Q3 2019 Earnings Call
Good day, everyone and welcome to the gang Capital's third quarter 2019 results conference call webcast.
This call is being recorded.
At this time I'd like to another conference over to gain Investor Relations representative the Cobra Gay. Please go ahead.
Thank you operator, good afternoon, and thanks, everyone for joining us for a third quarter 2019 earnings call.
Speaking today will be game capital CEO , Glenn Stevens CFO , Nigel rather today's commentary on me accompanied by earnings slide deck, which can be accessed via webcast on our IR website now or at a later time.
Following their remarks, well open the call into question.
During this call we may make forward looking statements to assist you in understanding or our expectations for future performance.
These statements are subjects are subject to a number that could cause actual events or results to differ materially I refer you to the company's investor Relations website to access the press release and the filings with the FCC for discussion of those risks.
In addition statements during this call including statements related to market condition changes in regulation operating performance and financial performance are based on management's views I live today and it is anticipated that future developments may cosby's views to change. Please consider the information presented and light.
The company May at some point elect to update the forward looking statements today, but specifically disclaims any obligation to do so.
I'd now like to turn the call over to go on.
Next to go thanks to everyone for joining us today.
During the third quarter, we saw continued positive signs of client engagement.
In our retail segment, we continue to deliver new account growth.
Nearly doubled over last year and grew 32% sequentially positioning us well for the return of normal market conditions.
Welcome to volatility in U.S. equities.
Supported growth in our futures business, which saw 24% increase in average daily contracts in the quarter compared to last year.
Turning to our financial results.
Q3, net revenue came in at 66.7 million within adjusted EBITDA of 6 million.
Turning to slide four.
Q3, our marketing investments delivered the fifth consecutive quarter of new account broke.
In addition, trailing three month active accounts improved 5% over last quarter.
We are encouraged by these results and believe in our continued success driving organic growth.
On the next slide digging into our active customer base.
Our continued success in acquiring new customers has been translating into consistent growth interactive customer numbers.
You can see on the chart our trailing three month active increased for a third consecutive quarter, putting them, 10% above the level last in Q4 of 18.
Notably actives were above Q2 levels of 18, which was which was the last full quarter prior to the implementation Oh, that's my regulations.
We remain well placed for one volatility returns.
Hi, Good short term example, being the recent oil price move tied to the missile strike in Saudi Arabia, and September where our platform experienced a fivefold spike in crude oil volumes.
Examples like this proves that we have sizable stored cline potential.
Which will materialize when volatility returns.
In addition to the new one active account growth we're seeing.
For other key metrics, we used to evaluate our marketing performance remain on track.
And they are.
Our cost per new account after five quarters of increased spending levels, we continue to track below our target.
Our breakeven point.
The timeline to recover the marketing investment from each cohort remains on track with Q3 results in line with our expectation.
Our internal rate of return our more recent I ours on customer acquisition cost continued to exceed our expectations and validate our marketing spend is a strong use of our capital.
And finally, our long tail of revenue well I hope you percentage of our revenue continues to come from long tenured clients.
As our new accounts become active the mix of client transaction revenue has begun shifting to our newer customer base.
We continue to expect at the newly acquired customers will deliver revenue well beyond our ROI benchmark, which is based on a three year lifetime value.
In addition, we continue to analyze ways in which we can optimize our spend in local markets to increase yield and or reduce our spend with limited or no negative impact.
Consequently, given the prevailing usually unusually low volatility environment. We are targeting 2019 annual marketing spend to come in closer to 41 million well have about 16% over last year.
In the past we've spoken about the AI driven hedging model that we have developed and deployed.
Thanks to our focus on leveraging data to drive more effective pricing and improved risk management, our new hedging model continues to outperform our past approach to hedging activities.
Our stated objective for this effort was to reduce variability of revenue capture.
Two commonly use measures for variability and risk management, our standard deviation and to Sharpe ratio.
Oh standard deviation of daily revenue is now more than 25% lower under the new model.
Wow, a sharp ratio was almost 50% higher.
So in both cases were seeing marked improvement.
Fortunately improved variation metrics are not expected to come at the expense of our long term revenue capture.
Which will continue to trend in line with our previous guidance of 106 RPM.
We are pleased with our progress to date and we'll continue to apply this model to a broader range of products in our portfolio.
We originally applied our new model to FX only.
And we expect metals and indices well go lives this quarter.
Looking forward, our long term strategic priorities to accelerate growth remain intact.
The four pillars of our growth are rooted in our data driven approach to customization.
