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Gain Capital Holdings, Inc. (NYSE:GCAP)

Q3 2013 Earnings Call

October 31, 2013 8:30 AM ET

Executives

Glenn Stevens – President and CEO

Jason Emerson – EVP and CFO

Analysts

Rich Repetto – Sandler O’Neill

John Dunn – Sidoti & Company

Patrick O’Shaughnessy – Raymond James

Operator

Good morning and welcome to the GAIN Capital Third Quarter 2013 Results Conference Call. All participants will be in listen-only mode. (Operator Instructions) After today’s presentation there will be an opportunity to ask questions. Please note that this event is being recorded.

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 October 31, 2013 and the company’s Form 10-K for the year ended December 31, 2012 for discussions of these remarks. In addition, statements during this call including statements related to market conditions, integration 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 the third quarter 2013 results.

Glenn Stevens

Thanks operator and welcome everybody to our Q3 earnings call. I would like to welcome everybody for joining our call and walk you through some highlights of our Q3 financial performance drilled down into some of the financial metrics and operating metrics as well as give you some insights as to our strategic thinking and focal points for driving our business forward.

We do have our deck available online and I’ll be using that as a backdrop for our conversation, after which we’ll have a period of Q&A. our highlights for the quarter are good. We achieved the second highest quarterly revenue we’ve had in the history of GAIN driven by increased retail client engagement and more favorable market conditions.

A subset of that is that our year-to-date commission revenue is up a 180% year-over-year contributing approximately 21% of revenue. It’s important to note that as we talk about diversifying our business streams going forward we continue to make progress along these lines and for those have been tuning in as we go on quarter-to-quarter you able to see the progress and we’ll highlight that a little more deeply in this deck.

We successfully closed on our GFT acquisition for the realization of expected operating expense energies underway. We report in and out to commit to that deal even before it was closed hence giving as a running start so on the official close it wasn’t from starting start at that point we actually able to run into the starting line if you will.

For Q3 our adjusted EPS was $0.13 that’s up 44%. More specifically for our third quarter financial results, Q3 net revenue was $60.6 million that’s up 52% these are year-over-year comparisons on a quarter-by-quarter basis. Adjusted EBITDA of $12 million that’s up 90% year-over-year, net income of $4.7 million was up 42% and our adjusted EPS of $0.13 that I mentioned was up 44%.

For the nine months through the year, that brings us the net revenue of $183.4 million that’s up 54% over the similar period last year. Adjusted EBITDA of $46.3 million, and net income of $26.2 million with an adjusted EPS is $0.71. Obviously the comparison from 2013 is quite favorable to 2012, and there are various reasons over that success which we can go into a little more details.

On the operating results, breaking down some of the numbers behind the output financials, our retail volume of nearly $395 billion was up 42%, institutional volume was $900 billion, up 79%, futures starts over $12,000, funded accounts over a $131,000 with client assets of $684.1 million, up 60%. For the nine months retail volume of $1.3 trillion and futures starts of over $13,000.

That’s kind of backdrop for consumer context. The next chart shows the market conditions and the takeaway on the slide is just to get a feel that we have not returned to heady levels of volatility what we call good trading conditions from GAIN’s perspective. Now there has been a bit of uptick off the trough that levels that we saw at the end of 2012, but we considered there is a class at full scenario where that absolutely some room for improvement in trading conditions and we like the fact that we’re able to manage some pretty decent results even what we consider some are blockbuster opportunity and opportunity environment.

As part of our three pillar approach which we’ve been touting for several quarters now. The goal for GAIN is to continue to diversify our revenue stream, that doesn’t mean to deemphasize our retail business which has been the cornerstone of our success, but just more about folding in or layering in complementary business lines that leverage our operational expertise, leverage our brand exercise and leverage our ability to push into different products and geographies using kind of a core competency.

We’ve talked in the past about our concentration be in the high 90s in terms of percent on retail and we continue to move that to where the balance will come from other businesses and those other businesses are going to be complementary in appearance similar products in geographies but they’ll focus on different customer segments like our institutional business or like our exchange-traded business. So the three pillars again to remind people is retail, OTC and one institutional another and exchange-traded business, fee-based business in the third.

So, for the retail column, we increased year-over-year client engagement, retail volume was up 42%, funded accounts continued to grow and we both know about of the GST acquisition which we’ll drill down some more. Our partner pipeline is very robust and had several new partners expected to sign in Q4 but also some that have signed in Q3. optimizing our marketing expense we use a lot of metrics we spent a fair amount of money in marketing being that we are very prominent online company that’s part of our mix but it’s not something we use in short forms we tried to use a lot of metrics-driven decision-making tools in terms of return on our marketing dollar spent with assets with our cost per account vis-à-vis the right time value of a client.

