IG Group Holding plc
Preliminary Results 2006
14 July 2006

Nat le Roux, Chief Executive Officer: Well good morning everybody. Nat le Roux, currently the CEO, but not for very much longer, and as we announced back in May I am going to be stepping down, moving into a non-executive role and handing over to Tim Howkins, the current FD. And the only thing that is delaying that handover is the recruitment of a new Finance Director. We hope to be able to say something about that relatively imminently, but under the current circumstances there is very little point, I think, me doing this presentation, so I am here, and happy obviously to answer any questions at the end, but hand over to Tim to do the presentation.

Tim Howkins, Finance Director: Thanks Nat. Good morning. As Nat has said, we were hoping to make an announcement about the FD this morning, but these things always take a little longer than you expect. We do hope to make some sort of announcement within the next few weeks.

I didn't think you would appreciate a one-man show from me, so accompanying me I have Matthew Tooth, who is our Financial Sales Director and he will be doing part of the presentation.

You will all have seen the figures by now, clearly a very good year: revenue up 44%; earnings per share up 61%, thanks to a good operational gearing, and that is not a new thing. As you can see from the chart, over the last eight years we have achieved compound annual growth in revenues at 40% and really achieved that in all stages of the market cycle. You have got bull and bear markets through that period and growth throughout it. 

We are paying a final dividend of 4p per share. That brings the total to 5.5p; that is pretty much exactly 50% of earnings, which is the policy that we said we would follow in the prospectus.

Current trading remains very strong, post year-end. June was actually the third-best month ever; not quite as strong as May, where clearly there was the benefit of volatility, but all the same very strong, both in financials, and as you would expect also in sport, thanks to the World Cup. 

We have seen very good levels of account opening and that is clearly one of the best lead indicators of future performance, so I think we are very well positioned for the future. 

Those of you who were here six months ago will probably recall me saying I had a certain sense of déjà vu with the equivalent slide and I have got even more again today. Once again a slide with very high growth in revenue, even higher growth in profit, and improvement in margin. I have really run out of things that I can say about this. The numbers really speak for themselves. Hopefully in six months' time the new Financial Director will be able to find something new and original to say about the equivalent slide.

Splitting the revenue down by business line: as you can see the highest percentage growth coming from our Australian business, with growth of 136%. But of course it is the UK business, which is far larger, which contributes the biggest growth in money terms: revenue up by very nearly £20 million. That is actually two businesses: UK financial spread betting, and a CFD business run out of our London office, but really covering pretty much the whole world, apart from the bits of the business serviced from the Australian and Singapore offices. Of that £66 million, £51 million from spread betting from financial spread betting, and £15 million from CFDs, and those numbers are up 37% and 59% respectively, so really very strong growth from that core business. I said quite a bit of that CFD business is non-UK and if you couple that with our Australian business, altogether £16 million of the revenues, that is about 17%, came from outside the UK. So we are beginning to become an increasingly diversified international business. 

Turning to the cost base: not much change in the cost base between the first half and the second half, with the obvious exceptions. Clearly bonuses and the long-term incentive plan P&L charge are both up, thanks to the very strong revenue in the second half. Advertising and marketing up in the second half. The difference between the first half and second half is largely the impact of the launch marketing of extrabet, our new fixed-odds sports brand. And finally a bit of an increase from bad debts: the two most significant events for bad debts during the year were the silver crash of April when, I don't know if you noticed, but silver had its biggest one-day move for something like 30 years; and the other one was Langbar, a stock which was suspended and then subsequently delisted following an alleged fraud, and our clients had quite large exposures to both of those. So between the two of them, those account for about 60% of the bad debt charge. 

I will now hand over to Matt to talk a little bit about how we have achieved that revenue growth.

