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spk01: Good day and thank you for standing by. Welcome to the 2024 Third Quarter Stonics earnings call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you'll need to press star 1-1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 1-1 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Bill Dunaway, CFO. Please go ahead.
spk03: Good morning. My name is Bill Dunaway. Welcome to our earnings conference call for our Third Quarter ended June 30th, 2024. After the market closed yesterday, we issued a press release reporting our results for our Third Fiscal Quarter of 2024. This release is available on our website at .stonics.com as well as a slide presentation, which we will refer to on this call in our discussions of our quarterly and -to-date results. The presentation and an archive of the webcast will also be available on our website after the call's conclusion. Before getting underway, we're required to advise you and all participants should note that the following discussion should be taken in conjunction with the most recent financial statements and notes there too, as well as the Form 10Q file with the SEC. This discussion may contain forward-looking statements when the meaning of Section 27A of the Securities Act of 1933 is amended and Section 21E of the Securities Exchange Act of 1934 is 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 its forward-looking statements are based upon reasonable assumptions regarding its business and future market conditions, there can 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 guaranteed the future performance. With that, I'll now turn the call over to Sean O'Connor, the company's CEO.
spk04: Thanks, Bill. Good morning, everyone, and thanks for joining the call. Starting on slide three of the earnings deck, the third quarter of fiscal 2024 was a solid result for us with net income of 61.9 million and EPS of $1.88 per diluted share. This represented a .7% ROE on stated book and 16.5 ROE on tangible book value, despite a 19% increase in book value over the year and a 54% increase in book value over the last two years. This is the comparative year ago period, which was a record quarter for us, where we're down 11% in net income and 13% in EPS. On a consecutive quarterly basis, our earnings were up 17% and our diluted EPS was up 15%. We had record operating revenues of 913.7 million, up 18% versus the prior year. Our operating revenues include not only interest earned on our client float, but also carried interest that is related to our fixed income trading activities. Net operating revenues, which net off interest expense, as well as introducing broker commission and peering costs, were also a record and up 7% versus a year ago and up 11% versus the immediately prior quarter. Total compensation and other expenses were up 12% for the quarter with variable compensation up 8%, which is in line with net operating revenue growth. Fixed compensation and related costs were up 22% versus a year ago and were up 6% compared to the immediately prior quarter, due in large part to severance costs relating to an executive officer. For the nine months to date, we recorded earnings of 184.1 million or $5.64 per share, down slightly versus the comparative period. On a trailing 12-month basis, our operating revenues were 3.3 billion, 21% versus the prior 12-month period, and adjusted net income was 238.9 million, up 6%, with EPS of $7.21 per diluted share, down 4%. We ended our third quarter 2024 with book value just over $50, $50.65, up 19% versus a year ago. Now turning to slide four in the earnings deck, which compares quarterly operating revenues by product versus a year ago. Generally speaking, the market environment was difficult for us with extremely low volatility. In fact, the VIX was close to all-time lows during much of the quarter, which negatively impacted revenue capture in most of our products. Low volatility and the resulting tough trading environment have characterized most of this fiscal year. This market complacency has been difficult to understand given the current geopolitical tensions, the election cycle here in the US and in many other countries, as well as the uncertain economic situation. As we know, volatility can change quickly, and indeed recent events over the last couple of days have proved this out, and we are hopeful we may see better market conditions ahead. However, we continue to see good client engagement and market share increases, as evidenced by generally increased volumes across most of our products. The earnings power related to our enhanced client footprint should be evidenced with improved trading conditions. For the quarter, we saw strong revenue gains in listed derivatives, with both our institutional segments seeing strong volume growth of 41%, as we saw market gains with large institutional clients, offset by a 17% reduction in contract rates. Our commercial segments saw a 17% increase in volumes and a 10% increase in contract