FXCM Inc. (NYSE:FXCM)
Q1 2014 Earnings Conference Call
May 8, 2014 8:15 a.m. ET
Jaclyn Klein - Head, Corporate Communications and Investor Relations
Drew Niv - Chief Executive Officer
Robert Lande - Chief Financial Officer
Lee Ferguson - Citi
Ken Worthington - JP Morgan
Ashley Serrao - Credit Suisse
John Dunn – Sidoti
Good day, ladies and gentlemen. And welcome to the FXCM Q1 2014 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 follow at that time. (Operator Instructions) As a reminder, this call may be recorded.
I would now like to introduce your host for today's conference Ms. Jaclyn Klein. Ms. Klein, you may begin your conference.
Thank you, operator. Good morning, everyone and thank you for joining us.
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 and such factors may be updated from time to time in our SEC filings. FXCM assumes no obligation to update any forward-looking statements.
And with that I would like to turn the call over to our CEO, Drew Niv.
Thank you, Jaclyn. Good morning everyone. 2014 has proven to be challenging operating environment. The currency volatility declining from the already low levels of late 2013 to levels of we've only see twice in over 20 years we have applied [indiscernible].
Certainly the worst trading conditions I have seen is 17 plus years I have been in this business. However having build up FXCM into one of the largest players in the industry over the past many years, we feel we have scaled to not only survive this [indiscernible] low volatility and zero rates but even thrive as we hope to expand our market share in this difficult times to when conditions improve. I will discuss more about this later in the call.
In the quarter adjusted pro forma revenues were $1.3 million versus $122.9 million in the same quarter last year and $107.6 million in the fourth quarter of last year.
Adjusted pro forma EBITDA was $24.6 million versus $43.8 million in the same quarter last year and $26.8 million in the fourth quarter of last year. Adjusted pro forma EPS was $0.07 a share versus $0.23 a share versus Q1 '13 and $0.10 a share for Q4'13. GAAP EPS was $0.05 a share versus $0.23 a share for Q1'13 and $0.08 a share for Q4'13.
In the quarter recently acquired V3 at $4.6 million revenues and $.4.9 million in operating costs excluding a little over a million in one-time acquisition costs. And our retail revenue per million was $88 million versus $88 million in Q1 of '13 and $93.00 per million in Q4'13. Institutional Revenue was $12 a million, the same as the first quarter and the fourth quarter.
Turning now to slide 4, we'll put a bit more perspective on the trading environment in which we are operating. And as I just mentioned and probably of no surprise those of you who follow currencies, trading conditions currently are quite difficult with the major currency pairs showing very little movement and [indiscernible] differences. This graph of JP Morgan G-7 volatility index going back to 1993, as you can see we have only fallen below a reading of 7 twice before, the second half of '93 and the mid 2007. Both pairs if you're following by notable pairs of increasing volatility. At FXCM we have always gone for million improved trading condition. So we're not going to assume that things are going to get a lot better and the lines will turn to a financial crisis as in the last two times this has happened.
We will continue to do and make the most sense of this environment, keep tight control on costs and pursue initiatives that independent of market conditions should enable us to capture market share. For example last quarter we took you through our plan to launch the share [indiscernible] in the coming months. Lastly we're actively pursuing acquisitions at attractive prices. We can execute on these three things. I believe they will be very well positioned when our trading environment trends are up. Even modest improvements as was the case the first half of '13, all depends on the translate and significant improvement due to our operating methods.
Turning now to slide 5, looking at our retail business in the quarter, average daily volume of $14.9 billion per day in the quarter was actually higher than Q4'13, even though the average [indiscernible] was down 5%. Q1 '14 versus Q4 '13, our client actually had pretty good quarter as well. It will show in the few slides when discussed in the balance sheet and increased 5% in Q1 '14 from the year end to $1.25 billion.
Again in the quarter EN was relatively high in our mixed revenue per million, came in at $88.00 per million. Retail DARTS were up a bit sequentially to $413,000 a day and they were no major changes in our mix of volume from recent quarters.
