GAIN Capital Holdings' (GCAP) CEO Glenn Stevens On Q2 2014 Results - Earnings Call Transcript

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GAIN Capital Holdings, Inc. (NYSE:GCAP)

Q2 2014 Earnings Conference Call

August 11, 2014 5:00 PM ET

Executives

Glenn Stevens - President and CEO

Jason Emerson - EVP and CFO

Analysts

Niamh Alexander - KBW

Rich Repetto - Sandler O'Neill

Dan Fannon - Jefferies

Patrick O'Shaughnessy - Raymond James

John Dunn - Sidoti and Company

Operator

Good afternoon and welcome to the GAIN Capital Second Quarter 2014 Results Conference Call. Our speakers today will be Glenn Stevens, CEO; and Jason Emerson, CFO. All participants will be in listen-only mode. (Operator Instructions) After today's presentation there will be an opportunity to ask questions. Please note, this event is being recorded.

During this conference call, management will make forward-looking statements to assist you in understanding its expectations for future performance. These statements are subject to a number of risks that could cause actual events and results to differ materially and I refer you to the company's press release of August 11, 2014, and the company's most recent 10-K and 10-Q SEC filings for discussions of those risks.

In addition, statements during this call including statements related to market conditions, the integration of GFT, 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 the light.

The company may at some point elect to update the forward-looking statements made today, but specifically disclaims any obligation to do so, except where required by law.

I will now turn the call over to GAIN CEO, Glenn Stevens to discuss the second quarter 2014 results. Please go ahead sir.

Glenn Stevens

Thank you, David. Good afternoon and thanks for everyone joining our earnings call here, to review our second quarter performance and the first half of 2014 overview. I will go through some bullet points and highlights, and then proceed to more details, and have Jason weigh in on some of the specifics.

As kind of an overview on the accompanying deck that is with this presentation, on the first slide, it has been fairly well documented at this point, that the first half of 2014, and particularly in the second quarter, we have seen challenging market trading environment, and that continues to weight on our overall performance. Its an obvious driver for short term and medium term decision making, and these currency volatilities in particulars are at levels we haven't seen in over 10 years, so these are quiet outliers in terms of trading activity, as it assures to average daily trading ranges, over all size of movement, and its across the board in multiple currency pairs, not just in specific few.

That said, we have been able to offset some of that malaise, with the continued growth of our commission-based businesses, we have more than doubled that on a year-over-year measurement basis. We have continued to exhibit a very successful execution strategy on M&A. We have closed four deals recently. Our pipeline is as robust as it has ever been, and I think we continue to hone our skills in that area, and we are harkened by what we think will continue to help drive our success going forward on that front.

That said, in light of challenging market conditions, the focus on overall expense management continues. We gave some guidance in terms of the synergy we expected to achieve on our GFT acquisition. I will talk more about how we are on track there, but its broader than that for us as a company, and we have been focusing on that for synergies and also how we can create a more competitive environment for us as a company, so that when you have these challenging environments, we can succeed.

On the next slide, more specific, just to highlight a few of the financial results for the second quarter. We had net revenue of $69.7 million. We ended up with an adjusted EBITDA loss of $1.6 million for the quarter. I mean, ultimately, our operating metrics stayed very stable; few indications to that, we had a 12% increase in retail volume for a similar period, with $522.2 billion, with an average daily volume of $8 billion. Our institutional volume continued to grow, the 27% increase, nearly $1.4 billion with an average daily volume of about $21 billion, and our funded accounts on a year-over-year basis increased nearly 40% to 130,840.

If you move to the next stage, in terms of the first half summary of both quarters put together, we are at a net revenue amount of about $151 million, that's 23% year-over-year increase, and adjusted EBITDA of $10.4 million for this half year period, and most importantly, as kind of a harbinger of our ability to generate revenue and ultimately earnings going forward, our client assets surpassed $840 million, that's a very large increase year-over-year, so the underpinnings are in place, and it offers us the opportunity to build on that as a platform, and continue to invest in our business.

Going back to the next slide, the market conditions, the graph just for volatility isn't a pretty one. If you look back -- as I said, you can notice, you can go back even north of 10 years, and we really ebbed in terms of trading conditions, when it comes to currencies moving around on a daily basis, on a macro basis, on a trending basis.

I think what's important though, is that we don't see this as a secular change, but more of a cyclical change, and that, on a broader perspective, currency markets for a long time, have shown to get in a rut for attractive periods, whether it be months, or even in this case, almost three quarters every year. But ultimately, they do break out, and I think the important takeaway here is that, if you look back at our performance, we don't need a correction to lofty levels, let's say 2008-2009 to create very material improvements. We actually saw that in 2013, when we only had a modest uptick in average daily trading ranges, and the bottom line increased dramatically. So we are positioned now to really reap the benefits of even a slight correction back to more normal levels or trailing averages of where we have been.

Also, as part of our strategic move going forward, we are migrating towards a broader mix, with our GFT acquisition and with our ability to add multiple products to have customers be able to trade different markets. We are becoming less and less important on a pure currency play, and we have seen a lot of evidence in that, in the metrics that come out for -- how much of our activity comes out of non-FX products. And its not a competency we want to move away from, but its about broadening the platform, and again, continuing to invest in the overall market and the overall relationship with our clients.

So breaking out a little bit, some of the subsectors if you will, the next slide talks about our retail, over-the-counter business. We ended up with a growth in funded accounts, which is a continued upside march, with our 37% year-over-year growth, through June 30, with strong client engagement, even in these somewhat tepid markets, we are seeing our average daily volume, as I mentioned, north of $8 billion, that's up 12% compared to the same period of Q2 of 2013.

We continue to generate volume and new accounts, from both our direct and indirect sales channels. We are currently at about a 50-50 mix on our, if you will, partner-based business and direct business, and there is a bit of a pivot that we have been operating around there. We like both drivers to be strong.

As I mentioned, prior diversification with CFDs and single stock CFDs is really emerging as a global leader in that space, and when it comes to pitching partners, or even being able to offer clients, we are almost in parallel, if you will, on the products that we can offer, and the different ways they can deliver those produces in different geographies.

