IG Group Holdings plc
Presentation of Preliminary Results
for the year ended 31 May 2007

Monday 23 July 2007

Tim Howkins, Chief Executive:  Good morning, I am sure the chart on the right-hand side is very familiar to almost all of you now. We have now sustained a 40% compound annual growth in revenue over 9 years. We saw a margin of just over 60% in the second half which is obviously up from the first half, and investment that we made in the first half, particularly in IT, IT staff as well as in IT hardware, has given us IT systems which are significantly more resilient and scalable than they were before and it has also given us the ability to develop much faster.  And technology is increasingly becoming a key driver of growth. That is a topic I will come back to in a few minutes.

Two other key drivers of growth are introducers and international expansion. And you will have seen from the results that UK CFD revenue was up by 90% and the rest of Europe up by 126% and Steve will talk a little more about some of the factors behind that shortly. We have put the Dividend up by 55%. That is putting up the Dividend payout proportion to 60% and that is also an increase from the previous 50% payout. 

As it says in the Statement, current trading is strong and you will have seen that we had record revenue, the highest revenue we have achieved yet in June. And really that is just driven by very slightly higher market volatility in June that we had seen in the previous couple of months.

I am now going to hand over to Steve to talk about the Results in a little bit more detail and then I will come back in a few minutes' time to talk about future growth drivers and some of our plans.

Steve Clutton, Finance Director:  Thanks Tim and good morning ladies and gentlemen.  Well another very successful year for IG. Strong performance on the top line, 36% increase in revenue, flowing through to a PBT increase of 35%.  2007 was a period of major investment as Tim mentioned, particularly in IT capability and capacity.  But it is pleasing to report that the business has demonstrated its operational gearing with a near 6% improvement in EBITDA margin in the second half compared to the first half.  Bottom line growth was 33% in EPS . The full year Dividend of 8½ p is a 55% increase reflecting a change in our Dividend policy as Tim mentioned. This reflects our confidence in the business and its cash generation going forward.

Turning to the breakdown of revenue, you can see that all areas of the business have continued to deliver profitable growth. Overall the financial side of our business is up 37% on last year. And sport is up 34%.  Spread betting in the UK performed well against a particularly challenging second half last year. And you can see very strong growth in the CFD business - a 71% increase on the previous year - driven by a very solid performance from introduced business which now represents over half of the total CFD number. This also reflects the attraction of our offer and in particular our DMA platform, L2.  Binaries continue to represent some 5% of total revenue and it is pleasing to see that sport enjoyed its highest growth rate for several years, coming in at 34% overall. 

Taking a look at the cost base, really with the exception of the bonus line, none of the costs increased significantly from the first half to the second half of the year,  something that we flagged at the time of our Interims.  Revenue grew 19% in the second half, versus cost growth of 12%.  And the increase in bonus really reflects the second half performance. By far our largest cost is salaries, and looking forward to 2008 we would expect the salary cost line to increase by around £7 million. £2 million of that is flow through from headcount growth last year. Around £1.5 million from pay review and around £2 million flowing from overseas expansion.  We would expect the other costs to grow in the region of £4 million and this excludes bonuses and LTIP  which are clearly performance related.

Looking at the business metrics, you can see the clear upward trend in UK spread betting transactions continues with compound annual growth rate over the last three years at 44%. The spike in May 2006 was driven by volatile markets at that time.  Average monthly transactions were 36% higher in 2007 than they were in 2006, reflecting our continued brand strength and UK market leadership.

In our financial business overall, account opening is a key lead indicator.  You can see from this chart that client recruitment in the fourth quarter was running at nearly 2½ times the rate it was 18 months ago. We are recruiting spread betting clients and CFD clients at an equal rate. And in total our newest overseas operations being Germany, Singapore and our Italian desk based in London, accounted for some 17% of new accounts in the last quarter. 

Turning to Australia, a couple of charts you have seen before, this time overlaid with monthly revenue. So, left hand side number of clients dealing, right hand side income and number of transactions on a monthly basis. The chart on the right hand side really highlights the revenue impact of a small group of clients trading precious metals in April 2006. It made the year on year comparative for Australia very tough. But it is pleasing to report that the high levels of revenue achieved in May and June 2007 really have put Australia back on its impressive growth trend. 

Looking at the CFD business overall. It's quite a diverse international business.  Over 60% of revenues are now generated by clients based outside the UK and the business is showing strong growth. Most recently 56% second half on first half.  I mentioned earlier that introduced business is a key driver of this growth and a good example of this is Irish private client stock broking business which generated over £5 million of income in 2007.  But clearly we are also seeing growth in all geographies as further stockbrokers, wealth managers, financial advisers and other introducers come on board.  Total revenue from our country specific operations in Italy, Singapore and Germany is currently approaching £400,000 per month. 

