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spk00: Welcome to StoneX Group's second quarter earnings call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Bill Dunaway, Chief Financial Officer. Please go ahead.
spk01: Good morning. My name is Bill Dunaway. Welcome to our earnings conference call for our second quarter ended March 31st, 2022. After the market closed yesterday, we issued a press release reporting our results for our second fiscal quarter of 2022. This report is available on our website at www.stonex.com, as well as a slide presentation, which we will refer to on this call and our discussions of our quarterly and year-to-date results. You will need to sign on to the live webcast in order to view the presentation. The presentation and an archive of the webcast will also be available on our website after the call's conclusion. Before getting underway, we are required to advise you, and all participants should note, the following discussion should be taken in conjunction with the most recent financial statements and notes thereto, as well as the Form 10-Q filed with the SEC. This discussion may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 as amended and Section 21E of the Securities Exchange Act of 1934 as amended. These forward-looking statements involve known and unknown risks and uncertainties, which are detailed in our filings with the SEC. Although the company believes that its forward-looking statements are based upon reasonable assumptions regarding its business and future market conditions, there could be no assurances that the company's actual results will not differ materially from any results expressed or implied by the company's forward-looking statements. The company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. Readers are cautioned that any forward-looking statements are not guarantees of future performance. With that, I'll now turn the call over to Sean O'Connor, the company's CEO.
spk03: thanks bill good morning everyone and thanks for joining our fiscal 2022 second quarter earnings call as i mentioned last time during our q1 call market conditions generally turned more favorable for our business as the financial market contemplated inflation and the fed response there too what we had not anticipated is the geopolitical shock which came from the russian invasion of ukraine which added significant uncertainty and volatility especially in the commodity markets As we have mentioned a number of times previously, ideal market conditions for us are moderate market volatility and a decent level of short-term interest rates. Extreme volatility certainly provides good revenue opportunities. However, also potentially leads to liquidity stress on our clients, which generally leads to a higher bad debt charge. Our risk management approach is to ensure that when we see these extreme market events, the net result is still a positive for our shareholders and our bottom line. Our team has now experienced many such situations, and we have implemented a robust risk management process, which over time has become embedded into the StoneX DNA. I was exceptionally pleased with how our team reacted. We have front office risk and operational people standing shoulder to shoulder and running towards potential problems. Our risk management process starts well before any crisis occurs, as we set positions and tenant limits on clients who are now onboarded and we continually stress test all of our client portfolios and adjust accordingly for changing market conditions. Our job is to make sure our clients understand the risks they are taking and have a mitigation plan and sufficient liquidity to navigate these market events. Not only do these extreme market conditions provide immediate revenue opportunities and of course the associated risks, but they also cause clients to rethink who they deal with and where their assets reside And larger banks, once again, recalibrate the type of clients they want to deal with. As we experienced following previous such situations, we are seeing a number of clients looking to transition their business to us. The result we achieved is a record quarter for core operational earnings, besting the record we set in the prior year period. So we're actually comparing against our previous record. ROE on stated book value was 26.1% for the quarter and 29% on a tangible book basis. Our quarterly earnings were $64 million or $3.11 per share. On a year-to-date basis, we achieved an ROE of 22.1% on stated book and earnings of $105.7 million or $5.15 per share. We continue to believe that the market environment will provide some positive tailwinds for us over the next year or so with sporadic volatility as the Fed withdraws its support for the market and interest rates increase, both direct and positive drivers for our business. Turning now to the slide deck and starting with slide number three, comparing operating revenues and the key operating metrics against the prior year period, which remember was in fact our record result up until now. Operating revenues were up 16% for the quarter with increases in all product areas except for securities and physical contracts. On a year-to-date basis, all products were up strong double digits except for securities, which was down 4%. Transaction volumes increased both for the quarter as well as on the year-to-date basis. In fact, we had three of our five busiest days ever in terms of transactional counts during this period of volatility. the other two days being the initial onset of the COVID pandemic. Revenue capture increased significantly in most products for the quarter and year-to-date, except for securities, which was down 21% and 23% respectively, and FX CFD contracts, which declined marginally 2% in both periods. Our average client float, both on the list of derivatives and as well on the securities clearing side, experienced strong