Matthew Tooth, Financial Sales Director:  Thank you Tim, and a very good morning to everyone. Tim mentioned in his introduction that turnover in the business was up 44% this year. For the most part of my section of this presentation we are going to look at the factors behind this turnover growth and the first slide here you can see strong growth in transaction numbers in the UK financial business. This is our core business. It comprises UK financial spread betting, through the IG Index brand, and CFD trading service from our London office, through the IG Markets brand. And this growth in the number of transactions has been achieved against a backdrop of what would have been historically low levels of volatility in the equity markets. Now generally speaking those are not ideal conditions for our UK business, but you nevertheless can see a very strong last quarter. May '06, where volatility did pick up a little bit, was in fact a record for the number of transactions, as well as a record for turnover for this business. 

Now we see three main factors contributing to this growth: the first is very strong levels of account opening, and I will say a bit more about those later on; the second is the brand leadership of IG Index in the UK; and the third is the growth in CFDs, both in the UK and overseas. Again I will talk more about this later, but essentially it is a growth in the retail market with clients trading directly on our IG Markets platform and the growth in the institutional client market with many clients trading on L2, which is our direct market access platform.

Moving on, the Australian financial business is four years old this month. The graphs, which are a bit pale on the presentation board here, show the number of clients dealing to be up 75% year-on-year, and the number of transactions to be up over 200% year-on-year, and in fact the growth rate is 234% year-on-year. 

During the year in Australia we have seen a welcome switch from the business predominantly being within individual Australian share CFDs, to be a more balanced mix of trading on shares, indices, commodities and FX CFDs. Now I don't want to overplay this; the most important line still is Australian share CFDs, but it is encouraging that there is an appreciation of the broader range of products that IG is offering. This is something that not all our competitors can match. We hope to maintain the clear momentum that you can see here, and we have taken a recent initiative to help achieve this. That is the recruitment of a local marketing manager alongside a commitment to increase our marketing spend in Australia. 

Now I said that I would cover some of the factors behind the growth of CFDs and the next slide is intended to show that an increasing amount of our CFD revenue serviced from London is being generated from clients outside the UK. This is a trend that accelerated in the second half of the year. In Ireland we have had success opening accounts for a significant number of high net-worth individuals, through a number of introducers. In Germany we have had some initial success with a German local language version of IG Markets, which has recently been upgraded and improved, and elsewhere in Western Europe we have the beginnings of what could be significant future revenue streams, with those sales based upon the local language translations of the IG Markets website content and dealing interface. 

Now continuing the theme with the next slide, IG Markets is convinced of the value of introducers into our CFD business. These are local partners for our services who provide an effective on-the-ground sales force that assists us with account opening and has contacts and relationships that we cannot assume that we will be able to establish directly. Now I mentioned that we had important introducers in Ireland, but we also have valuable introducing broker relationships in Germany, Switzerland, Holland, Russia, South Africa, in the Middle East and elsewhere. Now we are working very hard in the sales and support side of our business to offer the best possible service to these introducers as we see this as an important part of our international expansion plans.

Moving on again, if I could only convey one message to you today, it would be that underlying our growth is a marked improvement in the rate of client acquisition. This is an important leading indicator for our business. In the second half of 2006 more clients than ever before were opening accounts and betting or trading for the first time. Now we are especially pleased with the growth in the UK financial spread-betting business, which is igindex.co.uk in the graph that you can see there on the left-hand side. Now what is behind this? Well it is some of the factors I have mentioned already; principally the brand leadership of IG Index in the UK, but perhaps a more immediate and direct cause was our decision in January 2006 to reduce the spreads on spot currency bets. Now this was an area where previously we had not matched our more aggressive competitors. Now the figures suggest that there is a very high level of elasticity of demand for these products and this has had a significant effect on the level of account opening. 

Now drawing an end to this part of the presentation, the final piece of the jigsaw that explains the increase in turnover is the revenue per trading clients. Now there are an awful lot of figures on that slide there, and I won't attempt to explore them in any detail, but suffice to say that the overall revenue per client was up in 2006 and it was at its highest in the second half of the year. Now this reflects the growth I have mentioned in UK financial spread betting and in CFDs. So there is now an increased proportion of these high-value financial clients in the overall mix.

