Q4 2023 StoneX Group Inc Earnings Call
[music].
Okay.
Good day, and thank you for standing by and welcome to the Stone Ex Group, Inc. Q4 fiscal year 2023 earnings call. At this time, all participants are in a listen only mode.
After the speaker's presentation, there will be a question and answer session to ask a question. During this session you will need to press star one on your telephone.
We'll then hear an automated message advising that your hand is raised to withdraw your question. Please press star. One again, please be advised that today's conference is being recorded I would now like to hand, the conference over to your Speaker Bill Dunaway CFO. Please go ahead.
Good morning, My name is built on a warm welcome to our earnings conference call for our fourth quarter ended September 32023.
After the market closed yesterday, we issued a press release reporting our results for our fourth fiscal quarter of 2023.
This release is available on our website at Www Dot <unk> dot com as well as a slide presentation, which we'll refer to on this call in our discussions of our quarterly and year to date results.
The presentation and an archive of the webcast will also be available on our website after the call's conclusion.
We're 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 10-K to be filed with the SEC.
This discussion may contain forward looking statements within the meaning of section 27 of the Securities Act of 1933 as amended and section 21 ear of the Securities Exchange Act of $19 34 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.
Can be no assurances that the company's actual results will not differ materially from any results expressed or implied by the companys 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.
Okay.
Thanks, Bill good morning, everyone and thanks for joining our fiscal 2023 fourth quarter earnings call.
During the fourth quarter of fiscal 2023, we saw strong 33% growth in operational revenues.
Spike generally moderating volatility, although we did see some really sharp moves in the interest rate markets.
The extent and speed of the interest rate increases over the last 18 months is nothing short of historic and has resulted in a general repricing of risk in financial assets across the board.
But while it would appear that the trajectory of interest rates, maybe flattening I do not think we have seen the full force and Brian to be historic moves manifested themselves, yet and there's likely to be some further dislocation in financial distress as a result.
This was a solid fourth quarter for us and a truly exceptional and another record setting year for the company overall validating our strategy and demonstrating the earnings power of our franchise.
For the fourth quarter, we recorded operating revenues of 778 million up 33%.
Versus the prior year.
Net operating revenues were up 4% and compensation and other expenses were up 3% from a year ago, resulting in pre tax income of 75 point.
$4 million up 14% versus the prior year, which was a strong comparable quarter for us.
Despite the increase in pre tax income a much higher effective tax rate to 32, 8% versus 21, 2% in the prior year quarter, driven by discrete items. Some year end adjustments in each period resulted in a 3% decline in net income to $50 7 million and diluted EPS of $2 36.
And then ROE of 15%.
For the full year's results the tax rates are relatively comparable at 26, 2% for fiscal 'twenty three compared to 25, 3% in the prior year.
Turning now to slide three in the earnings deck.
Listed derivatives operating revenues were down 2% largely due to a 3% volume decrease versus together.
Listed derivatives in our commercial segment volumes were up 21% higher on the institutional side.
The volumes and this is a much higher volume business were down 9% leading to the overall contract volume decline.
OTC derivatives operating revenues were up 22% off the back of strong volumes.
Security is operating revenue was the most significant contributor up 70%.
Does that number somewhat distorted due to the much higher interest rates on our fixed income business.
Carried interest on fixed income position is reflected in operating revenues, while the offsetting interest expense to finance these positions is not.
The RPM the rate per million numbers have been adjusted to reflect this offsetting expense.
Net operating revenue for the fourth quarter for Securities declined 15%, primarily primarily as a result of the rate per million declined 45% due to lower volatility and tougher market conditions in the equity business as well as a lower margin product mix in both equities and fixed income both of these mentioned in previous call.
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FX and Cfd operating revenues were down 3% with a higher RPM being offset by lower Adv impacted by tougher new client acquisition environment internationally.
Global payments operating revenues were up 21% due to a higher RPM versus the prior year quarter.
Interest and fee revenues were up 110% versus a year ago, as we compare to a lower rate environments in the prior year.
C suite balances were down 40% as clients moved into higher yielding alternatives with our client funds on the derivative side were relatively unchanged.
Moving on to slide four for.
For the fiscal year as a whole it was generally a very similar picture.
Listed derivatives operating revenues were down 3% largely due to a 4% <unk>.
And the average rate per contracts largely coming from our commercial segment.
OTC derivatives operating revenues were up 11% over the back of strong volumes, which were up 20%, although the rate per contract declined 7%.
Physical contracts operating revenues were up 26% versus the year ago period, primarily as a result of the CDI acquisition at the beginning of the fiscal year as well as the growth in our buyer fee biodiesel feedstock business.