growth, up 38% and 29% respectively, due both to higher margin rates imposed by the exchanges due to volatility, as well as market share gains, and in aggregate now stands at over $7 billion, up 36% from a year ago. Interest earnings on client balances were up 79% versus a year ago due to higher client balances, and we are now starting to see interest rate increases. interest earnings should start accelerating strongly as the new rate hikes start to work their way through the system versus the immediately prior quarter operating revenues were up 21 versus the three months ended december 31 there were double digit increases in product revenues across the board except for global payments and physical contracts which were both down marginally the prior periods being records for that Strong volume increases across the board, except for OTC and global payments, which were marginally down. Revenue capture was up across the board versus the immediately prior quarter, and our average client float was up 12%. Moving to slide four and looking at the same metrics on a 12-month basis, our operating revenues were up 20% versus the trailing 12 months ended March 31, 2021. There were double-digit increases in product revenues across the board, except for physical contracts, which were up 6% of a record performance in the prior period and securities, which was unchanged. Strong volume increases across the board, except for listed derivatives, which was up only modestly. Revenue capture was up enlisted and OTC derivatives, however, declined in securities and FX and CFPs. Our average client float was up 30% and interest earned on client balances was up 64%. Turning to slide five and a summary of the earnings as reported, but also on an adjusted basis, which includes the ongoing accounting impact of the game transactions. We recorded operating revenues of $544.7 million, up 16% versus the prior period, which is a record. We achieved record quarterly revenues for three of our four segments, commercial, institutional, and retail. Global payments were slightly behind the immediately prior quarter, which was its record quarter. Total compensation and other expenses were up 24% for the quarter. Most notably, variable compensation due to high incentive compensation. Fixed compensation costs increased 5%. Other costs, including trading system, market information, non-trading technology costs, and other fixed expenses increased over the prior year as a result of the strategic initiatives I've touched on over the last several calls and will discuss again later on this call. Our selling and marketing costs were up 120% over the prior year, and while not technically variable, reflects our digital marketing spend during times of heightened market activity when it is more effective. Bad debts were $12.3 million due to the market stress I mentioned earlier. This is slightly above the 1% of operating revenue we target, although on a trading 12-month basis, it represents 1.1%. of operating revenues, so very much in line with that target. Net earnings were $64 million or $3.11 diluted per share, representing a 26.1% ROE. Looking at the summary for the training 12 months, our revenues were $1.8 billion, up 20% over the prior comparable period. Net income was $147.2 and $152 million on an adjusted basis. Our reported EPS was $7.18 for the training 12 months for a 15.8% ROE or 16.3% on an adjusted basis. Our quarterly earnings were up 53% or $22.3 million higher than the immediately prior quarter with EPS showing a similar increase. We ended the quarter with book value per share of $49.86. and shareholder equity eclipsed the billion-dollar benchmark for the first time. Turning to slide six, which is our segment summary, just to touch on the highlights before Bill gets into more detail, aggregate segment operating revenues were up 16% for the quarter, and segment income was up 19% versus the record results last year. On a sequential basis, operating revenues were up 21%, and segment income was up 30%. The standouts for the quarter were our commercial segment, which increased operating revenues 28%, and segment income 26%, both new records. Retail showed good growth in operating revenue, up 17%, and segment income up 42%, also both new records. Global payments operating revenue is up 22%, and segment income 23%. Institutional segment increased revenues 6%, however, segment income was down 4% due to lower revenue capture versus the comparable period. For the trailing 12 months, we see much of the same with double-digit growth across the board, except for the security segment, which was down 12%. These are strong quarterly results, but as we've said repeatedly, we take a long-term view in how we manage the company and our franchises. As such, we believe the best way to gauge our results and progress is to look at longer-term performance, such as the trailing 12 months, rather than specific quarters taken in isolation. Turning to slide 7, which sets out our trailing 12-month financial performance, these numbers have been adjusted for the accounting treatment related to the gain acquisition, as disclosed in our prior filings and appear in the reconciliation provided on the last page of the earnings deck. If you look at the graph on the left hand side, the blue bars represent our trailing 12 month operating revenues over the last nine quarters. As you can see, this has been a remarkably smooth and strongly upward trend as we have steadily expanded our footprint and capabilities. Our revenues are up 50% over this period or 22% annual compound growth. Our adjusted pre-tax income likewise has grown significantly. up 58% for a 25% TAGA. On the right-hand side, you can see adjusted net income in the yellow bars, which is up 69% over this period for a 30% annual compound growth rate. With that, I'll hand you over to Bill Dunaway for a discussion of the financial results. Bill.