We continue to optimize our core markets. When I mean that on a geography basis, you always want to look into new markets, where it might be an opportunity, but in places like the U.S., which is still an important market for us, we are separating ourselves for most of the pack, as either number one or number two provider in the market, and when we were not just driving to get there, and so, there are situations, where market won't prove to be tenable over longer term, and we will consider pulling back. But for now, its about optimized in those markets with better marketing spend and the whole onboarding experience for clients, and trying to become a stronger brand in each one of those markets, and treating them not as a global market, but actually a little bit more in a local basis, so we can attract ourselves to the clients more effectively.

On the commission-based business, which is a perfect compliment to the over-the-counter retail business for us, we continue to make strides down the next slide. We really want to be able to use our M&A business, use our organic roll-out and say what can we do on the commission businesses, to make that even a more material part of our overall mix?

If you'd go back even or scan few years ago, the commission-based business was a blip on the screen, and if you look at the revenue even for Q2 of 2014 versus Q2 of 2013, that business is now generating over $32 million of revenue versus 2014. So its becoming more material for us, and complemented in a more normal market environment, I think you end up firing on multiple cylinders, which is exactly the strategy we want to execute on.

Our institutional offering continues to grow. Our GTX platform continues to be well-received. We have new record numbers of individual users, not as individuals, but as new account users every single quarter, and again, that's an illustration of being able to bring in more participants, and get a more broad-based appeal in terms of competing with some of the larger players in that space now. But our goal is to continue to gain market share in that space.

On the futures, I mentioned that a little bit already, but our client assets are up 44% year-to-date. We have expanded that through M&A, with some of our recently closed acquisitions there. Its important to note that, while we have been doing that, we have been able to increase our revenue per contract, some of that is more of the higher touch service that we offer to some of our clients there, and so we want to be able to increase the margins, in that exchange business in the U.S., it's a challenging market, but we have had some margin expansion, and both of those deals that we announced, GAA and TT have proven to be accretive, which was within our expectations, but we have delivered on it.

And on the advisory side, I think the key there is focusing to help meet client-based demand for guidance, and we call it guidance based trading, and ultimately, for self-directed traders that want a little bit of help, idea generation or just the sounding word if you will, with our purchase of Galvan Advisors, we were able to roll that out to a broader set of clients, and that's just in its infancy in terms of us integrating and offering that serves to more users.

So across the board, if you look at some of -- trying to address the needs of the clients, I think we are trying to take in the feedback of what clients want in this kind of market, and being able to innovate or orient our service, so that we can be more sticky with them, and also, we can be able to, in the end, add more margin and add more value.

Despite of the challenging marketing conditions, as I mentioned, I think its important to note that we continued the strength of our core operating metrics, and ultimately over the longer term, if you had a weakness there, that in my mind, should raise some alarm bells. But if you have a temporary or a passing scenario in terms of trading conditions, in terms of volatility or movement in the market that you necessarily can't control as a company, the things you can control, you want to deliver, and in that respect, we continue to grow our funded account base, both organically and through M&A. We continue to invest in our overall platform there, and we have seen the resulting increase in assets, increase in accounts. So even if you have a market that isn't overly exciting in its current state, being able to pull in new clients, and basically extend our lead on many of our peers, I think that poses us in a good position going forward with any kind of a modest market rebound, to be able to extend that lead and that leadership role.

So at this point, I will flip this over to Jason and go through some of the financial details, and then we can summarize and move on to Q&A. Thanks.

Jason Emerson

Great. Thank you, Glenn. Before we dive into the results for the second quarter and the year, I'd like to provide more color on the restatement of our first quarter results, which was done to correct understated trading revenue, in connection with the combination of our London businesses, an isolated error occurred, which caused us to underreport revenue by $4.2 million in the first quarter. As part of the subsequent restatement of revenue, we made other immaterial adjustments to expenses including referral fees, exchange fees, and depreciation. As you will see in the amended 10-Q that we filed today, the impact of the restatement was an increase in revenue from $75.8 million, $79.9 million, an increase in pre-tax earnings from $2.1 million to $5.1 million and an increase in diluted earnings per share from $0.04 to $0.09.

We identified the cause, and are in the process of remediating the issue. These efforts will be completed during the current quarter, so that we are able to confirm a clean internal control opinion by the end of the 2014 audit period.

I am now going to take you through the results for the second quarter and the year so far in a little more detail in the next slide. As Glenn noted earlier, net revenue of $69.7 million for the quarter is down 5% for the quarter a year ago, while revenue of $151.1 million for the first half of 2014 is up 23%, compared to the same time in 2013. We experienced very challenging retail FX trading conditions in the second quarter, negatively impacting revenue capture of the retail OTC business. Second quarter retail OTC revenue of $36.4 million compares to $57.5 million in the quarter a year ago, and for the year, revenue of $87.6 million is down 6% compared to last year, driven by the decline in trading conditions year-over-year.

The challenging trading conditions during the quarter resulted in a revenue per million of $70, well below the trailing 12 month average of $98 per million. As we have said in the past, we operate the business to be slightly profitable at the low end of the $80 to $120 range per million that we have seen historically. Our retail OTC business is well positioned to deliver positive earnings, with continued growth in our client assets and funded accounts, for when trading conditions improved in the foreign exchange markets.

Our diversification efforts continue to make traction within our retail OTC business. The acquisition of GFT in 2013 significantly expanded the products available to our retail OTC customers to more than 12,500, and the trading volume in non-FX products is now more than 25% of the retail OTC business, up significantly from three years ago.

We continue to make progress in our strategy of diversifying revenue across clients, products and geographies. Our commission-based business have grown through both acquisition and organic efforts, carrying $32.4 million in revenue during the quarter, and more than doubling, comparing to the same time last year. We are focused on growing the commission based businesses, to generate more stable revenue and reduce volatility in earnings of the firm overall.