Securities operating revenue was again, the most significant contributor up 74%, although again distorted for the higher because of higher interest rates as I mentioned earlier.
Net operating revenues in securities transactions declined 11% versus the prior year as an increase of 52% in Adv was more than offset by 40% decline in revenue capture.
FX and Cfd operating revenues were down 23% versus the very strong results a year ago with ADP downturn.
Rate per million down 12%.
Global payments operating revenues were up 24%.
Due to both a higher ABB in RPM.
Interest and fee revenue was up 331% versus a year ago, as we compare to a lower rate environment and the year prior.
On an annual basis by FTR sweep was down 25% as clients moved into higher yielding alternatives, while client funds on the derivative side were up 25%.
Turning now to slide five and a summary of our fourth quarter and our full year fiscal results.
We recorded operating revenues of $778 million up 73% versus the prior year.
Net operating revenue was up 4% and this is after interest expense, including the interest related to the fixed income trading mentioned earlier.
Total compensation and other expenses were up 3% for the quarter.
This resulted in net income of $50 7 million down 3% for the year from the year prior and diluted EPS of $2 36 down, 5% and a 15% Roe.
As I mentioned upfront there is a much higher tax charge. This year 32, 8% versus 21, 2%.
On a pre tax earnings basis, the quarterly results were up 14% versus the prior year quarter.
The average pine float was seven 8 billion down 10% from a year ago and up 1% from the immediately prior quarter.
<unk> results were boosted by higher interest and fee income on our client float as short term rates increased over the period.
Average yield on our client float was 372 basis points for the year overall, and 422 basis points for the fourth quarter.
The yield on our client float was adversely affected by some interest rate swaps, we entered into about two years ago, which will start rolling off in the coming quarters and should boost our yield assuming of course no change in interest rates.
In comparison with the immediately preceding quarter operating revenue was up modestly and net operating revenues were down 7%.
Fixed compensation was up 2% and variable compensation was down 14%.
And net income was down 27%.
Looking at the summary for the full fiscal year. This was a record year for us in almost every metric.
Operating revenues were a record $2 9 billion up 38% over the prior year.
Net income was a record $238 5 million up 15%.
Look at EPS was $11 18 for the full fiscal year up 12%.
ROE was 19, 5% despite equity having increased 53% over the last few years.
We ended Q4 'twenty three with the book value per share of <unk> $66 31.
$13 61 for the year with 26% versus a year ago.
Turning now to slide six which is our segment summary, just to touch on a few highlights of the full bill gets into more details for.
For the quarter segment operating revenue was up 32% and segment income was up 20% with good performances across all of our client segments.
And our commercial client segments.
Income was up 10% off the back of a 12% increase in operating revenues with strong results from OTC derivatives and of course higher interest rates offset by lower physical commodities revenues.
Our institutional segment realized a 65% increase in revenues, which translated into a 22% increase in segment income.
Foreign exchange business had a very had a very good quarter and of course, we benefited from the positive impact of interest rates. This was offset by a tougher environment in securities, particularly on the equity side.
Despite operating revenues being down 9%, our retail segment delivered a 39% increase in segment income due to good revenue capture on the digital trading platform and 23% lower non variable costs.
Some of this cost reduction is a result of certain functions such as the digital marketing group being moved to a central overheads to be leveraged throughout the entire organization.
Global payments operating revenue was up 22% and segment income was up 32% driven by a 26% increase in revenue capture.
For the full fiscal year segment operating revenue was up 37% and segment income was up 13% with strong performance across all of our client segments, except retail with segment income was down 60% against the exceptionally good prior year performance.
Okay.
These are solid results, but as we've said repeatedly we take a long term view and how we manage the company and for our franchise as such we believe the best way to gauge our results and progress is took a look at longer term performance such as trailing 12 months rather than specific quarters taken in isolation.
Turning to slide seven which sets out our trailing 12 month financial performance by quarter. These numbers have been adjusted for the accounting treatment related to the gain at CDI acquisitions as disclosed in our prior filings and which appeared in the reconciliation provided on the last page of the earnings deck.
On the left hand side, the baas represent about 12 months.
<unk> 12 month operating revenue over the last nine quarters as you can see this has been a smooth and strongly upwards trend as we have steadily expanded our footprint and capabilities.
Our operating revenues up 74% over this period for a 32% CAGR.
Our adjusted pre tax income likewise has grown significantly at a 37% CAGR.
On the right hand side, you can see our adjusted net income in the back office, which is up 79% over the two years for 34% CAGR.