Few notable notable examples.
With our marketing investment, we're leveraging detailed cohort payback and internal rate of return analyses to enhance and customize our spend at the regional and product offering levels.
On innovating the trading experience, we're using data to get a better understanding of how our customers trade and what their preferences are to enhance our platforms to better suit their requirements on a customized basis.
By paralyzed by Personalizing, our trading experiences.
Based on regional product and customer segment preferences, we can drive higher engagement and activity, thereby extending lifetimes and lifetime value.
I mentioned a great example, this earlier what the recent price movement in oil.
In August we introduced a new spot crude product to complement our existing futures offering and provide our customers with a product they more easily recognize.
This afforded us the opportunity to take greater advantage of the spike in activity.
With that new product accounting for almost half of the volume during that short elevated period.
Data is also helping us become more proactive and identifying potential premium clients much earlier in their journey with us and helping us understand how to better engage with them.
As I reflect on the past nine months and look forward I'm encouraged about our position to deliver long term value.
We acknowledged that we have witnessed a period of unusually low volatility.
It has had an adverse impact on our ability to deliver short term financial result.
With that said, we have not walk from the sidelines, but rather have been proactive in evolving our business model and our marketing efforts.
That has grown our customer base, which is critical to long term success of this business.
Ultimately are broadening base of customers will drive event, driven volume increases enhancing the benefit from our improving operating leverage as we reduce our expense base even further.
We have repeatedly deliberate expenses at or below the lower range of our guidance and expect to continue to do so.
Our ability to better capture revenue opportunities coupled with expense management will ultimately allow us to maximize profitability.
But that I will turn it over a nigel for a deeper review of our third quarter results.
Nigel.
Thanks Glenn.
During the third quarter net revenue decreased 30% year over year to $66.7 million, that's compared to $95.5 billion last year.
GAAP net loss was $2.1 billion, resulting in GAAP net loss per share of six cents as compared to net income of $10 million and GAAP earnings per share of 22 cents in the prior year.
Adjusted loss was 2.1 $2.8 million and adjusted loss per share was seven cents as compared to adjusted net income of $13.8 million and an adjusted EPS of 31 cents in Q3 2018.
Adjusted EBITDA was $6 million compared to 30.5 million in the prior year.
In our retail segment market conditions are a quarterly IDV decrease of 10% year over year to $7 billion.
RPM of $114 for the quarter was slightly above our long term expectations, but below the stand at all PMN $164 seen in Q3 2018.
The combined impact of 80, Vienna help him. So total retail revenue $57 million year over year decrease of 34% with the RPM differential accounting for almost 90% of that reduction.
Marketing for our retail segment was up 36% for the first nine months of 29 thing as compared to the prior year period, as we remain committed to our organic growth strategy.
Retail overheads for Q3, and the year to date were both down 6% over the prior year, reflecting our continued focus on operational efficiency strategy.
Turning to the futures business revenues were up 9%, a $10.6 million for the quarter as compared to $9.7 million last year.
Well future as average daily contracts increased 24% to 31895 during Q3.
Revenue per contract decreased to $4 59, due to shift in product mix remains in line with year to date and trailing 12 month averages.
Overheads for the future segment year to date with 4% low over the prior year period profit margin for the features business improved to 16% in Q3, 20, renting up slightly to 15% on a year to date basis compared to prior year.
I'd like to take a moment to provide an update on our overhead guidance.
When I Q3 earnings call as a result with continued optimization of our cost structure outside of our growth initiatives, we guided to over his this year coming in there $119 million compared to the original guidance provided during Q4 18 earnings of $190 million to $200 million.
With one quarter left in the financial year, our overhead stands at $132 million equating to an annualized 176 million.
The further reduction below the previous hundred 90 million plus guidance has been driven in part by a reduction in the variable component arising from financial performance this quarter.
At this stage at 2020 guidance remains within the range previously provided I am $170 million to $190 million.
We remain committed to pursuing opportunities to further streamline our overhead expenses, which we believe will ultimately enable us to create stronger operating leverage as what does allow us to be profitable should the unusually weak market conditions continue.
As a reminder, in Q1, we decided to amend the presentation of our liquidity to directly along with the cash and cash equivalents figures shown on the balance sheet.
We made this changes we believe is preferable to reference the cash reported on our balance sheet and how that has moved period over period as set out in the appendix this presentation.
We continue to balance the uses a needs for cash in the order the dog Graham. This slide shows the primary priority being to ensure gain has a liquidity requires to operate efficiently and effectively.
