IG Group Holdings PLC

LSE:IGG

Earnings Call Transcript 2019-Q1

[Operator]

Ladies and gentlemen, welcome to the IG Group Q1 FY '19 Revenue Update. My name is Hailey, and I will be the operator for your call this morning. [Operator Instructions] I will now hand you over to Paul Mainwaring. Please go ahead.

[Paul Richard Mainwaring, CFO & Executive Director]

Thank you. Good morning, everyone. Thank you for joining the call. You've seen today, we have issued our scheduled Q1 revenue update, giving you the revenue for the first quarter of our FY '19 financial year compared with the first quarter of FY '18, with a couple of metrics update on where we are with professional clients. And this period also covers the first month of the ESMA measures relating to CFDs coming into effect from the 1st of August.A short statement, I'm sure you've read it, so Liz and I are happy to take any questions.

[Operator]

[Operator Instructions] The first question is from the line of Haley Tam of Citi.

[Haley A Tam, Managing Director]

Two questions, please. First of all, in terms of more than 50% of revenue coming from professional clients in Q1, I just wondered whether you had an expectation of that number to go up from here. And then secondly, given that shift towards professional clients, I just wondered if you could help us understand the fall in revenue per client for the EMEA clients year-on-year because I would have expected maybe that to go up, like the U.K. one did.

[Paul Richard Mainwaring, CFO & Executive Director]

Okay. So on the 50% from pro, as you remember, we've always looked at the historical revenue and said at the end of the period, taking into account those clients who are professional at the end of this period, how much revenue came from those professional clients that has, as you know, has been growing over the course of the last few months as more people have opted up. The extent to which it continues to grow will also depend upon how many new retail clients we onboard and the level of trading that our retail clients undertake. So that wasn't a -- that isn't a metric we're going to make a judgment on. But we clearly have got the significant part of our revenue safe harbored through professional clients. On the second question about the revenue per client, I mean, revenue per client clearly does depend upon a number of factors, including the level of activity that clients undertake. And there is no doubt that this quarter has been a more quiet quarter than its comparable period. The reason why the revenue per client is lower in EMEA relative to a small increase in the U.K., I think, largely reflects the fact that, as a proportion of the U.K., there are more professional clients than we have in EMEA.

[Operator]

The next question is from the line of Alistair Ross with Investec.

[Alistair Guy Ross, Research Analyst]

Paul, just a quick one on the back of that first question. In terms of 50%, I mean, what does it look like in the last month? I mean, that was over the last quarter, it feels like it should be well over 50% and probably trending upwards. So if you can comment on that, that would be great because, clearly, I think everyone is focused on that number. Secondly, just in terms of crypto, I think Q1 '18 was a fairly quiet quarter, but Q1 '19, it feels like it might be even quieter than Q1 '18 in the terms of crypto. How is that trending? And what is the expectation for the rest of the year? It feels like that's fallen off a cliff and isn't due to come back. But if you could comment on whether you've lost those customers, whether they might be trading other products, et cetera, whether they've lost all their money and, therefore, they're not trading anything? And then the last one is just on the 10%, you comment on the reduction of approximately 10% on historic revenue. If you could just comment on mitigation, clearly you guys have looked at mitigation in the past, stating sort of the 6 points of mitigation at the full year results. Clearly, is the 10% pre or post mitigation? And what should we expect in terms of mitigation if you've got -- if you can comment on that, I'm pretty sure you probably can't.

[Paul Richard Mainwaring, CFO & Executive Director]

Okay. So let's take those in turn. Let's take the professional clients, the proportion of our revenue in the U.K. and EU that came from professional clients in the period after the ESMA measures were introduced was well in excess of 50%, reflecting the impact of the reduction in the volumes undertaken by retail clients. That's absolutely right. There's another metric that we use, which is just looking back at the period prior to the introduction of the ESMA measures, and it was 50% for that period. So I mean, I do appreciate everyone is focused upon that. We are rather hoping that we'll stop using that reporting, and we'll simply have to disclose the impact -- or the revenue that comes from pros and the revenue that comes from retail, which I think we are unlikely to move to in the future. On crypto, there was more crypto revenue in Q1 FY '18 than in Q1 FY '19 by about GBP 4 million. Look, as we said many, many times, it's really not appropriate to try to read a trend from looking at what happens in 1 particular part of 1 asset class. But clearly, the excitement and the load of opportunities for clients to trade cryptocurrencies is lower now than it was. And we expect that the run rate that we've got for now is likely to continue. Unless factors change in crypto, I can't see that, that would change significantly. So we are going to be reporting against some periods where the level of revenue related to crypto trading by clients was much higher in Q3, but clients will trade what's interesting. And at the moment, despite all the world events, the markets are generally less interesting for clients than they were this time last year. But as ever, there will be times during the year when it will be more interesting, so we'll have to wait and see what happens with that one. On mitigation, look, there's a number of things that both the clients can do and that we are doing. Our product innovation has not yet really had any significant impact, but there are a number of things you know we're doing that will come live largely in the second half of the year. In terms of what clients do to mitigate the impact upon them, that's really why we're saying it's not possible to draw firm conclusions because it's going to take a little while for clients to fully adapt, fully adjust to the ESMA measures and we see what clients do in response. We need a little bit more data to really be able to be -- get to draw a firm conclusion from what we think clients are going to do.