So there is lots of thought process that go into how you deploy these resources because it’s – it is a final resource for us that something we have to manage closely. And ultimately you have to be used in a judicious manner across products, across customer segments and across geographies.

For the next pillar on the commission based business ultimately you can see that 21% of our revenue for the nine months is now coming from that type of business. So back to the point about diversifying the revenue stream that – that’s a number that was in single-digit, low single-digit merely a year or two ago and so our strategy to again build our overall top line revenue from multiple sources is evident in this kind of progress.

And it’s important to note that this came even while retail volume has continued to improve and if you look at the significant impact year-over-year or significant progress year-over-year on our retail numbers we’ve been able to get this higher percentage of non-retail FX revenue coming in, in spite of the fact that we’ve had very strong growth on the retail line. So, it’s not at the expense of a cannibalistic way, it’s in a complementary way or and way to augment their overall numbers.

Our institutional volume continues to rally as a strong pipeline of new customers as our product continues to gain market share and foothold you know the proprietary technology that we utilize is really resonating well with a lot of institutional clients whether they’d be banks or hedge funds or high network it’s a perfect complement to the GFT business, there is a natural combination there with a lot of the customers that they have using institutional type platforms.

Futures account growth was 15% year-over-year again that’s a business that’s kind of medium-term vision for us that we feel like we can leverage a lot of GAIN’s strength and be able to bring some value added to the futures business that we think is right for someone to come in and create some disruption if you will, to bring the service and bring clients the product that can be sticky and gain a fair amount of market share in a short amount of time.

At this point what I’ll do is a flip over to Jason, Jason joined us recently as our CFO and he’s got a chance to meet with some of our analysts and some of our investors but we’ll come accessible as time goes on. so just for this first time I’ll ask you to go easy on him when he get to Q&A I told him he got to pass the first call and then he can go from there, but I’ll flip it over to Jason now he can take you through some of the specifics on the financials and then we’ll – wrap it up for highlights. Jason?

Jason Emerson

Great, thank you Glenn and good morning everyone. Thanks for participating today. I’m pleased at such strong results to review in my first earnings call as GAIN’s CFO. Last four weeks of working with the team have solidified my view of GAIN as an innovative performance-driven firm with real growth potential.

The third quarter was another period of strong year-over-year comparisons for GAIN with growth from our core retail FX offering as well as our commission-based businesses. As Glenn has already noted, we post in 52% revenue growth which primarily represented organic growth has it only as four trading days of revenue from our GFT acquisition.

Our retail FX business grew 48% driven by an increase in active accounts as well as improved market conditions. Commission-based businesses expanded revenue by a 133% to growth of our institutional volumes as well as full quarter from our futures business. Adjusted EBITDA was up nearly twice as much as revenue, which demonstrates the operating leverage inheriting our business model. The adjusted EBITDA figure excludes restructuring and acquisition-related expenses of $800,000, associated with the GFT acquisition.

In the first nine months of 2013, we delivered $47.3 million adjusted EBITDA up almost three times from the same period last year, a 54% revenue increase while total expenses were up 32%. EBITDA margin in the first nine months almost doubled to 26% driven by strong revenue growth across all business segments. Net income of $4.7 million was up 42% for the quarter and quadrupled for the first nine months of the year. Adjusted net income for restructuring and – for restructuring acquisition-related expenses we get an adjusted net income figure of $5.1 million for the quarter, despite the impact of one-off increase in tax expenses.

On the expense side in the third quarter, the increase in trading expenses reflected slightly higher percentage of retail volume from our partners, as well as nearly $2 million in partner fees that we do not expect to recur in future period with a closing of the GFT transaction.

For the year, trading expenses up due to both higher volumes is also having a full nine months of OEC related trading expenses relative that only having one month for the same period in 2012.

Forex expenses have been relatively contained and compensation of benefits was higher in the quarter and year-to-date attribute to the combination of higher bonus compensation driven by our year-to-date results as well as client investments we’ve been making in our institutional futures businesses ranked in top tier talent to help us build out these offerings to new client basis. Comp expenses margin of 25% for the year is down from 30% to the same time in 2012.

Marketing expenses is up for the quarter as we invest in regional growth efforts, but down 21% year-to-date as we’ve been able to effectively focus to spend on our geographies with greatest growth potential.

Lastly on the bottom right year-to-date retail trading revenue per million increased slightly to a $101 per million consistent with the levels we’ve seen over the last 12 to 15 months.

Turning to the next slide, we see that GAIN continue to make progress and diversifying its revenue base into both institutional and futures. In 2011, GAIN was very much a retail FX shop with 97% of our revenue coming from the FOREX.com platform. We defined the three pillars of GAIN as retail, institutional and exchange-based trading and set out that enhance our revenue by adding commission-based offerings to reduce the impact of FX volatility.