spk01: Thank you, Sean. I'll be starting with slide number eight. which shows our consolidated income statement for the second quarter of fiscal 2022. Sean covered many of the consolidated highlights for the quarter, so I will just highlight a few and then move on to the segment discussion. Transaction-based clearing expenses were up 2% to $76.5 million in the current period, primarily related to increases in OTC and listed derivative volumes, as well as higher costs in our retail FX business due to increases in client funding transactions. Introducing broker commissions were up 6% to $43.2 million in the current period due to increased activity in our listed derivative and wealth management businesses. Interest expense increased $3 million versus the prior year primarily due to an increase in securities lending activities as well as higher average borrowing on short-term financing facilities of our subsidiaries. Variable compensation increased $18.1 million versus the prior year due to an increase in net operating revenues and represented 31 percent of net operating revenues in the current period compared to 32 percent of net operating revenues in the prior year period. Fixed compensation increased $4 million versus the prior year, with the gross principally related to salary and benefit costs of increased headcount, which increased 10 percent as compared to the prior year. Other fixed expenses increased $27.9 million as compared to the prior year to $99.9 million, and were up $13.4 million versus the immediately preceding quarter. As compared to the prior year, selling and marketing expenses increased $7.8 million and professional fees increased $4.8 million. The increase in selling and marketing primarily relates to an increase in digital marketing in our retail Forex business and to a lesser extent costs related to our biannual global sales and strategy meeting. In addition, trading systems and market information increased $2.1 million and non-trading technology and support increased $2.2 million as part of our initiative to expand our digital offerings. Depreciation and amortization increased $2.7 million and primarily relates to an increase in internally developed software. Finally, we have started to see increases in travel and business development, increasing $2.5 million as compared to the prior year. As Sean mentioned earlier, we recorded bad debt expense of $12.3 million for the quarter versus $900,000 in the prior year period. During the current period, we received a $6.4 million foreign exchange antitrust class action settlement, which is reflected as another gain on the consolidated income statement. Net income for the second quarter of fiscal 2022 was $64 million and represented a 16% increase over the prior year and a 53% increase over the immediately preceding quarter. Finally, as we close out the quarter with the net asset value per share of $49.86 per share, this compared to $43.48 per share a year ago. Moving on to slide number nine, I'll provide some information on our operating segments. The commercial segment had a record quarter, adding $39.8 million in operating revenues versus the prior year and $31.5 million versus the immediately preceding quarter. Within this segment, listed derivative operating revenues increased $15.5 million versus the prior year as a result of a 30 percent increase in the average rate per contract as a result of strong performance in LME metals. OTC derivative operating revenues were $62.4 million for the quarter, which was up $27.3 million versus the prior year quarter, primarily as a result of 18% and 52% increases in OTC derivative volumes and average rate per contract respectively, driven by strong performance in agricultural and energy commodities as a result of heightened volatility in global commodity markets. Operating revenues from physical transactions declined $5.9 million compared to the prior year, as a result of a $1.6 million decrease in physical agricultural energy commodity revenues, as well as a $4.1 million decline in precious metals revenues, with the prior year comparable period being a particularly strong quarter for precious metals. Finally, interest earned on client balances increased $3.3 million versus the prior year, principally due to the 15% increase in average client equity, as well as an increase in interest charged to customers on certain margin balances. Segment income was $70.1 million for this period, an increase over the prior year and preceding quarters of 26% and 7% respectively. Moving on to slide number 10, operating revenues in our institutional segment increased $11.2 million versus the prior year, primarily driven by $6.4 million and $5.4 million increases in listed derivative and FX operating revenues respectively, which were driven by widespread volatility in global markets. Securities-related operating revenues declined $7.8 million compared to the prior year period, as a 16% increase in the average daily volume of securities transactions was more than offset by a 21% decline in securities RPM. The decline in RPM was primarily a result of the prior year quarter benefiting from wider spreads due to heightened volatility driven in part by the COVID pandemic. Interest earned on client balances increased $1.5 million, primarily as a result of a 58% increase in the average client equity as compared to the prior year as well as a modest increase in short-term rates. Institutional segment revenues increased $41.5 million versus the immediately preceding quarter, primarily as a result of a $27.8 million and $7.1 million increases in securities and listed derivative operating revenues, respectively, as well as a $3.6 million increase in FX-related revenues. Segment income declined 4% to $50 million in the current period, as the increase in operating revenues were more than offset by 1.8 million and 2 million increases in variable compensation and interest expense, respectively, as well as a $9 million increase in non-variable direct expenses versus the prior year. The increase in non-variable expenses is primarily related to a $2 million increase in bad debt expense, a $1.7 million increase in professional fees, as well as increases in trading systems and market information, depreciation and amortization, and fixed compensation related to our digital initiatives. Sean has mentioned on prior calls, segment income increased $18.1 million versus the immediately