Moving to slide 6, our institutional business. FXCM pro business turned into a solid quarter given the conditions and you can see from the graph on the left. Its customers traded $546 billion in the quarter. Revenue for million, it was $12.00 a million. [Indiscernible] continued to gain market share and continued to be most encouraged by their performance. We had outperformed most of our peers in the industry due to three factors. We're small player with small market share, so it's easier for us to gain market share and have a meaningful effect two business. Two: as western banks reduced their emerging market exposure, our market share in that region grows and we've had significant customer wins in multiple markets due to this. Our specialization in the emerging market customers also puts us in an excellent position to capitalize on this trend. Also number three is many competing platforms have introduced changes that are at the behest of certain groups of users that buy to get other groups of users. We have to say that the users that have seen their experience to tirade on these platforms have introduced their usage of hours, specifically in many platforms have introduced [indiscernible] and we have taken market share in that user group. We are very excited by the process of further market share gains that are seeing many positive signs in this business.
The other half of slide, about Lucid. Lucid is primarily tied to conditions in the [indiscernible] and not surprisingly Lucid was pretty much flat in last quarter generating $10.2 million EBITDA and $15.5 million in revenues. Lucid continues to be very cost conscious it has 66% EBITDA margins. This includes having to navigate many [indiscernible] changes, as many of the largest venues they trade at and adapting to these changes. Given the overall speed this advantage that Lucid has relative to its peers, many of those changes should be meant positive for Lucid in long run or for market share.
Market conditions coupled destructional changes have also led to the beginning of a shake out in the HFT space and foreign exchange, still in term of stages but its picking up speed and that will give very meaningful benefit to Lucid in the coming years.
Slide 7, I'd like to give you a brief update on these three markets. As we have mentioned in our call on marks, V3 is a joint venture we created with our partners at Lucid. So it's brought an opportunity for Lucid's successful [indiscernible] into new markets and [indiscernible]. V3 purchased liquid assets and hired some staff of Infinium Capital, a market maker for options and commodities, [indiscernible] and effects.
We are maybe halfway through the process of transition into the scale and business model we have in mind. We attained a high speed infrastructure of our existing overhead expenses and related to Infinium business. As V3 trades optional and a variety of different commodities, it provides some diversification, more of eccentric business and will not be as correlated to currency volatility.
Nonetheless trading conditions have made the legacy in Infinium business model, not immediately profitable, which is a change from a few months ago. As we complete the transition and implement more Lucid knowhow over the next six months, it should transform the business structurally and allows to take much more aggressive posture limit. We're confident it will generate strong margins with significant growth potential in the coming quarters.
Moving on to slide 8, yesterday we announced the acquisition of current accounts from the U.S. operation of FSVP. This allowed 7300 after account and approximately $47 million in client equity at an attractive price. As we offer and support the anti-floor platform that FSVP offers will be not just to say significant efficient but sometime comes with platform changes. With FSVP leaving the U.S. market, there are now only true player retailer that [indiscernible] compared to over 43 a few years back.
Competing in retailer [indiscernible] continues to acquire more scale and resources of every major market. Scale is necessary in good market conditions and in the 20-year-old [indiscernible] now can be difference between life and death for a broker. Our company [indiscernible] primarily due to lining and the absence of volatility is that it creates more opportunities for M&A. Market conditions in the last two months have been so severe, but another six months of the same pace it is entirely possible that the competition and many jurisdictions will decline by more than half.
Our pipeline is very robust. We're actively engaged in four transactions. Many of which have approximated would be our largest retail acquisition to date. We have a scale and resource to complete three of them. We will [indiscernible] while trading conditions remain depressed.
As we saw in the first half of 2013, the added capacity can generate outsized returns and even moderate improvements in trading positions.
Turning to slide 9, we do see employment down to 6.3%. It is getting much more likely that U.S. ranks will be rising in 2015, sooner and faster than most people are expecting. Something that we have highlighted from recent investor conferences or perhaps we're taking a few minutes to go through now is the potential impact [technical problem] where there is a carry on the major currency players, volumes could actually increase 10% from current levels. This would happen for a variety of reasons. First it illustrates one of the fundamental inputs in most of its trading models, the introduction of interest rates or even just biases between one country tightening or even relative to another, make these models so much more effective and with the results and higher volumes. That can, as you could see a great deal of volume that people come in. Just before the role of times over 5:00 p.m. capture the overnight [indiscernible].