Now before handing back to Tim I want to run through one more slide, which is on risk management and quality of earnings. Anyone who is familiar with IG has probably seen a version of this graph before. The blue line is the 60-day average of daily trading revenues: you can see this accelerating towards the end of the period, the rate of growth there. The red line is a measure of daily revenue volatility. Now you can see this has been held in a fairly steady state for quite some time now. And to end on a very obvious note, we are absolutely delighted that the risk management framework that we have put in place is continuing to do the job for which it is intended, which is to achieve a low level of trading revenue volatility. 

Now if I can just thank you all for your attention and hand you back to Tim.

Tim Howkins: Thanks Matt. The Sports Department had its best rate of growth for five years, since 2001. The largest part of the sports business is sports spread betting. And that has achieved 25% revenue growth, which is all the more remarkable, I was about to say, because there were no major sporting events, but I am sure I will get heckling from over there. Of course England won the Ashes, but apart from that, there were no major sporting events in 2005/6.

Why has this business suddenly started to grow again after quite a long period of fairly muted growth? What we have done in sport is bring a financial-markets pricing technology to sport, and that allows us to offer more markets than our competitors, and markets on which we update the prices far more frequently than our competitors. And I think we have had that technology for a couple of years now and the word has finally begun to get out in the market place and we are beginning to see an improved level of client activity.

We also launched two new fixed-odds businesses during the course of the year. Extrabet, which is our new mass-market fixed-odds offering, we launched in late March, clearly with the World Cup in mind. We have now just passed the 9000 clients mark, which is really towards the top end of client recruitment that we had anticipated for this business. Through the World Cup we did see that those clients were quite fickle. We had quite a few clients who came along, did one or two bets, then moved on, and I think that is probably just the natural course of what you would expect during the World Cup. All the fixed-odds bookmakers were offering lots of account-opening opportunities, so we will see how that client base develops and how 'sticky' it becomes as we move into the regular sporting calendar, and particularly the start of the football season in the UK in a few weeks' time. 

Market-making on exchanges, you have probably heard us talk about before. We were market-making in one exchange most of the year, and then literally just a few days before the year end we started market-making in Betfair. That really had quite a dramatic impact on the volume of business we were doing through exchanges, and clearly that has no impact in the financial period just ended, but we did see very good levels of volume and income in June. This has been an attractive form of sports betting for us. It has no cost of client recruitment and very little overhead from our point of view. A little bit of initial IT work to get it going and then, very much, it just leverages off the existing staff and pricing technology. Sadly the technology of the exchanges is not ideally suited for what we are trying to use it for. They really designed their exchanges for the man at home posting one or two orders an hour into the exchange, whereas we are hitting possibly 10,000 orders in an hour. Both the exchanges that we are market-making into are committed to improving their technology, doing a few little tweaks, which should hopefully improve our ability to market-make, and of course there are other exchanges out there as well, and we will be talking to those in the coming months.

So to the future and what are our strategic priorities? Well clearly we have got some existing businesses, which are delivering very rapid growth, and I think our first priority has to be to maintain and build on that growth. I am not going to talk for hours about customer service, breadth of offering, all these good things. One thing we did in the UK market; it has been received wisdom for some time at IG, that if you stray from the core investment press you get very low return on advertising spend. We did some marketing in the Sunday Times and the Sunday Telegraph in the spring and that actually showed quite good client recruitment. We are in the process of undertaking some market research before possibly slightly broadening our marketing reach for the UK financial spread-betting business. Australia we have already touched on. We are again increasing our marketing spend and as Matt said, we have recruited a local marketing manager. We are moving for the first time to fully competitive commission and spread, and we would hope to see some elasticity of demand as a result of that. Further afield, I have a separate slide to talk about international rollout so I will come back to that.