<unk> line represents our ROE, which has remained above our 15% target, even though our capital has grown by 53% over those periods.
With that I'll hand, you over to Bill Dunaway for a more detailed compensation bill.
Sure.
I'll be starting with slide number eight which summarizes our consolidated income statement for the fourth quarter of fiscal 2023.
Transaction based clearing expenses declined 1% to $68 6 million in the current period, while introducing broker commissions increased 5% to $39 2 million in the current period.
Principally due to increased activity in our commercial segment, both enlisted derivatives as well as a result of the CDI acquisition, which was effective October 31 2022.
Interest expense attributable to trading activities increased $175 6 million versus the prior year, primarily as a result of the $138 $7 million increase in interest expense related to our institutional fixed income business and a $27 $2 million increase in interest paid to clients.
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Both of which were a result of the significant increase in short term interest rates.
Interest expense on corporate funding increased $1 7 million versus the prior year also as a result of the increase in short term interest rates, but partially offset by a decrease in average borrowings.
Variable compensation declined $17 3 million versus the prior year and represented 28% of net operating revenues in the current period compared to 33% of net operating revenues in the prior year period.
This decline in variable compensation as a percentage of net operating revenues as a result of the significant increase in interest and fee income earned on client balances as compared to the prior year. As this revenue is typically not included in variable compensation payouts.
Fixed compensation increased $17 3 million versus the prior year due to a 14% increase in head count, resulting from the expansion of our capabilities among our business lines as well as in support areas facilitate this business growth.
The effect of annual Merit increases and a $1 $7 million increase in share based compensation as compared to the prior year.
Fixed compensation increased 2% versus the immediately preceding quarter.
Other fixed expenses increased $6 8 million as compared to the prior year and $4 $7 million versus the immediately preceding quarter.
As compared to the prior year non trading technology and support increased $3 2 million trade systems and market information increased $1 $9 million occupancy and equipment rental increased $1 5 million and travel and business development increased $1 million.
The increase versus the prior year is principally related to an increase in bad debt expense in our physical AG and energy business, which was partially offset by a recovery in our institutional futures and options business.
Net income for the fourth quarter of fiscal 2023 was $50 7 million, which represents a 3% and 2% decline versus the prior year and immediately preceding quarters respectively.
Moving on to slide number nine.
Ill provide some more information on our operating segments.
Our commercial segment added $22 3 million in operating revenues versus the prior year, However declined $45 2 million when compared to the immediately preceding quarter, which was a record one for this segment.
The increase over the prior year was driven by a $10 $9 million increase in OTC derivative operating revenues, most notably in agricultural and soft commodities and.
In addition interest earned on client balances increased $19 5 million as a result of a significant increase in short term interest rates.
Average client equity declined 22 point, 22% versus the prior year, primarily as a result of lower margin requirements due to the decline in market volatility.
These increases were partially offset by a $9 $4 million decline in operating revenues from physical transactions. Despite the acquisition of CDI earlier in the year, principally due to decreased activity in biodiesel feedstocks this quarter, which had been a large contributor to the immediately preceding record quarter in this segment as well as a decline in precious metals revenues.
Fixed compensation and benefits increased two 9% or $2 9 million versus the prior year, However declined 900000 versus the immediately preceding quarter.
Other fixed expenses increased $2 6 million, including increases in travel and business development professional fees, selling and marketing and depreciation and amortization.
Bad debt expense increased $5 million as compared to the prior year.
As I mentioned earlier was primarily related to our physical AG and energy business segue.
Segment income was $88 million for the period, an increase of 10% over the prior year period, However, our 25% decline versus the immediately preceding quarter.
Moving on to slide number 10.
Operating revenues in our institutional segment increased $167 9 million versus the prior year, primarily driven by $125 $3 million increase in securities operating revenues compared to the prior year period as a result of a 58, 7% increase in the average daily volume of Securities transactions.
As well as the increase in interest rates.
The increase in security of Adv was driven by an increase in client volumes in both equity and fixed income markets.
Sean mentioned earlier the increase in interest rates also led to a significant increase in securities related interest expense for the period, which I will touch on momentarily.
Interest and fee income earned on client balances increased $34 4 million versus the prior year as a result of the increase in short term interest rates as well as a 10% increase in average client equity.
This was partially offset by a 40% decline in the average money market and FDIC sweep client suite suite balances versus the prior year.
Interest and fee income earned on client balances was up $8 million versus the immediately preceding quarter.
The rise in short term interest rates drove $171 $8 million increase in interest expense versus the prior year.
