FXCM posted its Q3 2014 financials after the close last Thursday. Top line revenues were $116.1Mln, up 19% from Q2 and 3% from the same period last year. Bottom line adjusted net income was $8.4Mln or $0.11 per fully diluted share versus Wall Street estimates of $0.10. Despite the earnings beat and revenue growth, shares closed lower on Friday closing the day down 5.1% to $15.81.
Affecting shares were comments that with the recent spread cuts, revenues per million dollars traded will decline, as well as the overall lack of FXCM providing clarity going forward about earnings. The goal though is that overall revenues will rise due to cost cuts and increased trading volumes with the new spreads.
Today we take a look at some of the important details covered during the firm’s post earnings report conference call.
M&A Was so Last Year…Now We Have $50Mln Buybacks: One of the outcomes of an improved trading environment, in which FXCM posted back-to-back record monthly volumes and exceeded $500Bln in total retail activity in October, is that everyone else is doing better. The result is that valuations have improved thus trumping any of FXCM’s numerous bids they have been relating to shareholders. During the call, FXCM CEO, Drew Niv and CFO Robert Lande basically threw in the towel on doing an impactful deal. Instead, there was the announcement of a $50Mln share buyback which relates to them not seeing any available deals in the market, and that purchasing shares would be the best use of their cash hoard to improve shareholder value.
GAIN Capital vs FXCM: Last week when reviewing GAIN Capital’s purchase of City Index we commented :“It’s worth noting that the offer wasn’t made by FXCM which has been very public about it being in talks with several parties, and we can assume had been in discussions with City as well. Yes, GAIN and City do have a past of working together, but why GAIN as acquirer makes more sense than FXCM is due to the vast majority of City Index customers trading on proprietary technology.”
During FXCM’s conference call, Niv brought up this point where he stated that they weren’t only eyeing deals that were accretive but where the acquired accounts were on a generic platform like MetaTrader 4, reducing client attrition levels. In relation to City Index he basically referred to City Index being worth more to GAIN Capital than FXCM as they are willing to operate numerous proprietary platforms. In any event, as mentioned last, the deal revealed the different business models the two firms were taking.
Cost Reductions: In their Q2 report, FXCM noted that if they couldn’t execute any notable acquisitions they would focus on cutting costs. That was quite apparent during the Q3 call as it was attributed to numerous initiatives. About the decrease in spreads in select markets and increase of account minimums, Lande stated, “We have determined that smaller accounts are just not worth it for us,” as he explained that there are the same compliance costs for both small and large. The smaller client base allows for reduced workforce of which the headcount has decreased by 3% with compensation reduced by 5% from Q3 2013.
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Reduced Spreads, Reduced Revenue Capture: According to FXCM, the reduced spreads that were initiated were expected to be rolled out to 30% of their clients. The result is that revenue capture of every million in retail dollars traded is expected to decline from $88-$92 to $75-$80. The goal is that the revenue capture decline will be mitigated by increased trading. In a small sample base, it did place the US’s month-over-month volumes growing 50% in October versus around 20% in other regions.
The question though is whether competing on price will now make them vulnerable to continue on pushing prices lower. Niv answered that pricing was a bigger factor for clients in low volatility markets, but less important in active climates. As such, they are positioning themselves for additional low volatility, but view themselves well placed at slightly above InteractiveBrokers (IB) but below GAIN Capital. However, they don’t view themselves competing against IB because of their value adds they provide to customers.
CFDs: One area that FXCM hopes to make up some of the lost FX revenue capture is through CFDs. In this regard, CFD volumes grew to 29% of all volumes versus 21% in Q1 2014. The broker hopes to increase this figure in 2015 with the introduction of single stock CFDs in Europe to be offered on an agency basis. If you want a state of the day of the money FXCM is leaving on the table in Europe, Niv has stated that 80% of revenue from Germany is from CFD trading. Therefore, as compared to other markets, CFDs are the more important product on a marketing aspect than forex in Europe.
FastMatch Growth: FXCM always dedicates a portion of its calls and investor presentations to discuss its intuitional business, such as with Lucid Markets and FastMatch. This time around they were especially focused on FastMatch, stating that volumes on the platform have risen to around 30% of activity taking place on Hotspot and 10% of that on EBS, Reuters and the CME. The volumes compare to 13.1% of Hotspot during Q1 2013. At $30Bln in average daily volumes during Q3 at Hotspot, this equates to just above $9Bln at FastMatch.
Speaking about FastMatch, Niv added this nugget, “We feel we are building a valuable asset here.” Our take is that with Hotspot now in play and potentially valued at $300Mln (authors note: expect a final value close to $400-$500Mln), FXCM is touting their stake in FastMatch to increase valuation calculations of their stock, as well as encourage feelers of what it would be worth if sold. Depending on what price Hotspot fetches, if it is in fact sold, it could trigger an immediate price move in FXCM.
China Growth: Last but not least, one region where FXCM isn’t cutting costs, and is actually increasing spending is in China. The country accounts for 20% of volumes, with Asia representing over 50% of FXCM revenues. Part of the appeal in China is that unlike in the West, compliance expenses remain low, thereby providing cheap costs of business per client. Taking advantage, FXCM has expanded its Chinese operations to include 24-hour support, local representations, Chinese language dedicated trading analysis, as well as increasing its marketing budget in the country (website operators have backed this up to Forex Magnates mentioning to us that FXCM is one of the most aggressive brokers campaigning in the country). Our view is that FXCM sees China as a massive land grab in which the existing cost advantages won’t always exist.