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Screenshot of a breaking news alert e-mail from Q2 2017
We believe that most of the headlines covering the just-announced Fiscal 2017 (March 31 year-end) results at London-based online trading firm CMC Markets Plc (LON:CMCX) will focus on the company’s regulatory-mandated overview of the year, which saw activity across the board (Revenues, EBITDA, profits, trading activity…) down single-digit percent as compared to the previous year.
However, digging a little deeper into the results shows that very clearly, the second half of the year (October 2016 through March 2017) was very much up at CMC, near or at record levels on both the top and bottom line.
As per our chart above, Revenues at CMC Markets came in at £85.3 million in the last six months of the year, up 13% over what was a slow 1H. It represented the company’s second best ever six-month period for Revenues, behind only 2H-2016.
On the bottom line, Profit before Tax in 2H-2017 was CMC’s best ever period, slightly ahead of 2H-2015. And profits were 58% ahead of the first half of the year.
Some other highlights and interesting notes not otherwise readily apparent from CMC’s 2017 results:
- increase in institutional trading activity – CMC’s institutional business, where it offers white and grey label and API connectivity to banks and brokers worldwide, saw a 38% increase in net revenue to £22.7 million during 2017, representing now 14% of CMC’s overall top line.
- increase in client money – total client money held by CMC was £317.5 million as at March 31, 2017, up 38% over 2016 (£230.7 million). As those who follow the online trading industry know, future trading expectations are closely associated with client asset levels, positioning CMC fairly strongly heading into Fiscal 2018.
On a regional basis, not much changed at CMC during Fiscal 2017. Activity for the full year was down in near-identical amounts in each of the UK, Continental Europe and APAC, with the UK accounting for 40% of Revenues in the CFD and Spread-Bet segment, the company’s largest unit.
We repeat below the full remarks of CMC Chairman Simon Waugh, as well as CEO and controlling shareholder Peter Cruddas. For the company’s full 2017 results announcement, click here.
Whilst I am pleased to present the Group’s results in our first full year since listing on the London Stock Exchange, there is no doubt that the past year has been challenging and disappointing, with net operating income down 5% and underlying profit before tax down 22%. The year-on-year fall in net operating income was primarily driven by more challenging market conditions with sustained periods of significantly lower market volatility, providing fewer trading opportunities for our clients.
The more significant fall in underlying profit before tax of 22% was a function of the lower level of net operating income combined with our continued investment in the strategic growth initiatives, which will drive the medium to long-term growth of the Group. We have made strong progress on each of the strategic initiatives, greater detail of which is included later in the report.
Although the financial performance is disappointing, the underlying fundamentals within the business have continued to improve with a 5% increase in active clients and client money at record levels.
The results for the year have been somewhat overshadowed by the proposals from the UK’s Financial Conduct Authority (FCA) and other European regulators as they reform the way that contracts for difference (CFDs) and spread betting products are offered. The Group welcomes strong regulation and is working with regulators throughout the consultation periods, to achieve their objectives. It is likely that once finalised, these changes will impact the profitability of the Group in the short term, although in the medium to long term we believe that the Group will benefit from these changes as smaller operators leave the industry and we grow market share.
Governance and the Board
Prior to the listing in February 2016, we made a number of changes to the Board, strengthening it in a number of key areas. This is the first full year that the Board has been in place and following a formal evaluation process the Board has agreed that it has operated effectively throughout the year. More detail is included in the Nomination Committee report.
Manjit Wolstenholme will be stepping down from the Board at our Annual General Meeting on 27 July 2017. I would like to thank Manjit for her valuable contribution as we prepared for our listing and during our first year as a public company, and wish her every success for the future. We have commenced a thorough search for a successor.
On behalf of the Board I would like to thank all of our staff for their hard work once again. Their effort and commitment has helped to ensure that we successfully managed the market volatility around the EU referendum as well as other significant market events during the year. The quality of our staff gives me the confidence to know that we will successfully deal with the regulatory changes, Brexit and other events that will impact the operations of the Group in the coming years. We have a considerable talent base in our London head office and intend to maintain the UK as our global headquarters. Continuing investment in our key talent will be an absolute priority for the Board in the coming year.
CMC Markets continues to be a highly cash generative business. Whilst the Group’s policy is to pay dividends of 50% of underlying profit after tax, given the Group’s strong cash position, the Board has decided to maintain the full year total ordinary dividend in line with the prior year.
The Board is recommending a final dividend of 5.95 pence per share, which represents a total ordinary dividend of 8.93 pence per share.