We ended the quarter and had total cash and cash equivalence of $200.7 million.
Broker receivables continue to remain a heightened levels being 107.7 million at the end of Q3 2019, almost double that probably is $57.5 million.
This reflects an increase in the size of a hedge positions caused by the growth in open climbed positions, which is a good lead indicators of future revenue.
Definitely remained committed to actually be returning capital to shareholders through dividend payments.
As such our quarterly dividend of six cents, where we paid on the 70 the December .
This represents the 32nd consecutive quarter gain has paid a dividend appeared stretching back to 2011.
In terms of the next priority buybacks gain did not repurchase shares during the quarter. As we were believed in remains more prudent for now to retain capital. During this prolonged period of market low market volatility.
In addition, we're conscious about 60 million convertible loan falling due next April that we intend to repay which will also reduce the interest expense impact that has on our profits.
However, we still remain committed to actually be returning capital to shareholders with a buyback being a key component of that.
A good example, being we recently bought back a portion of the 2020 combos.
In terms of share buybacks, we have approximately $41 billion authorized and remain for additional repurchases as of September thirtyth.
With that I, when that's going into the operator for questions.
Yes. Thank you well now begin the question answer session.
They are asking a question your press Star then one under touched on file.
If you didn't speakerphone, please pick up your handset before pressing monkeys.
Are you talking a question is trying to address you would like to withdraw it. Please press star then too.
At this time, we'll pause momentarily to assemble the roster.
And the first question comes from Dan Fannon with Jefferies and company.
Thanks, I guess my first question is on capital the no buybacks in the quarter just curious.
As to why just looking at the share price action and then.
Ultimately here, just thinking about M&A and the construct a low vol environment.
You've talked about how that puts pressure on some of the more.
The smaller competitors with less scale. So can you talk about the environment today for potential M&A as well.
Sure Dan.
No.
They actually tie in a little bit together and that number one because we don't feel like we have.
Yes, an option using our equity at these prices for M&A that leaves cash.
Our seller financing other creative measures, but particularly cash as our best option for opportunities that arise in this low vol environment. So that dovetails also with our decision to temporarily scale back some of our some of the buying back our own stock, which we've been under one pretty consistent with participating in and it's not off of our slate of.
Options going forward by any measure, but there are two of the items number one.
Some of the M&A that you mentioned no currently prudent and timely for that in the second part of it is we are planning to.
Hey off the first tranche of our debt in April of 20.
Which is about.
$15 million or actually a little higher net $60 million on to pay off that's full not we bought it what a small portion back of it but I'm essentially making sure that thats kind of earmarked and geared.
To be paid off so we're being mindful of that as well and.
And in these environment, where it's more difficult to generate a lot of excess cash so.
On both sides are those all of those we made the decision over this quarter to do a little bit of of wait and see.
So I guess the combination of the two number one being prudent and and having not available without changing any of our operations, our strategic levers to pull and number two from an M&A perspective, you're right that the environment is interesting for us and but we I don't believe we have I present valued stock is.
One of our leveled levers to use.
Got it and then just with regards to expenses I understand.
Marketing and the outlook for that in the fourth quarter I guess, just surprised in the third quarter that the GE in a number went up sequentially.
You know as much as it did and just if there's anything behind that are kind of thinking about cheniere going forward.
And then the context of the overall overhead costs.
Kind of framework you gave us Nigel.
Yes. Good question, Dan here, you're right. It is stepping in Q3 in part there was some one off costs in there, which we but by the nature of why repeat I mean partner was a bit of a step up within the variable component where in relation to bank fees in the fees we pay.
Payment providers for processing customer deposits and withdrawals, which we saw a.
Positive.
That's what we're seeing a little bit more engagement from those guys now.
In terms that funding and trading to some degree.
Okay alright, thank you.
Hi.
Thank you and the next question comes from Rich Repetto with Sandler O'neill.
Good evening, Glenn good good evening Nigel.
Yes.
I guess my questions first on slide seven when you show the hedging the AI driven hedging model.
And Oh, I get you're looking at the standard deviation a daily revenue.
But when I saw just take a look at your RPM over this same period.
It certainly looks like that's very volatile when you had a 50 at 164, so I guess I'm not up on my statistics here, but can you explain sort of the difference between you know how we get to the numbers for the quarterly RPM when everything is.
And your chart shows.
You know, we're reducing volatility.
So totally totally fair question.