preceding first quarter. Moving on to the next slide, operating revenues in our retail segment added $17.8 million versus the prior year, which is primarily driven by an $18.8 million increase in FX and CFD revenues as a result of 10% and 15% increases in ADV and RPM as compared to the prior year as a result of heightened volatility in global financial markets. Operating revenues from securities transactions increased $1.3 million. However, operating revenues in retail physical precious metals declined $2.9 million versus a particularly strong prior year period. Operating revenues in the retail segment increased $23.6 million versus the immediately preceding quarter. Segment income increased $13.5 million versus the prior year, primarily as a result of the increase in operating revenues and the $6.4 million class action settlement I mentioned earlier. This is partially offset by an $8.1 million increase in non-variable direct expenses, primarily driven by a $5.2 million increase in selling and marketing, a $700,000 increase in trade systems and market information, as well as a $400,000 increase in depreciation and amortization versus the prior year period. Segment income increased $22.1 million versus the immediate preceding quarter, primarily as a result of the increase in operating revenues and the previously mentioned settlement. Posing out the segment discussion on the next slide, operating revenues and global payments added $7.5 million versus the prior year, driven by an 8% increase in the average daily volume and a 12% increase in the rate per million as compared to the prior year. Non-variable expenses increased to $1.9 million and is primarily related to the expansion of our payment offerings. Segment income increased 23% to $23.9 million in the current period, however, declined 2% versus the immediately preceding quarter. Moving on to slide number 13, which represents a bridge between operating revenues for the first quarter of last year to the current period across our operating segments. Overall operating revenues are $544.7 million in the current period, up 73.3 million, or 16% over the prior year. I have covered the change in operating revenues for our segments. However, the $3 million decline in revenues and unallocated overhead is primarily related to the $1.9 million FX-related net gain and the internal merger of operations of GAIN Capital's UK subsidiaries in the prior year period. The next slide, number 14, represents a bridge from 2021 second quarter pre-tax income of $76.3 million to pre-tax income of $87.4 million in the current period. The negative variance in unallocated overhead of $19.4 million is related to the decline in revenues I just mentioned, as well as an increase in unallocated expenses. including $4.4 million increase in variable compensation as a result of improved performance, a $1.4 million increase in fixed compensation and benefits, a $1.9 million increase in non-trading technology and support, a $2.1 million increase in professional fees, a $1.5 million increase in depreciation and amortization, and a $2 million increase in selling and marketing expenses. Finally, moving on to slide number 15, which depicts our average invested client balances and associated earnings by quarter. as well as a table which shows the annualized interest rate sensitivity for a change in short-term rates. The interest rate earned on these crop client balances increased 9 basis points to 28 basis points for the current period. The 25 basis point Fed increase in short-term rates occurred late in the quarter, so the effect of that hike, as well as yesterday's 50 basis point increase, will start to be seen in subsequent quarters. As noted in the table, with the increase in client balances noted earlier, we estimate a 100 basis point increase in short-term interest rates would increase net income by $32 million, or $1.59 per share on an annualized basis. With that, I would like to turn it back to Sean for a strategy discussion.
spk03: Thanks, Phil. Turning now to slide 16, which sets out the high-level strategic objectives that we as management are focused on. We have included the slide before, but I think it's worth repeating for those that are new to this course. Our primary objective is to keep expanding our financial ecosystem to make us more relevant to clients. We want to continually access more markets, more sources of market liquidity, while offering more products and capabilities to our growing client base. This forms the cornerstone of our next objective, which is to grow and diversify our client base and generate more traffic across our platform. If we are relevant to clients and we have attractive ecosystem, this obviously becomes easier. We want to ensure that we are diversifying our client base by type, so by segment, commercial, retail, and institutional, as well as by geography, which of course will be enhanced as we continue to digitize. We need to digitize our business to increase internal efficiencies and scalabilities, which will drive operational revenue as well as increase client engagement. As we offer more digital ways for clients to access our ecosystem, we massively expand our total addressable market. In a digital environment, every client anywhere is an opportunity for us. Our business needs to be supported with regulatory capital and we need to deliver consistent earnings to create the internal capital runway to support our growing business. This allows us to be disciplined in approaching the capital markets when we believe capital is appropriately priced as well as when considering potential acquisitions. This is a simple strategy we have been focused on for over 15 years and has proven successful and effective. Over the last six quarters or so, I've given a more granular view of the various projects we are undertaking in our segments. I'm not going to go through them all again. However, we continue to make excellent progress and hit our milestones in delivering many of these new capabilities, some of which will be launched in the next three to six months. I think I would summarize our client-focused initiatives as follows. Firstly, digitizing our offerings to access a broader base of typically smaller clients that cannot support a high-touch approach, and in so doing, leverage some of the expertise we acquired with the GAIN transaction. This is happening with payments. We'll be looking to access