[Indiscernible] our retail institutional customers trade $6 trillion,10% higher volumes that results in $38 million higher revenues. So while just trade increased may not be with us in the immediate future, it is worth knowing that the potential impact on FXCM should become clear the time has come in.
With that I would like to turn things over to Robert to go over our financials.
Thank you, Drew. Turning now to slide 10, before going over our income statement I thought I would just show you as I've done in the past few quarters, the progressions are operating expenses and the discipline we believe we have exhibited in costs.
This quarter was a bit different because we added V3 markets which brought with it $4.9 million in cost for February and March in the quarter. If you were to limiting these you can see that total operating costs were $62.4 million in the quarter compared with $61.1 million last quarter and adjusting for about a$1 million in one-time items that are in compensation this quarter, basically some reverences and things like that. Our operating cost volume is pretty much flat sequentially.
Turning to slide 11, our income statement of adjusted pro forma income, I do not propose going through all the lines but I will be happy to answer any specific questions you may have in the Q&A. our revenues were down $11.5 million or 9% to $111.3 million. $8.6 million of that decrease is due to lower retail volumes in the quarter relative to last year this time and $7.5 million of the decrease is from lower Lucid revenues. At least two items are partially offset by the $4.4 million in revenues from V3, now in our results and $1.7 million in higher revenues from our FXCM pro-institutional business.
Referring broker fees were consistent with recent results at 23.1% of retail trading revenues and if you strip away the additional V3 market costs as I did on the previous slide, operating costs were $62.4 million, an increase of $4.8 million. As I mentioned that would be reduced by about a million from some one time items in compensation.
Interest expense is also higher this quarter versus last year as we did our $174 million convertible offering in the second quarter of last year and share count is higher by 4 million shares, the most part [technical problem].
Turning to slide 12, the balance sheet, we had $402 million of our own cash at the end of the quarter to be $357 million you see on the topline. I also add the net due to and from brokers which includes the cash that we leave on deposit at clearing banks to support open positions. Customer equity had a solid quarter and was up 5% from year end 2013, a particularly good performance. [Technical problem] from the $290 billion they traded in March last month. ADV was $11.4 billion a day. [indiscernible]declined 1% to $179,500 and DARTS were $351,000.
Our institutional business again did very well given the trading environment with our institutional clients trading $185 billion or $8.4 billion a day, continuing the trend of Q1 in recent quarters of market share gains. So with that let me turn things back to Drew to conclude.
Thank you, Robert. In summary we have a number of initiatives to drive organic growth this year. As discussed in our last earnings call we are expecting [indiscernible] that come in months and revenue opportunity for us and [indiscernible] is very significant. We have also now on board selective assets [indiscernible] V3 markets and together we Lucid, we believe we can build this into a very solid business.
In addition there are a few players who have the scale we have to weather this storm. We are main optimistic that we may have opportunities that our [indiscernible] will come and this environment only increases our likelihood by many-many times. Today's small acquisition and is the easiest platform we believe will be just the beginning.
Finally longer term that I've taken you through today, our meaningful [indiscernible] it son our business, what the impact could be if differentials were developed. With that I would like to turn things over to the operator and open the line for questions.
(Operator instructions) Our first question comes from Bill Katz of Citi. You may proceed.
Lee Ferguson - Citi
Hi, this is Lee Ferguson filling in for Bill. I appreciate the commentary on the rate sensitivity. Just want to see, is there cap on any of the contribution if rates continue to rise and how should we think about the high end of that?
There is no cap in the sense that it -- there is on the interest rate that are interest on deposits. There's no cap, right. That's just you know straight line. On the carried rate component, that doesn’t expand nearly 100%. We try to essentially put in for that a volume of fairly conservative numbers. But obviously as interest rates, for example insight differentials are -- if they are steeper, well then obviously the line goes up more, the characteristic positions are up higher. If the interest rates are not , interest rate per occurred differentials are not as steep then. It doesn’t -- it has some sort of cap to it, historically. Obviously we're not foreseeing long term, that G7, you know FX rates go about 5%-6%. So that obviously is the cap. But the -- you know for us if you model in 2%, that funds rate a few years from now, that doubles last year EBITDA without us doing anything additional.