rates. Securities revenue was up 37%, with volumes up 37% rate per million down 9%. FX and CFD revenues were up 6% due to small gains in both volumes and spread capture. OTC revenue was down 8%, largely due to volumes being down 10% versus a record prior year period. Payments revenue was down 5% due to a lower revenue capture as a result of tighter spreads in most of our key payment corridors. Physical revenues were down 17% versus last year's very strong quarter, due largely to a decline in our renewable fuels business. Our aggregate client float, which includes both listed derivative client equity and our money market and FDIC suite balances, declined 10% versus the prior year. Despite this, interest and fee income on these client balances increased 26% to 115.9 million due to us capturing a higher interest rate in the current period versus the year ago period. Turning to slide five and looking at the same data of the trailing 12 months, we can again see good revenue growth across most of our products, with the exception of physical contracts. Volumes were up across the board, except for FX and CFDs, which were down 12%. Again, on a long-term basis, is an important indicator for us when it comes to measuring client engagement and market penetration. Revenue captures largely a function of market conditions. And again, we see a mixed picture as market volatility generally retraced to lower levels compared to the prior year, with the exception of FX and CFDs, which experienced a higher increase in rate per million, up 34% versus the prior year. In addition, we continue to see the effect of a change in product mix and securities revenue capture with increased volumes in lower margin products. Turning now to slide six, our segment summary, and just to touch on a few highlights before Bill gets into more details. For the quarter, segment operating revenues were up 18%, and segment income was up 17% versus the prior year quarter. All segments were up both in terms of revenues and income, except for payments, which was marginally lower. Our commercial segment had a record quarter in both operating revenues and segment income, with segment income up 7% off the back of a 4% increase in operating revenues, with increased revenues in listed derivatives and interest offsetting the lower OTC and physical revenues. On a sequential basis, operating revenues and segment income were up 31 and 47% respectively. Our institutional segment realized a 34% increase in operating revenues, which translated into a 38% increase in segment income, off the back of a strong increase in securities revenues and interest income. On a sequential basis, operating revenues were up 10% and segment income was up 1%. Retail was again a standout this quarter, with operating revenues up 5%, driving a 60% increase in segment income, highlighting operational leverage we have in this digital offering. On a sequential basis, operating revenues were down 6% and segment income decreased 17%. In our payment segments, operating revenues were down 4% and segment income was down 1%, primarily due to tighter FX spreads in our key payment corridors. Operating revenues were up 4% and segment income was up 15% versus the immediately prior quarter. On a trailing 12 month basis, we had operating revenue gains and segment income gains across the board. Retail was again the standout, with segment income up 209%, followed by institutional up 17% and payments up 19%. Turning now to slide seven, which sits out at the top of the page, our trailing 12 month financial performance over the last eight quarters. These numbers have been adjusted for the accounting treatment related to the gain in CDI acquisition, as disclosed in our prior filings, and which appears in the reconciliation provided in the appendix of this earnings death. On the left-hand side, the bars represent our trailing 12 month operating revenues over the last nine quarters. As you can see, this has been a smooth and strongly upward trend, and as we have steadily expanded our footprint and capabilities. Our operating revenues are up 72% over this period for a 31% compound average growth rate. Our adjusted pre-tax income has likewise grown significantly at a 22% CAGA. On the right-hand side, you can see our adjusted net income in the bars, which is up 40% over the last two years for an 18% CAGA. The dotted line on the right-hand side represents our adjusted ROE, which has remained above our 15% target, even though our capital has grown 54% over this period. The bottom half of the slide sets out our long-term performance, both measured in stockholders return, which is the bottom left graph, in which we have significantly outperformed both index shown, as well as our financial performance on the right-hand graph, which shows we have grown our stockholder equity, operating revenue, and market capitalization at nearly 30% compound growth rates over the last 21 years. With that, I'll hand you over to Bill Dunaway for a discussion of the financial results. Bill, over to you.
