U.S. Markets closed

Edited Transcript of IGG.L earnings conference call or presentation 21-Jan-20 9:30am GMT

Half Year 2020 IG Group Holdings PLC Earnings Call

London Jan 23, 2020 (Thomson StreetEvents) -- Edited Transcript of IG Group Holdings PLC earnings conference call or presentation Tuesday, January 21, 2020 at 9:30:00am GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* June Yee Felix

IG Group Holdings plc - CEO & Executive Director

* Paul Richard Mainwaring

IG Group Holdings plc - CFO & Executive Director

================================================================================

Conference Call Participants

================================================================================

* Ian White

Autonomous Research LLP - Research Analyst

* Portia Anjuli Patel

Canaccord Genuity Corp., Research Division - Analyst

* Richard Michael Taylor

Barclays Bank PLC, Research Division - Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

June Yee Felix, IG Group Holdings plc - CEO & Executive Director [1]

--------------------------------------------------------------------------------

Okay. Good. Good morning. A warm welcome to you. Thanks for joining us for our FY '20 half year results. As you know, I'm June Felix, CEO; and I'm joined by Paul Mainwaring, our CFO. Together, we're going to present IG's results presentation and answer all your questions. Paul and I are also joined in the room by the strong bench of leaders who are part of my ExCo and who have worked so hard as partners with me during IG's year -- IG this year -- for IG this year.

In terms of the running order for this morning, I'm going to provide a high-level view of the continued progress we've made in the execution of our growth strategy over the half. Paul will cover our financial performance. I'll update you on the strategic and operational progress and finish with some final thoughts before Paul and I take questions.

At our strategy update in May, we detailed what our plans would look like over the medium term. With this clear focus, we have been able to deliver a good performance, and we are confident that we will return to revenue growth this year as guided. It's early days, but I'm pleased with our progress in the half as this is the first 6 months as -- since we launched our strategy. It's important to remember, this has been achieved against a tough market backdrop. The comparative period last year included 2 months of trading prior to the ESMA product intervention measures coming into effect. In addition, our Professional clients identify fewer trading opportunities in Q2 this year. That was because of reduced market volatility compared to the same quarter last year. As you are all aware, IG has the highest level of all Professional clients in the industry.

Despite these challenges, we have delivered the following financial results in the half: net trading revenue was flat against a tough compare; our total operating expenses were up, reflecting our investment in our growth strategy as guided. This results in an operating profit of about GBP 100 million with an operating profit margin of 40.1% and basic EPS of 22.4p. These results are early positive evidence of the rationale underlying our strategy to leverage our strengths and to make our business work harder for us in the core markets and in the new growth opportunities. Ultimately, this strategy will deliver more value for our shareholders through very clear medium-term financial targets.

As a reminder, we set out in May to deliver the following targets: revenue growth in our core markets at around 3% to 5% per annum over the medium term and to increase revenues from the significant opportunities by GBP 100 million to around GBP 160 million in FY '22. Our performance in the half shows that we remain firmly on track to deliver.

Let's first look at our core business, which provides a strong foundation for growth. I want to remind you that IG's sustainable, nonconflicted business model is based on our interests being aligned with our clients. IG sets the industry standard in terms of service and execution quality, and clients will pay us with their tenure and loyalty. Client retention and client loyalty is what makes IG different. Importantly, we have grown our active client base in the core markets in the period. This growth is in line with our medium-term ambitions of delivering 3% to 5% per annum. And as we've always said, it's the size and quality of our client base that drives long-term value. At the same time, first trades increased by double-digit rates in the core markets, showing there is continuing demand for our proposition.

Turning to our significant opportunities. I'm really excited by the growth and progress we've made across our portfolio. In Japan, revenue is up 82% versus prior year. Emerging markets has grown its client base nearly 40%. In Greater China, we've added key leadership. In the U.S., we've achieved a #1 ranking in customer satisfaction. We've increased our Institutional account base by 30%; and Spectrum continues to grow, with 4,000 trades in 1 day last week. It's a consistent drumbeat, and we are working really hard to make it louder.

Now while early days, it shows, IG is delivering a more diversified, sustainable and global business. We are on track to meet our targets of GBP 100 million in incremental revenue by FY '22. I'll give more detail in the strategic progress section, but I'm going to turn it over to Paul now to take you through the financials.

--------------------------------------------------------------------------------

Paul Richard Mainwaring, IG Group Holdings plc - CFO & Executive Director [2]

--------------------------------------------------------------------------------

Thank you, June. Good morning, everyone. I'm going to take you through our results for the first half of FY '20 and our financial position at the end of the period.