In 2012 we really built up the institutional business adding a [board desk], a new GTX clients with volume more than doubling to $2 trillion dollars and revenue almost tripling to $12 million. Even as many of our competitors reported following volumes.

We also made the acquisition of futures brokerage OEC late in the third quarter, adding another source of commission-based revenue taking the total commission-based contribution of 13% looking ahead to 2013, you could see that the commission component now represents 21% of revenue. GTX volume is doubled from a year earlier, while revenue is $21 million compared with $12 million for the same period in 2012. OEC has made a meaningful contribution to revenue of $16 million for the year.

So looking at a significant growth for both businesses both in dollar terms and as a percentage of total revenue. We said in the past that we expect the commission revenue to represent around 20% of the total for 2013 and we’re on track to achieve that. Long-term we expect both futures and institutional FX will continue to grow. On the institutional side we have several competitive advantages are differentiated GTX platform and experience sales trading team and now the GFT sales trader business. For futures working to build out the offering averaging a wide range of both partner and direct client relationships from our core retail FX business.

Strategically these businesses tend to be much more revenue sticky than retail OTC trading. To the growth in commission business is very important as we diversify our revenue and improve our resilience in times of a lower FX volatility.

Turning to the next slide, we have a financial overview of the GFT acquisition. The purchase price was broken down to the $40 million cash plus $3.6 million of GAIN’s shares and sold our financing of $33 million. It’s worth noting that there is no prepayment penalty on the seller note and shares are subject to restrictions with regards to how much can be sold over the next 24 months. In this transaction there are multiple areas where we expect we can achieve synergies including headcount, technology, marketing, real estate and other areas. For a total of $35 million to $45 million in the first 12 months following the close.

We’ve already made progress that on this front when earlier this month we enacted a plan headcount reduction across GAIN and GFT which combined with the product business December 31, 2012 have lower of headcount by 22%. So we’ve gone from nearly 700 personnel between GAIN and GFT combined to $545 to the end of the October were slightly more than half of the reductions being made this month. A portion of reductions we made last week shows up in our results as a $400,000 restructuring charge with additional expenses that will hit in Q4 as well that in the 2014.

We do also expect on a much regulatory capital synergies bring up cash on the balance sheet in the medium-term plus important to note that is not included in the $35 million to $45 million figure which is all expense-related. We expect to make further progress in the fourth quarter and that the transaction would be accretive excluding one-time charges related to the acquisition and significantly accretive for the full year in 2014 as we realize the bulk of the synergies.

Moving to the next slide, will give you – we’ve provided some more details on the performance of both GFT and GAIN for the year. We completed the acquisition of GFT on September 24, so we had four trading days of contribution which amounted to $2,.8 million of revenue or about 5% of total net revenue and $700,000 of EBITDA.

On the table below we broken out the performance of GAIN and GFT and the year-to-date GAIN has post revenue of a $183.4 million with an adjusted EBITDA margin of 26%. GFT revenue is 88.2 million, or by half of GAIN’s revenue for the period and a 13% increase year-on-year.

On the far right we estimate the performance of the two combined companies for the year assuming we achieved 75% of the midpoint of our $35 million to $45 million expense in the year estimate, the result is a significant increase in scale. Revenue grows by 48% the $271.6 million we maintain our adjusted EBITDA margin of 26% but adjusted EBITDA is now $70.5 million compared with $47.3 million for GAIN as a standalone company.

I’ll now hand the call back to Glenn to discuss some of the strategic aspects of the GFT transaction and how we transformed the firm’s scale, business mix and product offers.

Glenn Stevens

Thanks Jason. If somebody doesn’t have the ideas that a lot going on in GAIN by this point then you haven’t been listening closely enough. And figured out how to pay people time and they have, because everybody is really busting it but it in a good way. The specific highlight with the GFT acquisition in Q3 has really been a combination of a lot of hard effort a lot of hard work and a lot of effort basically to bring us a step function trajectory change. So you know, we like to call this a transformational deal for GAIN and I believe that it is because the people and the products and the geographic dispersion, the cost synergy, the new level of revenue you know we crossed the milestone from an asset perspective on our balance sheet of $1 billion I mean, these are all kind of highlights that provide a look into what we feel like the future holds for GAIN in terms of been able to escalate our rate of growth and emerge as truly a leader in the space globally and aside for a multitude of a customer segment.

So, I appreciate some of the detail that Jason put together to try to share with a listeners on this call and for our investors and stakeholders, but you know the important takeaway if you look at this to say, okay, we looked at this deal as an opportunity to kind of jet fuel things at GAIN while organic growth machine is still very healthy and well intact and it’s important though to say that it compliments well with an M&A strategy.