spk03: Thank you, Sean. I'll be starting on slide number eight, which summarizes our consolidated income statement for the third quarter of fiscal 24. Sean covered many of the consolidated highlights related to the operating revenues for the quarter, so I'll just mention one more item and then cover off on some of the consolidated expense fluctuations and then finish with a segment discussion. Operating revenues for the current quarter include an $8.5 million realized gain on the sale of inventories carried at cost, for which losses on related derivative positions were recognized in the immediately preceding quarter as discussed on our last earnings call. Similar in nature, the prior year quarter had a $3.6 million realized gain on physical inventories carried at cost. Moving on to consolidated expenses, transaction-based clearing expenses increased 21% to 81 million in the current period as a result of the increases in listed derivative and securities volumes as compared to the prior year. Introducing broker commissions, we're relatively flat with prior year, 43.1 million in the current period. Interest expense increased 81 million versus the prior year, primarily as a result of the $72.7 million increase in interest expense related to our institutional fixed income business, as well as a $5.2 million increase in interest expense related to securities lending activities, both of which were due to the increase in short-term interest rates and in addition in the case of the fixed income business, increased volumes. Interest paid on client balances on deposit declined 2.3 million as compared to the prior year due to the decline in average client flow. Interest expense on corporate funding increased 9.2 million due to the incremental interest on our March 1st, 2024, issuance of senior secured notes due 2031, which allowed us to extend our debt maturity profile and bolster our liquidity. The proceeds of these notes were used to defuse 348 million of senior secured notes, which were scheduled to mature in June of 2025, as well as to pay down existing borrowings on our revolving credit facility. While the funds from the issuance of the new notes were used to redeem the notes due 2025, the redemption did not incur until June 17th, 2024, in order to redeem those notes at par. This resulted in an incremental 6.8 million of interest expense during the defeasement period. In addition, upon completion of the redemption of the notes due 2025, we recognized 3.7 million loss on extinguishment of debt related to the write-off of unamortized original issue discount and deferred financing costs. Partially offsetting the incremental interest expense on the defeasement notes, we earned 3.9 million in interest income on the funds held in escrow up until the redemption date. Overall, this transaction was leveraged neutral for us while extending out our maturity profile by six years. Following the transaction, we have nearly 2.2 billion in long-term capital available to support our clients and our growth. Moving on, variable compensation increased 10.1 million versus the prior year and represented 30% of net operating revenues in both the current and the prior year period. Fixed compensation increased 20.8 million or 22% versus the prior year, which was partially driven by a 4.1 million increase in severance as compared to, or 4.1 million in severance cost as compared to 700,000 in the prior year. As well as a $1.8 million in accelerated share-based and long-term incentive compensation related to the departure of an executive officer. In addition, non-variable salaries increased 8.8 million or 13% due to a 12% increase in headcount resulting from an expansion of our capabilities among our business lines as well as in support areas that facilitate this business growth, as well as annual merit increases. Fixed compensation increased 6% versus the immediately proceeding quarter, primarily due to the increase in severance and acceleration of share-based compensation and long-term compensation I just noted. Other fixed expenses increased 15.8 million as compared to the prior year, including a $6.1 million increase in professional fees, primarily due to an increase in legal fees, a $5 million increase in non-trading technology and support and a $3.5 million increase in occupancy and equipment rental, principally driven by the acquisition of additional space in London and a continued build-out of our offshore presence in India. Compared to the immediately proceeding quarter, other fixed expenses increased 1.4 million, principally driven by a $700,000 increase in professional fees and a $700,000 increase in trade systems and market information. Finally, to close out the discussion of expenses, we had a favorable variance in bad debts and net of recoveries of 5.8 million and 900,000 versus the prior year and the immediately proceeding quarters respectively. The other gain of 1.8 million in the current quarter is a class action settlement received in the commodity exchange gold futures and options trading matter. Net income for the third fiscal quarter of 2024 was 61.9 million, which represents an 11% decline versus a very strong prior year period. Net income increased 17% versus the immediately proceeding quarter. Moving on to slide number nine, I'll provide some more information on our operating segments. Operating revenue in our commercial segment increased 9.5 million versus the prior year and 61.7 million when compared to the immediately proceeding quarter. The increase versus the prior year