The group's net trading revenue was GBP 249.9 million. That's GBP 1 million lower than in the same period in the prior year, which, as June has said, did benefit from 2 months of trading prior to the implementation of the ESMA product intervention measures. Our total operating expenses before variable remuneration were GBP 136.3 million, GBP 14.2 million higher than in the first half last year. And the group's operating profit was GBP 100.1 million, with the operating profit margin at 40.1%.

The group's effective tax rate applied to the interim PBT is 18.6%. This reflects our estimate of the effective tax rate that will apply for the full year. However, if the government decides to postpone or cancel the reduction in the rate of U.K. Corporations Act, which is currently enacted to take effect from the 1st of April, our estimate of the effective tax rate for FY '20 would be 18.9%.

Our basic EPS is 22.4p, and we will pay an interim dividend of 12.96p per share, equal to 30% of last year's annual dividend of 43.2p per share, which, as we have again reiterated, the Board expects to maintain until the group's earnings allow us to resume progressive dividends.

I'm going to spend the few minutes focusing on our revenue and its drivers. The overall picture of revenue by product type shows that our OTC leveraged revenue in the first half was just fractionally lower than the first half last year. Importantly, however, the number of active OTC clients served by the business is up by 6%. Growth in the size and quality of the client base is the driver of medium-term revenue growth for the business.

Average revenue per client will vary from period to period, reflecting the market condition and the 6% reduction in revenue per OTC client compared with last year reflects 2 key factors: firstly, lower volatility and a few opportunities for clients to trade; and secondly, the impact of the ESMA product intervention measures, which have reduced the value of retail clients in the ESMA region. Please note that our approach to hedging and our risk limits have not changed, and the rate of conversion of client income into trading revenue in the first half is in line with the rate of conversion in previous years. I'll take you through the drivers of OTC leveraged revenue for each key market group in a moment.

Our exchange-traded derivative revenue, which, in this first half is still all coming from Nadex in the U.S.A., is down 7%. The client acquisition for Nadex has been challenging in this period. And as June will explain later, we are taking steps to refine the product proposition and target audience for Nadex and to position it more effectively as part of our overall U.S.A. business.

The revenue from stock trading remained pretty small. They're GBP 2.6 million for the half, but the focus of this business is to help attract new clients, for whom OTC leveraged trading may be appropriate and to help us retain clients. At the end of the period, we had nearly 38,000 stock trading clients. A full 5,900 also traded OTC leveraged products.

This OTC leveraged revenue bridge analyzes at the moment in revenue from one period to the next. Reassuringly, the pattern that shows in the effective half year is consistent with the pattern we've seen in previous years, which gives us confidence that we can return to growth. The growth in our OTC leveraged revenue comes from attracting new clients who generate more revenue than the revenue lost from clients who have stopped trading, net of the revenue from existing clients who return. In the first half of this year, the revenue generated by clients who traded with us for the first time was GBP 25 million, GBP 17 million higher than the net amount lost. Compared with H2 last year, we've also benefited this half year from existing clients trading more. That's reflected in the purple bar, which will go up and down depending on market conditions.

In gearing, revenue growth comes from attracting new valuable clients whilst retaining existing valuable clients so that we can grow the size and quality of the client base.

One of the metrics we use to measure how well we are doing in attracting new clients is a number of first trade. And the performance in this first half is really encouraging. OTC leveraged first trades were nearly 23,000, 56% higher than the same period last year and 35% higher than in the second half last year. As we explained before, historically, each client cohort is a similar pattern with respect to attrition, average revenue per client and average lifetime value, and we have not seen any reason to think that the behavior of the clients we've recruited in the first half this year will be different. We, therefore, expect that the H1 FY '20 client cohort will, as other client cohorts do, generate revenue for many years. Each client cohort we recruit is a valuable asset. And the benefit of that is shown in the analysis of revenue by client tenure. In the first half of this year, 52% of our OTC leveraged revenue was generated by clients who have been trading with the group for more than 3 years.

Now although our total revenue in the first half is unchanged compared with the prior year, this does mask significant differences in the dynamics across our different markets. To explain these different dynamics, we have split the revenue into 3 groups: the ESMA region within the core markets where revenue is 12% lower than last year, the other core markets where revenue is 6% higher than last year, and our significant opportunities where our revenue is 43% higher. I'm going to look at each of these in turn, starting with the OTC leveraged revenue in the ESMA region.

And this slide sets out the performance of the business in the ESMA region since the product intervention measures have been in effect by comparing the average quarterly performance in the first half of this year with the average quarterly performance in the last 3 quarters of last year when the measures were in effect throughout. The average quarterly OTC leveraged revenue in the ESMA region of GBP 63.3 million was 3% higher than the average last year. That growth has come from the 4% increase in the number of active clients, with a 1% reduction in the average revenue per client.