Interest expense related to fixed income trading and securities lending activities increased $138 7 million and $5 1 million, respectively as compared to the prior year, while interest paid to clients increased $23 9 million.
Segment income increased 22% to $55 million in the current period. Despite an $800000 decline in net operating revenues is variable compensation declined $6 million. Other fixed expenses declined $3 3 million and we had a fairly favorable variance in bad debt expense of $1 $5 million versus the prior year.
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Also contributing to the increase in segment income, we received a $2 $1 million FX related antitrust class action settlement during the current period.
Segment income increased $9 9 million versus the immediately preceding quarter.
Moving on to the next slide operating revenues in our retail segment declined nine four.
Prior year.
It was primarily driven by a $7 $3 million decrease in FX and Cfd revenues, primarily as a result of a 13% decline in FX Cfd average daily volume, which was partially offset by a 4% increase in rate per million as compared to the prior year.
The current period was relatively flat with the immediately preceding quarter with retail segment operating revenues increasing 900000.
Segment income increased 39% to $28 million in the current period. Despite the decline in operating revenues as variable compensation declined $2 8 million fixed compensation declined $4 2 million and other fixed expenses declined $5 4 million.
The decline in fixed compensation was partially driven by FX hedge gains on positions, we established to hedge compensation expense in some of our foreign jurisdictions the.
The decline in other fixed expenses was driven by a $1 $9 million decline in selling and marketing as well as a $2 $5 million decline in depreciation and amortization.
Segment income increased $10 8 million versus the immediately preceding quarter.
Closing out the segment discussion on the next slide operating revenues and global payments increased $9 9 million versus the prior year driven by a 26% increase in the rate per million as compared to the prior year.
Segment income increased 32% to $32 3 million in the current period as a result of the growth in operating revenues, which was partially offset by a $200000 increase in fixed compensation and an $800000 increase in other fixed expenses as compared to the prior year.
Segment income increased $3 7 million or 13% versus the immediately preceding quarter.
Moving on to slide number 13, which represents a bridge between operating revenues for the fourth quarter of last year to the current period across our operating segments. Overall operating revenues were $778 million in the current period up $194 6 million or 33% over the prior year.
I've touched on the variances in the operating segments and a $3 $9 million positive variance in unallocated overheads is primarily related to FX revaluation gains as well as FX hedge variances, partially offset by a decrease in interest income.
This variance is primarily covered in the segment.
Discussion I just walked through so I'll move on to the next slide number 14, which represents a bridge from 2022 fourth quarter pretax income of $66 4 million to pretax income of $75 $4 million in the current period.
The negative variance in unallocated overhead of $24 5 million was primarily driven by a $15 $5 million increase in fixed compensation and benefits as a result of a build out of our compliance and it functions to support our continued business growth as well as the incremental costs associated with the acquisition of CDI.
Finally, moving on to slide number 15, which depicts our interest and fees earned on client balances by quarter as well as a table, which shows the annualized interest rate sensitivity for a change in short term interest rates.
And fee income net of interest paid to clients in an effective interest rate swaps increased $15 1 million to $46 million in the current period as compared to $30 9 million in the prior year.
This represents a $2 $1 million increasingly immediately preceding quarter, primarily driven by an increase in short term interest rates.
As noted in the table, we estimate 100 basis point change in short term interest rates either up or down would result in a change to net income of $16 8 million or about 81 per share on an annualized basis.
With that I'd like to turn it back over to Sean.
Thanks Bill.
Turning now to slide 16, which sets up a high level strategic objectives that we have been focused on for the better part of 15 years now we've included the slide before and went through it in some detail at the end of fiscal 2022, So we thought maybe a review.
Update that would be appropriate.
First building our ecosystem, we want to stay relevant to our clients, both existing and new clients by adding products and services and creating the best financial ecosystem to connect them to the global financial markets. I believe <unk> is now becoming known as a growing and best in class financial services franchise.
We continue to continually invest in our ecosystem by acquiring talent either individuals or teams as well as investing in technology to expand our products and capabilities to better serve our clients well.
These investments resulted in increased costs and expenditures often times well in advance of the ultimate benefit is being achieved.
Central to achieve the strategic objectives. None of these projects in isolation will result in a significant change to our current growth trajectory and certain of these initiatives may not be viable in the long run however in aggregate and over time, we believe that these initiatives will bend our growth curve upwards.
In addition, because many of these initiatives are digital in nature, we should see operational leverage and scalability start to kick in as well and a steady improvement in margins as a result.
Our fixed income group has strategically diversified into a broad spectrum of fixed income asset classes. This approach has proven to be highly beneficial, especially in recent quarters and provided resiliency to our revenue streams admit the fluctuating interest rate environment.
