up other environments we wouldn’t have had over a year ago. If you have a voice team that makes sense to add to your existing business, then that’s something we wouldn’t even talk about until we had the platform in place. So I think it’s actually broadened that landscape for us. You could argue has contracted a little only because there has been so much contraction and consolidation the last couple years. But we’ve more than offset that.
There are no further questions at the moment. I would now like to turn the call back over to you for closing remarks.
Thanks operator. Just finish up by congratulating my team at GAIN for an extremely strong quarter. We look forward to similar ones and we continue to appreciate the support of our shareholders and look for the opportunity to add to new ones. Thanks for joining today and have a good day,
Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect and have a great day.
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