During the quarter and for the year, each of these offerings delivered positive operating results. Net loss for the quarter was $5.2 million or $0.13 per diluted share. Adjusting net income for restructuring, integration, and acquisition related expense, we get a figure of $4.8 million and a loss of $0.12 per diluted share for the quarter. Year-to-date we have a net loss of $1.3 million or $0.04 per diluted share, and on an adjusted basis, net income of around $0.5 million or $0.01 per diluted share.

One additional item to note is that during the quarter, we adjusted the presentation of interest related to borrowings. We have historically presented this expense within the interest expense revenue line item. Given the history of effective interest expense related to the convertible notes, issued in the fourth quarter of last year, we have adjusted the presentation such that interest on borrowings would be presented below operating income.

Moving over to fixed operating expenses, as we execute on our strategy of growing our retail OTC and commission-based businesses, we continue to be focused on managing the expense base, to deliver operating leverage when market conditions improve. Total expense excluding referral fees and acquisition related items, as well as adjusting for the first complete quarter of having GAA, TT in our results, was $48.3 million for the quarter, down from $49.6 million last quarter, and down 18% compared to the same time last year on a pro forma basis. This savings results from our progress capturing synergies from the GFT transaction. For the year, total expenses excluding referral fees, acquisition related items were $97.9 million, down 15% from $114.6 million on a pro forma basis.

So we are seeing the results of our integration plan, and have an impact on reducing the cost base. We are on track to deliver annual run rate expense reductions of $40 million by the fourth quarter of this year.

While we believe the current market environment is the result of cyclical conditions, we are in the process of enacting a number of cost management efforts. These initiatives are incremental to the expense reductions we expect to achieve from the GFT acquisition. The impact of the combined set of cost initiatives, will begin to have an impact, starting in the current quarter and layering into the first quarter of 2015.

Turning to the return on capital slide, gain on distributed quarterly dividend of $0.05 per share on September 19, for holders of record as of September 12, and we will continue to opportunistically buy back shares.

Now I will turn the presentation back over to Glenn.

Glenn Stevens

Thanks Jason. On the next slide, we just want to review some highlights from our year-to-date 2014 acquisitions and investments. We actually have been active enough that w have to slice these into timeframes, otherwise I wouldn't have enough time on this call to go through how many successful acquisitions and deals we have been able to get done.

So ultimately, its important that this comes across as a core competence for us. I think some firms are good at it, and some firms are looking to get good at it, and I think that we have developed an in-house team of expertise, and that means all the pieces of integration and identifying targets, having successful negotiations, and ultimately being able to capitalize on those opportunities, and we have been saying for a long time that it has got to be part of our Group, and I think that we are delivering on that.

Now unfortunately, we haven't had a market condition or an environment that illustrates the success of these. It's great for me to say that, all these acquisitions this year have been accretive, and they are, but not materially enough, where we are able to shout from the rooftops to say we have structurally changed our business. However, we have structurally changed our business. We have made huge strides in terms of diversifying away from a sole reliance on retail FOREX trading. We have been able to add an institutional business that is a perfect compliment to that. We have done that in sub-three years. We have added a commission based business on the future side of exchange for the futures to compliment what's available in the U.S. market, instead of turning our back on the U.S. market and embraced it and said, let's be the leader that we are, and count on it to be a significant contributor going forward.

So all of those kind of things are listening to clients, seeing opportunities, do things organically from an onboarding process to payments for all of things that work on behind the scenes, that aren't obvious in press releases or for us to be able to point to. But they all lead to an opportunity to build your platform, and build your position in this market.

And on the inorganic side, on M&A, again, we have added some talent there, we have developed some expertise, but we try to do it in a strategic way. We say what makes sense, and then, is there a target that's available to fill what we think is a void. Now, we can't control the macro environment short term, but that's not why we are here. We are here for a broader time frame, and we want to be able to put these little pieces in place as they make sense. And in some case, there are bigger pieces like GFT.

So a quick review there, we expanded our futures business, we said there is an opportunity to pick up some assets to increase the marginal value added to our clients if you will, which would result in a higher margin per contract, did that with GAA and Top Third. On the advisory business, we said, in challenging markets, customers want help. So let's bring a really well respected, well established business, as looking for a bigger partner, brought those guys into the fold, and it has gone extremely well and we are excited about a broader roll-out for that products that come out of Galvan Research.

And on the GTX piece, we want to make sure all the underpinnings are in place. And so, being able to buy the rest of that IP that essentially covers everything, FX and non-FX for us, gives us that platform to say, hey GTX is going to be here to stay, its going to be a bigger player than it already is, but in order to do that, let's go even more than FX and be able to bring multiple services to our client that you're rapidly expanding with.

The good news there also is that we are not done. We have a very robust pipeline, lots of active conversations, wouldn't surprise me to get one more deals done this year, and so, I think that's again part of our mix and our mantra internally to say hey, we have to be able to manage our operating metrics, manage our costs, and look for opportunities to build the overall platform over the footprint if you will, of our business.

So in terms of closing remarks, my discussion can come across very kind of half-build, or a glass-full focus, but its not unbridled enthusiasm. The goal here is to say, look for opportunities, continue to build in the future, have faith and have confidence in what we are going to be able to deliver with that modest return to the norm, not a complete 180 degree over back to the heyday of 2009.

But do that in a responsible manner, so the cost management stuff, we had a nicely laid out timeline to be able to achieve synergies on a GFT acquisition, that's going along right according to plan, right across the board, but we didn't want to stop there, so we have kind of broadened that mandate, and said, well, that's well, that's going a long way to capture that $40 million run rate, what else can we do; because until things improve, we can't have our heads in the sands, we have to be responsible, and so we have an opportunity to rise on the M&A, go get it. But, when it doesn't and if the market doesn't improve, I am not going to sit here and hope. My team is not going to sit here and hope. We are going to act, and we are going to respond to customers when we can, by the same token, we got to be able to lower our threshold, so we can be profitable, even at levels that frankly we haven't planned.

