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Edited Transcript of GCAP earnings conference call or presentation 25-Jul-19 8:30pm GMT

Q2 2019 GAIN Capital Holdings Inc Earnings Call

Bedminster Jul 29, 2019 (Thomson StreetEvents) -- Edited Transcript of GAIN Capital Holdings Inc earnings conference call or presentation Thursday, July 25, 2019 at 8:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Glenn H. Stevens

GAIN Capital Holdings, Inc. - President, CEO & Director

* Nigel Rose

GAIN Capital Holdings, Inc. - CFO

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Conference Call Participants

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* Daniel Thomas Fannon

Jefferies LLC, Research Division - Senior Equity Research Analyst

* Jenny Ni

JP Morgan Chase & Co, Research Division - Analyst

* Kyle Kenneth Voigt

Keefe, Bruyette, & Woods, Inc., Research Division - Associate

* Richard Henry Repetto

Sandler O'Neill + Partners, L.P., Research Division - Principal of Equity Research

* Nicole Briguet;Edelman

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Presentation

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Operator [1]

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Hello, everyone, and welcome to the GAIN Capital's Second Quarter 2019 Results Conference Call and Webcast. Today's call is being recorded.

At this time, I would like to turn the conference over to GAIN Investor Relations representative, Nicole Briguet. Please go ahead, ma'am.

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Nicole Briguet;Edelman, [2]

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Thank you, operator. Good afternoon, and thank you to everyone for joining us for our second quarter 2019 earnings call. Speaking today will be GAIN Capital's CEO, Glenn Stevens; and CFO, Nigel Rose. Today's commentary will be accompanied by our earnings slide deck, which can be accessed via webcast on our IR website now or at a later time. Following their remarks, we will open up the call to questions.

During this call, we may make forward-looking statements to assist you in understanding our expectations for future performance. These statements are subject to a number of risks that could cause actual events and results to differ materially. I refer you to the company's Investor Relations website to access the press release and the filings with the SEC for discussions of those risks.

In addition, statements during this call, including statements related to market conditions, changes in regulations, operating performance and financial performance, are based on management's view as of today, and it is anticipated that future developments may cause these views to change. Please consider the information presented in this slide. The company may, at some point, elect to update the forward-looking statements made today, but specifically disclaims any obligation to do so.

I'd now like to turn the call over to Glenn.

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Glenn H. Stevens, GAIN Capital Holdings, Inc. - President, CEO & Director [3]

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Thanks, Nicole, and thanks to everyone for joining us today. Our Q2 results showed positive signs of increased client engagement, which would typically drive our trading revenue upon the return of more normal market conditions.

Overall, the trading environment, and consequently, some of our volume metrics, remained subdued during the second quarter as the CVIX dropped 17% below the Q1 '19 low, and VIX declined 8%. While the Eurodollar, our most traded product, saw trading ranges 15% tighter than the previous quarter, we did see pockets of volatility across sterling currency pairs and some major indices, which helped drive higher overall revenue per million.

Q2 RPM came in at $130, well above our Q1 '19 RPM of $50 and 18% above the trailing 12-month average of $110. Encouragingly, as we moved through the second quarter, we started to see signs of a return to more normal levels of client engagement with client positions growing to levels we haven't seen since the fourth quarter of last year, which often translates into stronger client volumes in future periods.

Turning to our financial and operating highlights for the quarter. Net revenue was $75.5 million as compared to $84.2 million in Q2 of the last year. Q2 adjusted EBITDA was $13 million as compared to $18.9 million in the same period in 2018. Net income came in at $0.9 million compared to $6.8 million in Q2 of last year. Q2 RPM rebounded, as I said, to $130, above the trailing 12-month average of $110.

We are also encouraged by the report that our step-up in marketing investment continues to produce positive results. In Q2, we saw another quarter of new direct account growth, up 5% sequentially and 83% year-over-year. Continued new account growth positions us well when normal market conditions return.

In Q2, we delivered our fourth consecutive quarter of direct new account growth. Not only did we grow new accounts, but we also saw an improvement in our trailing 3-month active accounts figure, despite a low-volatility environment. We are pleased with the trajectory over the last few quarters and are encouraged by the metrics we have seen.

Turning to Slide 6. We've highlighted the one-off impact of ESMA product intervention measures that were introduced last August of '18. Using Q4 as the new post-ESMA baseline, direct active accounts have improved for 2 consecutive quarters. As you can see on the chart, once the impact of ESMA on active accounts had been fully realized in Q4, active accounts have rebounded. Our marketing efforts are not only adding new accounts, but also active accounts, despite the unusually low volatility environment.