Notably there has been a distinct shift in perception among institutional investors and top industry talent like we are now increasingly being recognized as a growing and successful fixed income franchise with the capabilities to compete alongside tier one players.
On the equity side, we've now launched and continue to grow our electronic market, making platform on the domestic NMS equities, leveraging our long standing institutional relationships up over 20 years from the international equity side.
We enhanced our institutional prime offering with the launch of our multi asset tax compliance custody solution, coupled with new financing capabilities, which include repo financing and securities lending under the banner of a lull.
<unk> institutional prime product.
We also bolstered the growth and the capabilities within London Prime services through some key hires these product expansions at major appointments are in line with our continued investments in our technology platforms across trading regulatory reporting middle and back office operations, all designed to augment client engagement and to drive.
Growth within our securities in Prime offer.
The crypto market has gone through some ranching is predictable changes recently with consolidation and we expect a smaller but more regulated market to start to emerge. We believe this market will be best served in the long term by well capitalized and regulator trends such as Fedex.
We have also made some crucial new hires for our stone ex digital initiatives early owned subsidiary of <unk> that specializes in providing institutions with access to digital asset trading custody and services, we plan on offering non custodial spot execution borrowing and lending and OTC bilateral derived.
Two global institutions down the road.
Carbon trading is another growing market in our primary role to date would be to provide our clients with access to select corporate trading instruments. In addition, we have a role in educating our clients on how best to participate in this marketplace. Many of our agricultural clients are potential sources of carbon credits, which can be monetized.
We have made good incremental progress over the last year and had a small but growing revenue stream and client base in carbon.
We continue to add new trading venues and exchanges to our ecosystem to better serve our clients Spandex recently became members of the nodal exchange, which offer a renewable fuels that polluted contracts to support an increasing focus on corporate sustainability carbon neutrality will also in the process of joining the ASX exchange in Australia and evaluating other potential.
Trading venues.
We have been expanding our capabilities and expertise in physical commodities to provide a comprehensive service from risk management to logistics and supply chain management.
Several years ago, we started to us to assist our biofuel refinery clients, we see efficient sourcing of physical inputs. In addition to risk management took those inputs and risk management of the resulting outputs along into more efficiently operate their facilities or.
Over time, we have now become a significant and a recognized player in the Biofuels renewable Biofuels industries in the U S.
At the beginning of this year you may remember, we acquired CDI physical cotton brokerage business, we sold the opportunity to make further inroads into the cotton vertical offering physical Cochrane brokerage and trading and risk management together as one service. This was a well priced transaction that resulted in immediate gain being recognized on.
<unk> and has exceeded our first year financial expectations. We have also validated the original thesis as we have seen market share gains in both physical copper brokerage as well as on the risk management services.
We have made significant progress in integrating this business and are excited about its prospects in the coming years.
We continue to believe that there is a sizable opportunity for us to expand our self directed offering to include all of the <unk> products and capabilities from Csp's, two stocks crypto precious metal quite payment futures and foreign exchange doing this will dramatically expand the addressable market for our self directed platform.
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While we have made good incremental steps, we are definitely behind where we shouldn't be in this project and are focused on accelerating our progress yet.
On the international side, we have the final testing to launch cash trading and international equities for all clients.
Coming quarters. This platform already office over 15000, OTC products designed for active traders and these same clients will now have access to investment products directly on our platform. That's not only expands our product offering to clients, but allows us to target a much larger universe of potential clients.
We are also leveraging this platform to provide our commercial clients with access to OTC hedging products.
In the U S. The regulatory framework at significant complexity to offering a multi asset class trading platform with different regulators legal entities and related protocols and challenges during the year. We launched our next one as our U S based self directed platform, allowing trading and equity equity options as well as derivatives.
This platform is active and we are incrementally marketing marketing it to existing clients.
We are seeking to have payments physical gold coins to both international and domestic stone its one platforms, making this a very unique cross cross asset class execution capabilities.
We continue to offer new OTC products to address client needs and have invested in our technology stack to do this faster and more effectively.
We are now introducing dozens of new product every month, some of which are new and industry leading.
At both incremental value as well as positioning <unk> as a leading innovator focused on adding value to our clients.
The next strategic objective for US is we are a client centric business and we need to constantly work at growing our client footprint into new markets and expanding our market share we have existing clients and cross selling all of our growing capabilities to our existing clients.
We also seek to serve new clients segments and channels.
We have all the capabilities to service clients of all types and have a large addressable market in front of us with very low market penetration currently.