We have just been through a capacity planning exercise for our IT systems. You possibly saw on the chart of UK transaction numbers that between May 2005 and May 2006 our transaction volumes went up two-and-a-half fold and clearly you can't sustain that level of growth without committing significant resource to IT systems. So we are in the process of building two completely new data centres, which are really designed to scale for the next two or three years, for the sort of growth that I am hoping to achieve. Obviously that comes at a cost and CapEx for the current financial year will be somewhere in the £8-9 million range. That will actually produce very little change to the depreciation charge because the spend that we had on building our IT platform in 2003 has just come to the end of its depreciation life, although it is still fully functional.

International expansion, and I am sorry this is quite a busy slide, but there is quite a lot going on. Ireland, Matt has already touched on, it is an interesting market. There has been significant wealth built up largely from individuals investing in real estate over the last few years, and most of that money is now being managed by private client stockbrokers. Those stockbrokers want to offer an advisory service with CFDs. They can't offer CFDs themselves, they don't have the infrastructure or the balance sheet to do it. So they want to introduce their clients to a CFD provider, and over the past few months we have signed up most of the major private client stockbrokers in Dublin and we have seen quite significant numbers of accounts opened over the last two or three months. 

In Europe, slightly different stories in different countries because although we are passported into Europe and can offer our services anywhere in the EU, we are subject to local conduct of business rules which govern things like how you market, how you handle clients, that sort of thing. In the Netherlands we have very recently issued a prospectus, which is a necessary precursor to offering share-based CFDs. In Germany we are about to open our own office and in Italy we have just recruited a team of staff for the London office who will target the Italian market. And in both Germany and Italy, within the next few months, we will start direct advertising for clients.

Further afield in Asia, we are getting a steady flow of clients from Singapore itself into the Singapore office and I think possibly even more exciting than that, we have had some interesting conversations with introducers in some of the neighbouring countries, including as it says here, Indonesia, Thailand and even China. 

Further afield, there are a number of territories which don't allow you to offer equity-based CFDs, but they do allow you to offer foreign exchange. We have for a couple of years had the necessary regulatory licence to allow us to offer foreign exchange in the USA. We haven't yet activated that business, and I think it would be a mistake to simply put a website live, do a little bit of marketing in the US. The chances of getting critical mass in that way are pretty slim. So I think in order to activate that US business, we would want either a white label arrangement with a major online broker, or possibly to acquire or recruit an existing sales force with an existing client base, and we have now appointed a member of staff full-time to look at that subject and hopefully we will have some further news in due course. 

While talking about the USA I should just emphasise that we don't, under any circumstances, accept bets from US clients. We have a large shareholder base in the US and I enjoy going to visit them and I particularly enjoy going to visit them without fear of arrest. So no change to that policy. No US bets.

So in summary, we have businesses in both the UK and Australia, which are delivering very strong growth. You saw from the chart that Matt showed you the volatility of income growth: the run rate of daily revenue, very dramatically high in the last few months of the year. And you might find those numbers helpful when thinking about your forecasts for the current year. We have seen sustained levels of high client recruitment through the last few months, and obviously that is a key leading indicator of future revenues, and we are just beginning the rollout of our business into some major markets across Europe. So all in all I think the prospects for the business are very promising and I look forward to the future with considerable excitement.

Very happy now to answer any questions that anybody has, starting first with questions from the room and once we have exhausted the room we will move to questions from the phone.

Question and Answer Session

Question 1
Richard Taylor, Citigroup: I have a couple of questions please. Firstly could you speak on the difference between the cost of customer acquisition, between getting business from introducers, and from doing it organically? And secondly, can you talk about the quality in earnings, obviously with something like Betfair and huge volumes going through that relative to Betdaq, so how do you manage that sort of risk, especially with the smart money being around on Betfair maybe?

