flatexDEGIRO AG

Hello and welcome to FLATEX DeGiro Analyst Call. Please note this call is being recorded and for the duration of the call, your lines will be on listen only. However, you have the opportunity to ask questions. This can be done by pressing star 1 on your telephone keypad to register your question. If you require assistance at any point, please press star 0 and you will be connected to an operator. I will now hand over to your host Frank Niehage, CEO of Flatex DeGiro, to begin today's conference. Thank you.

Good morning, everyone. A warm welcome to our Q3 earnings call. I'm here with my colleague Mohamed Shahroor and Achim Schreck. Like always, I will do a short brief introduction and then I'm happy to hand over to Mohamed to run you through the presentation and the details. Let me start as follows. Needless to say that we are in tough times and that the geopolitical situation here in Europe, as well as the fear of recession and the inflation and the interest hikes are very, very challenging for our industry. However, we are happy to present solid financial and operational performance in Q3. I'm happy to mention that the revenues are positive up 4.3%. The increase of revenue per transaction is even up 6.5% versus last year Q3. And thereof, no surprise, the EBITDA is positively up 25% versus last year's Q3. And therefore, we will continue to stay with the guidance of at least 400 million revenues. And we are confident that the fourth quarter is going to be financially even better than this one. Let me highlight a few things before we shift gears and go into details. I'm happy to report that we are on top of things and do well with respect to our cost management. and you will see an even stronger effect next quarter and although we are talking about very challenging times there's also a flip side of a coin there is positive elements with respect to the interest environment what does that mean many many years we didn't earn in treasury with respect to our deposits and we even had to deal with negative interests And after ECB has increased positively to 0.75, obviously within the next weeks, we're going to expect further increase in interest. And that obviously has a very positive impact of our treasury situation. And Mo will talk about that more in detail later. But overall, we expect for the next 12 months a positive increase. The effect of up to 50 million provided that the expected interest rates increase is going to happen as everyone believes. Further, there's additional income due to several management measures taken by us. For instance, we've increased at Digiro the charges by 50 cents per transaction and that is going to have a positive effect already in Q4. but even more positively obviously next year. Second, we have enlarged the offering of our credit product, our security credit product at Digiro, where in the past literally only 10% were technically able to use that credit product. Now it's going to be enlarged to almost 100% of our clients and obviously More we're going to talk more about the details and what the expectation of the usage is going to be. And third, we have enlarged our ETP offering, which in the past was restricted to Germany and the Netherlands. And now we're going to offer it in three more countries in Europe. And that will also have a slight effect in Q4, but an even bigger one next year. And last but not least, we have started a program, Member Get Member, and the first days already show positive effects, and that's going to be more affected in the last quarter and then obviously for next year. So all in all, there is, from our side, positive elements here to highlight and mention, and although the environment is quite challenging. We will prove how solid our financial and operational business model is. And let me highlight three more events which have happened this year. As I mentioned already, the increase in charges at D0, but we also waive negative interest obviously for our clients when ECB stopped charging negative interest and we do quite well with respect to our sports sponsoring. Beyond the fact that we have Borussia Mönchengladbach advertising our brand Flatex, we also now do the main sponsoring with Sevilla and we use for the international business De Giro trademark and this obviously will help to increase brand awareness very positively and keep in mind that when we started two years ago until now we have a 300% increase in brand awareness so the sports sponsoring does work well in this respect and we are positive to see that not only in Spain, which is our third largest growth market or third largest market, but also internationally. This is in a nutshell what I would like to highlight and please allow me one more thing. Don't be surprised if in the future we will no longer forecast trade numbers and client numbers. Obviously, we're still going to report that, and it's important to us, but we will stop forecasting, and the explanation is quite obvious in those times and in an environment with a geopolitical situation and inflation and recession fear. We rather focus on what we can control, and this is our financials, and this is very positive. And this then brings me to hand over to Mo. Mo, please, the floor is yours.