There are a number of other key metrics that we use to evaluate marketing performance and hence, help us optimize spending levels. Number one, our cost per account -- or cost per new account. After 4 quarters of increased spend, we have remained efficient with our costs, tracking below our target cost per new account. Number two, breakeven points. The timeline to convert each cohort into a profitable client remains on track, with Q2 results in line with our expectations and modeling, and despite market conditions, continue to track well. Number three, our internal rate of return. Our more recent IRRs on customer acquisition costs continued to validate our marketing spend as a strong use of capital.

And number four, the long tail of revenue. A healthy percentage of our revenue comes from long-tenured clients. From Q3 of '18 through Q2 of '19, 57% of revenues came from clients with tenure of more than 3 years. We expect the newly acquired customers will deliver revenue well beyond our ROI benchmark, which is based on a 3-year lifetime value.

There continues to be a level of flexibility within our total marketing spend. We continue to target approximately $50 million of annual marketing spend for this year. However, we can adjust this up or down as warranted by market opportunities. Our long-term strategic priorities to accelerate organic growth remain intact.

We continue to be committed to driving shareholder value through the following 4 key areas: Our increased marketing investment, which is supported by conversion optimization efforts to further increase ROI; leveraging our powerful brand assets in FOREX.com and GAIN Capital to compete on a global scale and grow market share by targeting 2 distinct customer segments, experienced active traders and retail traders; innovating the trading experience for our customers by delivering the best-in-class trading platforms, decision support tools and delivering new ways and products for our customers to trade; and lastly, our strong focus on premium clients as we continue to investigate and evaluate ways to enhance and expand our services for this high-value audience.

While market conditions have remained challenged in the first half of the year, we're pleased by our ability to continue to drive results in this quarter. There are a few key factors at play that will position us for the return of normal volatility. These include: an increase in open positions indicating building client engagement, 4 consecutive quarters of new direct account growth and 2 consecutive quarters of direct active account growth. We are confident these 3 factors should drive trading revenue in future periods when normal market conditions return.

As we've said in the past, if you look at the existing underlying value of our company, we believe we are trading at price levels that are well below our actual company value, particularly when you add up our demonstrated ability to attract new customers, our strong balance sheet and our capacity to generate EBITDA in even less-than-optimal market conditions.

With that, I will turn it over to Nigel for a deeper review of our second quarter results. Nigel?

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Nigel Rose, GAIN Capital Holdings, Inc. - CFO [4]

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Thanks, Glenn. The following figures reflect results from our continuing operations. During the second quarter, net revenue decreased 10% year-over-year to $75.5 million as compared to $84.2 million in Q2 2018. GAAP net income was $0.9 million, resulting in GAAP EPS of $0.02 as compared to net income of $6.8 million and GAAP earnings per share of $0.13 in the prior year.

Adjusted net income was $3.6 million and adjusted EPS was $0.10 as compared to adjusted net income of $4.4 million and an adjusted EPS also of $0.10 in Q2 of 2018. Finally, adjusted EBITDA was $13 million compared to $18.9 million in the prior year.

In our retail segment, the first quarter's challenging market conditions continued into the second quarter as evidenced by the CVIX and VIX declining sequentially by 17% and 8%, respectively. This resulted in a 33% decrease in ADV to $7.1 billion compared to prior year. As Glenn mentioned earlier, RPM growth was driven by volatility in the British pound and some major indices as well as a notable increase in clients' opening positions. Typically, we tend to see clients trading in and out of positions, generating volume and spread revenue. However, the second quarter saw an increase in clients' holding positions for extended period of time. Whilst that resulted in lower volumes, it did generate a meaningful increase in client financing revenues, the combined effect of which had a positive impact on revenue capture. RPM of $130 for the quarter was above the $106 RPM seen in Q2 2018 and the $110 from the trailing 12 months ended June 2019. The combined impact of lower volumes and strong RPMs saw total retail revenue of $64.7 million, a year-over-year decrease of 13%.

Overheads for our retail segment for Q2 and the half year were both down 7% over the prior year. Following the one-off and -- impact of ESMA affecting Q3 and Q4 of 2018, client assets have since improved 2% despite 2 consecutive quarters of very low volatility.

Turning to the futures business. Revenues were $11.7 million for the quarter as compared to $12.1 million last year. Futures average daily contracts decreased slightly to 31,401 during Q2, although May was the fourth-highest volume month since the acquisition of Top Third and GAA. Overheads for the futures segment in the quarter were 5% below Q2 '18 and 8% lower for the half year. Profit margin for our futures business improved slightly to 15% in the first half of 2019, delivering similar profits as the prior year despite 11% lower revenues.