Part of it is perspective, and so what I mean by that is on anyone that they're slightly to different approaches on the one hand to scan deviation knowledge reported daily.
Yes, it's ultimately designed to drive a narrower range over quarters and over longer period. So im not so much in a vacuum but from a daily measure we have seen a relatively consistent march into a lower standard deviation of our.
In our day to day now we don't report a daily PML, but of course, we we track our own daily piano and ultimately by driving an hour range of output. There you know double stack up into a narrower range of variability from in this case quarter to quarter, that's that's going to be kind of overtime.
The reality is that the older model.
Go back Q1 of 18 was was that they actually have a wider range by for daily leased indignation PML and it actually did drive a higher Oh, sorry, lower Sharpe ratio. So you want you want lower standard the higher sharp now to your point when you look back.
For the last two quarters for example, and look at the 164 and the 50 and you add the two of them together. It goes right smack again to our average of 105. So yes, yes on two quarters with an up and down it failed G.S. moving around a lot when you take the lens back a little further and look back and smooth it out into multiple quarters.
It goes right smack into a magazine as 105 that we've been tracking to for years frankly, so so on that one over those two quarters no you're right that this particular model Didnt didnt soften that reality, though is I believe it or not those spikes actually would have been more exaggerated just given market conditions such that it.
What has actually been wider than 50 in one fixed before that.
It.
It's not an improvement over the previous three five quarters, but actually wasn't him was an improvement over because we run simulation testing all the time I wasn't improvement over the goal of the old model that way. So again on the on the longer you. If we had to parallel universe of looking the old model New model. This new model does continued.
Actually raise the sharp and largest and deviation those two quarters as you pointed out probably fair, but when you look back further and you can we go back 1357 years, New model testing complete outperformed in every case.
Okay.
Oh, Okay that helps Glenn then they the Nick next question Nigel just on the tax rate can you tell you had I think it given this guidance for <unk>.
Yes for the three quarters you.
To date and it sort of buried was that because of the the loss I guess.
Yeah I mean.
It's a function all the level of losses, but also where those losses arise and then the impact of items that deductibles.
Piano purposes, but are not deductible for tax purposes.
And those can move the right around a little bit goes you would think 19% in the UK, 21% in the U.S. you'd be around 20% ordinarily.
On slide 23 years of Diana adjusted basis, where the 16%, which I think we mentioned on the September metrics. So the gap between that sort of 20 in the 16 would be due to some of those nondeductible items, reducing the tax credit.
Got it okay.
And I.
I guess sort of a optimal Hawk question. Glenn you know what did you certainly have heard about zero commissions in the equity.
Market and I'm, just trying to see whether any M. I know your model is completely different.
Got it.
Strict agency model like but.
Has that even come up.
I would clients in regards to the built the lowering of commissions I guess.
In a different asset class.
That's an interesting point rich and of course, we've been watching.
That whole development unfold, so quickly do anything with touch on large players for a piece of the market, particularly in the us.
One little side benefit Thats actually had is that there was a certain sense of we can lead to call. It missed trust a lack of understanding or discomfort, we're actually customers not paying commissions in our business kind of didn't fit well with some customers you have new customers looking into our market I'm trying to figure out how to trade. This mark.
Okay, and it's almost like I don't get it that seems to good to be true I totally get it. If you charge me five Bucks a 10 Bucks a trade then I then I would make sense. What do you mean, there's no commission and trying to walk somebody to the whole concept of being able to have a bid offer spread and extract.
Our Defacto commission on each trade by being the market maker, it's hard to explain than saying it 799. So in one in some ways. You know now we have others, joining our challenge to explain the customers to say well, yes, we're able to let you trade with us without commission and.
Okay, I get it but why and then they have to explain security lending revenue and financing revenue in all the kind of stuff not great and not easy so in one in some ways. It actually that's credibility to our model Oh I see I see how a broker can be commission free and still be completely above board. So thats kind of an odd.
But beneficial understanding for us as equity traders look at other markets on the other part of it though.
Is that outside the U.S., we do have commissioned some commission based products, where people are accustomed to paying commissions to creating non FX products and in those cases.
You have a situation where spreads are so tight that they'll pay that and we have yet to see any of the provided in that cfd business.
I feel any pressure to adjust the models, but it is something we would get you would have to consider and my guess is that.
The pricing we're just the adjusted so when you're at these razor thin bid offer spreads.
In these products that have a low commission you'd probably end up with an adjustment that way because it's a little bit of a combination of is it in the spread or is it in the commission until it ends up getting adjusted but but in general it hasn't created any negative connotation I just wanted to highlight that one kind of positive one because our relationship managers have provided some feedback to say hey.