Thank you, Frank. Good morning also from my side. Today's conference call and earnings call. I'm happy to go directly into the highlights of the last quarter and happy to run you through a bit of additional information to give you a better understanding of the development, not only in the last quarter, but also looking forward to the Q4 and to next year. The revenue development has been reported already yesterday. We've been 4% up quarter on quarter compared to last year's quarter. Compared to last quarter, so Q2 2022, we are almost flat of 300,000 euros in revenues. Obviously, there is an impact given through the release of provisions with respect to the long-term incentive plan. And since I expect also questions towards this topic. The release has happened due to two factors. The first factor, as you know, the long-term incentive plan is based on two factors, share price and EPS, expected EPS over the next years. Since both have been adjusted, or the share price has decreased and the EPS consensus has been adjusted, there is actually this effect also. The release of provisions is considered under other income. explains also the development operationally still very strong water with respect to with respect to revenue per trade and I remember when we when we started after we took over the hero we kept promising and I kept promising that there is there's a big chance to rebalance DeGiro set up between profitability and growth. We managed now over the last 12 months to continuously increase the revenue per trade by 7%. We promised the sustainable revenue per trade of above 5 euro. It's actually the fourth consecutive quarter with the revenue per trade of above 5 euro. And they are, or this development is mainly driven obviously by the De Giro measures that we took over the last 15, 18 months. On a nine-month comparison, the effect is even more significant, as I said, especially given the fact that since the beginning of this year, the changes in the De Giro pricing have kicked in in the first step. In the second step, since the first of September, We have increased the handling fee on the DeGiro side by 50 cents. We will come later to this point to explain in detail the consequences of this measure. Given also the development of revenues for trade, there is a slight decrease between Q2 to Q3 with respect to revenues for trade. The reason here for is also to be very clear and transparent. The reason here for is mainly that the trade mix has slightly changed. Give you also here a little comparison and a little bit of data. In Q1 2022, for example, we had 74.7% in high revenue trades. We consider equities and ETPs to be high revenue trades. And in Q3, the number is 72.7%, which is obviously roughly 4% decrease, and that decrease is also reflected in the revenues portrayed. But despite this change, still we are very happy about the revenue portrayed generated by our business model. An increasing revenue per trade. We'll come in a second to the trade activities. Despite dropping trading activities flat compared to Q2, but plus 25% compared to last year's same quarter. Very solid. Obviously also slightly driven by the release of provisions. However, for us it's important to continuously provide a significant account at EBITDA as well as adjusted EBITDA figures. Speaking about the adjusted EBITDA, so adjusted for long-term incentive plans and provisions for long-term incentive plans, the adjusted EBITDA is down by 37% compared to last year. What I would like to do here is to highlight again the operational leverage of our business model. and quite interesting also to explain where this drop of 37% comes from. If we look into the absolute drop, it's a drop of 14.2 million euros. Compared to last year's quarter, we did also 3 million less of trades. If you multiply the 3 million trades by the 5 euro, let's make it simple, 5 euro, that's a 15 million revenue that is literally missing compared to last year's quarter. Why am I explaining this? To actually show you the consequence when we talk about the drop through rate on EBITDA. If you apply a drop through rate of 80 to 85% of the 15 million revenues, we're talking about 12 to 13 million of EBITDA that is missing. And that's literally very comparable to the 14.2 actual data. Operational leverage, if you run a business like ours, fortunately or unfortunately goes both directions. When trades are growing, you will enjoy the 80% incremental margins. If trades are going down, you will enjoy the or less enjoy the 80% because they will start then to kick in into the other direction. However, we are reaching more and more kind of floor in trade numbers. Q3 was a relatively weak quarter with only 15.3 million transactions. why is that important also to understand if this is the kind of floor for our business model and if we manage to generate in a floor scenario still 24 million of adjusted EBITDA which is almost 100% cash quota, I think that describes very well the solidity of our business. In the same time, our marketing has been also normalized and reduced. I think that is very important to highlight. We are very much aware of our cost base. We are very much aware of which instruments we have or where we have the ability to reduce a variable cost. We managed very well to bring down the marketing costs. Nevertheless, to also continue with client growth. Compared