small commercial clients. Our Farmers Advantage platform, we are looking to service smaller agricultural producers globally, amongst other initiatives. Secondly, expanding our retail platform to include more of our products and capabilities, which is something we laid out when we acquired GAIN. Our retail platform is currently being rebranded and will soon be significantly enhanced internationally to offer cash equities and domestically to offer securities, future and FX trading, as well as crypto assets. This will be a significant enhancement, offering more traditional investment products together with leveraged speculative products on one platform. Third, to continue to roll out narrowly focused customized technology solutions to target those client groups to make them more embedded and stickier. StoneHedge is a good example of this with our large commercial grain customers. We want to keep expanding our products and capabilities. We have dramatically expanded our securities capabilities in the U.S. over the last five years and continue to do so on the equity and fixed income side where we now cover almost all asset classes. You can see with the increase in fixed costs in the institutional segment, we continue to make investments and believe that these investments will, in due course, produce additional revenue. This includes also our equity team rolling out electronic market-making capability for domestic U.S. stocks, and we're now looking to leverage all of our securities capabilities into a more global business as they are largely U.S.-based at the moment. We have made good progress building the core capabilities for this in the UK and recently have made some key highs on the security side in Singapore. The global payments team is expanding the local currency pay-in capabilities and our precious metals team has made excellent inroads into the massive US physical precious metals market. So as you can see, we have a large number of projects in flight, all of which have been worked on for some time. The good news is many of these have started to be released some in beta form and some to limited groups of clients. But most of these initiatives should be fully launched and rolled out to our client base in the next three to nine months, which is pretty exciting. As we mentioned in our last call, in late December, the interest rate market started to move higher, thus signaling the probability that the Fed would start to raise interest rates in the coming months. The market expectation three months ago when we had this call was perhaps for a Fed funds rate of about 100 basis points by year end. As we now all know, that view has changed dramatically, with expectations now around 250 basis points. There's still a lot of uncertainty around where this will settle, with data showing very high inflation, while at the same time, recession risks are growing. While there's no certainty as to what the final outcome may look like, it is fairly certain that rates will be going up faster than we thought three months ago. We anticipate that starting in Q3, we should start to see a steady rise in average yield earned on our growing client float. We'll also continue to pay close attention to the yield curve and where possible lock in attractive longer term yields on our float. Finally, we have started the process to refinance and restructure our holding company debt. We have closed the renewal of our parent level bank facility for three more years. while also expanding the capacity under the facility from $400 million to $475 million, with additional support from existing lenders, as well as several new banks joining our syndicate. We will now turn our attention to the remaining term debt in our capital structure. Let's move to the final slide, 17. This was our strongest operational quarter to date, with good market conditions and excellent results across all products and all client segments. Again, we achieved earnings of $64 million, diluted EPS of $3.11, and an ROE on stated book of 26.1%. This is also the best six-month period we've ever had, with earnings for the six-month period of 105.7%, a diluted EPS of $5.15, and an ROE of 22.1%. When our performance is viewed through the slightly longer-term lens, such as trailing 12 months which evens out quarterly anomalies our results continue to show a steady and strong upward trajectory growing our revenues at a 22 percent compound annual growth rate and adjusted earnings at 30 percent we continue to see strong growth in client trading volumes and client assets which speaks to the growth in our underlying client base and client engagements This combined with heightened market volatility and increasing interest rates puts a real tailwind behind our business for the next year or so. This year, as we just discussed, we will see a number of our digital platforms being launched, which will more tightly integrate our offerings by client side, make it more engaging for clients to interact with our financial ecosystem. While we're initially seeing some increased costs associated with bringing up these platforms and standing them up, As we start to actively market these platforms, we should further accelerate our growth with the scalability that technology provides to increase margins and overall profitability. We have a unique and comprehensive financial ecosystem with a very large addressable market in front of us. We certainly have good market share in certain niche segments of our market, but lots of white space remains in areas where we already have client relationships and demonstrated capabilities and now need to monetize these opportunities. As we said last time, one thing will always be constant for the StoneX team. We continue to dedicate ourselves to better serving our growing client footprint around the world by providing them with the best financial ecosystem and service to access the global financial markets. Operator, we are ready if there are any questions. Thank you.
spk00: We will now begin the question and answer session. To ask a question, you may press star then one on your telephone keypad. If you're using a speakerphone, please pick up your headset before pressing the keys. To withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster.
spk05: Our first question comes from Daniel Fannin with Jefferies.
spk00: Please go ahead.
spk02: Thanks. Good morning gentlemen.
spk03: Hey Dan, how are you?