2018 will be an important year for the Group as the regulatory changes are finalised and the way the Group will best serve the needs of our clients within that environment becomes clear. With our award winning technology, focus on client service and strong balance sheet, we believe that as the industry adjusts to these changes we will be in a position to emerge as a stronger business, delivering future growth and shareholder value.
7 June 2017
2017 has been a busy and eventful year for CMC Markets, as we completed our first full year as a public company. We have made strong progress on our five strategic initiatives outlined for our investors during the listing process, including signing of a partnership with ANZ, launching new products (binaries and Knock-Outs) and continuing to develop our award winning Next Generation platform.
Our financial performance has been lower than last year driven by lower client activity resulting from an unusual lack of market volatility for large parts of the year. However, active client numbers and client assets have continued to increase. I am therefore confident that we have the right foundations in place for the business moving forwards.
The big industry event of the year, which was outside our control, was the decision of a number of European regulators to announce changes or commence consultations around client appropriateness, minimum retail margins, risk warning amendments, client incentive schemes and marketing of leveraged products.
Our primary focus has been on the consultations within our core markets, in particular the UK and Germany, where the consultation period took place from December 2016 through to March 2017, and we have made thorough and detailed responses. These consultations were initiated as a result of low-quality providers applying low levels of regulatory compliance, questionable sales practices and irresponsible behaviour, primarily from overseas jurisdictions. CMC Markets has always had a strong focus on compliance and service and I am confident that by working with regulators, in the long term, the Group and the industry will emerge in a stronger position.
The recent German regulatory consultation has resulted in the regulator maintaining its initial position which requires the implementation of negative balance protection for retail clients by 10 August 2017, whereby clients cannot lose more than their account balance. The flexibility of our Next Generation platform means that we are able to quickly adapt the platform’s functionality to meet these new requirements. We await communication of the outcome of the UK consultation.
The other significant event for CMC Markets during the year, which was specific to the Group, was being chosen by the Australia and New Zealand Bank (“ANZ Bank”) to service their stockbroking business, where our technology was one of the main catalysts for winning the transaction. The agreement means we will transfer and service over 250,000 ANZ Bank annual active stockbroking clients from September 2018. CMC Markets is already the largest non-bank retail stockbroker in Australia and this transaction will propel us to the number two position in Australia overall with a 23% market share based on ASX trading statistics.
This transaction is expected to be highly profitable for both CMC Markets and ANZ Bank once we have fully integrated the software and migrated their clients onto our platform which is expected to commence in September 2018. Combined with our existing business we will have in excess of 300,000 annually active stockbroking retail clients, a number of intermediaries and total client assets in excess of A$53 billion. Naturally, for a deal of this magnitude, although revenue streams will not begin for over a year, a project is underway to ensure that the transaction is a success. We are developing additional stockbroking platform functionality, and increasing the property and hardware capacity needed to support the anticipated rise in trading activity and staffing required to service the client base.
CMC Markets targets experienced clients through a more feature rich trading platform and excellent client service. Our award-winning, proprietary Next Generation platform was specifically built to attract more experienced clients and, more importantly, to retain them. We aim to have a long relationship with our clients and this has been achieved as illustrated through the fact that approximately 32% of our active clients have been with us for over three years which is significantly higher than the industry average.
In addition to our Next Generation platform, we employ experienced sales trading teams that are available to speak to clients any time and keep them updated on market movements. We also target experienced stockbroking clients through our Pro platform in Australia. Overall globally we won 34 awards for service, platform and technology during the year.
I founded CMC Markets in 1989 and over the intervening years the business has grown and has dealt with many periods of significant change; in many cases we have pioneered the change. This has included embracing the internet and new technologies including mobile and adapting to regulatory change. I love being at the helm of the business and I plan to steer us through any proposed regulatory changes ahead. That is what I have done successfully for 27 years and will continue to do going forward.
Financial performance and KPIs
Over the year, global markets were less volatile than historically, particularly in our major asset class, Indices, and despite short-term volatility around the EU referendum and US presidential election, this ultimately led to fewer trading opportunities for our clients. Against this backdrop of low levels of market volatility, particularly in the first half, clients traded less than the prior year with net operating income being 5% lower than the prior year at £160.8 million. Operating expenses before exceptional costs increased by 6% to £105.8 million, due to increased investment in marketing and higher staff costs.
Profit before tax was £48.5 million, a 9% decrease on the prior year, driven by the reduced net operating income and the low level of variable cost within the business. However, with this operational leverage we anticipate that when revenues increase there will be a low incremental increase in cost, and therefore believe that our strong client metrics are a good foundation for future earnings growth. Own funds generated from operating activities were £47.0 million for the year ended 31 March 2017 and the Group continues to have a strong regulatory total capital ratio of 31.5% as at 31 March 2017.