to, for example, Q2, we reduced the CAC significantly. High investments are made in strong commercial environments. That's absolutely obvious. And given the current environment, we don't see the necessity to have high investments in marketing. But nevertheless, we will continue to have a stable level, a sustainable level of marketing investments to win clients and to win high quality clients. I think we are proving that we are capable of adapting to the environment. And going forward for the last quarter, we will put our full focus on pool marketing. We'll reduce significantly the push marketing, so to focus on affiliates, on all these type of marketing where clients have the intention to look for a broker or are going for brokerage services instead of nudging first-time users. To make use of a brokerage service Yeah, we discussed it I think up and down a challenging market environment affects the trading We are 16% down compared to last year's quarter in terms of transactions and I think it's important here to Recap on Frank's words trading activity is something that is very very difficult to forecast because it depends to the vast majority to external factors to two factors that we cannot control as a management whether geopolitical factors as we have noticed in the first and second quarter and still unfortunately going on second macroeconomic factors Third, also general sentiment, retail sentiment with respect to markets. All of these factors are explicit factors. The only way how we can control implicitly trade numbers is to take care of a net client ad with high quality. So not to dilute the customer base. This is something we can control very well as management. We come in a second to trading activity and to client's quality. and hope that we can show that that we are managing to do this with respect to this parameter quite a good job with the marketing team but trading activity can be to a large extent not be controlled so we will stop forecasting client trading activity going forward rather focus on the financial kpis now we see a drop agreed the big hypothesis still is is that an industry specific drop Or is it because of our actual client quality and client activity and the quality of our clients? What we did here is to, again, as we do every quarter, to benchmark the trading activity of our client base. We use here the darts per customer account to compare our trading activities. with actually the most, from my perspective personally, but also I think I can speak for our management, compared to the most admirable peers in Europe, which are Avanza and Nordnet. And what we actually see is that the trading activity is dropping industry-wide. It's not an effect of flat-x to zero, it's an effect that Avanza and Nordnet have experienced as well. Keep in mind, we are comparing here continental European clients, by the way, with the best possible trading region in Europe, which is the Nordics, with the highest activity, with the highest engagement and still managed to be in line with actually the most admirable region for retail brokerage, which I think proves very clearly that our customer ads are of great quality. And as I said, given that we compare here a continental European customer base, by the way, with a very, very Accelerated growth and speed of growth to the Nordic peers, which are tier one Champions League peers This is the evidence for us that it's not our client quality. That is that is that is getting less and less in Inactivity, but that it is rather industry specific movement let's go from macro perspective of the clients into micro perspective and Customer activity per quarter is still relatively good. In 2022, in the first nine months, we had already an engagement rate, so an activity rate of 47, close to 50%, which does say that almost half of our client base that we had at the end of September 2022 did at least one trade during the last nine months. now there's q4 to come I assume personally that this number will go close to 50% which becomes very comparable then to the 2019 figure of 52% so relatively stable trading active customer base of roughly 50% now how does this translate the activity level to the activity of the active clients which is the the top right diagram the top right graph It shows actually that the activity of our active clients has been in average over the last six quarters relatively flat at somewhere between 20 to 25 trades per quarter. Why is that important to highlight? Because during this last six quarters, we added roughly more or less 800,000 clients to our business models. Now, if we would assume that these 800,000 clients are of bad quality, this number must drop, must drop significantly. It does not. It's staying flat. It's staying sustainable and stable, which again is for us clear evidence for the client quality and activity. The share of US volume has dropped. Fair to say, U.S. volumes in the retail brokerage sector is mainly driven by tech companies and tech investments. Usually Europeans don't need to go to the U.S. to buy utilities, something they can do in good old Europe as well as they could do in the U.S. So there is no need to buy electricity provider or oil and gas provider in the U.S. something they can do also with British Petroleum and can do with Dutch Shell. However, the tech industry is mainly globally a US-dominated