We didn't come into this year and say, well, how will this look at below $80, below $75, which if you go back two or three years, this is outside that range. And so it's a scenario that we want to be able to build more resiliency into our business. So ultimately, that comes with diversification of product, diversification of customer types, and ultimately a cost basis that we can rationalize; and so, we are very proactive in that case, and ultimately, that's where we want to go. And so we look at this quarter, we look at this year-to-date, we look at the contacts of multiple years and we looked forward.

So I think on that note, we ended up with getting deals done on the M&A side. Continue to really focus on our cost management, even outside the GFT acquisition, and then in the end, do what really matters [indiscernible] to say, continue to strengthen our operating metrics, because when market conditions improve, if those are in place, it's a no-brainer that you end up with a better situation.

So I think on that, we will move to Q&A, and take your questions.

Question-and-Answer Session

Operator

(Operator Instructions). Our first question comes from Niamh Alexander of KBW.

Niamh Alexander - KBW

Hi. Thanks for taking my questions. I guess Glenn, you were talking about the deals and their positioning eval and you are delivering on the cost saves, but I just can't see them in the numbers. The expenses look pretty high, the revenue is down. I know it's a challenging environment, and we are just looking at the numbers, you're running the companies. But here is the deal, the comp is up, the non-trading costs are up, and I know you just swallowed some deals, but we are not seeing any corresponding revenue for the expenses. So its kind of -- you are saying that you are on track for the 40, but I am not seeing it in the numbers. So can you help me maybe understand what kind of expenses that you added on with some of these businesses, where the offsetting revenue is?

Glenn Stevens

Sure. Couple of pieces. I think if you take the retail piece out, you can really see a huge change in a retail revenue. Some of that pullback in retail revenue was offset, or supplanted if you will, by the other revenue that came in, you're right, in some of the institutional businesses, the comp ratios are a little higher, that's not really new news. So in our GTX business, maybe in the futures business a little bit, some of the comp ratios there is more comparable to institutional salespeople. That hasn't changed in the retail side at all. Although I will say, when you say you're not seeing the $40 million, I guess I would point to our year-over-year expenses basis, actually I would even take you back to the chart, where we actually continue to march every quarter over the year with our fixed operating expenses. In other words, non-variable paid out continues to march lower, and I think that, in terms of the $40 million run rate for the GFT deal, that's something that we said that over a year's time, going forward, we will be at a $40 million recurring lower run rate.

So at the end of Q4 of this year, there would be no surprise here. We don't need to Hail Mary in December 31st. We are going to be at a lower -- put the two combined companies together, there will be a $40 million lower run rate for those two companies. So we are seeing some of that come through, because our expense year-over-year are already lower. I don't know Jason, if you want to add anything on that, but I think we are seeing that?

Jason Emerson

Yeah, no, just to put a final point of that. Niamh, in terms of looking at the first half, we look at the operating expense reduction. If we look at -- do the walk and the fixed operating expense, we go from $114 at the end of the first half when you take out referral fees and DNA and impact of GAA, TT, cut down to $98 million. So we are seeing that impact, in terms of the core expenses of the business come down.

Glenn Stevens

Now to be fair, you say we will take out the referral fees. That is somewhat subject to market conditions there, when we have volume based yields, when you have kind of the threshold that has to get out, that's part of my point about saying that, in an improving condition, those don't improve as much, and as -- sorry, increase as much, until you get the margin expansion. However, this is absolutely the time to be reviewing those multi-year deals that have been standing, and say hey, Mr. Partner, let's rationalize these and make sense. So I don't know if we answered your question, but I think on the non-variable stuff or the non-referable stuff, we are seeing the money come through, although we are not done yet. And I think a little bit on the variable stuff, that's been focused too. So we don't just sit here and hope that conditions improve.

Niamh Alexander - KBW

I guess if I ask it another way, you have added a few other small companies during the past quarter as well, and that [indiscernible] are going out. So I am just trying to like -- what's the delta? What's left to kind of cut from the existing cost base?

Glenn Stevens

Well I wouldn't -- I don't know if I put a number on and say, hey, here is what we are going to cut. But, I would say that its material, you don't bother talking, if its not multiple seven figures, and ultimately, I think that, one thing about scale, let's face it, when you can grow, then you just have more room to cut. It's a simple scenario that says, you get that economy of scale, whether its on the facility side or the admin side or whatever it may be, there are ways to cut, even we still in the process of going back and negotiating with vendors and partners that we are serving GFT and gain at the same time. We are able to go through into those scenario and say, oh by the way, now we will re-up this relationship with whatever vendor it is, its got to be done cheaper, because we are repaying you more from both of those entities.

So how much lost? It is material outside of the synergy stuff, and I think that -- we fully expect to see that flow through. I think the important part here though is to say, we have to be responsible in our cutting, we have room. I mean, we can look at what our marketing expense has been for a while, it has been very consistent, continue to invest. There is room there. What I am trying to say is, if we don't see a reasonable way out of the current environment, we have levers to pull, and if we do, then great, we are perfectly poised. But we are not stuck at this point. The question becomes really, if you were in 2012 and you didn't invest in your business, and -- we'd have a lot on the table for 2013. So now, you always have that balance of saying sure about everything, and it's the classic baby out of the backwater, and so you leave yourself shy of your optimal fighting wings, because you went and cut too much.

And so if I knew in 2011, what 2012 was going to look like, I'd cut the heck out of everything, and then I would have been in better shape for 2012. But then I'd have to remember to go spend go everything again, so I was ready for 2013. Now I am not going to be a wise guy, but if I really knew what the next six months of volatility look like, I'd probably have a different job, sitting by myself in a room, with people that are calling me up and giving me money.

So ultimately in that case, we have to kind of have a more smooth and reconvene, flexible. The idea is to say, are you building the metrics? And I think ultimately, if we weren't seeing them, the operating metrics improving, we'd have a different conversation. But by seeing them improve, it does help bulk of the story of saying, this will pay off. And if it doesn't, that was my point, we are not just going to sit here and quietly hope, we are actually making changes to address some of that.

Niamh Alexander - KBW

Okay. All right. Fair enough, I will follow-up later on the conference call. And then just on the restatements Jason, was that -- it looks like it was a few different issues, it wasn't just all around this one omnibus London account or something, or what was going on there? Is it all fully resolved now?