I'd like to take a moment to provide an update on our overhead guidance. On our Q4 earnings call in late February 2019, we provided initial guidance of $190 million to $200 million for overheads in FY 2019. More recently, at an investor conference last month, we updated our overhead guidance to an annual range of $180 million to $190 million. Now as a result of continued optimization of our cost structure, outside of our growth initiatives, we expect overheads this year to come in near $180 million, in line with our half year actual run rate. This lower guidance is driven by decisions to accelerate planned savings, some of which we previously expected to realize in fiscal 2020. Consequently, we're also able to lower our 2020 guidance to a range of $170 million to $180 million. We remain committed to pursuing opportunities to streamline our overhead expenses, which we believe will ultimately enable us to create stronger operating leverage as well as allow us to achieve profitability in unusually weak market conditions.

Based on our latest internal forecasts, assuming tax legislation does not change, we believe our tax rate for 2020 will be in the range of 24% to 26%.

All this said, we're mindful that we need to continue to drive the key strategic initiatives Glenn outlined earlier: leveraging powerful brand assets, innovating the trading experience and focusing on premium clients. As a reminder, last quarter, we decided to amend the presentation of our liquidity to directly align with the cash and cash equivalents figure shown on the balance sheet. We made this change as we believe it 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 of this presentation.

At the end of the quarter, GAIN had total cash and cash equivalents of $209 million. Broker receivables more than doubled to $111 million in Q2 2019 as compared to the prior year. As we mentioned earlier on our call, the increase has largely been driven by growth in open client positions, indicating building client engagement, which we expect should drive future trading revenue upon the return of volatility. We have ample liquidity for corporate development opportunities and remain well positioned to pursue selective transactions that provide geographic or product expansion, should they arise.

We also remain committed to actively returning capital to shareholders, including through dividend payments and share buybacks. As such, our quarterly dividend of $0.06 will be paid on the 27th of September. Share buybacks continued as our shares remain undervalued. During the second quarter, we repurchased nearly 0.5 million shares at an average share price of $5.61. That leaves approximately $41 million available for additional repurchases as of quarter end.

We continue to balance the uses and needs for our cash as the diagram on this slide shows. Our primary priority for use of capital is ensuring GAIN has the liquidity it requires to operate efficiently and effectively; secondly, to ensure we have sufficient dry powder for opportunistic M&A; and thirdly, to continue to pay our quarterly dividend, which we've paid for 31 consecutive quarters as of this quarter.

In echoing Glenn's sentiment, we continue to feel GAIN remains undervalued as our share price isn't even reflecting our cash position, let alone the strength of our balance sheet, coupled with the success of our organic growth initiatives in driving new and active accounts.

With that, I will turn it over to the operator for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And today's first question comes from Kyle Voigt with KBW.

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Kyle Kenneth Voigt, Keefe, Bruyette, & Woods, Inc., Research Division - Associate [2]

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I guess I'm just looking at the quarter, and I know the vol was really low, but the RPM was also 18% above the trailing 12-month level of $110. So I guess my point is that if you had a more normalized RPM environment, and even if your volumes were 20% higher or so, we'd still have the same outcome in terms of the financial results, which was $3.3 million or so of pretax income in the quarter. And I don't think that target would be something that you'd be internally targeting or you'd be targeting something much higher than that. So just the question really is, is there something that gives you confidence that if RPM normalizes lower on a go-forward basis, that there will be a volume increase substantially higher than what I just outlined? And is there something that can give us confidence that we're going to be back in a $10-plus billion ADV level at some point in the future?

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Glenn H. Stevens, GAIN Capital Holdings, Inc. - President, CEO & Director [3]

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So a couple of things. I think even in recent quarters, you look back north of 10 or even 11, and ADV is pretty easily attainable when markets -- you look at the first half of 2018, which it seems like a long time ago but it isn't that long ago, and you had some markets moving around. And particularly, you didn't have our most voluminous product, the Eurodollar, being stuck in such a tight range. So it pulled a lot of participants in. So seeing a commensurately higher ADV is certainly in our expectation range, if you will, the way you outlined it.