was principally driven by a $16.4 million increase in derivative operating revenues driven by increased volumes and widening spreads in London metals markets following the US and UK sanctions on Russian metals. In addition, interest earned on client balances increased 10.2 million as compared to the prior year due to higher interest rates realized on client balances. Offsetting these increases operating revenues from physical transactions declined 11.7 million despite the realized gain on the sale of physical inventories carried at cost I mentioned earlier, principally due to very strong performance in renewable fuels in the prior year. Finally, operating revenues from OTC derivatives declined 5.7 million as compared to the prior year, primarily due to a 10% decline in OTC volumes, primarily in Brazilian markets. Fixed compensation of benefits increased 3.5 million versus the prior year and 3 million versus the immediately proceeding quarter, primarily due to increased headcount and 600,000 in severance costs in the current period. Other fixed expenses increased 4.6 million versus the prior year, but were down 500,000 versus the immediately proceeding quarter. As compared to the prior year, we had increases in professional fees and selling and marketing. Partially offsetting these increases, we had a positive variance in bad debts and had a recovery of 5 million compared to the prior year. Segment income was 125.7 million for the period, an increase of 7% versus the prior year and 47% versus the immediately proceeding quarter. As a reminder, in the first quarter of Cisco 2024, we started to allocate a portion of our corporate expenses, each of our four operating segments, including costs associated with compliance, technology, credit and risk, human resources and occupancy. We've provided this allocation in each of our segments to the current period and will continue to do so prospectively, however, we have not calculated similar allocations for previously reported periods. For the current period, this allocation of corporate costs for our commercial segment was 8.9 million. Moving on to slide number 10, operating revenues in our institutional segment increased 127.8 million versus the prior year, primarily driven by a $99.6 million increase in securities operating revenues compared to the prior year as a result of a 37% increase in the average daily volume of securities transactions, as well as the increase in interest rates. The increase in securities ADV was driven by an increase in client volumes in both equities and fixed income markets. Interest income earned on client balances increased 13.6 million versus the prior year as a result of the increase in interest rates realized on these balances, which is partially offset by 9% and 24% declines in average client equity and average money market and FDIC client suite balances, respectively, versus the prior year. Interest and fee income earned on client balances was up 4.7 million versus the immediately preceding quarter. The increase in securities ADV drove a $79.4 million increase in interest expense versus the prior year. Interest expense related to fixed income trading and securities lending activities increased 72.7 million and 5.2 million respectively as compared to the prior year, while interest paid to clients decreased 3.8 million due to the decline in client balances. Segment income increased 38% to 62.2 million in the current period, primarily as a result of a $37.4 million increase in net operating revenues, which was partially offset by a $4.2 million increase in fixed compensation and benefits, as well as a $1.6 million increase in other fixed expenses. Segment income increased 900,000 versus the immediately preceding quarter. For the current period, the allocation of corporate costs for our institutional segment was 13.1 million. Moving on to the next slide, operating revenues in our retail segment increased 4.7 million versus the prior year, driven by a $4.8 million increase in FX and CFE revenues as a result of an 8% increase in rate per million as compared to the prior year. Operating revenues declined 5.8 million versus the immediately preceding quarter, despite an 8% increase in ADV due to a decline in RPM, which was at an all-time high in the preceding quarter. Segment income was 27.6 million in the current period, which represents a 60% increase over the prior year. This was the result of the 5% increase in operating revenues, as well as 1.7 million and $2.5 million declines in fixed compensations and other expenses, respectively, as compared to the prior year. In addition, in the current quarter, received a $1.8 million in the gold-fixed class action matter. For the current period, the allocation of corporate costs for retail segment was 11.9 million, and segment income declined 5.6 million compared to the immediately preceding quarters. Closing out the segment discussion on the next slide, operating revenues in our payment segment declined 4% versus the prior year, despite a 6% increase in ADV, as the rate per million declined 13% as compared to the prior year. Segment income declined 1%, 28.2 million in the current period, as a result of the decline in operating revenues, which was partially offset by a $1.1 million decrease in fixed compensation and benefits. Segment income increased 3.6 million versus the immediately preceding quarter, and for the current period, the allocation of corporate costs for our payment segment was 5.3 million. With that, I'd like to turn it back over to Sean.