Although the Group’s policy is to pay 50% of profit after tax as dividends, given the Group’s strong cash generation and liquidity position, the Board has recommended to maintain last year’s total ordinary dividend and pay a final dividend of 5.95 pence per share despite the lower earnings.
Active clients have increased by 5% for the Group to 60,082; however a 6% reduction in the number of trades and a 3% decrease in the value of those trades contributed to a fall in overall revenue per active client (RPC) of 11% to £2,517. Although lower than the prior year, RPC remains amongst the highest in the industry and is a reflection of the quality of our client base. RPC is presented net of retail and Institutional client rebates, which were £9.9 million for the year, a decrease of 6% from the prior year.
2017 has generally been a good year for overall client acquisition for the CFD and spread betting businesses, with new clients increasing by 13% compared to the prior year. Our stockbroking business has seen client acquisition increase by 20%.
The UK continues to be Group’s largest market; net revenue fell by 3% although the value of trades increased by 6%. The value of trades saw an increase in lower margin institutional business offset by a large decrease in Indices business.
In Europe net revenue fell by 7% marginally higher than the reduction in the value of trades, whilst in APAC & Canada net revenue decreased by 11%, again slightly higher than the value of trades.
We are pleased to have increased our primary market share in the UK, maintained our number one market position in Germany and continue to be the number one CFD provider to high value clients in Australia according to independent Investment Trends research.
Despite the regulatory uncertainty, we continue to focus on our clear strategy to grow the business in the future around five strategic initiatives, and underpinning each of these is our continuing focus on client service, innovation and technology.
When looking solely at financial performance, it has been a mixed year for the initiatives, but we are continuing to make progress across each of them, and will continue to refine them as the regulatory outlook becomes clear.
In our established markets, the lacklustre market activity has been the main driver of lower revenue by reducing the number of trading opportunities for existing and returning business. In addition, our increasing marketing spend has also not had the expected impact on new accounts, with cost per acquisition flat on the prior year.
Regarding new markets and developing regions, our Poland office has shown good growth since its launch in October 2015, but in size it remains immaterial to the Group at present with a contribution of 1% of net revenue. Despite regulatory change in France, another year of growth has been achieved.. We have also incorporated an education entity in China in readiness to open an office in Shanghai in the first few months of the new financial year.
From a digital perspective, we have focused on our mobile marketing capabilities, whilst also continuing to improve websites and the client journey.
Our institutional business, where we offer white and grey label and API1 connectivity to banks and brokers worldwide, continues to grow and CMC Markets had 154 active institutional relationships during the year, an increase of 43% against the prior year. This growth in clients contributed to a 38% increase in net revenue to £22.7 million.
Throughout the year we have continued to make improvements and enhance our award winning Next Generation technology. Innovation is core to the Group and during the year we successfully launched our full binary offering, the ‘Knock-Out’ product in Germany and continued to improve our API1 offering to institutional clients. In the coming months the platform will be upgraded to HTML5 which will help to provide additional flexibility in the future, as well as maintain our leading position in technology against our peeHaving returned as the Group’s full time CEO in 2013, the hard work in developing our technology, platform and premium client strategy is giving us a clear advantage. Our technology innovation is hugely valuable and important to our clients and our business. It is key to our future growth and scalability and we continue to invest in technology as a platform for our success. Owning and developing the key components of our platform software means we are able to innovate rapidly, driving our business forward and responding to the needs of our clients and our regulators.
In the last year or so I have visited our offices in Australia, New Zealand, Singapore, Germany, Austria, Dubai (major partner) and there continue to be many opportunities around the world for us as a business.
I would like to thank our staff for their continued hard work and dedication throughout the year. We have very talented people across all areas of the Group and their commitment is key to our future success.
I would also like to thank our clients for their continued support. We strive to provide the best levels of service and a great trading experience to our clients, and during the year I have met many of our clients from across the globe. The feedback we get is invaluable and vital to our ongoing success, ensuring we meet or exceed our clients’ needs.
I believe that becoming a public company in 2016 was the right decision for the business, as there is no doubt that being listed provides us with additional opportunities. Some of the institutions and clients we are speaking to would only work with us if we were a public company.
It has been a transitional year and I am looking forward to our future. Over the coming year the regulatory uncertainty will reduce and we can continue to move forward. These are exciting times for the Group as we progress our diversification across different continents, products and technology. For now the sector is shrouded in uncertainty around regulatory change, but for CMC Markets development and innovation continue as they have done for 27 years and I firmly believe that the Group will be a long term beneficiary of the expected improvements in the industry in the future
Chief Executive Officer
7 June 2017