environment, thus the peaks in 2020 and 2021. Now we are normalizing back to a percentage of roughly 20%, 20% of the total volume, which is still above the 2019 levels that were rather at 15%, 16%. Bringing us from the quality, which is getting more and more important for us, and which is also the driving force, getting to the quantity. As I said, in Q3, we added 94,000 gross clients, a flat and consistent growth, despite the challenging markets. And the good quality has been proven over the last two slides with industry-specific growth and activity levels. Interesting also to highlight here the 2022 cohort in terms of activity has actually exceeded the 2021 activity levels so the cohort levels of 2021 and is very much in line with 2019 and 20 which tells us again here the quality the type of quality that we are winning in 2022 is still relatively high which is also, I would say, very logic given the market, given the circumstances, the number of, let's say, first time users and rather leisure traders is decreasing because these people are now, as I always say, discussing at barbecues or at dinners with their families, with their friends, inflation, interest rate, then what to buy or what to sell. So the quality, the residual quality at the market that you can convince to come to us increases organically, so to speak. How does this transfer and translate into a net growth? 376,000 customer ads in the first nine months. We had 40,000 accounts that were churned. And with the retention rate of 98.4%, we expect by the end to be at 50 to 55,000 churned clients. So the customer additions, the net customer additions were actually 337,000 customer additions in terms of brokerage. Given the organizational off-boardings in B2B and B2C, On the B2C side, to clarify here again, it's mainly the merger that we had between De Giro and Flatex in Austria. It's the merger that we do between De Giro and Flatex in the Netherlands. And the divestment of Hungary and Norway, plus A number, a significant number, actually roughly 50,000 clients that were coming from B2B to C business that we discontinued is the reason why we expect for the full year an off-boarding, an active off-boarding by the company of roughly 100,000 clients. So we'll be left over with 294,000 net customer growth. And I think here again to highlight not only the quality is right, but also the quantity we grew in the first nine months faster than Avanzo, Nordnet and Fineco together. With respect to the organizational offboarding also here, why are we pushing for this? Why is the result such a high number? Because we are pushing to finalize this organizational offboarding in 2022. So, to get rid of all these accounts by the year end, so we can start in 2023 with a clean base of customers. Now, we talked about quality, we talked about quantity, and there's one more, I think, important aspect to highlight, which is the assets under custody with respect to quality. There's been a couple of questions by the investor base and by the analyst base with respect to AUCs, assets under custody, how they develop. There is obviously the hypothesis that I absolutely respect and understand with increasing interest environment. Are the clients trading less? So are they buying less? They don't bring any fresh money to the table. They are rather withdrawing the cash to put it into interest-gearing asset products, saving accounts, and so on and so forth. So we are happy to highlight here the assets under custody analysis for you. What you see is compared to the beginning of the year, our AUCs decreased from 43.9 billion to 37.7 billion. This decrease is mainly or only explained actually by the decrease in securities value from 41 billion to 34 billion, which is 7 billion delta in percentage 17%. very much explained by market developments. If you compare this number to indices across the globe, we are talking about drops of 20 to 30%, 35%, so very much in line with the drops that we see in indices. Now, interesting, however, to consider two things. The first thing is, what is happening to cash? Cash has increased from 2.8 billion to 3.5 billion, so by 600, 700 million euros. As I said, the hypothesis is, or very often when we discuss it with interested parties, is people will not bring any more fresh money to the table. They are rather withdrawing the cash and invest it into saving products. Let's see what happened to our actually net cash inflows. What we have seen is, in the first nine months of this year, that the actual net cash inflow was 5 billion euros. This 5 billion is split into existing customer accounts of 2.1 billion. So existing customers that we used to have by the end of 2021 brought 2.1 billion more of cash to our platform during the last nine months. And even more interesting, which also highlights again the quality of our customer ads is that the new customers, the 380,000s, almost 380,000 that we acquired in the first nine months brought 2.8 billion euro in cash into our platform. If you think about what the average is, we're talking about that every client that we won in 2022 brought 7,000 euro in cash into our platform. I think that describes very well the quality of the customer ads. That's the first point that we would like to highlight here. So in total, we had a cash inflow of 5 billion. Now, the second interesting point is what was the use of these proceeds? What did clients do with these 5 billion net cash inflow? Actually, 4.3 billion, so the vast majority of it, roughly 90%, were invested and reinvested into securities. So people were buying shares, ETFs, funds, whatever. 