This slide puts our direct overseas expansion into context.  The chart on the left shows cumulative number of clients trading from the point when office was opened. Australia was opened in 2002 and we have rebased Singapore, Italy and Germany. You can see that these countries' lines are trending more or less in line with what we saw in Australia which is encouraging news.  Operating in these new territories does not require major investment. The chart on the right shows that the major expense is discretionary marketing spend. There is minimal set up cost relating to regulation and for example long lining IT capacity. The discretionary marketing spend clearly depends on the size of the audience and the number of media outlets. You can see, it is much smaller in Singapore than in Germany.  Recurring costs are staff and accommodation. But headcount requirement is modest given that these are really sales and account opening operations.  So while Singapore is the smallest in a low cost environment, Italy benefits from sharing some existing group infrastructure being a desk in London.  Our highest cost is Germany and we would expect our Spanish and French offices costs to come in somewhere between Italy and Germany, around £1-1.2 million per year including marketing.

Apologies, a very busy slide, but one you have seen before and I will just focus on the revenue per client for our financials business and pick out a few highlights and salient points.  UK clients effectively self select. The smaller client generally goes for spread betting, most of the larger clients go for our CFD offering.  And so those larger professional clients really account for the higher income per client in UK CFDs which you can see is in the region of £4,100 in the second half.  The higher Europe income-per-client reflects higher-end introduced clients, for example in Ireland. And the lower CFD income-per-client in Asia Pacific really reflects the higher proportion of direct retail clients there at the moment and a newer client base.

UK financial betting, income-per-client continues to trend around £2,000 in a six-month period with the second half impacted by a large influx of new clients. 

Turning to sports, over the last two years we have seen very good growth in sports which accounts for 10% of the Group revenue.  There has been strong incremental growth in the new businesses that we started two years ago, being Binaries, Extrabet and Betting Exchanges. It is making a solid contribution and we've have recently ring-fenced some dedicated IT development resource for it. 

We have flagged our intention to raise our Dividend payout ratio from 50 to 60%, but I thought it would just be worth spending a little time on the moving parts and the dependencies behind that decision.  Top half of this table shows that we have a large cash balance of over £480 million. Of course that includes a lot of client segregated funds - our own cash balance is about £93 million. Whilst the Group is clearly quite cash generative, the limiting factor in any Dividend payment or use of cash for acquisition or return to shareholders is regulatory capital. I am just giving you a feel there for how the regulatory capital has moved over the year from £62 to £94 million and that shows the surplus over the regulatory requirement at the bottom of the table - there is an increase from £30 million to about £44 million of surplus. Now clearly regulatory capital has risen with retained earnings less Dividends paid and it effectively rises faster than regulatory requirement.  In recognition of a growing regulatory capital surplus and our confidence in how we feel about the business going forward, we have decided to distribute more of that surplus in our new Dividend policy which increases the pay out ratio from 50% to more like 60%. 

A slide that I think we have had in the last six or seven presentations, really to sum up. Still very little revenue volatility.  We increased the Group's maximum exposure to global equity markets by 10% to £15 million back in May. We did a similar level of increase back in January 2006 and it really reflects the expansion in the business and the rise in equity markets in the last 18 months. But you can see the revenue volatility is really in a tight band. 

I will now hand you back to Tim. Thank you.

Tim Howkins: Thanks Steve.  TradeSense you probably all remember is a customer education programme which we launched back in January. There are two parts to TradeSense. One is the pack; the training materials which you receive over a six week period. And the other is during that six week period, the ability to deal in very small size.  TradeSense has been the main thrust of our advertising for UK spread betting since we launched in January, under the strap line 'Make sense of spread betting'. And that has been very successful. In the autumn you may recall recruitment of UK spread betting clients was running at about 800 a month. It has been consistently very comfortably above 1,000 per month since we launched TradeSense back in January. The other affect that TradeSense has had is some increase in rates of conversion, although that is actually less marked than the impact it had on recruitment of clients.  Given that it has been successful for UK spread betting, fairly obviously we are now in the process of rolling it out across the rest of our worldwide offering and the first place outside the UK to get it was Australia, three weeks ago today. And we will be progressively rolling it out through the rest of the offering.

As I said earlier, technology is becoming increasingly both a differentiator against our competitors and a key driver of growth in its own right.  This morning we launched PureDeal which is our new online dealing application for UK spread betting. It features one click dealing, very rapid dealing. It has got a very information rich, fully customised all-user interface. We are very pleased, as you can see here, we have got Reuters News and we are the first spread betting company in the world to offer our clients free Reuters News. At a more technical level, dealing with PureDeal does not require Java.  Having a Java-based platform has become an increasing customer service load, because increasingly new PCs don't ship with Java installed.  PureDeal doesn't use Java, so we avoid all of that.  And the affect of that is that PureDeal can be used straight out of the box on a very wide spectrum of PCs, using different operating systems and different browsers.