Obviously as we enhance our ecosystem, we are able to offer a more compelling value proposition tie existing and potential clients.
We are growing our client footprint significantly over the last 10 years assisted by a positive industry environment.
There has been significant consolidation at the small end of the market as increased regulatory costs and capital burdens have rendered smaller monoline players.
To earn acceptable returns on capital on the other hand larger banks have seen capital requirements with trading businesses steadily increase under the Basel regime with additional new capital charges on the current consideration we see this trend continuing and many clients will be looking for new brokerage and trading relationships, we believe that our new.
Our unique global financial ecosystem allows us to be the counterparty of choice and places us in a strong position to win additional market share.
We have continued to invest and grow our EU presence post Brexit with an expanding office in Frankfurt to service, our existing European based clients and allowing us to more effectively market to new clients in Europe, which may not be adequately covered post Brexit.
We have dramatically expanded our product capability in Singapore, adding fixed income foreign exchange and commodities expertise, which should allow us to increase our market penetration in Asia. We've also expanded our licensing to facilitate broader payments and security offering.
Our payments business has also launched its platform focused on small and medium sized Brazilian enterprises looking for a more efficient way to make into international payments to both <unk> and non <unk> 20 countries. We have launched our new digital payments platform for corporates.
Europe and relate to expand us geographically.
We are also adding international payments capability to all of our existing internal platforms on the commercial side further embedding ourselves with these existing clients.
On the security side, we have historically had little client penetration outside of the U S. Despite a global product offering in both equities and fixed income.
We have now added a small team in Asia, and bolster our growing presence and bolstered our presence in London.
In addition, as you heard earlier, we are bolstering our capabilities in London to enable a more fully fledged offering.
We will not be able to achieve the necessary growth and scale unless we continue to embrace technology to digitize offering.
This will not only enhance client engagement, but increased scalability and margins. This.
This initiative requires a rethink of our processes from front to bank back and has been underway for some years now but has accelerated recently.
Many of the product initiatives I mentioned above are digital in nature. So I will not mention them again the advantage of digital offerings is that it dramatically expand your addressable market. If we find anywhere is a potential client and it offers scalability and operational leverage to enhance margins.
Creasing, we're using technology on the trading side many of our trading platforms are designed to aggregate trading flow and internalized spreads. So we can maximize the planned revenue opportunity and minimize our hedging costs as we gain critical mass and trading volumes the impact on revenue capture can be significant and should further drive margins.
We also spend considerable effort, providing technology to help our clients be more effective and intend to become stickier to us.
During the year, we launched an expanded stonehenge for Aqua and Mexican clients, which has now gained significant traction with new platform.
Provides trading efficiency on outside and Embeds us as a critical partner with with many of our most important clients.
We continue to enhance our digital platform for OTC and structured products to allow our commercial hedging clients to run intricate scenarios to determine the best product for their needs and instantly get quotes.
A lot of these projects are underpinned by the success of our data Lake, which allows users to come to one place to get normalized data from many systems of record instead of multiple point to point connections to the systems information can be accessed from one place in near real time in an easily consumable for.
You can see continue to see validation of this approach as many of our internal departments as well as our client placing platforms can easily standup applications, we continue to build and enhance the data lake as we expand our business.
Our risk management team has made really significant strides in <unk>.
To more easily aggregate and analyze data with real time monitoring.
Of risk across the organization.
Also our accounting team completed a conversion to a new accounting and HR system, and we are already seeing dramatic improvements in efficiency and effectiveness.
We have a number of projects underway throughout many of our support areas to better use technology to create efficiency and scalability of our infrastructure, which over time should drive operational leverage. These includes contract management system for legal team.
Technology to better track and monitor internal audits and operational risk issues and also a major project to automate our compliance <unk> monitoring.
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.
The most important thing we can do is to create the capital runway for continued for our continued growth. This is why we focus on ROE.
It is interesting to note that 10 years ago, we had little over $300 million in stockholders equity.
And only a slightly lower number of shares outstanding as we do now.
Over this 10 year period, we have more than tripled our shareholder funds acquired over 15 businesses and significantly expanded our client footprint largely finance organically from retained earnings and the unbelievable power of compounding.
During this growth we have largely achieved a 15% ROE target certainly not every year, but on average over the period, it's pretty close if not higher.
This has happened despite the investments we have made in technology and infrastructure the cost of developing new capabilities. The integration of a large number of acquisitions and despite low interest rates for extended periods of time.
Achieving our ROE target will continue to be our north star and we believe as we digitize our platforms gain scale that margins and ROE should start to increase.
Okay.