Second part of it is that larger customers, which as you might expect, provide a disproportionately large amount of volume and revenue opportunity. They are more elastic to lower volume. So when you have -- sorry, to lower volatility. So when you have a return in marketing trading conditions and market trading opportunity, they come in a lot bigger and that moves the needle, again, disproportionally. Third piece is because we continue to add clients and assets and engage customers, then as a collective, the needle is more responsive that way, too. So there's not a ton we can do about some of the prevailing market conditions that, albeit seemed 3-month, 6-month, oh gee, what's going on. It's not unprecedented, right? We've gone through quiet periods before. In this case, a couple of key items like euro, like some other major currency pairs, even like -- things like metals and energy have been quite subdued. So the combination of all of them makes it harder, but nothing's changed that we wouldn't expect to see a snap back. And I would suspect, because based on all our metrics and based on all our kind of potential values in terms of number of customers and number of funded accounts and things like that, that we'd be at ADVs higher than where we were before because we've been adding new customers at a higher rate than we have in the past.

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Kyle Kenneth Voigt, Keefe, Bruyette, & Woods, Inc., Research Division - Associate [4]

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I guess the concern is that the regulatory environment's also changed, and you kind of highlighted some of that, that happened in the second half of the year. So I guess even with accounting for the regulatory changes that have gone through, you're still confident that you can get back to kind of 1H levels if volatility returns?

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Glenn H. Stevens, GAIN Capital Holdings, Inc. - President, CEO & Director [5]

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Yes. But Kyle, that's true. One of the reasons we highlighted it was more about showing the growth in new accounts, funded accounts, active accounts. And also what it was showing, which we didn't highlight but we have, in Q4 we highlighted it, in Q1 I think we mentioned it again, was reiterating and confirming with our audience that the ESMA changes, which are really the only material change to leverage that customers -- that might impact customer volume, didn't really impact us. It was a sub-5% move or impact, if you will, because a lot of those customers were small. Now it moved the numbers because each customer gets one vote, so your actives change, which is why we put that chart out.

But if you recall kind of in Q4 and Q3, we said, hey, here's what ESMA has meant. Here's what it's meant to us. And at least in a good way compared to many of our peers, it was a really small impact. So that also means that that's not like a structural change that we have to overcome the other way. It -- in the one hand, you could say that our penetration into the U.K., European market in the smaller customers should have been better in the past, but at least we don't get penalized now for not having that success because it doesn't matter that that's a long-standing change. It doesn't impact the professional clients, of which we continue to cultivate and have as part of our customer group.

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Kyle Kenneth Voigt, Keefe, Bruyette, & Woods, Inc., Research Division - Associate [6]

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Okay. Last one for me, and that was helpful. Last one for me is just we've been in a low-vol environment for almost a year now. Just wondering at what point do you think we could see some more consolidation in the space.

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Glenn H. Stevens, GAIN Capital Holdings, Inc. - President, CEO & Director [7]

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Yes. So I think the cry-uncle time period, to your point, coupling to some of those firms that do have a structural change to overcome. Someone who was very reliant in the U.K. market, for example, or in parts of Western Europe, who says, well, gee, do I have to completely rechange my growth curves and my cost structures and things like that? Yes, it does create some pause there and definitely creates opportunities for conversations that are more, I use the word reasonable now than maybe they were a year ago. We definitely see some of the smaller firms starting to cry uncle. Part of the reason for us keeping some powder dry is for, as we like to call it, opportunistic M&A, and that's very much on the table for us.

The -- one of the things that put a little bit of pause in there is because people really weren't sure what the shakeout was going to be from the regulatory perspective kind of post-ESMA. So now that we're kind of 9, 12 months, if you will, into that post-ESMA, because if ESMA came out August 1, call it, and we've got a chance to watch the dust settle, it has helped kind of clarify people's models and such to say, okay, this feels like it's a sustainable environment. Because people really didn't know what was that going to mean. What was the follow-up? What are the next steps going to be? And I think we've kind of answered that to some degree. So yes, I do believe it opens up. You're very much at the stage now where it's harder to model those things longer. And then the last one will be interest rates moving, where now that Brexit appears to be on a clearer path to happening, that should open up some of the gates as well.

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Operator [8]

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And our next question comes from Rich Repetto with Sandler O'Neill.

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Richard Henry Repetto, Sandler O'Neill + Partners, L.P., Research Division - Principal of Equity Research [9]

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So I guess my question -- some phenomenal results in regards to the RPM, if you look at the sort of the -- externally looking in. And I guess -- I know you cite the euro. But I was trying to understand better, like given that volatility continued to decline, that there might be more transparency in regards to see if any other explanation -- or more transparency with regards to the profitability of CFDs or other products that might have kicked in this quarter versus last.