spk04: Thanks, Bill. Moving on to slide 13, which sets up the high-level strategic objectives that we are focused on, this basic approach and strategy has been unchanged for over 15 years and has served us well, and we have mentioned and discussed the non-numerous calls before, but I think it's probably worth repeating again. We remain in a constructive industry environment, which aligns with our strategy, which is summarized on this slide. Following the financial crisis, there was a comprehensive and significant response from the regulators around the world to create a more robust and durable financial market. The key impacts of this were massive increase in costs due to more complex process and oversight, as well as dramatically increased capital requirements. This made it difficult for smaller firms and those with narrow product offerings to generate sufficient revenue to remain viable, given the cost and capital requirements. As a result, there has been and continues to be a fairly dramatic consolidation in our industry. This can be evidenced by looking at clearing FCMs and broker dealers, the number of which has massively declined. We have directly participated in this process through some of our acquisitions, and have also benefited indirectly as clients have been forced to find new firms for their business. In addition, we have seen a fairly significant withdrawal from our markets by the big banks, as capital requirements have forced them to reevaluate their strategy. The large banks in aggregate still account for the majority share of the market, but they are retreating, which creates a significant opportunity for us. Generally speaking, the Basel capital rules are punitive for the trading type operations we have, and if adopted fully, I'm certain the bank's withdrawal from our market will continue to accelerate, as they increasingly focus on their tier one core customers. Both of these factors, the low end consolidation, and the withdrawal by the larger banks, have directly and positively impacted StoNEXT, and have allowed us to post CAGAs close to 30% over the last 20 years. We think there's still a long way to go in this reordering of the market structure, and with our broad and unparalleled capability and product set, we are a daily place to continue to take advantage. The most significant strategic priority for us in the context of the market dynamics I've just mentioned, is to keep building our ecosystem. We want to be the most relevant firm in the space by having the best ecosystem to connect clients to the global financial markets. This makes us an attractive destination for new clients, looking for a single partner to satisfy their trading needs, and allows us to remain relevant to our existing clients. I believe StoNEXT is now becoming known as a growing and best in class financial services franchise. Secondly, we are a client-centric business, and we need to consistently work at growing our client footprint into new markets and expanding market share where we have existing clients. We will also seek to serve new channels, segments, and markets, and increasingly look to cross-sell all of our various capabilities to all of our existing clients. In addition, we will not achieve the necessary growth and scale unless we continue to embrace technology and digitize our offering. This will not only enhance client engagement, but increase scalability and margins. This initiative requires a rethink of our processes from front to back, and has been underway for some years now, but has been accelerated with the acquisition of GAIN, which itself is a digital business. Success on the technology side should allow us to accelerate revenue growth by more effectively gaining market share, drive margins through better revenue capture on the execution side, and allow us to achieve better operational leverage. These three factors together could and should be a powerful driver of our bottom line and net margins. Finally, our business is supported by capital, and we need to underpin our growth with internally generated capital, access capital markets when appropriate, and approach acquisitions in a disciplined manner. Our business requires regulatory capital to the client activity we take on. We believe that most of this capital should be in the form of permanent equity capital to provide the fortress balance sheet that will define a long-term client franchise. Moving on to the last slide, and in conclusion, we achieved solid results in the third fiscal quarter 2024, delivering record operating revenues of 914 million, up 18%, earnings of 61.9 million, and a diluted EPS of $1.88. This represents a 15.7 ROE on stated book ahead of our long-term 15% target. For the trailing 12 months, we generated net income of 234.8 million, an EPS of $7.21 per diluted share. In some ways, the clearest and best measure of financial performance is the growth in book value per share, which for the last year is up 19%. We are pleased to see that our business continues to generate strong long-term returns for our stockholders despite lower volatility and more challenging trading conditions, which demonstrates the multiple drivers of our results and the diversification of our business. When our performance is viewed through a slightly longer term lens, such as trailing 12 months over the last two years, which evens out the quarterly anomalies, our results continue to show a strong upward trajectory, growing operating revenues at a 31% CAGA, which is up 72% over the last two years, and our adjusted earnings at an 18% CAGA, which is up 40% over the last two years. Over these last 12 months, we continue to see growth in online trading volumes across most of our products and in operating revenues across all of our segments. Which speaks to the growth of our underlying client base and engagement.