So let's move to the final slide 18, and wrap the call up.
So in summary, this was another strong quarter with good market conditions and solid results across all products and client segments. As we mentioned earlier, we achieved earnings of $50 7 million diluted EPS of $2 36, and then Roy Unstated book of 15%.
This quarter capped the best fiscal year in <unk> history with earnings of $238 5 million.
Diluted EPS of $11 18, an ROE of 19, 5%.
29% on tangible equity a stated book value per share is now $66 31 up $13 61, 26% over last year.
Our performance is of use through a slightly longer term lens, such as trailing 12 months over the last two years, which evens out quarterly anomalies. Our results continued to show strong upward trajectory growing operating revenues at a 32% CAGR in our adjusted net income of 34% CAGR.
We continue to see strong growth in our client base. This is being driven in part by increasing capital charges being applied to the trading activities at larger banks under the Basel regime, and smaller players being squeezed out by higher regulatory capital costs.
We believe that this constructive market environment combined with the outlook for good general market volatility and current levels of interest rates with a real tailwind behind our business for the next year or so.
In fiscal 2024, we believe we will see an accelerated cadence of delivery on our platforms as we continue to more tightly integrate our offerings by client type and make it more engaging for clients to interact with our growing financial ecosystem.
Continuing to invest in our financial ecosystem expanding products capabilities and talent, we have a unique and comprehensive ecosystem with a very large addressable market in front of us.
While we have good market share in certain niche segments of the market lots of white space remains in areas, we already have client relationships and demonstrable capabilities and now need to monetize these opportunities.
One thing we will always be constant for the <unk> team, we will continue to dedicate ourselves to better serve our growing client footprint around the world by providing them with the best financial ecosystem and client service to access the global financial markets.
In closing I'd, just like to say the management team and I are extremely proud of the talented <unk> team to continue to propel us to new Heights.
So with that let's open the line operator and see if we have any questions certainly as a reminder to ask a question. Please press star one on your telephone and wait for your name to be announced to withdraw. Your question. Please press star one again, please standby, while we compile the Q&A roster.
My first question.
Our first question will be coming from Daniel Fannon of Jefferies. LLC. Your line is open.
Thanks, Good morning, gentlemen.
Good morning, <unk> how are you.
Im doing well thank you.
This quarter.
The revenue environment was still good actually you're just looking at revenues growing year over year. This is the first time I can remember variable compensation.
Being down in the context of a while revenues are growing and obviously fixed was up but I just wanted to make sure as I think about the component of variable versus fixed going forward and if theres been any change or if there are changes as we think about payouts or how youre compensating employees that will drive just more shift towards fixed versus variable.
Overtime.
Yes, Dan ill go ahead, Todd just at a high level.
I'll, let bill jump in so.
The best way to think about sort of variable is to correlate it to net operating revenues.
Operating revenues before the interest charge and obviously you know this kind of an accounting anomaly there on the fixed income side.
It's been full interest charges before sort of brokerage and exchange fees. So if you look at all of our net operating revenue was up I guess, 4%, 5% something like that I don't have the number right in front of me.
And I think you should look at variable related to that because that's really kind of how most of the payoffs calculations work.
And then I would say one other factor as I mentioned, we are always investing in teams of people.
Spending initiatives and often times.
Have some of those costs hitting before we have revenue.
As the revenue starts to hit you.
You start to get variable comp replace some of that or you get offsetting revenue, let me say it that way so.
Over time, if we just stopped investing in new products and new teams you would see variable comp come down as a percentage because you would start to see those initiatives either be terminated or become successful and they are the offsetting revenue and sometimes a little bit of leads and lags on that so you can see a little bit of fluctuation from quarter to quarter just depending.
On how those new initiatives are running through it but I'll stop there and let bill add anything he wants to add.
Sure I mean, Sean I think you nailed most of it the only comment I'd make is so looking at focusing on a percentage of net operating revenue is the way to do it and I think if you look at historically, we've probably been in the 31% to 32% of net operating range.
For variable comp what you do see it I tried to pointed out in my section of the call today, a little bit as the interest and fee income.
On client balances have increased here, particularly year over year.
That typically does not fall into variable compensation calculations, so youll actually see variable comp as a percentage of net operating revenues kind of trend down a little bit as a percentage as interest and fee.
Client income goes up.
Conversely, the opposite effect if it goes the other way, but so I'd say that the real.
Low rate environment that we have been in in the last two or three years.
Our prior to the last 18 months I should say I think youre looking at probably like 32% of net operating revenues as a gauge and probably more like 29%, 30% in the current environment is that helps.