So, to delve in a little bit from kind of the business perspective or strategy perspective on GFT, we – I want to reiterate some of the things that we put out back in to one when we said we announced this deal at the end of April and had a brief look into hey, why – why are you doing this? And look GFT is a company that a lot of good things, but combined with GAIN it gets to migrate to great things.

And in terms of where we are if you look at the scale perspective it gives us a 2013 run rate over $360 million revenue, client assets of nearly $700 million. We’ve gone from several 100 products to 12,500 financial markets that we offer products into just look at the product depth or breadth, OTCFX, CFDs, spread betting FX options, binary options I mean they can keep going on it. So we want to be able to use those leverage, fashion the right offering, the optimal offering for our clients in different places than for different people.

The business mix gets us to where our strategic goal was which was kind of a 50:50 split in terms of indirect and direct business and I think that’s the key there, I use the word it gets us to our strategic goal. We put out strategic goals that have generally three year time horizons; we adjust those annually to see where they need tweaking. But if you move to the next slide and there is a series of pie graphs there. I want to show the migration from when we look at a target, when we look at what we think is an optimal strategy we know we have two ways to get there, we grow internally, organically or we grow by strategic M&A.

And in some cases like this one we’re able to take a bit of a leap forward versus an incremental step forward. You look over at some of the pie charts look at GAIN alone, our direct business was 63% of our business with indirect being 37%, look at the complementary mix at GFT with the callers kind of in an opposite setup there and then look at the results where it says PF GAIN Capital let’s call it pro forma for now.

Look to the right on the trading volume importantly look at the breakdown between retail institutional and then lower left client assets that’s just a nice graph when your number jumps up like that. On the revenue contribution same idea, the commission revenue continuing to become a more prominent part of our mix and we think that bodes well for us in terms of delivering more stable results over time. In terms of the idea in our retail OTC business which is still by far the biggest breadwinner of the family here. The volume byproduct impact on the next slide shows that the non-FX and the FX business for GFT is much more prominent than non-FX than it was at GAIN standalone.

So together the mix brings that non-FX business to nearly 23%, 24% whereas that number was subtend for GAIN and so same idea when you have a trading condition that may not be ideal for FX it doesn’t mean there aren’t some trading opportunities in other products whether would be metals, energy, indices what have you. Yes it’s possible for the trading conditions to be a lackluster across all markets or for that matter be really robust across all markets. But generally speaking portfolio theory tells you it’s a mix of kind of hot items and items that aren’t hot and if you win all of those markets then you stand a better chance of being able to glean a positive revenue result across the board.

So going back to where what GAIN does for us looking forward the next slide is titled the GFT positioning for GAIN, for growth in 2014 and beyond again we get an immediate scale increase but that generally if it gets more half and gives the ability to attract more clients, be a thought leader and be a market leader in many ways, it also let you attract more prominent partners. And as I said with this scale in terms of products and global footprint that’s important and diversifying our revenue streams. This is one example and a good one of a successful process by which we identified a valuable acquisition. We’re able to – I believe get some really good terms for the deal close it and then hit the ground running on a strategic operational implementation of it because ultimately you can have really good ideas, this I need to identify the opportunities to make them happen and then you need to make them happen.

So we’re deep in the stage of that third piece of making it happen and the team that’s dedicated towards it now and the planning in place and [find] that the progress that’s already been made, Jason alluded to making some efficiency cuts in terms of head count, we’re doing much more than that in terms of data, in terms of infrastructure, in terms of offices, all kinds of things. And so throughout the next several months that’s going to be a heightened focus for GAIN and making sure that we extract and position ourselves for much value as possible for doing that. However it doesn’t put us in a sideline in terms of strategic priorities going forward.

The good thing about having done a series of acquisitions over the years we GAIN has and will have a history and our strategic priority of making opportunistic situation that fit within our strategy. So when you look at us compared to other people who are active in this space we try to evaluate every opportunity that it makes sense as a puzzle piece. So that when you step back and look away the puzzle piece of the lines go away and you recognize the picture.

And so for this one, we said hey there is a lot of benefits here and the numbers make sense and we have the operational excellence to get it done and by the way this should knock us out of the box to be able to look forward. So for that you want to keep looking at that we’re able to conclude four successful transactions in the last 24 months, I absolutely can sit here and say we have a robust pipeline with potential acquisitions currently being reviewed. We have continued to return capital to shareholders which once again we approved a $0.05 quarterly dividend this quarter. Our share repurchase program is still in place and we want to continue to build a diversified shareholder base.

