FXCM Q1 Earnings, Post Conference Call Review

Following their earnings report, FXCM held its conference call presentation. You can check out the entire transcript of the call here. Below are areas that were of focus in the prepared presentation and Q&A session.

Revenues per million: Although Q1 2013 retail volumes were record breaking for FXCM, revenues were below 2012 levels. This was due to a drop in ‘retail revenue per million’ from $94 to $88. The decline brought the figure below $90-$100 level, which FXCM has stated on multiple conference calls as where they expect revenues per million to fall. CEO Drew Niv attributed this decline due an increase in volumes originating from Japan which has lower revenues per million as well as a higher proportion of yen volumes “ which saw a decline in the pip conversion from prior years when the Yen was worth more money.”

OptionsXpress : FXCM announced that optionsXpress, a division of Charles Schwab, had become a white lable partner of theirs. In terms of White Labels , beyond the ones that were announced, such as with ETrade and Barlcays, Niv said that they had more in the pipeline. He added that the existing partnerships are beginning to contribute.

Institutional Business: As written yesterday, FXCM’s record quarterly revenues were driven by its institutional trading division. The unit was boosted by the acquisition of 50.1% of Lucid Markets. FXCM stated that Lucid achieved $361,000 in daily revenues during the first quarter which was 39% above Q4 2012 levels. During the Q&A, it was asked whether Lucid would be affected by potential changes at EBS or other firms to curb high frequency trading. Niv answered that it would be beneficial for Lucid as they aren’t the fastest ECN participants. He also pointed to Lucid’s 43% and 31% growth in trading at EBS and Thomson Reuters respectively, which shows they haven’t been hampered by changes that were enacted during 2012 at those venues.

Dealing Desk is a dud: The dealing desk account offering with lower spreads that was launched last year continues to be growing slowly. Niv stated that only around 1 of 10 new clients are choosing it.

Cash Flow : As in the past, FXCM has made an effort to highlight that investors should focus on cash flow. In that regard, FXCM posted $33 million in after tax cash flow during Q1, a 136% increase from Q1 2012. CFO Robert Lande commented on the cash flow importance “Our near term focus will be to reduce debt level somewhat but you can expect us to start ramping up returning capital to shareholders shortly through share repurchases and potentially dividend increases.”

Organic Growth/Caution: During the quarter FXCM experienced organic growth taking place in Japan and China. However, Niv on more than one occasion pointed out that despite an increase in Volatility ; we are still around five year lows. As such, while the broker is positioning itself to be present in areas experiencing growth, they are still being cautious. Niv explained “we believe our best strategy to increase shareholder value is to increase the scale of the company and sizing geographic reach, while well diversifying our sources of revenue,” thus indicating they will continue to be searching for opportunistic M&A deals.

End of Principal Model: It’s not the first time it was mentioned, but Niv once again stated that he was skeptical that single dealer market making in retail FX would continue to be permitted by the major regulators. FXCM obviously has a vested interest in this, but their theory is that Dodd-Frank regulations are forcing more institutional trading to be conducted on multi-bank platforms. Therefore, it’s only a matter of time before this becomes a reality in retail FX. In the Q&A, Niv added that it was a “virtual certainty” that agency business will become mandatory among major regulatory jurisdictions. He also said that he imagined some firms with a principal model would make the switch, but others wouldn’t be able to survive; which fits in their theme that they see consolidation continuing.

Trading Breakdown: FXCM didn’t provide specifics, but Niv mentioned that EURUSD trading composed around 40% of volumes in 2012. In 2013, yen crosses, specifically GBPJPY, EURJPY, and the USDJPY account for between 50-60% of volumes, with the three pairs being the top three pairs traded during many days. Therefore, Niv explained that FXCM’s retail division was going through a shift in their trading activity which could continue to depress their overall revenue per millions number. Also, taking a look at these figures, it suggests that if FXCM were to strip out their Japan and China growth, overall trading may be stalling or in decline.

Q1 2013 Earnings Presentation