GAIN Capital shares pummeled after Q1 report, down 8%

After reporting Q1 results which clearly disappointed investors, retail forex broker Gain Capital Holdings Inc (NYSE:GCAP) saw its shares drop 8% on Tuesday, closing at $9.52. Monday’s close was $10.32.

Traders also seemed to take some of their disappointment out on Gain’s rival FXCM Inc (NYSE:FXCM), which traded down 2.5% to $1.95, moving farther below the $2 line. FXCM is expected to report its results later in the month.

So what happened?

(After all, Gain’s press release included phrases such as ‘We are extremely pleased with our performance in the first quarter‘, and ‘We had record retail trading volume in the quarter‘…).

Well the answer is fairly simple – falling revenues and margins.

Gain Capital revenues profits Q115

Gain saw its overall Revenue drop 19% from Q4 ($92.9 versus $114.7), with its all-important retail revenues off 22%. This happened despite the aforementioned record volumes Gain reported for the quarter. The reason is a drop in margins earned on volume – Gain’s pips-earned-per-round-trip-trade fell from 2.3 pips in Q4 to just 1.7 pips in Q1.

gain capital pips q1 2015

Gain’s explanation for the falling revenues (and margins) was that ‘customer trading activity was focused on one-way trading in euro/dollar, which muted our revenue capture for the quarter.’ In other words, much of Gain’s volume was low-margin EURUSD, much of which Gain needed to hedge (costing it money) since clients mainly took out shorts on the Euro, as the EURUSD pair fell steadily throughout Q1.

It will be a few more months before we find out if the falling-margins phenomenon was a one-time thing, or a trend. But either way, Gain shareholders weren’t liking what they saw.

In fairness to Gain, Q1 certainly could have been a lot worse. The good news is that Gain seems to have gotten through the Swiss Franc spike crisis relatively unscathed. Gain’s $8.3 million profit in Q1 is still a fairly impressive result, in light of what happened at several other leading brokers.

And starting in Q2, Gain will be including the results of UK-based City Index, which Gain bought for $118 million. The City Index deal formally closed early in April. City Index did not make much profit in Q1 (EBITDA of $2 million), but with its quarterly revenues in the high-$30 million range the potential to add to Gain’s bottom line is certainly there.

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