Something you will have heard me talk about before is our L2 direct market access platform. And again that is becoming increasingly important as a driver of growth.  The LSE has been having a push on direct market access generally for shares trading in the UK. And when they have advertised through the spring, we have tried to advertise at the same time. And the affect of that is that we have seen an increase in users of about a third over the last three months. 

Mobile is something that we have had for a while, but it finally works on a vast majority of phones. Probably if you bought a phone in the last 18 months, as long as you spent a sensible amount of money on it, it will use our new dealing application. It also supports BlackBerries and a wide range of PDA's and we have seen the use of the mobile platform roughly double over the last six months. 

And then finally a new subject which I will just touch on today is API which stands for Application Programmers Interface.  And what that is about is third parties connecting their systems directly into ours, connecting directly to our execution engine.  An example of that that we have already got live is somebody who is running what is effectively a black box, algorithmic trading strategy. They want to route their orders directly into an exchange, but have those transactions become CFDs. Using our API interface they can do that and they don't actually need to use a dealing application, or they just connect their technology straight into ours. And there are very many flavours of API. As you look into the future you can see things like instead of offering an online broker a white label solution, where on their website they have to have two separate platforms, their's for shares dealing and ours for CFDs, it would be much preferable to them to be able to integrate our product within their main dealing application, and API technology gives you the ability to do that sort of thing. And we will be working on those sorts of projects over the coming months. So I think API is a subject you will hear me talking about increasingly in the future.

We have already touched on international expansion. Our expansion into Europe is going very well.  As Steve said, we opened both our German office and our Italian desk back in the autumn and together those are now generating about 300K of revenue per month. 

Three main sources of client recruitment, seminars and investor shows, introducers and direct advertising and on the right you can see one of our German campaigns. And even if you speak no German you can probably get the message that that is about leverage.

I have mentioned MiFID many times before and the opportunity that presents to us in Europe. In the next Quarter, i.e. the Quarter ending at the end of November, we will be opening offices in both Paris and Madrid.  We have already hired senior staff in both locations. We have located offices and we are currently building the necessary IT connectivity. So our plans are really very well advanced in both countries.  And really that is it for now for opening offices around Europe.  Steve talked about the cost of opening an office and it really makes no significant difference how big the country is, whether you are opening in Germany which is 80 million or the Netherlands which has a 10 million population. The cost of setting up the infrastructure would be very similar and the drain on management time would be similar. So our view is that at least for now we will concentrate on the four key centres of Europe which are France, Italy, Germany and Spain, and other territories around Europe we will look to tackle using introducers or white labels.  Steve has already touched on the very great success we have had using the introducer model in Ireland which has built from nothing to a £5 million-plus revenue business in the course of a year or so. And we very much hope we can replicate that success across Europe. And we are already having one or two interesting discussions, but as they are only discussions I will say no more about that for now.

And then as we finish off our plans for Europe, we are able to begin to think about the rest of the world. And really once you step outside Europe, probably the most likely product we are talking about there is forex. And there are significant forex operations already, in particular in the US and Japan. And as our MiFID plans come to fruition, we will begin to give those areas a little more thought.

So just to summarise.  We continue to see good growth from both our UK spread betting and our Australian CFD business. We saw really quite significant growth, 126% from Europe and we have got offices in Madrid and Paris coming shortly. Introducers are becoming increasingly important as a driver of growth and we hope to replicate the success we have had in Ireland. Technology is increasingly becoming both a differentiator and a driver of growth in its own right.  TradeSense did great things for client recruitment in the UK and we hope it will do the same elsewhere.  And as I have already said, trading since the year-end has been strong and we achieved record revenue in June.

Very happy to take any questions if you have got any?

Question and Answer Session

Question 1
Male: If we start with the Dividend please. Great to see the Dividend going up, but is it also an implicit sign that acquisition opportunities, particularly in the new geographies aren't really there at the moment?

Answer: No the difference between a 50% payout and a 60% payout is only £3 to £4 million of extra Dividend. So it certainly does not have any significant impact on our ability to do acquisitions if something comes up.

Further Question:  And the focus remains Europe for the time being I presume rather than the UK in terms of acquisition opportunities?

Answer:  There certainly aren't any obvious acquisition opportunities in the UK at the moment.