spk00: This should
spk04: result in enhanced long-term earnings power as trading conditions improve. As a reminder, our 2024 fiscal year, we celebrate our 100 year anniversary of our namesake legacy company, Saul Stone and Company. Again, remarkable to think what started as a small -to-door egg wholesaler has since grown into a global financial franchise, expanding over 80 offices across six continents. Our longstanding track record sets a standard we believe is largely unmatched in our industry, yet we recognize we are still far from realizing the full scope of the opportunities and the market share available to us. With that, operator, let's open the line for questions.
spk01: Thank you. At this time, we'll conduct the question and answer session. As a reminder to ask a question, you'll need to press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. Please stand by while we compile the Q&A roster. Our first question comes from the line of Dan Fannin of Jeffreese. Your line is now open.
spk02: Thanks, good morning, Sean. Bill, how are you guys? Hey,
spk04: Dan, how are you? Yeah, how
spk02: are you? Good, thanks. I'd like to start just on the short term, just given all that's happened here in the last kind of handful of trading days. I'd be curious about what you've kind of seen through your platform, both from a volume perspective, which I assume is elevated, but maybe also on the balance side. And curious if you would characterize this as good or bad volatility as we kind of get to some of these very quick moves and extremes. And I know volatility has been low as you highlighted, Sean, your prepared remarks, but just a little more context around more recent would be helpful.
spk04: Well, I think as we've always said, moderate volatility and reasonable interest rates are the best environment for us. Very extreme volatility that the time that we saw at the onset of COVID or in the financial crisis or during the Ukraine War, that can be less helpful because clients are defaulting, there's a lot of market dislocation, which is difficult to handle. We make a lot of money in those environments, but you can end up with bad debts and charge auctions and the like. I would say the recent volatility over the last five days, in my opinion, didn't get to the sort of extreme volatility that I've just described. So it was obviously a spike in volatility. You know, I think obviously there were some people who were probably caught off sides by it a little bit, but we didn't see major market dislocations, the market was orderly, but volume spiked, spread spiked, and obviously that's good for us, right? So the last five days were sort of a good trading environment for us, but not extreme, didn't see any major dislocations. And as far as we are aware, you know, there's no major sort of damage that we've heard about out there. So I would say sort of high volatility, but without any major problems, if that answers your question.
spk02: Yep, that's helpful. And I guess in terms of balances and like risk, or kind of what's happened, any changes that's worth noting there?
spk04: Nothing that we can discern at the moment. Obviously, in that environment, we sort of, you know, there are lots of margin calls that have to be made. All of that was done in an orderly fashion, you know, didn't sort of see any major problems. What does tend to happen though, if this volatility continues, and you know, I think we were at extreme low volatility. So, you know, even though the mix is probably gonna come off a sort of 60 spike it hit, I think we may be in for slightly higher volatility and not go back down to the lows. When that tends to happen, you get recalibrated off a new volatility basis, which may require more balances to be put up to sustain the same level of activity. That's certainly what we saw, you know, maybe 18 months ago. I mean, one of the reasons we had much higher client balances was the exchange requirements were higher because of the COVID and Ukraine war situation, right? Had elevated volatility. So we may see a little bit of an uptick in balances just because margins get recalibrated or sort of higher volatility levels.