People got this question kind of satellite Koji now I guess.
Got it got it and glad I'm going to leave it to someone else asked how October is doing today. So.
[laughter].
Yes, Thank you and the I suppose it comes from kind of wait with KBW.
Hey, good evening.
And on October , but I had just a question on the new direct accounts they continue to grow.
Got him that slide you provide there I guess when we see a number above I think it's about 40000 on this new direct accounts acquired in the quarter, but we only see your trailing three month active direct accounts increased by 3000 in the quarter.
I'm trying to figure out what does that really mean art I guess, it's one of two things are these clients is opening accounts and just not trading at yet or are you experiencing higher attrition rates then you have historically.
[noise] icon, yeah, coming I mean.
Sure. Thank Wayne, but the answer your question I mean, it does take time for new accounts, yes. Once they've opened accounts to get used to the platform going on fund and then B.
They are ready to trade and then for the Ryan money into I think Retrading remarkets.
So that can be a slight delay and I would mention that that that timing of delay, which we do monitor very closely and quieter period almost automatically scratching somewhat it's really busy somebody open funds in trade in a very short amount of time and when it's low volatility or not as much of an urgency affect the time between since.
Submitted at two traded which by the way in between there means approval and funding and traded extends out now we can accelerate by our own technology in efforts and investments the ability for us to improve.
Submitted app, but that doesnt help the timeline as much because you can't extract funds from somebody they have that they have to opt to fund obviously voluntarily so without that now factor into markets that naturally extend itself, which which we've seen this in this environment Thats kind of one factor the other the other factor I think I would.
And also is that.
Some of some of the customers, we're bringing to market as we widen our widen our audience and we've expanded our marketing does bring in.
Slightly less intended or.
Urgent customers, who are seeking us because because by natural by natural selection, let me cast a wider net we ask people, who say, yes that is pretty interesting I'll open an account, but but what happens is we they almost end up in our funnel of conversion efforts, where we have outbound so someone someone onboards put in an app and this is.
Nothing no for anybody who has shopped online for vacation or piece of closing or whatever where where you get an email. It says hey, we saw you're interested.
What can we do to sweeten the deal well how can we how can we get you to convert to a lot of customer and so again. This concept of number one they are not being a market urgency and number two going to a wider audience, there's a little bit more effort to get them to that traded level.
Because I will say that the funding percentages have held up pretty well on which is which is encouraging because summit on one hand, you know.
It's been awhile, but we no longer.
How are.
Unique impressions right you remember that term everybody was using online businesses unique impressions that who cares. Good luck on the website. What are you doing to convert and then monetize them. So we moved on from there and then it was submitted that yes, but if the quality of you submitted apps degrades then that doesn't help you convert we haven't seen that that's actually holding up very well.
Well and then some from the percentages and conversion from submitted apps to approve that has held well because again a few quality was low people aren't.
Early well first is not an age they don't have sufficient funds whatever things that would disqualify them.
In various jurisdictions has held up well and then and then the funded percentages as it has held up well the part that's the challenge for US in these environments. When its client is getting to convert to trade. So it doesn't surprise me that that yield is lower but what's really more important is that your hurdle to engage them and thats why I used. The example of the oil.
We didnt have a double or triple we had a fivex spike in oil now granted oil is a small product for us and it was two days and it didnt hundred them on their penile impact. Obviously, however, it did show me now with a broader they have opened and funded and ready to trade clients when something happens that was compelling and that.
And on a Saturday and by Sunday evening, we saw this huge spike that continued through Tuesday that show a bigger base of clients engage and by the way we looked at the numbers and it wasnt just existing customers that would lead us more than a year nearly half of the volume and came from customers inside of the year. So these are new people, who hadn't necessarily engaged.
Having said Oh shoot I have an opinion I need to do something I think that was really I think I was very helpful. And then when you add on top of that kind of us trying to innovative new product and that's why we highlighted the idea of saying here's a spot oil product that doesn't roll over like a future. It's just really easy to trade trade just like the currency you are bullish earlier bearish oil you not to worry about carry fund.
Dancing end to end of contract life or anything like that we can see that the response is really good. So I guess, what am I use that as a microcosm, but the reality is as long as that potential value is there, which we're seeing by building. All these funded accounts and that's why we kept the funded accounts, they're not open applications the not submitted applications they're actually.
You know accounts that have been completely approved and ready to go.