Answer: There is effectively no cost of recruitment of the client for an introduced client, but there is a revenue-sharing arrangement. Those revenue-sharing arrangements mean that the group of introduced clients tend to be paying something approaching institutional rates. So the best rates we would offer to a direct client is the net revenue that we tend to keep from an introducer. In terms of managing risk on Betfair, we are able to limit our risk that the system allows us to, actually, as I would imagine your own market makers do; fill up buckets of liquidity, as that bucket is emptied you can decide whether to refill it at the current price, or move your price according to the weight of business you are seeing. So risk management within Betfair is no different to risk management with our direct business. The only difference is that because there is a huge client base out there, any price that you put up, which is attractive, gets hit very quickly. So it is actually a useful tool for risk management. 

Question 2
Nathan Wong, Merrill Lynch: Just three questions. One is on the average revenue per client, as you said it went up a lot. Do you really think that is sustainable or do you think that is peak cycle type revenue per client? The next question is on the cost basis, it grew quite a lot and you are also mentioning about maybe increasing advertising and different advertising channels and also in the office costs. Could you give some sort of indication about the type of increase in cost base we are looking at going forward? And finally you mentioned that in Australia it is predominantly Australian shares that are getting most of your business, would you be able to give an idea of what the sort of mix is between shares, indices, FX for the UK, so that we have a sense of what it could be in the future? Thanks.

Answer: Revenue per client. I suspect there is a slight volatility effect in the second half. I certainly think there is not any significant volatility effect in the first half, so perhaps the first half's revenue per client is a better measure for the spread-betting business and the Australian business. 

Looking at the CFD business, there has been a shift of mix towards 'high rollers' if you like. A lot of the introduced clients are very high net worth individuals with very high-value accounts. So I think, provided we can continue to maintain that sort of mix on the CFD business, the CFD revenue per client probably is sustainable. Cost increases; none of the individual increases are individually large. The increase in rent from taking new premises is all in the order of half a million pounds. That is for both the Australian office, which is quite small, and the new floor we have taken in London. As I already said, the depreciation charge won't increase significantly despite the CapEx. We have taken on some more IT staff, but again in the context of the overall salary costs, I don't think you are going to see dramatic increases, but clearly salaries will go up by more than just inflation.

In terms of the revenue mix, if I can answer a slightly different question because the numbers I have in my head. The overall revenue mix for our total revenue is something like 38% from individual shares, 20% from equity indices, 25% from foreign exchange, 10% from sport, 5-6% from binaries and whatever is left, which should be about 5-6% is the other stuff: interest rates, commodities, those sorts of things. That mix does shift around a bit from month-to-month, according to what is interesting.

Question 3
Jason Streets, UBS: Just a question on the risk side. Can you say how many losing days you had last year? Or losing weeks or some useful number?

Answer: In 2005 calendar year we had three loss-making days. I think we had one right at the beginning of January. They tend to happen on days when the markets are incredibly quiet, so around holiday time. So I think we had one in the first couple of days in January, and I think that is probably the last one we had. There might have been one at Easter; I can't remember.

Matt: Normally on a US holiday or something like that, but I can't think of any.

Tim: The run rate is of the order of three a year.

Further Question: The follow-up question is: should you take a bit more risk now Nat has gone?

Answer: [Laughing] Possibly. I mean we did increase some of the headline exposure limits by 10% in January and we said we would wait a few months and look at them again. Probably towards the end of the summer we will look at them again, and again we wouldn't increase those ever by more then 10% in one go. But, yes, I think there is an argument to say it is time for another nudge up. And you can see from the volatility graph that that had very little impact on the volatility of income.

Question 4
Henal Patel, Dresdner Kleinwort: You talk about MiFID as a potential opportunity, but we have seen recent press articles suggesting that MiFID could also be quite negative for the industry. Could you perhaps comment on that and give us some indication of what the effect on the business could be going forward?