600 million was the positive delta under cash custody. So what we are actually doing here is, first, to bring the evidence that clients are bringing fresh money to the table. And second, we are bringing the evidence that they are not withdrawing cash from our platform to be invested into interest asset products. On top of that, Throughout the whole year, so just also here to avoid misunderstandings, throughout the whole year, the whole nine months, from January until September, for each and every single month, we had a positive cash net inflow. So it's not like that in the first half we were brought in $7 billion and we lost $2 billion over the last three months. So even in July, August, and September, every single month of Q3 was a positive net cash inflow month. That is with respect also to that question and to, so to speak, the last nine months. I hope we provided you with diligent information and transparent information. Now I'd like to jump over to the outlook that Frank touched already on and provide you with a couple of highlights. The outlook is more, let's say, more a kind of 2023 outlook. I think the year is, let's be fair, almost over. There's two and a half months to go. We are very confident that the next two and a half months will be good two and a half months. We have taken some measures that will have obviously an effect already on Q4, but please don't consider it too much as an explanation for Q4, but rather with respect to potentials for the next year. We started, Frank mentioned it, members get members. activities across all the Giro countries. We used to do it only on the FlatEx side. Now we have it also on the Digiro side, which is obviously a very strong marketing tool because it is a relatively cheap marketing tool. And as we all know, referrals from friends and families are usually the best converting marketing. So you pay less and get usually a higher quality. That should be also a very good driver towards the next quarters and years to generate more and more high quality clients for less cost. Second, we started a big ambassador program with our people, with our teams, aiming on the one hand side to increase financial literacy across our growth markets. We are collaborating with the leading universities in France, Spain, Italy and Portugal. Business school colleges investment clubs to also here not only to promote obviously flat X and the Giro or in these countries the Giro but to increase also the awareness for financial literacy and to do presentations workshops And any type of support that could contribute also here clients to our platform but not like clients that are that are facing trading as gambling but rather as sustainable investing That's a bit on the qualitative part. Going to the quantitative part and the potentials. The most obvious discussion and environmental change that we are all facing are interest rates. We just touched on that. We increased over the last nine months our cash position by 22%. roughly 700 million euros from 2.8 to 3.5 billion. Now, what is the use of proceeds from our perspective as a bank and our balance sheet of the 3.5 billion euro of deposits? Roughly 1 billion is being used to refinance the margin loans and 2.5 billion sits literally in a highly rate sensitive, very, very short durated. I think the interest duration is currently less than 50 days. liquidity and credit portfolio so 2.5 billion are literally on a one-month roll fully sensitive to interest swings now if we consider the current discussion around around interest environment and potential increases that says that only for q4 we expect at a depository rate which we currently have of 75 basis points an additional positive effect on the ebt of 5 million euros and in ten days if I'm not mistaken nine days on the 27th or 28th we will have the next ECB meeting and if we assume there will be another two interest steps 225 basis points that would have an effect of 8 million euro on the q4 of additional incremental EBT now looking to the 12 months EBT potential is a Next year, 2023, stays at 125 basis points. We are talking about slightly above a 30 million EBT potential. If rates might go up towards 2%, we might even hit the 50 million euro of additional interest income on the top line that literally drops through to the bottom line. I know there will be again the question, or there might be the question, do you have to pay interest rates to your clients? And let me again highlight two things. The first point is over the last 15 years, fortunately, there was some period where we were generating interest income. We never paid interest to our clients. Second, we always told our clients, look, you pay as you go with us. You only pay for trading. You're not paying for using the platform. You're not paying for analyzing assets on our platform. You're not paying for getting news on our platform. You're not paying for getting any kind of financial KPIs on our platform. You only pay when you trade. Because we are a broker and understand ourselves as a retail broker, we cannot pay you interest for the money, for the trading money that you leave on the table