It’s important for us, for all our stakeholders existing and perspective to know that we are here for the long run, we are here to build value and on all of those levels we want to be able to frankly build something that the stewards of which myself and my team are for this overall value proposition, you touch all the items right, you make sure your core business works, you make sure your strategic M&A is working, you make sure your manage the numbers well and you make sure that your transparency, your [massive] history and your accessibility to the existing shareholders and prospective shareholders is there and you build a – a client tell if you will that our customers of GAIN or investors in GAIN are proud to be part of it and again that has a longer term value and we want to be able to look back at this several quarters looking to the future now and say see a lot of the right moves were made and filed through on.

So before we get to Q&A just in terms of some closing remarks this quarter is another opportunity to showcase some of our upside and showcase some of our ability to take advantage of reasonable trading condition, of market consolidation opportunities I think that for the quarter and for the year-to-date particularly relative over 2012 which was challenging on many levels. It’s important for people that stuck bias and for people that bought into the timing of our story, it’s a good one. And ultimately GFT is one piece of the puzzle, it’s not the end of all be all but it’s done really well and it should have – it should be sending a signal that well we go to this, and that we made a good choice with this but also that our core business continues to move in a very strong fashion. So in terms of just summing up the quarter is a strong story for us to tell, the year-to-date is a strong story for us to tell, but most importantly except the table for us having been able to tell a good story going forward as well.

So with that I will go to Q&A and then we can wrap it up from there. Operator?

Question-And-Answer Session

Operator

Yes, thank you. We will now begin the question-and-answer session. (Operator Instructions) And the first question comes from Rich Repetto with Sandler O’Neill.

Rich Repetto – Sandler O’Neill

Yeah good morning, Glenn, good morning Jason and congrats on a strong quarter here.

Glenn Stevens

Good morning.

Rich Repetto – Sandler O’Neill

The first question is just to sort of augment but you briefed through it real quick but the tax rate, tax rate was significantly higher than what we had anticipated, you could just cope with that.

Glenn Stevens

I’ll start and Jason can add if you like. To clarify on that one, there is a one-off item in there that’s putting a bulge in the rate for this quarter. I think whether Jason mentioned not kind of going forward the full year is much more normalized of our expectations, if you want to add to that.

Jason Emerson

Sure, sure, Rich. So we had two events in terms of we’ve adjusted our effective tax rate for the year based on what we would see the business that was going into the end of the year. So our effective tax rate is 31% to 32% based on business levels and the impact of the one-time tax event which is historic and doesn’t impact and not something we foresee in the future has an impact of approximately $1.1 million to $1.2 million in terms of that tax expense that you see in the income statement.

Rich Repetto – Sandler O’Neill

Okay. And I’m sure we’ll get more detail off-line. Second I guess the revenue caption Glenn 121 this is the few different questions in regards that Did this include that $2 million one-time partner fee and then where we run in, in October and then how does the revenue capital look combined with GFT, it looks to us like it might put pressure on the retail but institutional would be higher is that sort of the right view?

Glenn Stevens

So, couple of things there were not any abnormal impact on the RPM. I think that one of the reasons we continue to highlight kind of our trailing 12 month average is because there has been and we would be surprised if there continues to be oscillation around that kind of a number that sine curve or cosine curve don’t touch my old geometry or manage on that – knowledge on that one. But you can see that it does continue to oscillate in kind of a symmetric fashion. And so the 120 is well within that range that we’ve been positing for several years not just 12 months going backward.

So no, there is no one-time item that would cause any kind of a weird hiccup. It’s just kind of part of our thing there. I mean we, one thing that we did have but wouldn’t be in that quarter is that there was a GFT payment when we migrated over some of their U.S. business back in November. We had a revenue share in place with them that would go away or has gone away once we close the deal. But that wouldn’t do anything to cause – a big hiccup.

So, ultimately the numbers that you’re looking at are clean numbers. And again I would argue well within kind of our normal range of output there that we’ve talked about. So, not too much to read into that other than kind of the normal variability in the short term quarter-to-quarter but most important we focus on, hey how is it looking less for month and it continues to chuck along at a reasonable number.

Rich Repetto – Sandler O’Neill

Okay. So that’s a comment on October is that it, it’s chucking long at a reasonable number?

Glenn Stevens

No, no I’m saying that’s a comment on I’m saying on the quarter. What you said look is there anything that’s one-off that would have to come in or go out to affect that number up to 212 and I’m saying no. As we continue through the year and looking back there isn’t anything that caused the up take for the same reasons. I’d be sitting here to say there isn’t any weird thing that causes something that’s below the 100. It’s part of our business that we continue with this oscillation around kind of a pretty consistent number of around 100.