[Alistair Guy Ross, Research Analyst]

And just in terms of that, so things have come live in H2 '19, are you referring to self-help in terms of MTF and U.S. retail FX?

[Paul Richard Mainwaring, CFO & Executive Director]

Yes. U.S. retail FX, we expect to come live. We hope that the MTF will be live by the end of the financial year. And we've got a number -- as always, we're always looking at all 3 new markets to climb and interesting and innovative instruments through which they can trade. And we will be launching different -- the new types of products during the year as well.

[Alistair Guy Ross, Research Analyst]

And just in terms of that run rate for crypto, because just for the week in week and sort of modeled the 36 falling to X, if we do take a run rate, what is the run rate revenue? Or what is Q1 '19 crypto?

[Paul Richard Mainwaring, CFO & Executive Director]

I'm just going to find my -- yes, I mean, I think I would expect that our crypto revenue, if I were to extrapolate Q1 FY '19, would be about GBP 10 million.

[Operator]

[Operator Instructions] The next question is from the line of Anthony Da-Costa of Peel Hunt.

[Anthony Da-Costa]

So 2 questions, if I may. The first is on sort of client numbers. If you could just give us some more flavor about sort of the fall and what sort of is leading -- or the attribution of the fall? I'm assuming, obviously, that it's [ got ] to crypto and sort of retail obviously going down potentially. And then second question is on retail client behavior. I know it's still early, but what sort of behaviors have you noticed in the last month?

[Paul Richard Mainwaring, CFO & Executive Director]

Okay. So on private client numbers, what we show is the number of clients who were active in the quarter. So that's not an indication of the number of people who could trade, it's the indication of the number of people who have traded. And we do find that when there are fewer opportunities in the market that clients are interested in, they -- we tend to see lower client numbers as well as lower revenue per client. So there's no particular trend that we would draw from that. We have recruited a new client to a similar level to the past in the quarter. I think that, that is a reflection of just having the opportunity -- of what opportunity clients could see in the market. And remind me of the second question.

[Anthony Da-Costa]

The second question is, what sort of retail client behavior have you seen since August? What are they doing? Are they sort of posting more margin? Are they just sort of leaving things as it is? What behavior has sort of been shown so far?

[Paul Richard Mainwaring, CFO & Executive Director]

Well, that's where we are not yet drawing our conclusions because we think it will -- it would be -- we're likely to be incorrect if we simply take the behavior of clients in August. So I mean, one factor is that there are some retail clients who were unable or unwilling to wish to elect to be a professional. And some of those clients have taken action by opening accounts with other entities in the group. It's too early for us to say or to -- and to set out what retail clients contracting to EU and U.K. entities have done. We think we need another month -- a couple of months of data to be able to be clear.

[Anthony Da-Costa]

And was there a noticeable uptick in sort of client inquiries to turn to professional following the rules just because they would have seen the impact?

[Paul Richard Mainwaring, CFO & Executive Director]

I don't actually have the application numbers in my head or in front of me, but there certainly was an increase in applications for people to elect to be a professional in the immediate run-up to the rules becoming effective. And we continue to see a steady stream of applications.

[Operator]

The next question is from the line of Paul McGinnis of Shore Capital.

[Paul McGinnis, Research Analyst]

It's kind of a question along sort of similar lines. Sorry, I did join the call slightly late, so apologies if this has been asked already. But within your minus 10% like-for-like guidance, sort of within that was a figure specifically for retail clients who don't or can't convert across of minus 34%. It might be that because August is such a short period that you don't want to say whether that has or hasn't proved to be a reasonable stat so far. And then just added onto that, is there anything so far that has surprised you either positively or negative as a group since 1st of August?

[Paul Richard Mainwaring, CFO & Executive Director]

You're right about the 34%. For those who aren't aware or familiar with that, in the Capital Markets Day presentation within the regulatory landscape section, that is set out on Slide 13 of that section, which is on the website, for those who want to see the calculation. And you are right that we are not yet drawing conclusions about the 34% relative to what happened in August. Either way, we want to get more data to be able to understand what that -- what we really think is happening there and to be able to draw a firm conclusion. And the answer to the second question is no, I'm -- nothing -- really, we expected what's happened. I mean, we always anticipated that there would be a reduction in the level of trading undertaken by retail clients, hence the 34%. But the 34% is not measured on 1 day or in 1 month. It's measured as the impact that we think would have happened to a historical period, and we just simply have not got enough data. And we also have to try to disentangle the effect of market conditions and opportunities to trade, and we just have not got enough data yet to be able to ascertain where we are with that. I mean, this has been a quieter period generally, down last year. And we're going to need a bit more data to be able to give you a better understanding of what's actually happened as a result of ESMA.

[Operator]

The next question is from the line of [ Arathy Nair ] of [indiscernible].

[Unknown Analyst]

This is [ Arathy ]. So I just had a couple of quick questions. My -- the first one I wanted to get across was, are you looking to focus on any other geographies given the trends in EU and U.K.?