Jason Emerson

So the revenue restatement was the core issue that we restated our financials for Q1, and we have a remediation plan in places we talked about; and its in process. We believe we will have the issue resolved by the end of current and in position to conclude on the financials for 2014 and address the weakness that was identified.

Glenn Stevens

And I guess just a final point there Niamh is that, yes, that was an isolated even that is completely done and dusted if you will, had that been identified and fixed, yes absolutely. And number two, its important to note that it was a timing related item, not that we couldn't find something and found it. It was a question of Q1, Q2 timing.

Niamh Alexander - KBW

So the D&A and the exchange, they all relate to that same issue?

Jason Emerson

No, no. So then in doing the restatement, we, in terms of preparing the reader of the financials, we ended up incorporating those adjustments into the quarter, given that we are opening up Q1 to do the restatement related to the revenue.

Glenn Stevens

Those would -- I would classify as -- of the less than material status. The reality is to have the opportunity with the hood open to do a few little tune-up items, you do it. And so that's why they got thrown in with it. No, not related to that, but the concept is, you have the guy open, fix the other things in there.

Niamh Alexander - KBW

Okay, fair. I should get back in the line, just real quick on the deals, sorry. You know, your cash balance is a lot lower now, you have done a few deals already. And I don't know, we have got that patenting [ph] happened after the quarter closed or not, and do you still have enough cash if you go on and make a few market decisions if you want?

Glenn Stevens

Yes, I think I wouldn't be talking about a robust pipeline about anything if we had the ability to figure out and pay for them. So ultimately, part of our management, I think we have shown to be pretty adroit at being creative there, be able to put deal structures together, so that seller and ourselves, it makes sense on both sides. And without even getting specific, we have already shown that we don't just write a check and buy the company, there has been a myriad of earnouts in the convert and self-financing, what have you. There is lots of things to be able to structure that. So short answer to your question is no, we don't see it as an impediment at all, for moving forward on deals.

Niamh Alexander - KBW

Okay, thanks. I will get back in line. Thank you.

Glenn Stevens

Sure.

Operator

Okay. Our next question comes from Rich Repetto of Sandler O'Neill. Please go ahead.

Rich Repetto - Sandler O'Neill

Hi Glenn. Hi Jason.

Glenn Stevens

Hi Rich.

Jason Emerson

Hi Rich.

Rich Repetto - Sandler O'Neill

I guess the first question is just, on the acquisitions, you do put out the expenses, I believe, in slide 24 that $2.4 million. So can you talk about the revenue that would go up, against the $2.4 million for the quarter?

Jason Emerson

Yes Rich. So the revenue for the GAA, and that's probably the GAA, TT in isolation, was approximately $2.8 million.

Rich Repetto - Sandler O'Neill

Okay. And then, Glenn, I am not sure I didn't -- whether it was asked or how it was asked, but you did say last quarter that you are going to come out and give more specific details on the additional cost cutting from -- that went beyond the GFT. Now you did lay out a timeframe, I believe you said from this current quarter through the 1Q 2015, but you're still not -- like we still have no idea how much that is?

Glenn Stevens

That's a fair question. On the one hand, we have been quite specific about synergy capture. On the other hand, what makes it slightly more difficult, a specific number to put on it, because part of it has to do with the business. And what I mean by that is, as I said, we have more levers to pull, so you say well, from a headcount perspective, from a marketing spend perspective, from a new product rollout perspective, those are a bunch of things that, if we don't see things improving, I mean, things in terms of overall market, while we didn't see the resulting improvement on the operating metrics. We probably -- we will cut into some of those spends with specific numbers. What we are doing here, is being able to tee up some of those pullbacks or initiatives, and say, hey maybe it doesn't make sense right now.

So you're right, I didn't get specific in terms of how many millions we expect to save. But if you want to do an overall ballpark, if we shoot for another phase of north of 10% kind of next step, the point I was trying to make is, we have brought up the idea that said, are you at rock bottom, and the answer is no, we have levers to pull, to create some more flexibility. But again, there is this balance, when it comes to the business part to say, when do you do it and how deep do you do it, and so in terms of additional numbers, I think that's probably a reasonably safe estimate to talk about another 10% decrease if you will, in those kind of expenses, because we have those -- the fixed expenses.

Rich Repetto - Sandler O'Neill

The 48 or so for the Q2? Or 97, 98 for the --

Glenn Stevens

Correct.

Rich Repetto - Sandler O'Neill

Then I guess my last question would be -- what do you call, unprecedented -- or at least it feels unprecedented right now. But there are things that point to -- that some of it, when you see layoffs at the big banks and the regulatory issues, so to strike you as a guy that has been in the industry for all his career, does any of this strike you as potentially secular?

Glenn Stevens

No, it doesn't. And I don't say that because its convenient for me to do so. You're right. As much as I hat to admit it, you're talking about FX since 1985, and a crappy year just does not stand out. I mean, if you look at this, even over a three year period, you'd say 2012 was pretty soft, 2013 was modestly improved, and 2014 has started out or has spent at least half a year in the dumps. I mean, you're right. If you look back at it, if I thought something changed, if I thought that this market has said, we are not going to do this anymore, then I think that's a different story.

That said, I can't sit here and go, everybody, just hang on, don't budge. So we are not doing that. That's why we had the other businesses. That's why we had the other products, and that's why we try to diversify in ed, not diversify in a way, but diversify in ed, through reliance on the currency movement; because I have to say, we haven't broken out. We have seen some glimpses of brilliance in August in terms of some little bit more moves. You see a couple of percent moves even in the equity markets bouncing out a little bit. You kind of can never predict when all of a sudden -- while even though they have been one explode, you will go back and go wow, that was amazingly low.