Rich Repetto – Sandler O’Neill

Okay, okay. And then my, the last question in regards to GFT, I know you put the contribution for the five days or whatever it was included in the third quarter. But if we back into numbers we thought that GFT was positive for EBITDA in the first half and it would imply that the GFT to the full quarter on its own had a significant EBITDA loss in 3Q, is that correct?

Glenn Stevens

I’d say that as their business for Q3 going back into their financials. They have been dancing around flat which I think we have guided to in terms of that. They lost some money in Q3 as we got into the last stages of being able to get the deal closed. There were some revenue challenges that they may have had just from a partner or capital perspective. We were trying to get the deal done at the last few weeks there just to make sure everything spotted and crossed.

I would argue they were not operating at peak efficiency not to mention you have tons of uncertainty for employees on their side. So, yeah they absolutely were not running at optimal levels. But I think the reason why we showed the slide that said here is where GFT was standalone. Frankly I’m not going to sit here and defend their operation because I didn’t run it back then, me and my team run it now.

Our goal is to get to that point where you look to the far right and say, hey I think it’s important that when Jason was going through the stats he said, look we’re assuming capturing 75% of the midpoint of our synergy. So it’s not even, I would argue it a very opportunistic or very positive or optimistic target he and when what I thought was pretty reasonable and said let’s say we take the midpoint to the 35 to 45 we’ve been guiding in terms of synergies. Let’s say we capture three quarters of it, look at the results that it gives you. So, you’re right they did not have a great Q3 but commenting on it doesn’t seem overly beneficial because we weren’t able to exact much influence frankly on business, on people, on flows, on customer the whole bit.

Rich Repetto – Sandler O’Neill

Okay that helps…

Glenn Stevens

And I guess Rich what’s most important is no lasting damage to GFT, and no lasting damage to GAIN. It’s, they get into the final stages of their rate if they limp home its fine but there is no injuries to Achilles, Hamstring or anything like that and most importantly we get the athlete into the house and we coach them our way.

Rich Repetto – Sandler O’Neill

Thanks for the analogy Glenn. I appreciate it.

Glenn Stevens

All right.

Rich Repetto – Sandler O’Neill

Take care.

Glenn Stevens

See you Rich.

Operator

Thank you and the next question comes from John Dunn with Sidoti & Company.

John Dunn – Sidoti & Company

Hi congratulations guys on closing the deal and congratulations to Jason [indiscernible].

Jason Emerson

Thanks John.

John Dunn – Sidoti & Company

Yeah, so you guys talked about your pipeline of new GTX customers. Could you talk about what like say – that is stickier revenue what’s the timeline of cording those customers like how long does it take what the discussions sound like?

Glenn Stevens

It’s good, it’s a good question because it’s absolutely more argues than your standard customer. I mean so retail customer gets attracted to our product or our site and for the most part drives themselves home where they’re able to open the account fund and our job is to make that runway as slick as possible. So, there is no impediment to their progress.

On the institutional side it’s a higher touch process. As you said the customer is stickier more valuable overtime and it really is a relationship we have to establish. They have to get comfortable without technology, comfortable with the value add that it offers, comfortable with all the piping involved and just in terms of flow and clearing and reporting that necessary fold into that all kinds of step stuff and other kind of regulatory hurdles in some markets and it makes for quite the amount of work. And if anybody gets to know an institutional trader you should know that there is a lot of inertia there and when anybody upsets their daily routine that could start with what’s in their coffee to end what their series on the train.

It’s unsettling and so you have to get over that, you have to truly show value, you have to show opportunity and you have to be able to prove your ability to be really a good offering. And so to answer your question, we’ve seen those processes take a year. They never take less than a month. I’d say ballpark they’re in the three to six month range that’s probably the sweet spot to actually getting somebody from an initial pitch to an initial trade that’s probably the right timeframe. But it does vary as long as a year plus and as I said I’ve never seen anybody get onboard inside of a month or two.

John Dunn – Sidoti & Company

Got you. And then do you guys have a longer term goal of the revenue mix between retail and institutional?

Glenn Stevens

Well we have put out to where at eventually 50% of our business would come from OTC retail and 50% would not. And so we put that in a little over a year ago as a goal. And I like to think the strides we’re making have been very good and very promising. And the important part as I said is not a goal in of itself because theoretically I could chop half of the retail business off tomorrow and that would, they would really move the numbers for their strategic goal. So, the percentage isn’t the goal, the percentage is at a higher level.

The near term is probably to say look get that to 30% and then go from there. It’s kind of like the direct and indirect mix. We want to continue to evaluate what the optimal mix there is. There is a lot of benefits to the retail OTC business it’s got some good margins, it’s got some growth, it’s got ability to growing a lot of market share plus it has variability built in.