Lee Ferguson - Citi
Okay great and just given the difficult currency volatility environment, how should we think about the leverage on the cost side. Which line items you think you might look to bring down if the environment remains as it is and how should you up margins?
I think you know Lee, there obviously adjustments that we can make in this business, primarily as to how ambitious you are choosing to be in terms of what we have reached for. But the biggest thing that we are going to be doing and the most meaningful is the, for example just to show -- to highlight the FX transaction or on-boarding 7300 accounts or non-boarding a single ounce of cost. So on this stand, staff spends, computer systems, say everything else, we just added 7300 accounts. We're looking, adding many-many times that number in the future acquisitions. We have something, if you look we accomplished three of the four we're talking about and we will be talking a number nearly 20x that number. So those can be very-very little of additional cost. A lot of it is really the fact that we add accounts through acquisitions, we adding no costs to it and that's how we expect to squeeze more, part of our current operation.
Lee Ferguson - Citi
Okay, great. Thanks.
And our next question comes from Ken Worthington from JP Morgan. You may proceed.
Ken Worthington - JP Morgan
Hi, good morning. This is Alex. I am actually filling in for Ken. I know you guys eluded to the volatility and just the press volumes. Given the fact, how should [indiscernible] brokers impact in volume and not just volatility and to which time I guess the lower volatility potentially more of a problem. They can persist for some time given the change in the viewers.
I think the thing is there is a lot of speculation how much is the FX scandal and all that stuff affecting the dealers and is not affecting volatility. The reality is if you look at the logic, the dealers are not driving direction, customers drive direction. If anything the dealers will there will provide liquidity. If the dealers aren’t there and their taking lesser risk, there might be not -- there should be more volatility because the markets should be thinner. The markets are not thin, you know per say they are just, they just don't move. I don't believe if the dealers do not. I'm sure there is an impact here and there, I'm certain. Institutional customers, they should not be impacting how the market moves. We've had much more significant structural changes in the past. [Indiscernible] which eliminates all currencies being a more significant one. In 1999 led to firing of thousands of people in FX had to be eliminated to all currencies. That did not cause currency volatility in '99 was not anywhere near the lows we're talking now. So this -- I don't believe this is a dealer and so this is not permanent. [Indiscernible] volatility. So we've got prediction to other people. But you know this is, I don't believe it's structural. I'm sorry what was the other question?
Alex - JP Morgan
I guess, I think you answered both parts of it. So thank you. And as a follow-up, [indiscernible] has mentioned its making some changes to discourage manipulations. How these changes likely impact with it?
As I have highlighted in the slides, EBS has made a bunch of changes. We are also making a bunch of changes. People have been making lots of changes. I don't think the market [indiscernible] to essentially discourage high frequency trading strategy, certain high frequency trading strategy. All of these things require adjustments by market participants as the quote count is reduced and you know all the different things that people have to take into account. You know in [indiscernible] are changed and therefore that change, so requires enormous amount of work and I want to trivialize that it keeps the guys at Lucid busy. But as I said in the prepared remarks that essentially because Lucid is not as you can see from our income statement. It is not a big CapEx business that essentially if you want to be it to be a high speed [indiscernible] you have to spend modest amount of money on equipment as we probably have seen in the financial statements of other probably traded companies or those that are about to go public to view. We are in a high speed business, but significantly more money than Lucid does on equipment. And so they are much more likely to suffer from the speed that is there -- from those speed disadvantages being taken away from them which is really what a lot of the changes are about. Lucid actually as a more even playing field as those speed changes are taken away because there not the fastest. And so this is one of those things where we believe, while that in a short run does a lot of work and it is not effected us and in the Q1 results already what your seeing is platform changes in March by EVS, which is not negatively impact Lucid's and other things. And so we are pretty confident that the others won't either.
Alex- JP Morgan
Great, thank you very much.
And our next question comes from [indiscernible] with Raymond James. You may proceed.
Hey good morning guys. So my first question is, how many landscapes you guys have said multiple times the few quarters that if you don't do any big deals by the end of the second quarter, that you are going to look to more aggressively use your capital force share repurchases. So now that we have about a month-and-a-half left in the second quarter how comfortable are you with the near term M&A outlook. Are you still optimistic that something is done or is the process just being stretched out longer than you'd previously anticipated?