Answer: I think that article was rather overdone. It is true that MiFID will impose the best-execution obligation which currently we have a waiver from. However I am not sure that has any significant practical consequence. Our prices are generally effectively best-execution already. For instance, on foreign exchange we aggregate three separate price feeds and we make a price that is based on those, and that does satisfy the FSA's requirements for best execution. The one thing it might potentially prevent us doing is weighting our price according to the weight of client business, which is something we do occasionally in equity indices where if we are seeing lots of buying flow, we might weight the price up slightly. We are still in discussions with the FSA about whether that is possible, or not, under best-execution. There is an argument that because you are making a two-way price, it is always best-execution because the client has the choice of buying or selling. I think the worse thing that could happen is we lose the ability to weight our price, but that applies to a very tiny proportion of the business. Asking our dealers how often they do it? It is pretty rare these days.

Further question: And just in general, the cost of abiding by regulation going forward. Do you see that as an ever-increasing cost? Especially as you expand internationally?

Answer: It is an increasing cost, but it is a manageable cost. We have a compliance department of two or three people and we have a legal department of three people. So it is not enormous in the scale of the business.

Question 5
Daniel Havercroft, Investec: Your forthcoming direct marketing in Germany and Italy, does this imply you are going to set up local offices?

Answer: There will be a local office in Germany, but not in Italy. So we have just recruited a team of Italians who will be based in London and that is simply because of the difference in the regulatory environment between the two.

Question  6
Tim Orchard, Zebedee Capital: You mentioned operating leverage in the press release and again in the presentation. For the full year, revenue is up 44% and EBITDA up 51%. Was that extent of operating leverage more or less than you would have hoped for? And will it change from here on? And secondly, on a different subject, you mentioned in May that you would say something more about the balance sheet and returning cash to shareholders with the final results. I may have missed that bit.

Answer: Yes, operating costs were up by fractionally less than revenue. Most of that was a step change towards the beginning of the year, which we talked about at the interim presentation, which was largely to do with an increase in IT headcount in particular, marketing headcount to a lesser extent, and one or two other costs. It is the first year where we have had a P&L charge for the long-term inventive plan, and as I said, relatively little increase in the cost base during the first half and second half. So, yes, it is in line with what we were expecting six months ago, and obviously at the EBIT line there is significant operational leverage. EBIT is up 59% on a 44% increase in revenue. Sorry, was there a second part to the question?

Further question: Returning capital?

Answer: We have said before that while there is some possibility of industry consolidation, it would be foolish to rush to return excess capital. There are several players out there who are quite weak and clearly are losing market share. They do have client bases that, at the right price, would be attractive to us. However they still have unrealistic expectations of what the right price would be. I suspect that subject is going to play out in the next twelve months, one way or another. Quite possibly not by us acquiring them, but quite possibly by them merging among themselves or somebody else acquiring them, or possibly even going out of business. I think against that backdrop, it would be premature to return excess capital now. I think that is a subject for twelve months away.

Question 7
Henal Patel, Dresdner Kleinwort: Just on that question, with your increase in active client numbers this year, what sense do you get of those clients coming from your competitors, and what sense do you get of those clients coming from just brand new clients to the spread betting industry?

Answer: I think most of the accounts that we open are new to the industry, rather than defections. Clients are surprisingly sticky once they have opened an account, even in the face of quite bad technology and quite bad service, because it is quite a lot of hassle to close down all your positions, take your money back, send it somewhere else, and you are out of the market while you are doing that. The competition have really got to upset someone quite badly before they will move, is the experience we have had so far. So I think most of that account opening is new clients.

Further Question: But with the FX spread cut though, you thought most of those new clients would have been from your competitors surely?

Answer: No. I think there was a flow of new clients who wanted to do foreign exchange, which we weren't receiving because we weren't fully competitive on spreads and once we were fully competitive on spreads we started receiving that new flow of clients. But I don't think it was large-scale defections from competitors. I could be wrong, but I don't think so.

Are there any other questions from the room? If not I will invite questions from the telephones.

[No lines at this time]

In that case, as nobody has got up in the middle of the night in America to listen to our telephone dial-in, I would just like to thank you all for coming and obviously if anyone wants to ask questions in a one-to-one environment, I am quite happy to stick around afterwards and I will take my microphone off before answering them. Thank you very much.

End of Presentation