Closer Look at Plus500's H1 Financial Results – Fundamentals Deteriorating?

Analyzing Plus500’s performance of its financial results today, Forex Magnates take a look at the broker's rising acquisition costs, expansion

CFD broker Plus500 issued its H1 financial results earlier today. The headline figures were a 138% increase in revenues to $106.2 million, with bottom line net profits rising 249% from the same period last year to $53.8 million. Earnings per share (EPS) amounted to $0.47, or about 28p, which annualizes at 56p and at a current price of shares at 510p, equates to a Price to Earnings (P/E) of 9.1. In early trading, shares have been jumping between up slightly and down a few percentages points. Compared to moves following other announcements from Plus500, today’s trading is at this point rather subdued.

Taking a closer look and analyzing Plus500’s performance, below are some of the key points of today’s release.

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Q2 Weaker Than Q1 – As written about earlier today, at $45.5M, Q2 revenues were 25% below Q1’s performance. On a year-over-year (YoY) performance, the numbers looked great, as they rose 82%. However, compared to Q1’s YoY tripling of revenues, Q2 results failed to continue the broker’s momentum. In its earlier Trading Statement in July, Plus500 had already warned that Q2 was “relatively subdued”. Beyond the topline figures, more worrisome is our next point.

Q2 Acquisition Costs Rise 72% – Possibly the most striking number from today’s results are average user acquisition costs (AUAC) rising 72% to $993 from Q1. A key driver of Plus500’s profit growth since going public has been their ability to raise average user revenues, while decreasing AUAC. Average revenue continued to be solid during the quarter at $1,117, only falling slightly from Q1’s $1,204 level. With volatility affecting volumes, the decline was well within line of trading activity. Two items may be at fault for the rising acquisition costs; increased spending to acquire customers during a slow period in the market (see last key point for more details), or the broker beginning to target more expensive but higher-end customers. While the latter is less of a problem and could provide longer-term profits, the former could trigger a rapid decline in profits during H2. To provide an answer, Forex Magnates contacted Plus500 but as of publishing time has yet to hear from the broker.

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Live Chat – Ok, perhaps launching live chat isn’t a big deal. But, for a firm that operates almost exclusively and doesn’t provide telephone support, beginning to offer live chat marks a change for the broker. Launching live chat may be related to acquisition costs, as the broker may be finding itself in a position where it needs to offer additional services to market to higher-end customers.

Expansion Through Possible M&A – Primarily focused on the UK, Europe and Australia, the Group stated, “Alongside growing market share in its core European operations, the Group is currently exploring a number of opportunities to build its brand and further extend market reach. The Group continues to explore expanding into the Asian market which has a vibrant CFD market alongside a substantial retail investor community.” On this, they added that they may become acquirers going forward in jurisdictions where Plus500 currently isn’t licensed. As such, it wouldn’t be surprising if we see them emerge as a buyer of one of the many smaller Japanese brokers.

Active Customers Decline – Part of any expansion would be related to how well they perform in their existing markets. In addition to an increase in acquisition costs, the second most striking detail of today’s report was the decline of active traders during the quarter to 38,652 from 50,438 in Q1. Attributing to the decline was a fall in new customers to 12,549 from 20,124 in Q1. On the surface, the numbers suggests that Plus500 is struggling to continue its previous growth and is facing more competition in acquiring customers. Possibly affecting them are rival firms who view their success and have begun to market similarly.

No Mention on Rising Costs or Declining Customer Levels – In providing its forecasts, Plus500 stated, “Current Q3 trading has continued to be strong and the Group is therefore confident of meeting market expectations for the year ending 31 December, 2014.” Overall, Plus500 is comparing itself to 2013 (for good reason) but didn’t provide many details on the Q2 decline from Q1, other than stating the quarter was subdued. While subdued explains a decline in activity, it does little to describe the rising acquisition costs and drop in active traders. Having stated that Q3 “has continued to be strong”, another similar quarter to Q2 would reveal that operationally it is becoming more difficult for the broker to continue its upward growth.

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