I think the process is now an overdrive over the last two months. As I said before I think that there is, its unlikely that if you take the last two -- March and April and you say with those market conditions persist for another six to nine months, your talking about half the [indiscernible] so remember for most of our competitors, it is not just a decline. It is only that hurts them is also a massive decline in revenue capture that does it. The reality for a lot of our competitors who have a principle model is that they benefit from customer loyalty. That requires a lot of volatility and in times like this when volatility is next to nothing, out goes customer losses, do not materialize. If you look at the last few months and that is something that pressures what they would consider to readily capture. [Indiscernible] subject to those factors because we are fixing a commission business. We are staking our trade on no matter what happens, whether a customer wins or looses. So you know for us it's really just a volume decline but for other brokers, for many other brokers it's just, they're getting twice and actually the revenue capture is much more -- declines are much more meaningful lying out for them than the volume decline. So as said six more months of this and there's going to be enormous amount of depth in the market and therefore we are seeing a lot more urgency in the part of sellers and we think there's going to be -- we're more confident than ever that deals will get back.
Got you, appreciate that. and then as we look at your first quarter trading line and I think particularly March and then in April, not only are your customers trading a little bit less but the average trade size has come down as well, from the 136,000 to closer to 32,000 or so. Is there anything specific that’s taking place that is making your customers trade in smaller quantities?
I think it's just the boredom issue. So the mix of customer changes, you know it’s the customers that if you think about the bigger customers or doing bigger trade and it's really for -- for trying to make a lot of money. You know what it they don’t make a lot of money, trying to play for a bigger move. Those bigger moves aren’t there, so that you know those trades don’t take place. I think its just one of those things that, it's the market, if you look at a more disturbing thing and just see it through the ATRs and we highlight to people which is average to a range. You know in the market even in typically slow days, your know 12 or 13 which will not considered to be very active markets. You [indiscernible] 80 points. So something typical like that on daily range. Last few months we're talking almost something like 30. So the order [indiscernible].
Got you, okay, that makes sense. And then moving onto Lucid, so Lucid's revenues pre trading and they were about flat from the fourth quarter and the revenues were about flat. When we look at [indiscernible] and look at EBS, they're volumes were up sequentially versus the fourth quarter. So looks like Lucid lost a little bit of market share. Is that a reasonable analysis and if that is the case, what do you think is going on there?
Sometimes these guys have to trade market share for yield, right. So you know that is a -- to retain yield, right. Given that and some of that has to do with adjustments to how things are going on. There are adjustments from the entire high frequency trading sector on those platforms. But I could say we believe they will come back pretty meaningfully and I'll think you'll see that Lucid will hold better than [indiscernible] You know sometimes a little bit worse than comes to others, but it should be fine. And one other thing we should also realize that [indiscernible] and obviously it all dries up, the dealers take away from the meeting, from the [indiscernible], the bigger ends generally speaking take away from the smaller ones with us and a few others being an exception. But that's something that you would see the line for them to decline on other venues that don’t report which had bigger decline.
Got you and the last one from me and maybe this is for Robert. So Robert, on slide 10 I appreciate the breakout of your costs, legacy FXCM versus V3. And as I'm looking at compensation expenses, the $26.3 million in the first quarter, that's up versus $21.5 million in the year ago quarter. And obviously you're [indiscernible] as last year you progressed, but can you just remind me what is kind of the source of that year-over-year compensation cost increase and to the extent that 2014 volumes remain relatively soft. Should we expect that comp might trail down as bonus accrual is lowered etc?
Yes, so I think last year it's really two things. One is compliance costs definitely ramped up in a meaningful way. We now have over 80 people in compliance which is quite a lot. A smaller item is we also acquired pharaohs [ph] on the institutional side which we consolidate in there, their comp is in there, about $0.5 million worth, as I said the other number for this quarter is about a million more than it should be with some severances and the like in that, so that’s kind of the story I think our comp level is probably in this 24 million to 25 million range going forward, hopefully we don’t have much more to add on the compliance front. Bonus accruals, we accrue through the year, what we believe is the proper number relative to the performance of the company, we will have to see. At this point I wouldn’t want to – I don’t see us tweaking it near term from either where we are right now.