Our ESMA region -- our Professional active client base continues to be really strong, with around 5,000 pro clients active on average each quarter this year. The average quarterly revenue per pro client has fallen by 2% compared with last year, but it remains at a very impressive GBP 7,719 per client per quarter. Now pro clients are not within the scope of the ESMA measures, and they are more sensitive to market volatility than retail clients. And the reduction in the average revenue per pro client reflects the weaker market conditions in the second quarter of this year.

We have seen a steady recovery in our retail active client base since the drop in numbers we saw when the ESMA measures were first introduced. Average quarterly revenue from ESMA retail clients was 19% higher than last year, reflecting a 5% increase in active clients and a 14% increase in average revenue per client. We are really encouraged by this. And although it is too early to draw firm conclusions, it does appear the retail clients in the ESMA region are adapting to the leverage restrictions.

Our OTC leveraged revenue in the other core markets is 6% higher than last year, which reflects a 5% increase in active clients and a small increase in average revenue per client.

Our performance in Australia shows a similar pattern to the performance of the ESMA region businesses, with revenue growth of 4% in the period, which was driven by a 4% increase in the number of active clients. We expect that ASIC's product intervention measures will come into effect in Australia early this calendar year and the actions we have taken to mitigate the impact of progressing as planned. June will take you through that in more detail in a moment.

Our revenue in Singapore is 3% higher, with a 7% increase in active clients, partly offset by a reduction in revenue per client. The increase in the minimum margin requirement for FX trading from 2% to 5% for retail clients came into effect in October in Singapore. But due to the nature of our long-standing sophisticated client base, many of whom are able to be categorized so that they are not impacted by the change. We do not expect the impact of the change to be significant. And I remind you that when we determined our medium-term revenue growth target for the core markets, we did take into account the expected impact of regulatory change of both Australia and Singapore.

Our revenue in EMEA, ex-EU, which comprises Switzerland, Dubai and South Africa, is 13% higher than last year, with a 4% increase in active clients and an 8% increase in revenue per client.

So in all our core markets, both inside and outside the ESMA region, we are achieving growth in active client numbers at a rate that is consistent with our medium-term growth target. And in our significant opportunities we've delivered revenue growth of 43%, with revenue in the first half GBP 12 million higher than last year. Again, it has been driven by the increase in number of active clients, which is up by 37%. You'll note that the average revenue per client in these businesses except -- for Institutional is also a little higher. That gives us confidence that we are not growing our active client base at the expense of quality. June is going to give you an update on each of these businesses in a moment.

So turning to operating expenses. We have guided that our operating expenses in FY '20, excluding variable remuneration, are expected to increase by around GBP 30 million compared with FY '19. In the first half, our operating expenses of GBP 14.2 million higher, in line with that guidance.

The year-on-year comparison is a bit more complicated than usual because of the implementation of IFRS 16, which impacts the accounting presentation of our operating leases, all of which relates to office premises, and because of the net credit in the first half last year that relates to regulatory fees. The announcement includes a full explanation of the nature of our operating expenses and the movement year-on-year and with the makeup of the variable remuneration charge for the half year, and I'm not going to repeat that now. I do, however, want to touch on the expected makeup of our operating expenses for the full year.

We are not changing our guidance with respect to the overall increase in operating expenses in FY '20 compared with FY '19. On this slide we are showing how that increase is made up by cost category, reflecting the changes we've made in the categorization of our costs as a result of the organizational redesign and taking into account the actual costs incurred in the first half. We've also shown the impact of IFRS 16 on the prior year costs. I hope you find this helpful.

Coming to the last 2 slides for me. Firstly, on our own funds flow and the movement in own funds. On this, I would highlight firstly that the tax payments in this half year include a full year's worth of payments as HMRC have brought forward the payment schedule for large corporate. And secondly, that the working capital outflow this half year is lower than in H1 FY '19, largely because of the lower level of bonus accruals for the beginning of this year compared with last year.

And this last slide for me shows the summarized balance sheet, the available liquidity and the regulatory capital position at the end of the period. We have maintained our strong financial position, which is one of the foundations that allows us to pursue our strategy. Our financial strength and the robustness of our business model and our risk management processes is reflected in our investment-grade credit rating from Fitch of BBB- with stable outlook, which we received in October. We have no plans to raise any more debt or to change our capital structure in any way. The rating applies to the group, but also to IG markets, which is our main hedging and market-facing entity. And the rating will assist us in the management of our relationships with our hedging brokers, our lending banks and potential partners.