On the institutional side as we talked about its very difficult from a pipeline conversion perspective, it costs more money per account to bring in, but it’s got stickiness it’s got less variability quarter-to-quarter. So, everything is a mix of that. So, I’d say ultimately if you fast forward it, I don’t know you want to call it a year or two or three and so what would GAIN look like if that 50:50 mix was out there. I think both types of business earn their keep and absolutely belong in a positive mix but more importantly is that you’re growing them versus the outcome percentage.

John Dunn – Sidoti & Company

Got you. All right and then on the M&A side, it seems like you guys are pretty well set on the product side. Can you talk about the potential deals you’re looking at now and just elaborate on the robust pipeline and what type of deals you might look at?

Glenn Stevens

Sure. So, what we’ve – well we kind of stopped doing that in the past that people have heard me say are three Ps of people and places and products. We try to make sure that is strategically fits into one of those items. And so people can mean that either it’s a talented group, whether it be sales people or product people and that’s bringing the group or a team in-house. And so we’re instantly boasted our futures business by bringing in a group from Pioneer, these guys focused on the different set of clients that are how we see folks are focused on. So, we thought that be a good compliment, that was an example of bringing in people.

But then the other part of the people is how do you access customer segment. So, that could be regional, that can be high network versus some small retail move to the market. So, I think at this point there is still opportunities even though you’re right, we’ve achieved a much more comfortable state in terms of products a few hundred felt good to us because we used to have a few dozen but now 12,000 feels even better than a few hundred. You’re right, the added benefit of going from 12,000 to 15,000 or 20,000 I would propend to agree with your idea that says it’s probably as big as going from a few dozen to a few hundred or few hundred to 10,000.

But the reality is that in these scenarios where we could build our business in a stronger way in the Middle East if there are parts of Latin America where we need to be with a better representation if there is a segment of clients. So, in those cases absolutely well we’ll look and we are looking at acquisitions that makes strategic sense. So, just because of products are robust now and just because we’ll have them well covered pretty well, it doesn’t mean there are lots of opportunities for us. I just want to make sure they fit in, in terms of product or in terms of people either getting people or customer segments or in terms of places from a geographical perspective.

John Dunn – Sidoti & Company

Got it. And then just lastly, in the same vain if volatility stays towards a lower end historical range and could that continues to hamstring the smaller players. Can you just give us a color on how you plan on taking advantage of sort of that the pressures got in a smaller end of the segment?

Glenn Stevens

The environment to operate business and if you just look at the U.S. for example, the regulatory floor for effort and headcount and where we fall. Just look at our success of becoming a swap dealer and our success of getting posted as a staff. There is a lot of these hurdles that are hard to do on a small scale, they require energy, they require resources, they require expertise. And so, whether it’s institutional or retail or reporting requirements for a regulator in the UK what have you. Those are the kind of things that put a lot of pressure on the margins and on the ability for a smaller player to operate. So, I think in some of these cases – and look even GFT which was a pretty good sized business. It made weigh more sense to be part of GAIN but it did to be standalone.

So, if you narrow that scope even further and say how about a company half the size of GFT, it makes even more sense. So, in some cases like that we want to be able to fold in a potential partner if you will.

We think the some absolutely is worth more on the part and it does help to be frank that some of the external pressures on new shop just make it a good business decisions to join with GAIN, not to mention as being one of the few public shops in this space we are able to be way more transparent about who we are and how we’re doing, and that’s just gives more comfort for someone to say yeah I’ll join and I want to be part of that upside and I want to be part of that transparency whereas private is a private it sometimes a pretty sticky situation. And we get to come into a discussion pretty open.

John Dunn – Sidoti & Company

Got it. All right. Thanks for taking my questions and congratulations.

Glenn Stevens

Thanks John.

Operator

Thank you. And the next question comes from Patrick O’Shaughnessy with Raymond James.

Patrick O’Shaughnessy – Raymond James

Hey, happy Halloween guys.

Glenn Stevens

And you too.

Jason Emerson

Thanks, thanks.

Glenn Stevens

I’m dressed off as a CEO today Patrick.

Patrick O’Shaughnessy – Raymond James

I’m dressed up as a tired analyst. So, first question is with GFT. Can you talk about the question that you’ve seen from the counters that come in, in line or better within your expectations and what’s were the customer experienced unlike so far those guys?

Glenn Stevens

So, fair question and I’m pretty equivocal about saying better than expected but not entirely unexpected and what I mean is that number one being able to start working with GFT as early in the last fall, it gave us a lot of insight into how their processes work and how their system works and what the highlights are for their product mix globally. So, as I mentioned earlier in the call about taking over their U.S. business again that was something we did earlier this year. And so we got additional insight. So, by the time we actually closed the deal and have migrated customers, we were pretty well versed we’re very – we understood GFT language better than we would have becoming cold.

