FXCM Inc Conference Call Review: Huge Business Shakeup Coming

After FXCM Inc (NYSE:FXCM) reported its earnings and trading volumes figures yesterday, the company’s CEO Drew Niv and CFO Robert Lande have taken to the earnings call. FXCM’s senior management revealed crucial details about the company's future plans after the dramatic events of the 15th of January.

The main takeaway from the earnings call is that as expected, there will be a major restructuring of FXCM Inc's (NYSE:FXCM) business in the coming months. The company’s CEO Drew Niv outlined that aside from selling its institutional businesses, which was already clearly communicated by the firm, it intends to part with its FXCM Japan and FXCM Hong Kong subsidiaries.

In the aftermath of the Swiss National Bank’s decision to scrap the floor under the EUR/CHF, FXCM Inc (NYSE:FXCM) was forced to shore up its balance sheet. The company was forced to recapitalize, signing a $300 million loan agreement with Leucadia National with a starting interest rate of 10%, growing by 1.5% each quarter.

Revision of Losses from January 15th and Sale of FXCM Japan and Hong Kong

Estimated losses from the Swiss National Bank's induced Volatility Volatility In finance, volatility refers to the amount of change in the rate of a financial instrument, such as commodities, currencies, or stocks, over a given time period. Essentially, volatility describes the nature of an instrument’s fluctuation; a highly volatile security equates to large fluctuations in price, and a low volatile security equates to timid fluctuations in price. Volatility is an important statistical indicator used by financial traders to assist them in developing trading systems. Trad In finance, volatility refers to the amount of change in the rate of a financial instrument, such as commodities, currencies, or stocks, over a given time period. Essentially, volatility describes the nature of an instrument’s fluctuation; a highly volatile security equates to large fluctuations in price, and a low volatile security equates to timid fluctuations in price. Volatility is an important statistical indicator used by financial traders to assist them in developing trading systems. Trad Read this Term on the currency markets have increased to $276 million from the initially reported $225 million. This figure matches the net proceeds which FXCM Inc (NYSE:FXCM) got from the Leucadia National loan agreement.

The company’s CEO, Drew Niv, highlighted during the earnings call that the firm intends to make significant reductions in its obligations to Leucadia National through the sale of non-core assets. The main surprise from this statement is in the details, as the CEO of FXCM Inc (NYSE:FXCM) stated that the firm decided to exit its business in Japan and Hong Kong.

Speaking during the earnings call, Mr. Niv said, “We have decided to exit the Japanese and Hong Kong retail markets selling our locally regulated subsidiary in each country. The sales will not only generate meaningful proceeds, but will also liberate over $50 million of cash which currently resides in these two entities.”

“We have multiple bids for each subsidiary and are seeing significant competition for these properties. We are in active discussions to select the best bid and move towards closing in the near future,” he explained.

From the $50 million which Mr. Niv mentioned, $22 million in cash lie on the balance sheet of FXCM Japan, while the remaining $28 million are in the Hong Kong subsidiary of FXCM Inc.

The company's CEO Drew Niv stated, “We believe that the sale proceeds plus cash freed from the balance sheet of these entities could exceed $250 million, which would go a long way towards repaying if not fully repaying the Leucadia loan.”

The total EBITDA from the Japanese business of the company in 2014 was $6 million on a non-GAAP basis. Back in 2011, FXCM Inc (NYSE:FXCM) paid $5 million for GCI, which had 17,000 accounts and $110 million in equity. Later that year, the firm took over Foreland paying $17 million for the aquisition.

Considering the lucrative Japanese market and the expansion appetite of many companies to acquire businesses in the region, the sale of this unit could net FXCM somewhere between $40 and $50 million.

The Hong Kong unit of the firm generated about $2.5 million in non-GAAP adjusted EBITDA in 2014. The jurisdiction and the lack of wide media coverage of the Swiss National Bank conundrum which FXCM faced, likely saved the value of the brand and clients continued to hold their accounts with the brokerage.

The main proceeds from potential sales will come from the non-core business of FXCM Inc (NYSE:FXCM). Back in 2012, FXCM acquired Lucid Markets for $176 million, with the estimated total costs of the investment totaling $192 million.

Considering the pressure under which FXCM is to sell its institutional business, and the outflow of institutional clients from FXCM, the company is not likely to recover its investment in this business.

The other big institutional business of FXCM, FastMatch, has experienced dwindling volumes in the aftermath of the Swiss National Bank debacle leading to decreased volumes.

FXCM owns 35% of FastMatch and the stake is on the sale list of the company alongside its high-frequency trading investment in V3. The company paid around $16 million for a 50.1 percent stake in V3, with the rest of the unit owned by Lucid Markets.

Retail Revenue per Million Drops to $69, Clients to Choose Dealing Desk or Not

The retail revenues per million (RPM) which FXCM reported for the fourth quarter of 2014 totaled $69. This is $1 below the estimate which the company made in its previous earnings report.

In order to optimize its RPM, FXCM Inc (NYSE:FXCM) has announced that it will be returning the dealing desk model for clients with equity below $20,000.

The company’s CEO Drew Niv said during the earnings call, “To accelerate growth in our core business we will launch a hybrid desk model for small retail FX accounts. These are accounts with less than $20,000 of deposits. While these accounts maybe large in number, they still represent much less than half of our trading volume.”

FXCM Inc aims to balance between dealing desk and agency model execution in order to maximize its RPM. The brokerage will present a choice for clients between higher Leverage Leverage In financial trading, leverage is a loan supplied by a broker, which facilitates a trader in being able to control a relatively large amount of money with a significantly lesser initial investment. Leverage therefore allows traders to make a much greater return on investment compared to trading without any leverage. Traders seek to make a profit from movements in financial markets, such as stocks and currencies.Trading without any leverage would greatly diminish the potential rewards, so traders In financial trading, leverage is a loan supplied by a broker, which facilitates a trader in being able to control a relatively large amount of money with a significantly lesser initial investment. Leverage therefore allows traders to make a much greater return on investment compared to trading without any leverage. Traders seek to make a profit from movements in financial markets, such as stocks and currencies.Trading without any leverage would greatly diminish the potential rewards, so traders Read this Term options with dealing desk execution and agency execution with lower leverage.

Following the announcement, shares of FXCM Inc (NYSE:FXCM) traded up 15% in pre-market trading on the New York Stock Exchange at $2.48.

FXCM Q4 2014 Earnings Presentation