Okay, and then I guess.
I think part of that question, Kevin off you directly answered or not maybe ill more directly ask as have your attrition rates.
Increased I guess when you look back over the past 18 months or 24 months has there been an uptick in attrition rates.
It's been.
Uptick in attrition no not necessarily an up the so like the rate of churn hasn't materially hasnt materially changed.
From what we've seen you own seen even at lower levels of customer attraction.
Okay.
And then just on the marketing I think if youve.
Maybe didn't put in this slide by in last quarter, I think you talked about an IR.
At very high our IR are on the marketing spend in you highlighted as a good use of capital right now as it is continuing to invest in marketing I guess it just is that what assumptions going into that in terms of you're just talking about these these are different types of clients, maybe that you're kind of casting a wide.
Our net is it possible that these clients maybe a lot less active and your current clients maybe less some just even convert from funded accounts to actually trading or active accounts.
Yes.
Functions are in that no. It's good it's a good question Kyle and the way we measured as a couple of fold. One of them is just time and so we're just coming up on our first cohort of a year's worth so it so off in Q4 of last year someone is now coming up on that first full year with us and if we are looking at a three year.
We generally consider lifetime value of our client to be Frank mostly captured within three years. No reality is we have lots of clients and trade with us want the five years and there is as long term.
Tailored revenues is almost almost 50% of revenues come from will be considered loyal clients with the tenure of more than three years, but for the purpose of this marketing investment we use a three year value as there as the or the total return aspect to look to reduce the IR are over that time right. So we look at the amount of money.
The amount of spend the amount of return in a three year period yields you're IR. The good news is that Thats held up continue to hold up.
Above our expectations and pretty well so in terms of the degradation of the quality of the client.
No we're not seeing a market marked marked situation. There however that to be fair to truly measure. It we probably have to look out another couple of quarters to say, okay. Let me add that first quarter cohort that came in let's call. It lets call. It a Q4 cohort then there was a Q1 19 cohort Q2 Q2, it's hard to make.
The complete determination that early in the cycle too when you and the reason being I think I have a better answer for you that if there were a plethora of trading opportunity and the returns weren't there then I'd have to say to you Yeah, you know what.
Because they should have been more active they should have treated more than we should have generated more.
Revenue because ctr.
Client transaction revenue. Thank you forget that one.
But that can transaction revenue it should have been there, but when you add we don't have that platter of opportunity than instead, you have a dark opportunities in long term lovallo. Dennis you don't want to be quick to judgment to say, hey, you're a week Europe quarter in our two quarters in well first of all it's it's two quarters over 12 and second of all year.
During this pretty poor environment to be able to make a decent judgment. So I'd say that based on observation empirical evidence no and number two based on kind of kind of subjective to to say well you haven't really even had decent a decent.
Test that way so despite that there's still getting some pretty solid returns in terms of an eye on the investment and that's why we actually mentioned that again in this back to say, we still consider it a very rewarding use of capital for us.
Okay.
I have one more question and then I'll hop back in the queue, but just maybe a little more unusual but.
But I'm thinking about your business and maybe potentially other adjacent areas, where I'd like your regulatory status scale trade technology user interface could be could be useful.
One becomes a mine is online and mobile sports betting and another broker in the space IDR launched a simulated sports betting application recently.
Because my question is would there be any desire for gain to build out something to address that kind of growing sports betting market in the U.S. directly.
Or even licensing some of your technology or partnering with someone.
In that space or is that just too too far ahead of a leap.
It's a really interesting question and we have spent a fair amount of mindshare internally reviewing it looking at it with partners.
It's amazing.
Frankly to see how much of a magnet its drawn I don't think you can listen to the radio a watch television.
Hasn't seemed to an end date.
Online, yet frankly, but certainly on TV and radio and this tristate area. You can you can't go 11 seconds without somebody on hitting you up with the client customer bonus and in our business to be able to track a lot of these.
Marketing activities, we're very the custom with it and it's amazing how similar they are they're deploying frankly financial services models to say look here's how you refer a customer or here's the signing bonus or here's a way to make a trade in fact, though but not not lose any money on it.
All these kinds of things are amazing and I'm not so sure FINRA.
Or the or the CFTC would be all too pleased but neither of those entities regulate sports gambling.
And so short answer to your question is yes, we very much have considered it and it was interesting to see I'd be K R. Dip. It tell if you will also to note some of our UK based brethren in the past actually had pretty sizable sports betting operations and whats interesting spent up until up until about five years ago.