Our next question comes from Ashley Serrao of Credit Suisse.
Ashley Serrao - Credit Suisse
Can you guys talk about your plan to leverage Lucid’s expertise for B3 markets, what exactly are you planning to do, what’s more front end versus back end loaded and would the margins of that incremental business be similar to Lucid or current to Infineon?
The margins will be a mixed, to certain that, it will be slightly lower than Lucid because of the some collection in a lot of those markets do require more manpower unless liquids market – in higher liquid and liquidity markets, so there is little less automated. But most of the changes are – that we are making are essentially software changes in quoting and risk management and things like that, I am not going to go through specifics but needless to say Infineon was not doing well which is why it was a distressed sale and buy the assets of that company very cheap, they weren’t doing well, because of risk management and lack of essentially modern day tools to compete with their peers who are crushing them. So Lucid is able to take essentially center stage in those fields, essentially quite to those other instruments we think that, that will have a meaningful impact on us being able to be a significant market maker in futures – options on futures and treasuries, again those are the products.
Ashley Serrao - Credit Suisse
And then Drew, you mentioned that competitions likely do have jurisdictions, so my question is it looks like the paint is universal, just given the fresh volatility in the environment, but are there some regions of markets that are struggling more than others based on what you are seeing today?
They all affect everybody, from the perspective of, in terms of what people are trading outside of Japan it’s generally all the same, the Japanese brokers aren’t – has art as everybody else but outside of Japan, it’s pretty much universally from that perspective, where the big differentiation is really on two fronts. One is what I said before about this whole thing of concerned brokers, many of them live on this – on the assumption of the revenue capture rate is fairly high for them to breakeven in this market, not even remotely plausible and we think that, that is going to lead to enormous amount of attrition of those brokers. Remember that a brokerage in a principle business, he is promised generally speaking a fixed rate for most of these introducing brokers and a while label and as we sort of calculate what is general way of capture is usually – cut in half and says here is the fixed rate base on a volume, people introduced in business. That is something that when the rate of capture declines a lot, it’s something that becomes unrealistic and it generally breaks those contracts, then what you're going to see is the depth of those brokers accelerate and their customer leaves them. That's something that makes a big difference for a lot of brokers, but that’s not too geographically specific, it affects brokers all over the place that way.
The thing I would say that geographically specific is the G7 countries have higher compliance costs and it’s that fixed capital cost – not capital cost, but capital amount that you need, fixed compliance cost, the high fixed overhead is required to run this business. Ex the brokers in G7 markets much more than it does, the ones in Lucid regulated jurisdictions and I think that’s something that you’re going to see more and more transactions on G7 countries because of that, anyway that fits our – it’s hard for us to buy brokers in less regulated jurisdictions because of the attrition or the compliance issues is harder. We don’t preclude it but it’s just traditionally we have not been able to do that as much. But I think the trend from an M&A perspective is very encouraging, because it affects exactly the kind of targets that we are after.
Ashley Serrao - Credit Suisse
And then on the regulatory landscape, recently I guess the Australian and Japanese regulators clamped down on the sourcing of Japanese clients, given that you have a fairly big friends in the region does this benefit you in anyway?
So what was happening is that a lot of brokers outside of Japan and again lighter regulated jurisdictions were essentially going from offshore Japanese guys soliciting them because a lot of our Japanese -- Japanese brokerage firm can only get 25 to unleveraged, you can go offshore and get 100 or 200 to leverage. Japanese regulators prohibit non-Japanese brokers -- non-Japanese regulated brokers from soliciting Japanese clients, the same old rule in the United States and many other countries as well, in most G7 markets and that is something that the US enforces more strictly than Japan traditionally enforced. But now the Japanese are doing a better enforcement of that and essentially make the choices for Japanese customers more limited to onshore brokers which we're part of and that is obviously better for us.
Ashley Serrao - Credit Suisse
And then finally for Robert, I just wanted to make sure I heard you correctly, you said there were 1 million severance costs this quarter but just want to make sure that in your reconciliation you don't exclude that. Is that correct?
Yes, I don't exclude that. That was not eliminated, that is in that 26.3 million but that should come out for next quarter.
Ashley Serrao - Credit Suisse
Are there any other similar one-time items?
No, that was it.