And with that, let me hand back to June.

--------------------------------------------------------------------------------

June Yee Felix, IG Group Holdings plc - CEO & Executive Director [3]

--------------------------------------------------------------------------------

Thank you, Paul. I'll now take you through our progress against our updated strategy, as announced in May.

First of all, I'd like to reiterate the importance of our purpose, vision and values in underpinning our confidence in delivering our strategy and financial targets. These values are evident day after day through the work of our global team. They support our sustainable business model and focus on clients. Our research shows that traders are a breed apart. They are entrepreneurial by nature. Traders are confident, they enjoy the challenge, they are comfortable managing risk and are driven to continually improve. Our history shows that we, at IG, are entrepreneurial at the core, continually innovating and improving to deliver the world's best trading experience. This is reflected in the values of: champion the client, love what we do and lead the way.

In pursuing our vision to provide the world's best trading experience, we made 6 strategic choices: to operate a sustainable business model, to provide the best trading client experience, win with our technology, tailor client propositions, broaden our product range and extend our geographic reach. These are our guiding principles. They incorporate IG's traditional strengths as well as providing the focus areas of our strategy. They complement the entrepreneurial mindset that is in the DNA of IG.

As we set out in May, in executing on our strategic and business goals, we are deploying 4 growth levers. Three of those levers, expanded distribution channels, a global firm with local focus and segmented target markets, are new focus areas. The fourth, our multiproduct focus, continues IG's 45-year tradition of innovation to meet the needs of active traders. To utilize every growth lever to its fullest potential in the geographies where we are underrepresented, we have invested in new experienced talent with proven capabilities and a deep knowledge of local markets. The key now is to deliver the strategy across the core and the new areas of diversification.

Let's focus first on the core markets. In May, we defined our core markets as our largest established markets, where we already have a prominent presence and significant share of OTC leveraged trading. These markets are outlined on this slide. You can see that we enjoy a 42% share of the premium trader market in the U.K. and a strong position in all the other core markets. In these markets, we will continue to build on the positive growth in client numbers that we've seen in the first half that Paul took you through. And we're going to do this through focusing on the high value segment, localizing our product marketing and delivering new products and offers. We are navigating changes in Singapore and Australia, and we'll share more details in a few moments. But summarizing the core markets, we are in good health, client growth is in line with our revenue targets. So no change to our revenue growth targets over the medium term in our core as a result of changes in the regulatory landscape. This provides reassurance that the lion's share of our revenue remains in a strong position.

As you know, we're waiting for the outcome of ASIC's product interventions in Australia. And what we've done is we've applied prior learnings from the ESMA product intervention measures to both Australia and Singapore. We've put in place the systems, processes and client outreach to ensure a smooth transition in both markets. We are on track to successfully navigate the proposed changes outlined in the ASIC consultation. In fact, we're taking actions to appropriately categorize clients as wholesale. Importantly, this category is not expected to be impacted by the proposed changes. We also believe we're well positioned in Singapore since MAS increased the client margin requirements for FX in October. In fact, many of our Singaporean traders are categorized as accredited, expert or institutional investors, meaning they are not subject to the changes in FX margin requirements. As Paul said, the potential impact of these changes has already been built into our financial targets.

Now let's turn to significant opportunities, which we're very excited about. I'm going to take you through each of these opportunities over the next section. However, as you can see, we're experiencing good progress across the portfolio.

The Japanese market offers huge growth potential for IG, with retail FX market size of around GBP 1 billion and over 2 million traders. I'm delighted to say Japan is one of our fastest-growing and strongest-performing businesses. Our revenue is up 82% and the number of active clients trading on our platform is up by 75%. This performance is because of the strategic choices we have made and the decisive actions we have taken. We appointed a new high-quality Japanese CEO in April, we have a successful and differentiated product offering, our investment in multichannel marketing is delivering results, and we've implemented a more efficient and user-friendly onboarding process. Together, they are significantly improving client acquisition and conversion.

What's really encouraging is that these results do not yet reflect the new user experience we spoke about in May, the new distribution opportunities we're seeking and the impact of new advertising. In December, the Japanese team launched a new brand campaign on a major TV station featuring a Japanese household name as our new campaign ambassador. We, therefore, are expecting further progress in the coming months.

I want to give you a flavor of the energy and excitement we feel about the business and how we're tackling it in a Japanese way. The image you see on the screen now is of our marketing at Shinjuku Station in Tokyo, which 3.4 million people use daily. The whole campaign in Japan has been really impressive, and we are proud to show you 3 of our new adverts now.