[Paul Richard Mainwaring, CFO & Executive Director]

Yes, absolutely. I mean, we are a global business. Because of the regulatory -- or the changes in the regulatory landscape, we have spent an awful lot of time talking about the U.K. and EU for the last -- for the past couple of years. We have a very successful business in Asia Pacific, which we continue to focus on developing. We are -- we will open our U.S. retail FX business, I think, early in H2, I think is our expectation. And we continue to look for opportunities to market our product where we have the license and it's correct to do so in other territories around the world. And we establish separately regulated legal entities in places like Switzerland and in Dubai or in South Africa. So we're always looking to expand our services toward the geographies where we think it's suitable.

[Unknown Analyst]

All right. Perfect. And just on Brexit as well, I see that the license of the German subsidiary has been received. And I was wondering, are you taking any other measures, are you prepping in any other way, besides the subsidiary, of course, for Brexit?

[Paul Richard Mainwaring, CFO & Executive Director]

In terms of how we operate the business, having a subsid within the EU, because currently all of our European business -- all our EU business, I beg your pardon, is conducted through IG Markets, which is a U.K. legal entity through the passporting regime. So the purpose of the subset in Germany, so our clients can contract with an EU headquartered subsidiary. That's the main issue that we need to deal with. And just to be clear, we've received the license in principle. It's subject to us satisfying 3 very standard conditions. So it will happen -- we haven't actually got the license yet and the subsidiaries aren't yet open. But that's our Brexit action. That's all that we think we would need to take. Obviously, in the event of a hard Brexit, whatever that might mean, there may be some other actions that we choose to take, but we're not planning on that right now.

[Unknown Analyst]

All right. Sorry, yes, what sort of other actions could we see? I'm trying to get a sense of what these are.

[Paul Richard Mainwaring, CFO & Executive Director]

Well, we have all kinds of different contingencies that we could operate with. We have our strategy in place so that we have an EU subsidiary for clients to contract to. If we find that we want to move existing clients, then that's one of the contingencies we might choose to take. It will absolutely depend upon -- the range of the action or depth of the action will depend upon the terms in which we leave.

[Operator]

[Operator Instructions] The next question is from the line of Ian White of Autonomous Research.

[Ian White]

Just a simple one from me, please. Previously, you've given some sort of a heads-up on sort of the where you see the regulator going next in terms of what's on ESMA's agenda. Are you able to give us any color at this stage? Presumably, the expectation remains that the leveraged trading restrictions will be renewed. And I think you said previously, you expected the regulator to conduct a deep dive on pro client classification. Is there anything further to say there, please?

[Paul Richard Mainwaring, CFO & Executive Director]

No, none of that's changed. We are certainly planning on the basis that the -- that these measures are in effect on an ongoing basis, whether that's through ESMA rolling the product intervention measures or through individual NCAs within the EU adopting them in their own rulebook. But we are expecting that this is the environment in which we will be operating. And no, we're not aware of anything else that ESMA might do. We do expect that our supervisors in the National Competent Authorities will, as they do on a regular basis, undertake reviews of how we are conducting our business. And we think that one of those is likely to be a review into how we have gone through the process of reviewing client applications to be professional, and we would expect that to be the case. We're not aware that they are going to do that, but we would expect that it's likely they want to do.

[Operator]

The next question is from the line of Ben Williams of Liberum.

[Benedict Guy Williams, Research Analyst]

A super-boring question. Mr. McGinnis referred to your Slide 13 at some Capital Markets Day presentation with the minus 34% number. Can you just remind us how much of that is binaries, please?

[Paul Richard Mainwaring, CFO & Executive Director]

It's inherently included within it. We never -- we haven't actually split out the effect of not offering binary before within that 34%.

[Benedict Guy Williams, Research Analyst]

And I seem to remember that you said that they were just under 5% of revenues in the previous full fiscal year. Is that right?

[Paul Richard Mainwaring, CFO & Executive Director]

For which geography?

[Benedict Guy Williams, Research Analyst]

I think that was a group number.

[Paul Richard Mainwaring, CFO & Executive Director]

Yes. So the binaries and options revenue that we disclosed would cover the world. If you're looking at the asset -- the revenue by asset class disclosure that we've done, that options revenue is for the world rather than just the U.K. and EU. I mean, look, the withdrawal of binary options to retail clients, it's not a big deal. I mean, it's nothing like as significant as the regulatory restrictions.

[Operator]

[Operator Instructions] This concludes our question-and-answer session. I would now like to turn the conference back over to the presenters.

[Paul Richard Mainwaring, CFO & Executive Director]

Thank you, guys, all very much for joining. As ever, if you have any further questions or follow-ups, do please get hold of Liz.

[Liz Scorer, Investor Relations Officer]

Yes. I'm around all morning.

[Paul Richard Mainwaring, CFO & Executive Director]

All morning. And thank you.

[Liz Scorer, Investor Relations Officer]

Thanks all.

[Operator]

Ladies and gentlemen, this concludes today's call. Thank you for joining. You may now disconnect. Goodbye.