Seven years ago is very much as a part of their business and then exited it because there was this kind of arguable tarnished that said nowhere for investors and so we're not going to get into sports betting and yet you see very reputable farms now kind of circling back and say hey, if thats, what you want to speculate on with all these tools and all this technology, it's much more than just a scientist.
Corner, taking a betsy on giving you slip a paper then I guess I guess my answer to you is I don't believe it's outside of it around the possibility. We do have a lot of technology and expertise in this space. However, it does appear that some of the private private equity backed shops in some of the other on transports.
From other other locales have really flooded this market to be interesting to see if the table to support all of them. Because it is there's got to be 15, right off the bat 15 pretty big providers for just the at least for now, Pennsylvania in New York in New Jersey, Billy Just Pennsylvania, New Jersey market. So.
But look to be fair, particularly in the U.S., it's highly likely this becomes multistate kind of like Easypass pretty quickly.
So it wouldn't be it wouldn't be terribly hard pivot for us and it's something that if it's done in a way that we think we can add value and differentiate I don't think it should be offer a possibility last.
Thank you.
Yes.
Thank you and that's again as a reminder, please press Star then one if you would like to ask your question.
And the next question comes from Ken Worthington with Jpmorgan.
Hi, good afternoon.
We have seen I guess losses three out of four quarters, there's clearly a lot of pressure on the business. How does the consolidation environment look right now so as you look to your I don't know smaller competitors are worthy competitors and you know parts of Asia in Europe I assumed.
Pressure is fairly intense on them as well.
Are those competitors closing shop or does it make sense you know to.
Acquire that those that customer base. So what does your appetite for transactions right now.
The appetite any ability remain because we have a track record of I. I would argue successfully assimilating.
Acquisitions over the last decade.
It does give us comfort and face that.
When and if they make sense, we'd be able to move forward.
And do something about it number one maintaining a fair amount of cash dry powder number two being operationally willing and able to do those deals because by the way sometimes people are financially able but operationally began to get mired.
And so thats handy and and we certainly have pockets of opportunity globally, where they would make sense to so regions like southeast Asia and the Middle East in Latin America, where we are even certain parts of Europe , we were not particularly strong yet I would argue that it's a step function ability to get into those markets. The good news is that with approach.
A long period as you mentioned of challenges in this environment.
It does make for a more reasonable value discussion when you when you happens discussion people. However.
In some ways when you buy into the business.
Were pretty good at being able to price the assets of another business, but when someone wants to sell their intrinsic what they considered consider their intrinsic value technology youre market positioning or what have you. That's a harder discussion because for us we kind of feel like.
It's a too it's a two pressure one pressure is is prevailing market environment.
In the present, the other pressures the regulators who actually.
Create a benefit for larger more stable more solvent.
Providers like ourselves and so in some ways. The marginal players who are deploying very aggressive tactics or very thinly capitalized or not really providing the proper infrastructure for an on the boots organization I'll give you. An example, even have.
No outside police been like Google determining that if you don't have a license in a market you can't be found on Google search in that market. So let's use Canada for example, unless youre rendered properly license there.
Only recently, we will shut down advertisers, there who decided to slow the local registration and.
Let me try to attract clients like that or the good news is for US is that we've become part of a very small group that can provide these services. There because we are properly registered in license and all those people we were competing with who didnt have any there audits that come from Iraq and capital requirements and staff from such we're competing with us at a very low.
Cost basis now they can't because because the regulator does what they can but it really helps from Google says, we'll now we're just going to block your content. So that's good examples of we would we don't need to buy that shop in that business. There because we're going to get that business going forward I'm, not saying, it's a huge market opportunity, but I'm, saying is an example.
Clearly of of other outside pressure is forcing some of the marginal players out. So I think that we do we do a very open an active in discussions where it makes sense strategically, but there's also a bit of a positive coming our way and I guess I'll add to that.
I'm being well capitalized does help kind of short term challenges when it comes to making money losing money.
But even on a cash basis, making money, but on a on a noncash space with a net income basis, when you count DNA and others, losing money.
But it doesn't mean that we're we're also not finding ways to to lower our breakeven. We continue to do that actually if you compare our kind of present.
Financials with with ones, even a year or two ago.
We're we're act by managing our cost effectively and you'll notice we continue to come in on the lower end of our every time, we give our cost guidance will comment on the lower end of it.
That's not that's not a desired that's going to go away for us.