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Glenn H. Stevens, GAIN Capital Holdings, Inc. - President, CEO & Director [10]

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Yes. Sure, Rich. I think one of the biggest driver really was what we alluded to in terms of the size of commitment on customers. It's -- in the past, we would use the asset mix or -- and say, hey, higher spread currency pairs like emerging markets. In the past, we had some of the knock-on effect from the Turkish lira moving that create pockets of opportunity. It's one thing when you get more volume in the really liquid, tight spreaded products like euro, but it's another when you get it in those kind of more esoteric products, weird crosses or some of the other currencies or some of the CFDs. In this case, it was relatively well spread.

I think what was most promising was that -- and what helped kind of amplify the improvement in RPM more than anything was what we tried to outline in the deck, and we probably didn't going into enough detail, was the higher levels of engagement. And bottom line, it just means that you don't get the ADV increase. But if customers put on larger positions than they have in the past, we don't get the ADV because they're not trading actively. They're not getting in and out of positions because those market are quiet. You don't have that impetus to take profit or to cut a loss or to average in or do whatever. But when they do show more conviction in financial markets to say I have an idea, I'm bullish, I'm bearish, what have you, then we have the opportunity because there's more financing involved, there's more carry involved, there's a whole bunch of these other drivers that help add to the RPM.

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Nigel Rose, GAIN Capital Holdings, Inc. - CFO [11]

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And just maybe, Rich, to add to what Glenn just said there was that the financing revenue from the customers building positions exactly and to try and turn that into a measure of financing revenue per million of volume, if you like. If you looked at the previous 4 quarters and the financing revenue per million versus what we saw in Q2, Q2 was up about 50% on the average of those previous 4 quarters. So it had a meaningful contribution to the revenue, whilst not, as Glenn said, really seeing an impact on volumes by its nature.

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Richard Henry Repetto, Sandler O'Neill + Partners, L.P., Research Division - Principal of Equity Research [12]

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And what would lead to such a dramatic increase in financing, the 50%?

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Nigel Rose, GAIN Capital Holdings, Inc. - CFO [13]

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Sorry, Rich, just to be clear, that's financing per million rather than the absolute financing revenue number.

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Richard Henry Repetto, Sandler O'Neill + Partners, L.P., Research Division - Principal of Equity Research [14]

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Sure. Per million, right.

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Glenn H. Stevens, GAIN Capital Holdings, Inc. - President, CEO & Director [15]

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And so what would lead to it? So the most vanilla way is that we've started to see levels of engagement -- and all that means is net aggregate positions from customers -- approach levels from 6, 9 months ago versus there were a lot lower in Q1. And so we're seeing -- when you had super-tight ranges in so many products, what we're trying to see now is that customers are starting to either hold onto those positions as they plan on some ranges continuing. Or you have others who are adding to positions, saying, okay, I think it's long enough in this low-vol environment. I think we're going to get some breakouts in cable. We're going to breakout in euro range. We're going to breakout in yen range. So the biggest driver is -- bottom line, it's not a stat we put out but would be kind of the open position per customer. We show activity per customer, but what we're definitely seeing is that the existing position per customer has increased dramatically. And why do we see that? Well, collectively, I think a lot of customers are starting to get a sense that we're going start to break out. We don't know if they're right or not. But the reality is that the -- a likelihood that we end up with higher spread revenue and trading revenues going forward goes up because customers are already engaged.

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Richard Henry Repetto, Sandler O'Neill + Partners, L.P., Research Division - Principal of Equity Research [16]

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Got it. Okay. I guess my next question is on consolidation, but it's a little bit more from a different direction. There's certainly rumors out there, and I don't know you don't comment on rumors during the quarter. But how would GAIN -- what would be the view on consolidation in regards to the benefits of merger with someone else? Not just keeping dry powder for potential European acquisitions or anything like that, but just...

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Glenn H. Stevens, GAIN Capital Holdings, Inc. - President, CEO & Director [17]

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Yes. Yes, no. Certainly, Rich. I mean, look -- yes, go ahead.

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Richard Henry Repetto, Sandler O'Neill + Partners, L.P., Research Division - Principal of Equity Research [18]

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Well, and then you've mentioned -- I don't know whether I'm sensitive to this or not, but you mentioned several times how undervalued you thought your stock was.

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Glenn H. Stevens, GAIN Capital Holdings, Inc. - President, CEO & Director [19]

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Yes. No. You think you're sensitive to it. I mean -- so yes, that's exactly the point. We're very mindful of the fact that -- and I've been vocal about saying that I think we were unfairly beat up in first quarter, even though we had a soft quarter, and we tried to give reasons why and explain that it was kind of part of the variability built into our business and built into our industry. But we definitely, in representing our shareholders and our stakeholders, are always in discussions, and when I say in discussions, have fiduciary responsibility to evaluate opportunities both ways, right? I mean we've been pretty active on the acquisition front. We've done a fair amount of -- for a relatively small company, have done a fair amount of M&A over the past decade, but that doesn't mean that we don't properly and rightfully entertain any incoming as well.