And our next question comes from Arnie Ursaner from CJS Securities.
This is actually [indiscernible] for Arnie. So despite lower volume you had in the last two quarters, trading and project expenses have continued a bit higher as a percent of the institutional revenue. Did you breakout the fixed versus variable component of the line item and maybe how we should think about that line going forward?
I don't have the fixed versus variable with me, Lee, you have to get that afterward but basically there is some upward pressure in this line just because prime brokerage has become -- the number of players that matter are keep shrinking in the space and they have a fair amount of pricing power in it. And so that's really the driver on trading cost, so you can see we did 7.1 million in Q4, 7.4 million, so there is some slight upward pressure on that, no question.
And then just switching gears a little bit, can you discuss the free cash flow metric in Q1 and how maybe we should think about this metric volatility should continue with this level for the rest of the year?
Yeah we disclosed on the first slide, maybe a metric that’s a simple one to look at on a per share basis, which was taking an adjusted pro forma EPS and adding back amortization of stock based comp and tax effecting that and that was $0.11 this quarter. That might be – that assumes depreciation equals capital expenditures and for us that frankly not probably true, our CapEx tends to be pretty low but making that assumption, that’s not – maybe it’s just a simple way of looking at the cash generation of the company.
And our next question comes from John Dunn of Sidoti.
John Dunn – Sidoti
On the CFD business, looking forward do you guys have sort of a target of what type of market share you eventually like to have in European CFDs and also maybe a snapshot of what the competitive landscape looks like over there?
So it’s a relatively concentrated market in Europe, on the high-end they involve doing other things, it's about $2 billion of revenue, this sort of total pie, focused really -- there is about 10 firms that probably own very decent chunk of that with I would say there's two firms that own I would say 40% or something like that. This is something where we are – maybe 60% owned by two firms, this is something we think we can make a very large dent in, we compete with these 10 firms today, compete with them very well and do really well against them in the instruments we do have, –because we don't have safety insurance, we don't have any market share and we compete them with that today that but given on service, reputation, quality software that most importantly I think trading software, trading speed, quality of execution, this is something where we think we can make a fairly big dent, we I think in the last call said we are aiming for 10% and 20% market share there. I think it's entirely realistic, it’s something that we share the same client, this is not something that if you will a new client market for us where to go get clients subscribe is exactly our clientele.
It’s just a place like Europe, our clients is one of the secondary brokers, are the primary brokers because we don’t have single share fees, and as we said before the – we said in our last call is that there is a meaningful difference therefore in the average size account because of that. Our average size account in western Europe is about $15,000 for FXCM, $40,000 and $69,000 for our two largest competitors in Europe and so we think that we are not just talking about regaining those shares -- not just by gaining share from onboarding new clients, but having a larger share of wallet from our existing customers who will move their accounts from those brokers to us. We think that from our customer feedback and if we had single shares, we would be that customers’ primary growth [indiscernible].
John Dunn – Sidoti
And then you talked about how the small players are being pressured, could you just maybe give us a little background of what led up to the FX deal and what finally tipped them?
I mean really if you look at this thing is, as we said before -- we said in previous calls, we talk to a lot of players on a relative number and really what it comes down to is price issue and whether it’s reasonable for us to buy, obviously there is generally speaking a meaningful price difference between the buyer and the seller, this is because we are trying to buy at relatively cheap. As market conditions worsen that spread narrows, until especially becomes credible for us to do it. I think that this is something where as I was saying from a previous question our jurisdiction in the United States is one of the most hostile and most expensive, it’s the retail FX brokers is one of the highest capital requirements and regulatory regime that is extraordinarily onerous in comparison leaving the G7 countries is regulatory regime that is very expensive to maintain and do well. And that's why you see the number shrink from 43 to 5 really in about six years or so. And we expect further share retention really US brokers and other brokers, in expense G7 jurisdictions are the prime target because of that.
I am not showing any further questions. I would now like to turn the call back to Jaclyn Klein for further remarks.
Thanks on behalf of Drew, Robert and everyone here at FXCM. I would like to thank you for joining us this morning and look forward to speaking with you next quarter. Have a good day.
Ladies and gentlemen thank you for participating in today’s conference. This does conclude the program and you may all disconnect. Everyone have a wonderful day.
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