spk02: I'm good. Thank you. I was hoping you could just talk about the health of your customer base. You know, obviously predicting volumes and sustainability is something that is hard to do, but you know, given some of the extreme moves in the first quarter, and some of the levels of volatility that occurred. Wondering just the after, if there's any kind of flow through or negative impact to the customer base and thinking about future activity, engagement, all of those metrics.
spk03: Yeah, so as I mentioned in my prepared remarks, when we see extreme volatility, obviously that translates into um liquidity stress on our clients um and you know we work hard to make sure clients are prepared for that um but obviously you do see bad debts and and clients uh not being able to you know fully handle the stresses that come at them so you know to a certain extent we see a washout of some of our clients you can see that in our numbers we had a 12 million dollar bad debt write-offs. So that's clear evidence that there's some damage that always comes from these elevated volatility type situations. But honestly, I think in large part, as I said, I think we have a very good risk management system. And I think over time, we've really synced ourselves up with our clients and made sure they understand the risks they take. Because we obviously want to mitigate any of our client fallout, right? Because we hope these clients will be clients for a long period of time. So I would say given the extreme volatility we saw, I think our client base in general came through really well. I don't anticipate a huge fallout in activity. Obviously, that's dependent on ongoing market conditions largely, but I think most clients were able to weather the storm. Many of them have done very, very well on the commodity side because of the elevated prices of commodities. So I don't think that's a significant factor. I think sort of the market conditions going forward are more significant, I think, in dictating what kind of revenues will get out of those clients. The second point I'd like to make, which I did make in my prepared comments, is every time we've seen this, we end up picking up market share. This kind of rattles everyone a little bit. What we see is a lot of clients want to sort of go up market sometimes. They start to worry about the financial health of the broker or the clearer they're using. We are one of the few in the sort of second tier space that's public. And we typically have more capital than most of our competitors. you know, we become a bit of an easy choice. We also have the biggest financial ecosystem. So, you know, we do find a lot of customers, you know, come to us and want to move their business across to what they perceive to be a more credible counterparty. And that's always very helpful, right? So that's been happening as we've seen before. And then secondly, you know, the banks oftentimes get a little bit rattled when they see this kind of volatility and start to sort of reassess, know their approach to the business which typically means they focus sort of on the higher value clients from their perspective and and the smaller clients get pushed out and we've seen that as well so this is a good opportunity for us for customer acquisition i think if you went back and looked what happened uh in the covert the sort of onset of covert which was the march quarter in 2020 if you look at what happened post that we definitely picked up a lot of market share and that showed up in increased volumes and showed up in our client float going up significantly. And I think we'll see some of the same, maybe not quite to the same extent, but I definitely think we'll see increased market share. So I would say on balance, I think this is a net positive for us on the client side. I think we'll end up with more clients and more client potential. You know, how that potential gets unlocked depends on market conditions going forward. So I'll stop there and see if that answers your question or if Bill has any further comments.
spk02: Yeah, no, that's super helpful. I guess just on the bad debt, if I think back when WTI went negative, the repercussions to your income statement was a lagged effect associated with some of that. So if you think about what occurred in the quarter, was it across a handful of clients? Is it widespread? Is there the potential for insurance recovery? Just want to think about just the breadth of that.
spk03: Yeah. Um, so, you know, the one thing which becomes hard to predict is the sort of second and third derivatives of the initial event, right? So, um, you know, clients have performed, but you know, if their clients become stressed and they have defaults, you know, that kind of, you know, goes up the chain. Um, we certainly anticipated in COVID that there would be a delayed effect. I think if you listen to my comments, um, on the call just post that March quarter, I think we sort of highlighted to people that there was so much dislocation in the supply chains that it was very hard to know how this would roll out and that there would potentially be, you know, some, you know, a lag effect on our bad debt. We don't see the same thing today. So I think the probability of, you know, a sort of a tale of bad debts relating to this volatility we've just seen is lower. I can't say zero. I mean, I think it is very hard to predict sort of the second and third derivatives of these things. But I think we feel good about there being less of a risk of that. Now, obviously, it depends what happens going forward and do we see another spate of extreme volatility or not. But I think generally speaking, we feel pretty good about where we are. Some of the, you know, we typically, when we, you know, when we review for bad debts, We always try to take a very conservative view. Obviously, we have to go through an accounting and gap analysis of how we decide to take bad bets. But if anything, we try to err on the side of conservatism. We typically discount recoveries or potential recoveries from clients that we believe are weak or tenuous. But sometimes those clients come through and they pay us back. So, you know, I think there is some potential for some amount of recovery for the amounts that we have written off. But I think they sort of fall below the threshold of being sort of comfortable and certain that that could happen. So I think it's possible, but I wouldn't rely on it. So does that answer your question, Dan?