So I don't have any comment to speculate on rumors that go out there because not only is it company policy, but it's not helpful. But that said, we also don't live in a cave and have a complete closed door when we say, look, if there's value to be created, that we're supposed to, with standard fiduciary responsibility, evaluate opportunities in both directions. So that -- so I guess to comment on that, we don't have, we believe, our stock as a currency to use outbound, which is part of the reason why we keep dry powder. I think if we were trading at multiples where we are now, that'd be a different story, but I think it'd be too expensive and imprudent to use our current stock for that type of scenario. But the corollary or the opposite of that has to be true, too. If you look at it and say, gee, in its present state, the market isn't recognizing the value creation that this company has with its balance sheet and customer base and ability to grow that customer base that we're showing here and sell -- potentially sell them other products. And yes, there's a little bit of a vol bet here to say, if you think vol is going to stay subdued for the next long period, okay, that's right. That'll been more challenging for us than if it has more normal vol. Not rip-roaring, just normal, which we've shown already. But if you believe all that, you also have to believe that we have to consider all situations and all opportunities, which we do.

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Richard Henry Repetto, Sandler O'Neill + Partners, L.P., Research Division - Principal of Equity Research [20]

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Got it. And then my standard question. Do I even have to ask it, Glenn?

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Glenn H. Stevens, GAIN Capital Holdings, Inc. - President, CEO & Director [21]

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No. No, no. You're not going to ask it because I'm going to answer it before you ask it just because...

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Richard Henry Repetto, Sandler O'Neill + Partners, L.P., Research Division - Principal of Equity Research [22]

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There you go.

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Glenn H. Stevens, GAIN Capital Holdings, Inc. - President, CEO & Director [23]

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Only because I owe you that much -- as much. I mean -- so I mean -- I think -- and I'm assuming we're talking about how is the quarter going so far, just in case you're not asking me about how my last bike ride was or anything.

Yes, I mean we -- in terms of being a few weeks into the quarter, from an RPM perspective, for example, I think that there continues to be situations that pop up that are causing customers -- alluding to that customer engagement levels. It's nice to see that continuing. There's still people and our customers and in all regions who continue to be willing to put their money where their mouth is, if you will, to establish positions. And so looking at RPMs being more normal, I think, is at least something that we've seen as the quarter unfolds, with seeing some continued engagement with our customers that we alluded to already for this quarter -- sorry, for Q2, continuing is there. We haven't a mega return to the 10-plus yards a day of volumes, and primarily because we haven't broken out of existing subdued trading ranges and such. But other than that -- which shouldn't surprise anybody because we haven't seen blow-outs in any of those markets yet. But on the other more positive signs in terms of RPM and customer engagement, that looks to continue along where Q2 left off.

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Operator [24]

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(Operator Instructions) And the next question comes from Dan Fannon with Jefferies.

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Daniel Thomas Fannon, Jefferies LLC, Research Division - Senior Equity Research Analyst [25]

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I guess I wanted to talk about the marketing spend. I think, Glenn, you reiterated close to $50 million this year. You're tracking, obviously, below that. Can you talk about the environment that you would need to see to get that? Or you're seeing it, and you're confident that it will see a pretty big acceleration over the next 2 quarters?

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Glenn H. Stevens, GAIN Capital Holdings, Inc. - President, CEO & Director [26]

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So fair question, Dan. Number one, we try to stay away in tactical application. We try to stay away from aggregate decisions. And what I mean is, although we have guided to that kind of $50 million, it's not a very helpful number for us internally because we don't spend $50 million. We actually spend $3 million in the Middle East, we spend $6 million over here. Like in other words, we pick and choose based on data and ROI hurdles and payback and breakeven analysis and good old fashioned just effectiveness of different campaigns, and we evaluate those so that they stack up. And the $50 million that we've put out is kind of a guidance number to say, hey, if you're trying to build a model, you should plan about this. And particularly since it's a big jump over last year, and we tried to give some detail around it as to why we believe that a big jump is justified. And we continue to believe that because the information and the feedback and the data that we're getting back is all supportive of it being the right decision, even in this environment that isn't so amenable to spending more into it. So on the one hand, I guess I would say to you that we have seen some cases where we've actually pulled back in small pockets of markets. I'll use the U.K. for an example. We looked at that market. We said there's a lot of paralysis going on. People are trying to sort out Brexit, trying to sort out a lot of politics related to that. They're trying to sort out what it means for businesses moving around and what that'll do for regulatory rules eventually. What I mean is that's when -- where we say, regardless of what we think subjectively, objectively, some of the banks that have balked in terms of our investment there caused us to take some pause, and in some cases, deploy it in other markets like the U.S., like Asia and other markets like that, and in some cases, just pull back.