So short answer, no, I don't see that change, I have seen this before. It doesn't mean we just stay paralyzed, it means we make changes, and that goes back to the cost point. We have to really squeeze one of the reasons we wanted to highlight the improvement, is to show actually that we are not just starting now, we have started. I thought that the right question was asked to say, are you done? No, are you capable of doing more? Yes. We gave a little bit of guidance as to what we think that number could be without too much pain, then there is the painful stuff which you could do even more. So there is flexibility in this model, absolutely. The question is, how much do you want to sacrifice. And if you see the metrics continue to improve, you want to make sure you're ready. So when 2013 comes back the way it did after 2012, you have some really serious numbers that come in. But its not a dice roll, its preparation for.

So that said, if I am wrong, and we don't migrate back to more normal levels, its important Rich that, we look at our revenue per million. We don't need to move back to $100, no. We have already run the numbers in at $85 and at $90, it's a lot of leverage of an operating model to be able to have that flow to the bottom line. But if it doesn't happen, we will be better prepared to weather that. And I use as an example, kind of look back to 2012, and Q4 was a pretty dire quarter for us, and our business now actually -- on a comparable basis, is more resilient. That RPM wasn't as low as this RPM, and we lost less money. This is a worst RPM and actually performed relatively better. I am not saying its great, but I am saying there actually has been an improvement, that's only -- that's left in the two-year period, that we have increased the resilience.

Rich Repetto - Sandler O'Neill

Okay. That helps Glenn. Appreciate. Thank you.

Glenn Stevens

Okay. All right.

Operator

Our next question comes from Dan Fannon of Jefferies. Please go ahead.

Dan Fannon - Jefferies

Thanks. I guess just a couple more on expenses here. The $43 million or the $98 million you guys throw out for your fixed costs, how much of that is -- is the difference just all trading related, or there is some variable compensation, that is not included within this fixed number? I am trying to get a sense of the full makeup of it?

Jason Emerson

So within that $98 million, there are commissions for our GTX and our sales-trader business are within those operating expenses. Those numbers are in there. I will get those.

Glenn Stevens

Specifically we breakdown. A predominant part of it is fixed operating stuff.

Jason Emerson

Most of it is fixed.

Glenn Stevens

Most of it is, and so that's the one we can focus on to say hey, what kind of needs to structurally change for that. But what's not in there, is the much bigger numbers for referral payments, partner payments out, and those are going to be volume based, those are going to be activity based and variable on that nature.

Dan Fannon - Jefferies

Got it. So what is your breakeven kind of revenue number that you think, where you wouldn't be posting a loss?

Glenn Stevens

So I think its low 80s, probably 83, 85, is -- let me [indiscernible] that. Couple of things, that's a revenue per million number in retail, but that's a little bit of a moving target, because as the other businesses become a bigger driver of total revenue, then that number actually becomes, if you will, less important for us, because the other businesses can carry more of the right.

That's number one, number two, as we change our expense base, which we have shown that we have, that number obviously goes lower. So however, I would say that, as we came in -- let's say as we came out of 2013, and we were looking forward to 2014, go backwards to a senior exec offsite in Q4 of 2013, we didn't say hey, how profitable will we be at 70 RPM in retail. We haven't seen it in over 10 years, 20 years, so it wasn't on the likely scale of the bell curve, and so, I think its important to note that, we wanted to continue to migrate lower, so that breakeven question you asked, next time we talk, I say its 75, then I say its 65. So it becomes less important, and -- but for now, to answer your question, low 80s is about where it is, given the current mix of our businesses.

Dan Fannon - Jefferies

Okay. And then could you discuss July a little bit? I mean, you did see a little bit of a pickup in activity, how that revenue per million kind of changed as a result of the pickup in activity, and just in last kind of six weeks?

Glenn Stevens

I think, in July for example, we saw volatility actually continue to deteriorate in terms of Q2. We have seen, as I mentioned a little earlier, little bit of a glimpse in August of some things moving around a little bit, a few little breakout moves here and there. July, I'd love to call it the bottom, and say, that was the depth of the trough, but again, prognosticating is not my strength, and so I think its important to note that we want to gear towards, every time you see it, then you know its possible, not likely, but possible, so you gear up for it. But I am not sure I am answering your question, but in terms of activity, in terms of opportunities and the trading conditions, July, at least to this date, is probably as poor as we have seen it.

Dan Fannon - Jefferies

Got it. And then I guess, just taking that next step further, you've just posted a loss, you've got $13 million in cash and the environment is not getting better in the short term, and you're talking pretty aggressively about M&A, so that's kind of I think the disconnect people are not really -- trying to put that together, those don't all add up?

Glenn Stevens

No, you're right. So if you're managing for the next month or the next four, you'd say time to hunker down and run the opposite direction. I think the message I am trying to send is, I don't see any reason why we can't have our cake and eat it too, which is, use this as an opportunity -- the last thing I want to do is, come out of this depressed environment, and say damn, it was a great opportunity to expand our footprint, and we didn't take advantage of it. There are opportunistic discussions to be had that we are having, that would not happen if we were in a more robust environment.

So one end, we are not betting blindly and doubling down, on a bad card. We are investing for the future, as metrics continue to improve or continue to stay stable at least, or strengthen. And so, I think what we are saying here is, my cake and eat it too scenario is that, while we are taking advantage of these opportunities, we have to lower our cost base, which is possible. It might not seem obvious, but we are saying, look, for our existing business that has been integrated, that pulls other businesses in, let's take some new initiatives off the table, lets pull back some [indiscernible] type scenarios on new product rollout or geographies. Let's do a few things that haven't panned out, as quickly as we wanted, and to take those cost runs off the table.

And while we are doing that, if an opportunity pops up, we shouldn't shy from it; because if we think that this business is going in two [ph], we should be having a different discussion; and what I said to Rich earlier was, we have seen periods of lackluster environment, and I don't think its forever. But I am not going to hope, I am just going to organize or position the company, so we can weather even more vital storm than we have already.

Dan Fannon - Jefferies

Got it. Thank you.

Glenn Stevens

Okay.

Operator

Our next question comes from Patrick O'Shaughnessy of Raymond James. Please go ahead.

Patrick O'Shaughnessy - Raymond James

Hey, good afternoon guys.

Glenn Stevens

Hi Patrick.