Okay.
I'm just looking at this quarter, where variable on a net operating revenues basis. There is a bit of a divergence. There is nothing 128 per cent ourselves now yes, okay.
Meaningful there.
Okay and then.
A lot of discussion Sean just about what Youre doing digitizing expenses getting more efficient initiatives a lot of opportunity for growth I guess.
In the context of the.
The fixed expense budget as you think about next year and how what the puts and takes around all the things youre doing and what that ultimately means from kind of how we should think about fixed expense growth.
Okay. So unfortunately when.
Can you try and digitize and make your business efficiently end up spending more money in the short term.
With the hope that eventually when these things kick in and Youll see some of the scale benefits emerging.
So we have been investing in a lot of these initiatives.
How does similar initiatives for a period of time now.
I think we sort of at Max expenditure points on those initiatives right now I don't see us taking on any other major new initiatives.
I hope is now that some of these initiatives to be start to see on the backend.
US gaining efficiency now.
Think that that means the fixed cost will go down I think what we should hope for as we can handle greater volume and growth without our cost increasing lock step I mean, that's really what we're hoping for is scalability rather than seeing the costs come down, but we're not anticipating.
It's a pacing.
Okay.
A significant increase in fixed costs I mean, we've got an inflation push inflation that is obviously higher than it's been for a while.
We will probably see somewhere between 3% and 5% sort of embedded growth and less fixed cost.
But we're not anticipating a sort of a step change in our fixed cost at this point.
We took that step change a couple of years ago already.
Okay and then.
One more on expenses Bill you mentioned, a positive offset within bad debt can you just so we get a sense of what the.
Normalized or what the actual expense was versus the recovery.
Yes, It was I think a $1 $5 million recovery in the institutional segment I think is what we saw.
So you can look at that.
Our one three I guess, if im looking at the earnings deck here.
Okay Alright. Thank you and then just one more on I guess expenses or the recent news around the litigation associated with <unk> and some of the.
The claims made within that I know, it's early but was hoping you could contextualize the businesses. This impacts in any kind of first.
Kind of outlook or comments on it.
Okay, well, obviously, we can't comment on pending litigation, so, but what I will say is we are aware of the complaint that was filed earlier this week.
It seems to us that this action is more focused on media and attracting publicity than anything else because it appeared in the media before the complaint towards even filed with the courts I went to price first.
We are reviewing the complaint but at this time, we don't believe any of these allegations of any merit. So we will it will depend ourselves. We believe we're in good position and we don't think there's any merit.
So that's about all I can tell you at this point looking into it.
Okay. Thank you and then I guess, one more just on the environment.
You have a lot of things that you mentioned you'd like to do and will do around expanding our client footprint as well as geographies and products can you talk about the inorganic opportunity today, given the market volatility and what that is presenting itself.
How active is the pipeline for new transactions today versus kind of earlier this year.
Sure well, we never plan for acquisitions, I know that always sound strange when we said given that we've done like I said the acquisitions.
We always focus first and foremost on sort of the organic growth of our ecosystem.
And an opportunity and as I said, it's a very.
Very constructive environment, we believe for organic correct I mean, I think the banks are.
Going to be hit with another big capital charge.
A big.
Confirms that the FIA held about that they believe it could really affect that sort of trading and clearing business at the big banks as it has but will just accelerate that so that's good news for us. So that's our primary focus that said.
We do like to be in the pipeline we included.
And most of the transactions that could be sort of sized for us I think we see most of them.
And I would say, there's definitely been more interesting opportunities of late and there was probably over the last two years.
As I've said repeatedly as we are sort of during the COVID-19 years.
Things with Crazy people will have any sort of big bumps in revenue and obviously multiples got to conduct historical levels. So at that point, we just didn't see anything that would even remotely interesting I think we've now on a more normalized environment and I think.
To consolidation continues smaller firms are struggling.
And you know they have to do something and those are the kind of opportunities we tend to see.
So I think we sort of back to a more normal cadence, but having said that I don't think there is initially anything on the horizon that we think is close so sort of.
It could be meaningful, but we definitely looking at more stuff if that answers your question.
No. That's helpful. Thanks for answering all my questions.
Okay.
Thank you Dan.
Showing no further questions I would now like to hand, the call back to Sean for closing remarks.
Alright, well thanks, everyone was a long call today appreciate all your attention and I guess on the final mix just like to wish all of those in the U S. A happy Thanksgiving to everyone else a great holiday season.
Legal speak to Indonesia, Thanks, very much bye bye.
This concludes today's conference. Thank you for participating you may now disconnect.
Okay.
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