So sorry for the long answer. But the reality is, we expect, in ballpark, to be tracking to that $46 million to $50 million annual number. And the reality is that some pieces of it will look pretty choppy. And so that in any given quarter, it might have a run rate of $52 million or $44 million, but that's only because a couple of submarkets in there or sub-spend chunks went up by a lot or down by a lot because it made more sense to us. So I think that it's possible to see a ramp in Q3 and Q4, but that'll only be if each individual, if you will, component adds up. And in many cases, it's not usually unanimous. You'll end up with some markets demanding more and other markets saying you might want to pump the brakes. And so that's why we end up with a mix and we end up with, yes, we'll probably track to about where we are for Q2, maybe a little higher for Q3 and Q4, but only if things add up like that, if that make sense.

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Daniel Thomas Fannon, Jefferies LLC, Research Division - Senior Equity Research Analyst [27]

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Okay. And then Nigel, a couple of question on expenses. So you're continuing to reduce the fixed cost component. So can you talk about what you're doing? And I guess, it seems like you're accelerating stuff. But why didn't you just do that from the get-go if it's -- or if there's more to do? Just kind of just talk specifically about the changes and what have you done. And then specifically on the intangible amortization step-down from 1Q to 2Q, is this a good run rate going forward?

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Nigel Rose, GAIN Capital Holdings, Inc. - CFO [28]

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Sure. Yes. So maybe starting with the cost base to begin with. And as you say, Dan, what's changed? When we started the year, I guess, none of us were anticipating seeing the conditions we've seen that continued into the year. So as ever, when we prepare a budget, it's not kind of set it and forget it. We continue to monitor it. Clearly identified early on, the volatility wasn't there. What levers could we pull? And I think we maybe touched on some of these in the Q1 call, that if we see this continue, what do you do? You don't just keep rinsing and repeating, and you look at how you might change some of the original plans and decisions for the year. So where we planned, for example, investments in certain parts of the business, we are looking at does it make sense to still do that? If it does, we'll do it. If it doesn't, then does it make sense to delay, defer or actually redeploy those resources somewhere else?

And so that's part of the thought process as well as just continuing to always look at our cost base, looking for opportunities where we can further refine and reduce cost as we go along. And as well the point about bringing forward some of the decisions to impact the savings faster, again, seemed to make sense in light of the conditions we were seeing from a market perspective. And then in terms of the amortization, that really is in relation to the FXCM acquisition that we made a couple of years ago, I think it was February 2017 where we acquired their U.S. customers for around $7 million. I think we said at the time that we were amortizing that cost over 2 years. So the last piece of amortization for those assets dropped off in Q1 of this year, along with some of the legacy intangibles in relation to the City Index acquisition back in 2015. So that's why a drop in terms of run rate, yes, I would look at the Q2 run rate as being a reasonable indicator of what it's likely to be going forward.

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Operator [29]

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And our next question comes from Ken Worthington with JPMorgan.

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Jenny Ni, JP Morgan Chase & Co, Research Division - Analyst [30]

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This is Jenny filling in for Ken Worthington. Maybe my first question will be more of a follow-up on Rich's question. So last quarter, you guys commented that a tighter range-bound in Eurodollar really limited 2-way trading and pressured revenue captures. I guess for this quarter, again, you commented that the range-bound is even tighter, but obviously, revenue capture really jumped a lot. I know you've commented on finance [revenue] helping and other pockets of [volatility] in the product. But would be really helpful if you could flesh out a little bit more what is playing to dynamics, especially in Eurodollar.

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Glenn H. Stevens, GAIN Capital Holdings, Inc. - President, CEO & Director [31]

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Yes. So I guess I'll try to reiterate it a couple of different ways. You're right the way you characterize Q1 in that many of the factors that subdued people's 2-way trading, difference of opinion, crossing the spread, getting in and out, doing whatever, higher levels of activity that engage clients in moving markets would normally do. That didn't change. You're right. We saw relatively similar levels of 2-way trading and such. What we saw a dramatic improvement of was the size of the positions that customers put on and how many customers actually engaged at that level. And so what I mean by that is that once those positions go on -- so if someone, let's say, is trading in and out with a one lot. A one lot -- a standard one lot is about 100,000 of notional amount. So even if its euros. The difference here is that if they were to trade 2 trades a week, 100 in and out, it would be 400,000 round turn. That would translate into a certain ADV for the whole day.