Patrick O'Shaughnessy - Raymond James

So, I guess just to beat the dead horse on expenses, so as we are looking at some of the -- some expenses in the quarter-over-quarter increase. So your employee comp and benefits increased by $2.3 million quarter-over-quarter, and GAA, TT, it looks like that was combined 2.4, so basically, was that all comp expense, is that where most of that kind of hits your P&L?

Jason Emerson

On GAA, TT, it's a combination of some referral fees, and within their expense base, some compensation and G&A.

Patrick O'Shaughnessy - Raymond James

So why was employee comp and benefits up on a quarter-over-quarter basis, even if you back out the GAA, TT? I would have thought that, maybe lower bonus accrual, some of the cost reduction efforts that you're talking about, that we would have seen that number actually come down?

Jason Emerson

So the mix of the commission base businesses, in predominantly sales trader, the mix of the products they traded, resulted in a higher payout. So that, and the GAA, TT effect are the main drivers for the compensation.

Glenn Stevens

As I mentioned, non-retail, some of the highly compensated, institutional like sales guys if you will, were able to sell some products outside of FX. In other words, have a little bit of a broader offering for their clients, and they manage -- its enough to move the needle, inside of the context amount that you're talking about. And that's something again, as you manage this expectation going forward, all the pieces make sense, and that's part of the levers there to say, hey, you want to make sure that you can rationalize all of these kind of comp schemes and organization. And some of it is leftover, and when the margins are there, then you don't necessarily go after it. When the margin or the opportunity isn't there, I am not saying that we are lazy, I am saying that you have to look at things in light of what's the current environment. So there is opportunity to make those more efficient. But to answer your question there, as Jason said, that's focused a little bit on -- that piece of it is focused on the product mix, on the CFD side, and spread that and things like that for institutional type like salespeople.

Patrick O'Shaughnessy - Raymond James

Got you. And then, as I am looking at your sales trader volumes for the quarter, it looks like your average daily volume was down about 23% quarter-over-quarter. So does that imply that sales trader revenue capture went up by a pretty substantial amount to result in more commissions paid to those guys?

Glenn Stevens

Yeah, that's correct. Some of that mix, that change to products non-FX can have that effect in certain markets, yes. This is probably as dramatic a dichotomy we have seen, where FX and kind of non-FX products were so different in terms of the revenue [indiscernible] that came out of it. Historically its not nearly as large as that, but this is a weird quarter on that one.

Patrick O'Shaughnessy - Raymond James

Got you. And then I apologized if I missed it, but did you guys talk about what percentage of your volume came from white labels this quarter?

Glenn Stevens

Well we have talked a little bit. We said that we're right about 50-50 in terms of volume coming out of direct and indirect business. And that's about [indiscernible]. We have gone 55-45 either way. Its presently around 50-50.

Patrick O'Shaughnessy - Raymond James

Got you. And historically, that percentage has been a pretty decent indicator for your referral fees? It seems like that relationship broke down a little bit this quarter. So how should we think about modeling out referral fees going forward?

Glenn Stevens

A couple of ways, number one, GFT acquisition did kind of make a structural shift in that there. Reliance on partner revenue was much higher than gains obviously. They were north of 85% coming out of that. And so, the way for us, to look at that first was to say, we have to go in there and look, the referral fees, number one, came out of GFT with a bigger reliance on partners. Number two, now when we say referral says, we have the futures business kind of baked into it. So it's a little different than the apples-to-apples.

So you're asking that question, how to remodel that now. The futures business, by design is a lower margin business. So as a percentage there, referral fees is going to go up. However, I think what's important not to complicate this, our OEC business in the past was 85%, 90% referral fee business.

The GAA, TT business is a more of a direct sale, and that's where we made the point in saying that our revenue per contract actually is going up, because that's direct, with less referral fees being paid out. And so one hand, I would say that overall referral fees go up because of futures. But that trend gets muted to some degree, because changing our futures mix with the acquisition in the last three months, now makes it a little bit more direct. So ultimately, I think where we were, probably stays pretty consistent, because of those offsetting effects.

Patrick O'Shaughnessy - Raymond James

Okay. Thank you. On GTX, so you guys announced during the quarter that you basically bough the remainder of the GTX technology that you didn't own. I guess I didn't realize that you didn't own it all to start with. Can you just talk about the history of how you came about that technology, and why you decided this past quarter to acquire the rest of it?

Glenn Stevens

I think the key takeaway there is, that there is a bit of a legal lease built into it, and that we didn't have it. We had a legal exclusive, we had a multiyear extended time exclusive license on the products, the pieces of it, the ability to build upon it, the ability to roll-out products beyond FX. And what we wanted to do at this time, was convert that into a full ownership of the IP.

So on one hand, it's a bit of a technical situation to say, operating wise, zero impact. Its more about ensuring about our future value, and to say, we got our staff approved. We started to put other products on to that platform, and ultimately decision was made to say, you know what, instead of even worrying about this license at all, convert it into an asset, and then be able to really go to town with it. I think what's key, it does bring about a little -- think about 10% of the fixed on that one overall, I mean, the license is helpful, because now the non-FX full range of products is something that's really key, because before, with FX-focused, now it's a set platform, and the technology, I think its key to be able to say, what else works in that environment, and so whether that's IRS forwards, options, what have you, we have no qualms about investing in it and building it out, because there is no reliance on license anymore. And I think ultimately in this case, the known difference in a license an owning the IP is pretty close when the license is written right, but to sleep better at night, when you own the IP.

Patrick O'Shaughnessy - Raymond James

Okay. Got you. That's helpful. That's it for me. So I will get back in the queue. Thank you.

Glenn Stevens

Thanks.

Operator

(Operator Instructions). Our next question comes from John Dunn of Sidoti and Company.

John Dunn - Sidoti and Company

Hi guys.

Glenn Stevens

Hi John.

John Dunn - Sidoti and Company

Just a quick question, do you see any geographic differences on the retail side, or the different regions evolve pretty homogenous?