spk02: Got it, okay. And then just in terms of, you know, the core itself obviously revenue is quite strong, but you know, we're continuing to see the fixed expense base grow. I think there were certain, there's some things you called out Bill in terms of the one timers around severance. But if I look the nine month number versus this year versus last year, just on a reported basis, you know, fixed expenses are growing at a pretty healthy rate. So wanted to get a sense of, as you think about this transition longer term of more digitization and frankly, trying to get more efficient, you know, where we think we are in that process, because, you know, understanding variable compliment with revenues, but would have thought there'd be a little bit more higher incremental margin on the fixed side in a period like this.
spk03: Sure Dan, so, Sure. Yeah, I mean, so certainly as I called out on a little bit, I mean, we had, you know, fixed compensation or non-variable compensation up, you know, about 6 million sequentially. You know, the vast majority of that, as I touched on during my portion, you know, was related to, you know, some severance and some acceleration, you know, so I think that certainly, you know, we wouldn't expect to have that level on a go forward basis. We've seen, you know, a build out of OCC, equipment rental, you know, we are trying to take steps to, you know, to go offshore with some of our development and that digitization. So we have, you know, taken some additional space in India, you know, which is flowing through and we'd like to think we'll see the benefits of that going forward. So, you know, obviously, you know, I think that we have seen, you know, a pretty good growth. We'd like to think that, you know, certainly it's a focus for us going forward to try to drive the operating margin that we have and really focus on, you know, the growth in the fixed side. You know, some of them, you know, end up being a little bit out of your control, like professional fees, et cetera. You know, but certainly it is an area of focus for us. So we would expect the growth in it, certainly not to continue to be at the rate it was, you know, kind of in the year over year that we've seen here, as you noted.
spk04: I would say, Dan, there's sort of, you know, two big buckets of, I guess, some sort of compensation cost, or two ways to think about it, right? We've got our sort of institutional, sort of high-touch business where there's a lot of variable comp and that business continues to grow and we continue to recruit teams of people and hire people and expand that business and that obviously adds to fixed compensation and obviously variable comp when the revenues grow. So I don't think that's gonna stop growing. I mean, I think what we've got to make sure is that that growth is sort of delivering the incremental revenue we hope it's going to deliver. You know, on the technology side, certainly for the client-facing technology, you know, you sort of have to build it and spend the money in the hope that down the line you'll see the revenue and I think we're starting to see that. And, you know, GAIN, I think it's the sort of old GAIN retail platform is doing exceptionally well and that's where we hope to see, you know, real margins because there's almost zero variable comp attaching to that but there's a high fixed cost element because you've got a lot of developers and so on. And what we try to do there is refactor that cost base by pushing as much of that cost to more efficient locations, you know. So we've got, oh, correct me if I'm wrong, but round numbers, we've got 400 plus people now in India, we've got 300 plus people in Poland, we've got people that we're spinning up in some other lower cost places. And, you know, there's a pretty big delta on the cost there. I mean, it's, you know, 50% or greater in some of those regions. So you get a lot of efficiencies if we can refactor the cost base. Now we're having to build offices to do that. You see some of that cost come through. But I think that's going to refactor that cost base and as we start to see that revenue come through, I think hopefully we should start to see sort of operational leverage coming from that. And we'll have a high fixed cost, but we'll have, you know, very high operational leverage once the revenues cover the costs. The other thing we're doing internally is, you know, we're undergoing a little bit of a internal reorg to try and simplify our tech stack, try and centralize and get some efficiency out of, you know, things we believe are sort of utility functions within the company. So we're working hard to try to see that we can make that spend as efficient as possible. So I don't know sort of at the end of the day what that means. I mean, you may still see costs go up because you may find we continue to expand on the high touch side and we continue to add people, but hopefully what you should see is, you know, that's offset with incremental revenues over time. And, you know, hopefully if we do our jobs right, you know, the costs may still grow, but what we should see is increasing margins. And I think that's how we should think about it, right? We really focus now on trying to be efficient, making sure we're using technology to create operational leverage as we go forward. So we want revenues to grow, costs may grow, but what we definitely wanna see is increased margins.