Yeah, I'd just add to regulators. So we focused on overheads, but if you look at our income statement now you will see DNA has come down because we've been comes about capex been introduced that over the last couple of years. So that's flowing through into the other day and I'd number on it we mentioned earlier repurchasing the converts that then reduces interest expense. So we're looking at every line weaker.
When an income statement to see how do we get those to a level that in conditions, where the 87 billion. We can be fairly confident we'll have a positive net income with the idea being that that if the storm you can't determine.
How long challenging conditions prevail, but we want to be able to being a better situation. So that when the weaker providers continue to suffer either you're able to do a deal with them or they can compete with you anymore. So that's why it's got a benefit that way too.
Okay. Okay, great. Thank you. Thank you very much.
Got it okay. Thank you and the next question comes from Russia.
They have PR.
Hi, guys.
Can you.
Give some color on the market, making this quarter as a proportion of total trading.
How did it and how did trend versus.
The volatility that you saw last quarter versus this quarter.
And to see mix.
So just to confirm you're talking about Q3 versus Q2.
Yes, Q3 versus Q2, just you know how would how the amount of market, making you do versus unit direction on trade.
Reflects I guess sort of like some of the revenue capture.
Can you talk about what proportion of the total trading with market, making and if and also if.
You know your AI related hedging model is helping.
You would.
With the market, making proportions.
And the RPM.
Hey largest knowledge of it just just are you, saying how much of the activity. We saw in Q through Q3 was customers naturally offsetting each other versus that's write offs that HD exists.
Tom.
We haven't disclosed that at this stage I think in accusing the case, we have that statement around I think is nobody on 95, 97% is either naturally hedged on ways to brokers and this this quarter was no different to that and keep in mind that from a market, making perspective. If you will you use the word uni directly.
And on just want to clarify there isn't any directional.
Market, making we're going up within our business are within our capacity so 100% of everything that we do is facilitating customer hedging now whether thats done as we said instantaneously or not that I. Just wanted just to clarify the directional aspect doesn't exist. It's.
But in terms of what portion that that remains pretty pretty much high the dip. The difference here. Most importantly that drives RPM capture or if you will our market, making piece is that propensity for customers to have to wait trading and what we what we mentioned for example in Q1 when you had very narrow ranges, but at.
Very well defined ranges you get you get very little.
Bi directional trading because it actually let's use the word in different contents, maybe you got a lot of human directional trading because when the euro is trading in a super tight range that repeat itself over a quarter you get the preponderance of your customers all selling at a high than all buying near the low as which means our ability to capture offset or internalization is.
He low so we end up having to do a lot of real time external hedging, which means you are correct. Your spread capture is lower when you have less defined ranges and more to a trading even with the same kind of volume. It's just a different nature you end up with the 164 instead of a 50 in terms of an RPM. So so I guess, maybe if I phrase.
It that way when you look back wasn't so much the nature of our market, making versus anything else. It was the nature of the customer trading that that defines a difference between a 51 in 64.
Okay. Thank you and also the hedging the hedging model that you're talking about using AI I see that the standard deviations of the daily revenues is going down and does this.
Does this help you in.
The reducing the quarterly variability of RPM is going forward.
So so it's good you asked the question because it's a little bit with a question again earlier in the screen today on the key part as what you said about quarterly because you know you know one of your colleague said, well, Hey, I see that the sharp ratio is improving because it's going higher over time and I see as the standard deviation of daily PNM was going down.
And that means improving there's less variable, but why now did you have this big difference between 164 and 50 in the first thing you highlight is to say well, yes in those two quarters that those are variable number one I'd point out that they go right smack through our long term average of 105 when you when you add 160 415 divide by too.
Oh pretty close and then and then.
Over longer term vis vis AI model was not necessarily designed to reduce quarterly variability. It's designed to review to reduce overall variability, meaning over a year over 60 month over two years. So we've been running these parallel testing since Q1 of 18 and by every measure in the last let's call. It 18 months.
If you go from Q1 of 18 to now so roughly 18 months.
All of the goal of the measures show that we would have had eight a. a higher standard deviation of daily PML, we would've had a lower sharpe ratio.
We are using our new model. So so it has improved.
I guess, the one thing that we can't show you is to say Oh by the way the difference between Q2 in Q No. Sorry, Q2, Q3 of 18 and Q1 of 19 would have been even greater everywhere in running the model.
Got it got asked I'll I'll take it offline. Thank you.
Yes sure.
Thank you.
And that does conclude the question answer session as well as a car sells the conference has now concluded. Thank you for attending today's presentation and not a centralized.