(presentation)

--------------------------------------------------------------------------------

June Yee Felix, IG Group Holdings plc - CEO & Executive Director [4]

--------------------------------------------------------------------------------

These adverts have been really well received in Japan.

Let's turn to emerging markets, where we're seeing strong growth. Our revenue and active clients are both up by around 40% year-on-year. This demonstrates this natural demand for our products. In addition, with our brand and reputation as an innovative and high-quality firm, we are benefiting from strong global tailwinds such as increasing wealth in emerging markets, increasing financial sophistication and ever-increasing digital confidence. These are all powering the interest and growth of self-directed trading. Looking forward, we will look to make DailyFX work harder for us and are building up our teams with local expertise. I believe we're really well positioned to capture further demand here.

Turning now to Asia. There's real opportunity for IG to grow in Greater China. We believe the dynamics in Greater China and Hong Kong are very supportive of our business. The growth in wealth in Greater China is impressive, as shown in the chart on the left. There are 4 million Professional investors, individuals who have over $1 million in investable assets. Hong Kong has over 500,000 Professional investors. The trading of CBBCs and warrants in Hong Kong represents a GBP 1.5 billion market opportunity. This is the same size as the total EU leveraged trading market, in a market with 6 million people. To capture the opportunity, we've hired a high-quality CEO for Greater China with proven experience building businesses through new products and partnerships. We hired a Head of Sales for the region, and we established a Hong Kong office. We'll be adding to our Greater China team to deepen our access to this important market, and we're pursuing Institutional sales as well as partnership opportunities there. The response so far from banks, securities firms, hedge funds and family offices has been encouraging.

Turning to the U.S., we're making solid progress here. To create greater synergy, over the last 6 months, we have organized our 3 businesses, IG US, DailyFX and Nadex, under new leadership. This will help us better capitalize on the strong links between DailyFX and IG US.

In IG US, we have a very attractive client proposition. Firstly, our client satisfaction is the highest of all margin FX providers in the U.S., driven by our well-tuned client service model. Secondly, research shows that pricing matters. And here, we have the scale and breadth to offer the tighter spreads. Thirdly, our DailyFX business is one of North America's leading ForEx news websites. The site averaged about 2 million global views per month in the first half, of which 500,000 views are from North America, 35% more than last year. We also believe there's real opportunity for DailyFX to act more effectively as a lead generator for IG US. It's still very early days. We do fully intend to grow our share of the 110,000 merchant FX traders in the U.S., a group which has increased by 10% year-on-year.

Nadex, our binary options exchange, will be adding new products and new marketing approaches as it broadens its client base and expands its proposition in the second half of 2020.

Now let's look at our Institutional segment. Here, we're targeting the 8,000 hedge funds and family offices that have less than USD 200 million in assets under management. This market segment represents an opportunity of around GBP 500 million for IG. Over the first 6 months, the team have hired new Institutional management and sales leadership, delivered a double-digit increase in revenues and a 30% increase in active clients. When an Institutional client decides to trade through IG, our revenue opportunity is, on average, larger than for our Professional client. Therefore, we continue to invest in this segment. We'll have a new brand launch in H2 and plan to expand our products and services over the next 2 years. We expect further upside in this segment.

Finally, in May, we spoke about the upcoming launch of Spectrum, IG's multilateral trading facility. Spectrum is the only multilateral trading facility to offer Europe's 400,000 on-exchange traders the ability to trade indices, commodities and FX 24 hours a day. Spectrum successfully launched its marketing campaign in October during H1. Around 700 clients traded turbo24s in Europe. As of today, there have been over 900 clients since launch. Most importantly, 1/3 of trades on Spectrum are conducted out of hours, showing the value of one of our key USPs for retail clients.

Our ambition remains unchanged. We believe Spectrum can take a meaningful share of the GBP 1.6 billion EU leveraged trading market. In the pipeline, the team are working to broaden its reach and product set. In addition, there's some really productive discussions with third-party brokers, issuers and market bankers to further accelerate the adoption of Spectrum. This launch of turbos represents a fundamental step forward in the progress toward delivering our strategy.

Here is a French video that we translated for you from the recent marketing launch of our turbo24 product traded on Spectrum. This video provides a brief overview of the key features offered by the platform.

(presentation)

--------------------------------------------------------------------------------

June Yee Felix, IG Group Holdings plc - CEO & Executive Director [5]

--------------------------------------------------------------------------------

Let me now summarize, before turning to the outlook. I'm delighted with the progress being made across our significant opportunity portfolio. By deploying our growth levers, we have successfully -- we will successfully expand our business in new geographies, segments and products, as shown on this slide. While we are excited about our significant opportunity portfolio, we remain deeply committed to the core of our business. The core business is a strong foundation on which we can evolve to become a broader and more diversified business. This new focus is reflected in our financial targets.