Glenn Stevens

Geographic differences. No. I think on one hand, it's a fairly global phenomenon that the rate -- that doesn't mean different regions can't grow at different rates, but I think when you have a general impact of a market environment, it affects all people equally, and so one may have been growing for us, let's say China, its growing faster than the U.S. market, but if they both get muted on its financial impact to us, they both get muted. So in that respect, we don't see behavioral differences or impact differences, although there are different underlying growth rates and opportunities. And some of it has to do with just how long you have been in that market.

So in some cases, if we are a new entrant, then it grows differently, than if we are longer in the tooth there. But I will qualify that, or state it as saying, we don't look at this as one big market. A lot of our offerings are localized from a marketing perspective, product perspective, and even from an onboarding perspective. So not to mention, regulatory wise, you have to have a local presence in a lot of cases, which by the way, is another one of those scenarios, that's painful when you're doing it, and painful when you have to spend the money to be there. But when the market opportunity arises, its only those companies with scale, which by the way, are clearly becoming fewer and fewer globally. We are seeing lots of shops fold up their tent, and when you come out the other side, draw the parallel to the discount brokers on the equity side in the U.S., or draw the parallel sometimes in the retail banking business. When you have this cathartic movement of winnowing out the weaker players, you do end up in a stronger position later, when you're one of the few dominant providers.

John Dunn - Sidoti and Company

Got it. Thank you very much.

Glenn Stevens

Okay.

Operator

Our next question comes from Niamh Alexander from KBW.

Niamh Alexander - KBW

Hi. Thanks for taking my follow-up questions. If I could just go back to the expenses a little bit, the compensation, if I ask it this way, if the business mix is the same next quarter, Jason and Glen, as it was this quarter, are we looking at the same compensation ratio, which is just comps and that revenue for example is around 35% and its up quite a bit from last year. So when I was asking about the acquisitions you've made, I was just talking about the deals you've closed, and how they would have added to the compensation and the revenue hopefully too. So is this is a good ratio to think about, or is it a bit elevated, just because we are such a low revenue right now?

Glenn Stevens

That's exactly right. There are certain thresholds, such as, the example of paying somebody a $100,000 base. If they make no money, their salary to the revenue they bring in is really high. But if they are on a percentage deal even, as the revenue goes up, I know I am sounding obvious here, the answer to your question is, it is elevated, but that's part of that concept to say, okay, where do you want to be?

You could not have them at all, and then that base level of compensation, you know, even benefits in office space would go away, but you would also lose the operating leverage, when you have increases and then the delicate balance becomes well, how much capacity we are supposed to have? We are not in the voice business, with some of the inter-dealer brokers, and you have legions or who may be, we are never going to be able to utilize that capacity, and we have seen some cuts in those kind of scenarios.

For us, it's a much leaner situation, and absolutely 35% to look like some higher brow Wall Street shops that we are not competing with them, we are not pretending to be. But I think that, it very quickly reverses itself, with even a modest uptick in revenue opportunity, because you are not paying out 70%, 80% in comps, we are paying out much lower percentages.

Niamh Alexander - KBW

So what is a good run rate now, with the kinds of [indiscernible], because I know futures added too, just covering the futures brokers in the past, such as a different pair of structure? So is it a good run rate within the current mix like, maybe 30% in a kind of a more normalized revenue generating environment, or what's a good run rate?

Glenn Stevens

I think high-20s is a probably safer bet, historically, we were in low 20s, and so 22-23, we move that up, I would say on a longer term, 27-28. I mean, so yes, its higher than where it used to be, but that'd be blown out.

Niamh Alexander - KBW

Okay. Okay fair enough. And then just lastly, you mentioned on the deals, and I know there was kind of cash in addition to just the cash on the balance sheet with all the broker receivables and what not. But help me think about your appetite to maybe fund a deal with equity with your stock price here at these levels?

Glenn Stevens

The appetite is not huge. Our equity is absolutely too cheap right now, and so that's not going to be our favorite option, if you will, and so it doesn't mean its off the table, it doesn't mean it can't be a component of the deal. But it's certainly what we wouldn't lead with on that one, no. Under a different scenario and a different valuation multiple, I'd have a different answer for you, but its not our lead with that right now.

Niamh Alexander - KBW

Okay. Fair enough. Thanks so much.

Glenn Stevens

Sure.

Operator

Our next question comes from Patrick O'Shaughnessy of Raymond James.

Patrick O'Shaughnessy - Raymond James

Yeah, thanks for taking my follow-up. So I guess the question is, how do you view your weighted average incremental margins at this point? So obviously you have a different mix of businesses and the kind of change from quarter-to-quarter. But on an average basis, say for every dollar revenue that comes in, what do you think is the variable cost associated with that at this point?

Glenn Stevens

That's an interesting question.

Jason Emerson

Just with the mix of business that we have right now, it does fluctuate with the commission base business.

Glenn Stevens

That's something I think we have been targeting. I am trying to look at a longer time period to say, what doe the variable look like. There is a huge movement there, as you said, does it -- where does it come from? If it comes from retail, the number would obviously be a lot lower, than it if comes from a sales trader, or it if comes GTX. And if it comes from future, because its probably much more predictable, essentially you know what the pay structure is, as Niamh alluded to, with some of the other ones.

So the only thing here, Patrick is that, in some cases at lower levels, if you have a relatively standout quarter for small group, it can move the needle a little bit. Like we saw that with sales traders. It skewed the payout, and it skewed some of the comp ratio. Its not something we expect to repeat, its not designed to repeat, and so -- I think I'd have to think about coming up with a number for your frankly, but in terms of saying, predicting it per quarter, it can move around a little bit, at these lower levels.

At higher levels it doesn't, because retail ends up being a bigger piece and it smoothes it out. When retail is a smaller piece, like it was in this quarter, the other pieces like sales trader, can move the needle more.

Patrick O'Shaughnessy - Raymond James

All right. Got you. Thank you.

Glenn Stevens

Thanks.

Operator

And at this time, there are no further questions.

Glenn Stevens

Okay. Thank you for joining the call today, and we appreciate you following-up. Have a good evening.

Operator

Thank you. That concludes today's conference call. Thank you for attending today's presentation. You may now disconnect your lines.

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