spk02: Yep, yep, it does. And shifting to the cost side, growth in the fixed costs and obviously a very good revenue environment, some margins, are we all that, you know, kind of the flow through is quite good. But if we think about the second half of this year fiscal year the kind of exit run rates for some of these expense levels are you should we anticipate you know kind of continued growth and some of these fixed costs you mentioned we know that all the investments in growth initiatives that you're focused on but I just curious about the trajectory or the pace of spend as we think about your income statement or your your your expense budget for the second half of the year
spk03: Yeah, well, Bill, maybe you can give more specific comments, but as a general comment, what I would say is, you know, some of the staffing up of some of the initiatives we envisaged to happen during this year have been impacted just by the inability to hire people. So, you know, we are behind and have, you know, lots of positions that we thought would be filled still available. so to that extent i think you know there is a potential for some increased spend coming at us over the next two quarters but i think on a on a sort of overall incremental basis it's you know it's small amounts of percentages versus kind of our current installed expense space um i think by and large we have invested in most of the capabilities we want i mean certainly There's been a big investment in upgrading our digital platforms and we're starting to see the payoff of that, but that's largely been embedded. And as you can see on the security side, we can see there's been a big increase in fixed costs and that maybe hasn't really sort of shown up with revenue. As I think we mentioned last time, we've brought on a lot of new teams, expanded into a lot of new areas. And as we know, that takes a couple quarters before those people become productive and some of them have to sit out on the market and restrictions and so on. So I think those two things will start to work for us. But, Bill, I don't know if you have any more specific comments for Dan on that.
spk01: Sure, sure. Thanks, Sean. Yeah, so when we're looking at the non-variable expenses, as Sean touched on, certainly non-variable comp is up. If you're looking versus the most recent quarter, it's up about $8.3 million. Underlying that is really $3 million, $3.1 million of that is true salary increase. And, you know, I do think we'll see some incremental growth in that, as Sean touched on, but the hiring market is certainly difficult. So whether we're successful in actually hiring them, I guess, is a little up in the air. But I would note, and I think we maybe touched on this last call, You know, our Q2 is the first quarter of the calendar year, and we do see a spike in, you know, payroll taxes and retirement contributions, et cetera, as kind of everybody's cycles reset, right, so the employer contributions to both of those are higher at the beginning of the year. So, I mean, those are both up 2.5 and 2.1 million, respectively, kind of sequentially versus the first quarter. So, you know, I would see some of that trailing down, Dan, here as people reach their maximums. And then, you know, looking at the other big spikes, you know, as we mentioned in Sean's comments, selling and marketing up quite a bit, you know, versus both last year and sequentially. And, you know, some of that flexes, right, especially in that retail forex space when they have periods of good volatility, we'll be spending more in order to try to get our name out there and more customer acquisition. You know, so that was up about 3.3%. $4 million over the first quarter. And also some of that, as we touched on, was related to the large conference we had that happens every couple of years, our Gold Sales and Strategy Conference. You know, so I wouldn't see that repeated, and that was probably in the tune of about, you know, two to three million. You know, but other than that, you know, I do think we'll see some incremental growth, but I think you did see, you know, some of those things that were a bit higher, you know, just because of the timing of Q2 and And I'll also touch on there's some like non-income taxes and trade errors that were somewhat elevated in the current quarter just because of the volume of transactions that we had that are not technically variable but kind of do kind of flow with the business. Does that make sense?
spk02: Yes, it does. Okay. And then... In terms of the initiatives, and, Sean, the ones that you've been talking about, several of them for multiple quarters, I guess in terms of the immediate contribution or the way that you – any specifics to the order for which you talked about, is it whether size of contribution, immediacy to roll out and seeing in the income statement, or longer-term, kind of larger opportunities?
spk03: I think this is a medium to longer-term incremental opportunity. I don't think any of these initiatives are going to light up in the next quarter, notably. I think this is a steady digitization of our platform, which will allow us to incrementally speed up our growth. If we do that right, that should show up in better margins and better growth over time. I don't think it's something you can model in into sort of the next couple quarters or something. I just don't think it's going to show up that way.
spk02: Right. Okay. And in terms of just the, as you are building new businesses, hiring, you know, additional teams and other, is there at the top of the house, any discussion around, you know, kind of the variable pay for performance, you know, kind of payout structure that occurs in most of your businesses and, Like, do we, you know, as you get more scale and as the platform gets more cloud and there's natural benefits of the brand, do the payouts ultimately come down to the benefits of, you know, to accrue back to shareholders and, you know, ultimately returns over time? Should we think about, you know, kind of more operating leverage in the business as you adjust the variable compensation, you know, kind of commission, you know, kind of payout benefits? legacy practices?