On top of that we were able to our – and our strategic plans because of their product breadth of being larger than GAIN, we’re keeping their platform. So, they’ll book platform as the lead platform for those multi product scenario. So, from a customer experience standpoint let’s think about that, I’m a customer that trades on a platform without company with a certain size balance sheet where we call them transparency. Now, I’m going to trade on the same platform but everything else is better. So, what I wanted to be the same stage the same and one I would have liked to have improved – got improved. So, if I’m keeping the relationship people at her key, they stay in place. If I’m keeping that platform in place where there is no change with experience.

But now, I’m increasing those kind of a – the several intangible stuff totally makes sense to do that. The other part is that the sales traded business is a core competency of GFT, that’s kind of a higher touch relationship business, that group has remained completely intact. And so, those relationships that were established at GFT have maintained and transferred over. And again that sales person isn’t put in a tough compromising position to say hey please stay tight with us but you can’t use other platforms that you were. No, we’re able to say please stay tight with us, these are the better things about the combination. And by the way your day to day experience doesn’t change.

So, although the expression level has been meaningless it doesn’t surprise me either because by design we were fortunate here that a lot of the reasons for customers to stay intact has done so. Partners, same way and we sent a strong message out to GFT’s top partners that they’re in a better situation now if than they even were and we spend every day proving that to them. And so, I’m really comfortable with how that progress has gone in terms of the transition.

Patrick O’Shaughnessy – Raymond James

All right. That’s helpful. Thank you. And then just kind of a bigger picture as you look at retail foreign exchange volumes in particular. You’ve been in this game for a long time, what are some of the potential catalyst that you can could be out there to move the civics backup. Do you think it’s going to take into account that using do you think it’s going to take some sort of market meltdown or what can kind of come around naturally that is going to – after the catalyst boost retail trading activity?

Glenn Stevens

So, I’ll take your reference to my age as a positive compliment but what – we have seen periods of lackluster civics as a proxy for volatility. Again, I’m in this market since 1985 and there have been protracted periods of a year two, three where major components of the market be at major currency payer or major interest rate policy since the last year or two and create kind of a lackluster environment. So, well one said say a good question, if I knew I would pull the lever and hit the button but to be fair, I think there a couple of things. Yes, you’re right, the uncertainty over the QV policy has paralyzed I think a lot of people maybe is one of the reasons why equity is kind of continue to rise because I just been in the sideline you say well let’s say that’s by those companies that are making money because that makes sense.

The interest rate business in FX is more closely linked, I think then people give a credit for. What I mean is have you heard about the Carry Trade a lot but the Carry Trade doesn’t to get from into this volume increases but it brings participants and they have an opinion and then they say well I don’t know about that currently but I can short yen and buy Kiwi because I can pick up the interest rate plan and then I change my mind three times this week about whether I like that trade or not and press though you have somebody who is an active participant, we don’t have that. The QV kind of going one way or another frankly, I think would help a lot, I think the uncertainty is what causes the problem. That can’t last forever and maybe if we don’t spend another three months, I’m talking about a government shut down the whole bit then we’ll get our you know what’s out of our, you know what and be able to move forward there.

But I’d also say that something else that it will help that, these are – this is slightly longer term but if you look at the RMB or you look at the Indian Rupee, those are products that will come online and will trade absolutely, it’s a question of when not if. And those are huge markets would lock a participant and locks a potential volume. And so if you look at some of the NDF market which for the most part our retail customers aren’t able to participate in but institutional guys are we have a bit of an expertise mission, these GAIN and GTX been able to offer the NDF trading.

You can see – if you think about kind of the professionals getting into a market sometimes ahead of the retail users you can see the uptake in trading a lot of those NDF products and some of those not all of them but some of those will come online. So, we actually may not even have to have this catalyst for the euro to breakout for dollar yen to breakout. It will be a mid or second tier set of products and in fact it’s another ways that will get people moving. And then the last thing I’ll say Patrick is that one of the reasons why we want to make sure we continue to round out our offering with non-FX products is just because if I’m wrong and things don’t improve in terms of trading conditions in FX, we’ll hope that opportunities pop up in energies, metals industries interest rate driven product. So, that’s part of the reason for the diversifying a revenue base as well.

Patrick O’Shaughnessy – Raymond James

All right. Very good. Thank you.

Glenn Stevens

You got it. Thank you.

Operator

Thank you. (Operator Instructions) All right. There are no more questions at the present time. So, I’d like to turn the call back over to Mr. Stevens for any closing remarks.

Glenn Stevens

Thanks operator. And thanks again for everybody who joined us for this quarterly recap. And we appreciate your interest and your follow up. And have a good day.

Operator

Thank you. This conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.

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