So to conclude, I'm very pleased with the advances made in the first 6 months of this fiscal year. This progress gives me confidence that we will deliver the medium-term strategic and financial targets that we set out in May. While early days, I'm proud of the accomplishments that the entire IG team has delivered in growing our high-quality client base and gaining traction across all our significant opportunity portfolio.

For FY '20, the company expects to return to revenue growth. As planned, our operating expenses, excluding variable remuneration, will increase by around GBP 30 million to fund this growth strategy. The Board intends to maintain the 43.2p per share annual dividend, and total group's earnings allow the company to resume progressive dividends.

We will continue to lead the way in our industry by staying true to our purpose, vision and values, which really differentiates us in the market and helps to provide us potential loyal and valuable client base.

I said, when I became CEO, that I look forward to leading the evolution of the group's strategy to deliver sustainable growth and attractive shareholder returns. This remains true, and I'm very proud of the progress we've made. IG is delivering a more diversified, stable and global business to our clients, our shareholders and other stakeholders.

Thanks so much for your time today. We're happy to take questions now.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Ian White, Autonomous Research LLP - Research Analyst [1]

--------------------------------------------------------------------------------

It's Ian White from Autonomous. Just a couple from me, please. First of all, your cost guidance seems to imply quite a significant step-up in costs across basically all of the line items you've called out for us. I'm just trying to understand what precisely are the drivers of those increases? And are there any interdependencies to revenues that you would call out, please? That's question one.

--------------------------------------------------------------------------------

June Yee Felix, IG Group Holdings plc - CEO & Executive Director [2]

--------------------------------------------------------------------------------

Yes. Let me just start, and then Paul will certainly take the detail. As we said in May and as we discussed with the Board, we are investing this year to catalyze and accelerate growth. So that was the core of it. And if you look at the detail, it is a lot around exactly what we've achieved, which is accelerating the acquisition of -- and growing our client base and also funding our significant opportunities. So it's investing back to growth.

But Paul, do you want to add anything in terms of detail?

--------------------------------------------------------------------------------

Paul Richard Mainwaring, IG Group Holdings plc - CFO & Executive Director [3]

--------------------------------------------------------------------------------

Yes. The detail. The 2 big areas of increase are what we call prospect acquisition. So that's spending on attracting potential new clients, that includes an increase in the external spend, but also an increase in the way in which we do that. So the circle and optimization effort that we do in terms of natural search, that's all in that category. So that's expanding that to address that target market.

And then the other is in sales and client management. So these are the people who actually work around the world, servicing the clients, converting those prospects into sales to all the PCMs and the sales team and so on. So that's where we're putting most of the investment. There is an increase in technology in line with what we said last year on development. And pretty much everything else, apart from those, the bits around regulatory fees are unchanged.

--------------------------------------------------------------------------------

Ian White, Autonomous Research LLP - Research Analyst [4]

--------------------------------------------------------------------------------

Maybe just one follow-up on the prospect acquisition. I mean you say you're calling those costs up about 23% half-over-half, in the second half. Would that be sort of -- per your strategy, would you be disappointed if you didn't see a commensurate uplift in new clients in the second half? Or is that taking it too literally?

--------------------------------------------------------------------------------

Paul Richard Mainwaring, IG Group Holdings plc - CFO & Executive Director [5]

--------------------------------------------------------------------------------

I think that's taken a little literally. Clearly, in H2, we're going to have a full year of spending on Spectrum, and that's one area where there's a fair degree of brand recognition work that's going on. And similar in the U.S. as well, which doesn't have an immediate return in terms of the first trades sort of sets a basis of brand recognition that will allow the future acquisition spend to be more effective. So we do expect to continue to grow at the first trades, and we're going to invest in these product areas to make sure that we are reaching the appropriate audience.

--------------------------------------------------------------------------------

Ian White, Autonomous Research LLP - Research Analyst [6]

--------------------------------------------------------------------------------

Okay. And just my second question, please, and sorry if I missed this. Just -- are you able to share with us the percentage of your Australia clients that you expect to be recategorized as wholesale and their revenue contribution for the first half, please?

--------------------------------------------------------------------------------

Paul Richard Mainwaring, IG Group Holdings plc - CFO & Executive Director [7]

--------------------------------------------------------------------------------

No. We're not going to show that. We've learned a lesson I think from the ESMA experience that everyone got rather fixated on that. What I would say is that we do have an internal target of how many clients we'll be able to include in categories that will not be impacted there by the change. The progress so far in achieving that is in line with what we set out at the start. So when -- that hasn't changed. We don't expect that the rules will be different from those that we've anticipated in our modeling.