spk03: So I would have a couple of comments on that. I think we've proven over time that having a very transparent, you know, cash compensation plan for our people where they can work out what their compensation is on the back of a napkin has been a very powerful, positive force for us. It's allowed us, you know, when we were a very small company to attract talented people. We're now pulling people out of, you know, the bulge bracket banks who want to come work for us because the big banks don't do it that way anymore. And, you know, and we allow people who do well to make a lot of money with us. So, you know, I don't think we want to move away from that, which has been very successful for us. I do get your point that when you're small, you really need the people because there's no franchise value. But I do think we've got to be really careful with sort of meddling with that because I think that could be problematic. What will happen potentially and what has happened is as these businesses have digitized, we have forced, and I think the teams have been willing to do this, the costs of that digitization and the IT costs have been pushed into the business units because obviously they're going to see the benefits of this technology spend over time. So their compensation plans have been adjusted from not really picking up central costs to picking up the IT costs. So that's been a major change. And I think as we digitize our business more, particularly on the low end, you end up with less sales and trading people who are commission and bonus compensated, and you end up with more technology people who are just sort of salary and flat bonus kind of compensated. So I think as we digitize, we should see some real operational leverage coming from that. So if you look at on the game side of the business, for example, a very, very significant proportion, like 80, 90% of the people in that business basically are sort of salary and fixed bonus. They're coders and they're people who build and maintain the platform. So the scalability and the operational leverage we get from that business is significantly greater than what we get from our high-touch institutional business. And I think what will happen is all our businesses will slowly migrate a little bit that way. So I think that's what's going to happen. I don't think we have a problem on the compensation side. I mean, we measure compensation very carefully. We've set a target of 40% as our cost ratio, which is way below any of our competitors and investment banks. Um, I think our current plan has shown that can generate the right ROEs for our investors. Um, so I don't think we've got a problem, but I think it will over time, uh, sort of change and become and, and, and generate more operational leverage as we digitize more. I think that's, what's going to happen. That makes sense.
spk02: Yep. Yep. It does. And then just lastly for me in terms of the current landscape, um, you know, the acquisition potential opportunity you mentioned, you know, some of the fallout from and share gains that you're seeing organically. Does that, you know, is it also presenting, you know, kind of itself in an M&A fashion in terms of some of the disruption that's occurring? Or is there just, should we think about it just more as customer ads and share gains versus any kind of bolt-on, you know, type of business ads?
spk03: Yeah, well, I would say our default situation is always to grow organically, and we work hard to do that. And, you know, I think we're becoming known in the market. And, you know, so we're seeing a lot of inbounds and a lot of sort of organic increases in our business. As I said in my prepared remarks, you know, that always seems to increase when you go through a period of volatility. Everyone starts to wonder if they're at the right place. And you know, once there's movement in a client base, it becomes easier to grab some of that. So I think it's a pretty positive environment or sort of organic growth. And I think that'll show up in our numbers. In terms of acquisitions, you know, I think someone asked me, might have been you, Dan, last quarter or even the quarter before, you know, sort of the landscape for acquisitions. And I think my response was, you know, the market's so overvalued and that overvalued mindset is cryptic everywhere. And people are taking sort of historic record earnings and putting, you know, historically high multiples on it. And that's just not an environment where we are going to be enticed to buy something, right? I mean, we want to be disciplined and deep value buyers of businesses that we can add a lot of value to. Having said that, I think that's changed a little bit, right? I mean, we've seen a lot of the excesses of the market have sort of rolled over. Many of them have round tripped. I mean, just look at Netflix or Zoom or So a lot of the SPACs where we were competing in M&A against SPAC alternatives, I mean, those haven't ended up very well for people. So some of the excesses are being run out of the market. I mean, it will take time before that reflects itself in sort of more reasonable price expectations. And then on the other side, when you go through these sort of traumatic events, there are people who could end up with business models that either suffered some trauma or shareholders who may be not so interested in holding those businesses. So I think the landscape's changed. I think it's becoming a little bit more conducive potentially to acquisitions. But just to be clear, there's nothing we've seen at the moment that's of any material interest at this point. So we will continue to organically grow our business. And if the right opportunity comes at the right price, we are always available to look at it.
spk02: Makes sense. Thanks for answering all my questions.
spk03: Okay, no problem. Thank you. Thanks for your questions.
spk05: Operators, anyone else?
spk00: At this time, there are no further questions. This concludes the question and answer session. I would like to turn the conference back over to management for closing remarks.
spk03: All right. Well, thanks, everyone. I appreciate your attendance today and look forward to speaking to you in three months time. Thanks very much.
spk05: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
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