The difference here is that they, in the first quarter, did that kind of trading, but generally stayed square or generally stayed in the sideline. This quarter, if you will, more people filled the theater such that they weren't coming in and out, so that ADV didn't change that way, but our RPM improved because those customers that did put their positions on either left them on longer, which means that generates a financing income for us. Because in this business, there is a daily rollover that's involved with any kind of pair, whether it's a currency pair or an equity outside the U.S., equities, metals, energies. All of these products have a daily financing charge. In some cases, it's a financing charge. In some case, it's foreign exchange rollover with an interest rate differential. All of these things create spread opportunity. And when customers are engaged in holding them on -- holding those positions longer, then we have an opportunity to augment our kind of vanilla RPM. So our vanilla RPM is spread capture. That gets adjusted only up, not down, because you have degrees of financing income. And when customer positions are larger, then the financing income augments the RPM more materially. When it's very limited running exposure with customers, then you don't get that augmentation. So on Q1, you did have a situation where it was really quiet, and you had very low levels of engagement by customers, meaning the positions they were holding. In Q2, we saw a rebound to more normal size of that, and that's why we saw the RPM rebound. So it doesn't mean that they were more active, it doesn't mean that there was more 2-way interest. It means they had generally, and still do, larger exposure, which we consider engagement and we consider an indication of customers willing to engage once the market comes around.

So the first step is the customer has to pay attention. The next step is the customer has to pay attention and commit and say, "You know what? I'm bullish. I'm bearish. I'm putting a trade on." The next step is, the market moves and they say, "Oh, I want to add to it. I want to get out. I have it wrong. I'm going to flip it." But that's all predicated by the market actually moving. The -- Q1, we were in that first step. They just pretty much watching. Now we're at least in that middle step where they're actually engaged. And that normally is a much stronger harbinger for future opportunity because they're already engaged. You don't have to actually bring them into the market. They've already established a position. However, when ranges are still subdued as they are, you don't have a tremendous opportunity to create those volumes every day and spread capture because customers aren't compelled to trade in markets that are quiet.

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Jenny Ni, JP Morgan Chase & Co, Research Division - Analyst [32]

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Got it. That's really, really helpful color. Maybe also second question, looking more longer term. Obviously, one of the operational targets is to lower the volatility of the revenue capture rates in retail. But thus far, if we looked back at the past 4 quarters, the capture rate has been rather volatile. I know it has been unusual kind of low-volume environment. But I guess, what steps have you guys taken to lower the variability in capture rates? How are these steps helping so far? And how long would you think these efforts will begin to show more benefits in stabilizing RPM?

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Glenn H. Stevens, GAIN Capital Holdings, Inc. - President, CEO & Director [33]

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So I guess the good news is, if I had my risk team sitting here with me, they'd be very upset in that perception. And I only say that because when you look at measures like Sharpe and you look at measures like variability, even if you look at our trailing 12 months on Slide 3, if you look outside of 1 quarter to the next, which I hear you, but if you actually look beyond the 90-day cycle, actually the variability and the Sharpe and the range is tightening and that is going down. And when you look -- it's hard sometimes to see it early when you see a $50 and a $130, you go, gosh, what the heck is that? But that's also $180 divided by 2 is $90. So if you say, well, what was your RPM for the half year? It was $90. And then you go back beyond that and you say, what was that? So if you look at our trailing 12 month, but then do it trailing each month 12 month. In other words, go back 12 months, then go back 13 and use 12 and go back that -- in other words, if you keep looking at those cycles, over time, the trend is actually for less variability. We don't have a wonderful example of that for these 2 quarters, granted, I'll give you that. But actually, it is tightening with the trailing 12 months over time.

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Nigel Rose, GAIN Capital Holdings, Inc. - CFO [34]

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Just to maybe add to that. On Slide 3, as Glenn was referencing, the chart on the top right, we were trying to show that on a trailing 12-month basis, since we introduced the model in back end of Q1 of last year, the high and low of that trailing 12 month has been tighter than the high and low that we were seeing in the couple of years before that.

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Operator [35]

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Thank you. And as there are no more questions, that ends the question-and-answer session as well as the call. Thank you so much for dialing into today's presentation. You may now disconnect your lines.