And remember, you do tend to get a bit of an uplift in the number of the people who apply to be in the category that's outside of those impacted just before they come into effect that we're very comfortable with how we're positioned on that. I don't think our estimates of the impact need to change.

--------------------------------------------------------------------------------

Unidentified Analyst, [8]

--------------------------------------------------------------------------------

Could I just ask for a little bit more detail on Japan? I mean it's staggering. I doubt anybody in the room predicted it. Could you talk to us a little bit more about product -- obviously, product range, a slightly different product mix, and we need to get our heads around that.

And also maybe when you show us those ads, what's the timing of those? How much is the timing? Just give us a bit of a sense of how much [benefit] it is, please.

--------------------------------------------------------------------------------

June Yee Felix, IG Group Holdings plc - CEO & Executive Director [9]

--------------------------------------------------------------------------------

So -- yes. So the product is what we had discussed before, it's an Options product. It's been very, very well received. It's -- what we found in our research is the Japanese actually love new product. And being an innovative company as we are, we've really touched a very positive theme in terms of interest so that a lot of people are talking about us. It's not just our advertising. There's a lot of buzz in the market.

In terms of the ads and sales, [Saijo-san], who is the star of the show, is known by 80% of all Japanese people. I mean this is like fantastic, right? We've been trying to figure out what the U.K. equivalent is, but I'm not sure yet. It could get risky. But the good news is he's -- really has a fabulous brand, and he is our brand spokesperson. The ad that you just saw at Shinjuku Station just went up January 20. We also have Shibuya, which is also an equally large hub, which is also going live. The ads themselves started right after Christmas for a week. So we're creating little bursts running those -- working with the agency to make sure that those are bursted out and create a drumbeat. So it's very exciting, and we're very excited with the response so far in terms of the lift in brand, the association and -- early days, though. More to report later on in the year. Great though, right? So excited. Okay.

--------------------------------------------------------------------------------

Richard Michael Taylor, Barclays Bank PLC, Research Division - Analyst [10]

--------------------------------------------------------------------------------

Yes. It's Richard Taylor from Barclays. Could I have 2 questions, please? Firstly, on the retail actives at 5%. Just wondering if crypto has anything to do with this. I saw crypto revenues doubled in the half.

--------------------------------------------------------------------------------

June Yee Felix, IG Group Holdings plc - CEO & Executive Director [11]

--------------------------------------------------------------------------------

Yes. Cryptos is small numbers still, okay? So you -- doubling off a very small base. So we're really not seeing that as a driver in any material way. So I think that's the most important point. And if you look at the average revenue per client is basically steady, which essentially says in the retail base. I think it's going up a bit across ESMA and the rest of the world, which -- and crypto usually has been traded in huge quantities. So we're very comfortable with our underlying base. And as we broke out in the detail, it's -- many of our core -- it's the core products, not the crypto.

--------------------------------------------------------------------------------

Richard Michael Taylor, Barclays Bank PLC, Research Division - Analyst [12]

--------------------------------------------------------------------------------

And then secondly, you've added 900 on the MTF versus 700 at the half end. Just keen to understand how many of those were, I guess, old retail customers that have transferred across? And, I guess, most crucially, how that's changing over time? You're now recruiting more genuinely new customers rather than sort of signing on existing IG customers that are perhaps retail customers previously.

--------------------------------------------------------------------------------

June Yee Felix, IG Group Holdings plc - CEO & Executive Director [13]

--------------------------------------------------------------------------------

Well, we're focusing on actually getting the turbo clients, right? So our proposition is totally different, and we're working really hard to do that. There are clearly some clients that have lapsed in the past that we are also targeting. But in general, we're seeing broad demand across the piece. We haven't broken out the percentages, so one versus the other. But we're really pleased that we're seeing demand across both the turbo clients who understand turbos as well as people that are really curious about our product, love IG and are willing to try new products that we offer and has distinctive capability.

--------------------------------------------------------------------------------

Portia Anjuli Patel, Canaccord Genuity Corp., Research Division - Analyst [14]

--------------------------------------------------------------------------------

It's Portia from Canaccord. I've got 2 questions, please. Firstly, if you could provide any comment on trading post the period, and that would be helpful.

And secondly, just thinking about what the Gambling Commission have said with regards to the use of credit cards. Just interested in what percentage of your U.K. customers use a credit card to pay their deposits.