with us. So rather invest it. And if you don't invest it, it's your trading credit that you need to invest. And we just have shown that over the last nine months, we did not have any cash outflows despite the ECB growth, ECB rate growth, which tells us here that we are not expecting, as of today, to pay any interest to our clients. So we consider this EBT potential actually to be a full gross potential that kicks in. Handling fee DeGiro. I'm also here to give you a bit more of transparency and a bit more of insight. In the first nine months at DeGiro, we did roughly 35 million transactions, which is what I always also communicate, give or take two-thirds of our total trades in the group. Thereof, 20 million transactions were carrying a handling fee. The delta is coming from products that do not carry handling fees, such as ETPs, such as ETFs, such as option contracts, futures, all that type of products, because only or mainly equities are carrying handling fees. So in 20 million transactions, so to speak, in the first nine months that we did, if we break this down or have an expected figure, just going pari passu, it's saying that in Q4 2022 we expect 7 million handling fee carrying trades increasing the handling fee by 50 cent should give us an EBT effect for Q4 of 3.5 million euros on a 12 months perspective again here going for next year on an annualized base that would result in an effect of 14 million euros but just by by increasing the handling fee by 50 cents Do we expect any further price increases on the fees? Let's see. We always said, and I said it today again, we're always working very hard to find a very fair and transparent balance between profitability and growth to offer our clients best service, best platform, best products, and best prices, but actually with also a level of profitability that ensures to continue this business model in the way we do it today. ETP partnerships, we discussed it shortly in the, we mentioned it shortly in the introduction. We started 1st of January this year to roll out with Societe Generale and BMP Paribas in Germany, Netherlands and France at the Giro to roll out ETP products. Also here to give you some feeling With this rollout, we gave actually 900,000 clients access to these products in these three countries. Clients did or are expected to do in 2022 an average 3.5 ETP trades, which results in total in 3 million ETP trades at the GRO only. We are not including FlatX here. We're just talking about the GRO. Now we will roll out in stage two, starting now in Q4, to roll out the ETP platform to Spain, Portugal, Italy and Switzerland which will add another 500,000 clients giving them access to ETP products that they don't have today. Assuming a significantly lower ETP activity just out of conservatism that would result in an additional 1 million ETP trades that we could create next year with a potential EBT of 4 to 5 million euros given that we generate 4 to 5 euro revenues per transaction. Last measure, price measure, margin loans at the Giro. Margin loans at the Giro so far have been only made available to 250,000 Digiro clients. So 250,000 Digiro clients have technically the ability to go for a margin loan. The utilization is today at 15%. So roughly 40,000 Digiro clients are using a margin loan with an average margin amount of 15,000 euros. 40,000 clients, 15,000 euro per client, equals 600 million of margin loans on the de jure side as you know we have currently 1 billion so it's easy mathematics to find out that the other 400 million are sitting more or less with the flat x clients now what we started in the summer is to do further analysis with respect to our products account types what do we offer to whom how do we allow access we came up together to enlarge the accessibility of this product and will roll out in November the access to margin loans to another 1.3 million clients that today do not access technically the margin loan. They will be then able to access it. Again here, just based on assumptions, we said, okay, if the utilization is only a third Of what we have today, it's 5% instead of 15%. That should then translate into 65,000 additional Giro clients that can use a margin loan. And if they take not 15,000 on average, but only 5,000 on average, that's another 300 million, 325 million of additional margin volume. At an interest rate of 400 basis points, that translates into 30 million of potential EBT on an annualized basis. Again here, it's a simple product measure for us, very similar to ETPs. There is no cost against it because the product is already existing. It was just only not made available to the whole group of clients by extending geographically, but also extending it from customer perspective, extending our product base. We expect here for sure a positive return. The first two measures, interest income as well as increase of handling fee will have definitely an impact, will have also a very forecastable impact. The third and fourth measure, the ETP and marginal loans, depend obviously on the usage, depend obviously on the interest of clients, but we feel here also very confident to generate incremental EBT with no cost against it. That's it for the outlook. I'd like to thank you for being with us and for listening and would like to open up the discussion and open up the lines for questions by the participants. Thank you.