spk02: Understood. Yeah, so it does, it does, thanks. And then as I think about rates and, prospectively, the potential for cuts, can you remind us on the swaps that are rolling off or what else might be offsets to lower interest rates on your interest income?
spk03: Sure, Dan, so the vast majority of all, sure, the vast majority of all the swaps are rolled off, the one we do still have on is pretty close to current market rates are just maybe 50 bits lower than what we saw. So, you know, we do have, you know, in the earnings deck, kind of still that sensitivity table that shows, you know, about a $20 million delta, you know, for a hundred basis point drop and, you know, either increase or drop, or obviously the drop is what everybody's focused on now. You know, but what I will say is that does kind of factor in that, you know, there is, you know, a fair amount that we are paying clients, you know, particularly on the institutional side where it is just a spread on the business. So there's probably about a third of those balances that, you know, with the drop in rates, you know, it's really not going to, you know, affect our overall capture on a net basis. And there's another, you know, probably third where it'll partially affect it. And then a third that you're not really paying interest on. So, you know, overall it's captured kind of in the net interest rate sensitivity table, but, you know, it won't be a dollar for dollar drop on the downside. So there will be, it will be some muted by, you know, the fact that we are just earning a spread on some of it. Does that make sense?
spk02: Yep, no, it does. I guess then just following up, Sean, just on kind of the environment, this location like this, does this create more inorganic opportunities? It's been for you guys a little bit quiet for, you know, several quarters, but the organic growth has been positive. So curious about just the dialogue and opportunity set as you think about M&A and in this environment.
spk04: Yeah, well, just dealing with the organic opportunity. I mean, I think, I think we've seen some really good organic growth at the moment and it feels to us that the, you know, the banks are really struggling and sort of having to refocus their business. I mean, we're hearing it from a number of banks now. So, you know, we're seeing a lot of talent becoming available and a lot of clients sort of being shaken loose. So, the organic sort of opportunity for us is pretty significant. And as I think I've discussed, you know, if we can bring on teams of people, that's almost like an acquisition, right? It's not recorded or accounted for as an acquisition, but the net result is the same. You know, you end up with a big chunk of incremental revenue coming across if you do that right. So, that's very constructive at the moment. In terms of acquisitions, I think, as I said previously, we've definitely seen more come across our desks and, you know, we're looking at a bunch of stuff. There's nothing we can mention at this point that's significant. But certainly it seems like the environment's getting better. When, if you have extreme dislocation, that generally provides a lot more opportunity for us. I don't think what we saw in the last five days is extreme. I think I said that earlier. I mean, it was sort of a blip, and it was good to see volatility go up a little bit. I don't think that's going to create any discrete opportunities of itself. But it does feel like, you know, the private equity bid is sort of a little bit going away. Higher interest rates have made that harder. It does look like a lot of these sort of startups that were spun up on unrealistic sort of expectations during the COVID period, when money was sort of free and available to all. Those businesses are sort of four or five years in now, and a lot of them are struggling. So, from that sense, it's becoming quite interesting. I think there are going to be a lot of interesting opportunities coming out of that. Now, a lot of those businesses may just not be viable at all and not interesting to us, but I do think there's sort of a lot of stuff where, you know, the chickens are coming home to roost, and, you know, that does give us some opportunities. So, we'll see how it goes.
spk02: Great. Thanks for taking my question.
spk04: You're welcome. Thank you.
spk01: Thank you. I'm showing no further questions at this time. I'll now like to turn it back to Sean O'Connor for closing remarks.
spk04: Well, thanks, everyone, for taking the time to listen. We appreciate it. And for everyone here in the Northern Hemisphere anyway, enjoy the rest of the summer, and we'll speak to you in three-month time. Thanks so much.
spk01: Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.
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