--------------------------------------------------------------------------------

Paul Richard Mainwaring, IG Group Holdings plc - CFO & Executive Director [15]

--------------------------------------------------------------------------------

Well, on the first one, I don't want to be unhelpful, but we will report our Q3 revenue, when we do the Q3 revenue update in March, is it? End of it.

On the second, we have about 5% of our deposits in the U.K. come through people using credit card. Now the reason they would use credit cards is often because if they want to put margin on quickly, that's just an easy way to do it. So we are not concerned by the Gambling Commission, their move. And we see no sign of it yet accreting into our...

--------------------------------------------------------------------------------

June Yee Felix, IG Group Holdings plc - CEO & Executive Director [16]

--------------------------------------------------------------------------------

Yes. And as we've always said, first of all, they know who we are. We have a good relationship with the FCA. There -- we're continually in contact with them. So to date, we -- they know we're not a gambling institution. So we believe we're in good shape for the foreseeable future.

--------------------------------------------------------------------------------

Paul Richard Mainwaring, IG Group Holdings plc - CFO & Executive Director [17]

--------------------------------------------------------------------------------

Last chance.

--------------------------------------------------------------------------------

June Yee Felix, IG Group Holdings plc - CEO & Executive Director [18]

--------------------------------------------------------------------------------

Yes. So crystal clear. No questions. This is always good.

--------------------------------------------------------------------------------

Unidentified Analyst, [19]

--------------------------------------------------------------------------------

Can you explain Appendix 5, please?

--------------------------------------------------------------------------------

Paul Richard Mainwaring, IG Group Holdings plc - CFO & Executive Director [20]

--------------------------------------------------------------------------------

Don't know. Have a look. In the slide there?

--------------------------------------------------------------------------------

Unidentified Analyst, [21]

--------------------------------------------------------------------------------

Broker margin.

--------------------------------------------------------------------------------

Unidentified Analyst, [22]

--------------------------------------------------------------------------------

Broker margin.

--------------------------------------------------------------------------------

June Yee Felix, IG Group Holdings plc - CEO & Executive Director [23]

--------------------------------------------------------------------------------

Oh, yes.

--------------------------------------------------------------------------------

Paul Richard Mainwaring, IG Group Holdings plc - CFO & Executive Director [24]

--------------------------------------------------------------------------------

Yes, it goes up and down. So that's a great thing. I mean, seriously, broker margin does depend upon what clients have traded, how much we can internalize, what the FX rates are and all kinds of things like that. So it does go up and down. I wish it had a correlation with revenue. If it has one, it's very vague. So it's a consequence of clients trading about the outcome of a hedging. This reflects the margin we have to put on with our hedging brokers in order to hedge the notionals that we're exposed to.

One of the things that drives it is how clients trade. So if they're long single-name equities and short indices, we are able to go to hedge in a very efficient margin way. When that isn't the case, it becomes more expensive in terms of cash requirement to hedge. It really does move around. We analyze the factors. We manage it by making sure they've got enough liquidity on hand to be able to meet any potential foreseeable margin requirements. So that's one of the things we have the liquidity for.

--------------------------------------------------------------------------------

Unidentified Analyst, [25]

--------------------------------------------------------------------------------

So just want to understand because that's affected by internalization. Just wanted to understand because that's affected by, as you said, exactly what people are trading, et cetera. Is that in there for understanding balance sheet reasons? Given that -- I mean because there's no revenue forecasting that we can take from that.

--------------------------------------------------------------------------------

Paul Richard Mainwaring, IG Group Holdings plc - CFO & Executive Director [26]

--------------------------------------------------------------------------------

No. There's no revenue forecast you can take from that. We have tried very hard to try to explain to the nonexecutive directors when we do our capital and liquidity planning how we could possibly project broker margin requirement relative to our revenue projections. And you can't. It's just very difficult to do. So what we do if we manage it on a historic basis, we look at the peaks, we look at what it was that drove those peaks, and we just make sure we've got enough liquidity on hand to handle it accordingly. We really do not want to be in a position where we have to change our hedging approach.

--------------------------------------------------------------------------------

June Yee Felix, IG Group Holdings plc - CEO & Executive Director [27]

--------------------------------------------------------------------------------

Okay. Well...

--------------------------------------------------------------------------------

Paul Richard Mainwaring, IG Group Holdings plc - CFO & Executive Director [28]

--------------------------------------------------------------------------------

Very good. Thanks, guys.

--------------------------------------------------------------------------------

June Yee Felix, IG Group Holdings plc - CEO & Executive Director [29]

--------------------------------------------------------------------------------

Thanks very much for coming. Thank you very much for your questions. Thanks for your support. See you in a couple of months.