Further Question:  The other aspect was MiFID.  It clearly opens up the continent for you, but does it also mean new cost in terms additional customer-facing regulations?

Answer:  There are two areas you could be referring to. One is the appropriateness testing we need to apply when we open an account. And the other is whether or not we have to offer best execution.  On the best execution point first of all, we have had a very helpful legal opinion recently which confirms our interpretation of the guidance issued by the EU which is that we don't need to offer best execution for spread betting.   On the appropriateness point, it will mean some changes to our account opening process.  But one of the tenets of appropriateness is that you can provide education to your clients and by so doing you can make a product which was formerly inappropriate, appropriate, because once they have been trained it becomes appropriate. And clearly that is a use of TradeSense. And that is another reason that we are so keen on TradeSense.  So, if the question is, do I think that recruitment will slow down post MiFID, then no I see no reason for that.

Further Question:  Just coming onto the IT cost and different perspective. You invested heavily in H1, pointing out that it is a more scalable platform. What sort of multiple of current volumes do you think the platform can accommodate before you need to invest again in IT?

Answer:  There are two sorts of investment you need to make. One is small scale adding on extra boxes to cope with additional load and that sort of expenditure is ongoing.  But it is very small scale.  The other question is when do you effectively have to take it all apart and build it again? And the pattern we saw last time was that the infrastructure we built in 2002/2003 was good for 3-4 years and then we had to take it apart. And I think that is the way we look at things at the moment. So we have designed the infrastructure with 3-4 years of very strong growth in mind.

Question 2
Male:  I was just looking for a bit of clarity on the introducers and the typical revenue share you might have with them. You know how much value you are having to give away. And also just some information on the client run rate in Germany and France and how this has changed in the second half? I think you were sort of attracting 60-80 in both jurisdictions in the first half.  Is it drastically different?

Answer:  No it has been similar for the second half.  On the 'how we share revenue', I am a little cagey in a public forum to say too much. The two models obviously have a very different dynamic.  If you are in an advisory relationship, so for example the Irish stockbrokers, you can charge quite a high commission to the end-client because the client is paying for the advice or the account management.  And therefore we keep quite a small percentage of the whole, but our net revenue is still similar to the percentage that we keep in the more white label model where typically the end-client will be paying our normal rates and we are effectively giving a wholesale rate to the white label partner.

Further Question:  And just quickly, you sort of mentioned that MiFID from a best execution perspective wouldn't impact your spread betting business. What sort of impact does it have on the CFD business?

Answer:  Well with CFDs our offering is already that on equities that we give the market; bid and offer. It isn't our price, it is the market price.  So effectively that is best execution. There is some documentation behind that to justify the execution venue. But as long as you have selected your execution venue sensibly, which clearly we have for our own purposes, then there really isn't an issue.

Question 3
Male:  Just a question on spreads. I think you brought them down in some of your products during the second half of the year. Can you just talk generally about the spread environments and whether you think you will need to bring the spreads in again on other products during this financial year?

Answer:  I think that is probably about the end of the spread cutting saga.  A very noticeable thing that happened a couple of months ago was one of our competitors, I won't name in a public forum, who used to offer a commission-free offering, went to a commission basis at the beginning of May and I think that really marked the end of the competition on spread or commission.

Question 4
Male:  Can I touch very quickly on sports betting. The second half, first half growth trajectory looked pretty impressive in sport. Was that primarily exchange driven? Was it Extrabet? And is there a very strong month-on-month trend which we should expect going into the new financial year?

Answer:  It's really across the fixed odds piece. And it becomes increasingly difficult to tease the three elements of the fixed odds business apart,  because to some extent an Extrabet bet can be offset by something we have done in the exchange or it can be offset by something we have done as a binary bet.  So we really increasingly look at that as a unified whole rather than attempting to tease them into three.

Further Question:  But in terms of the trajectory going into the new year?

Answer:  There is quite a comfortable trajectory there.

Question 5
Female:  Can you give us a bit more detail about your thinking about the Far East expansion, I am sure you have thought more about it than you have told us. And whether you think acquisitions are possible, sensible or whether this is likely to be organic and in which areas?

Answer:  I think it depends where you are looking. If you are looking at somewhere like the US or Japan there are some quite decent established businesses. And in that environment I am not sure it would make sense to start up an operation from scratch and try and do it completely organically. So I think were we to go into either of those markets it would be more likely to be by way of acquisition than organic.

Further Question:  Are you thinking about going…[too quiet to hear]?

Answer:  Clearly we would not be talking about it if it hadn't crossed my mind. That does not mean it is particularly imminent. I think it would be fair to say I mentioned the subject last January and nothing has happened in the intervening six months.

Question 6
Male:  Given the leverage in your structure and the large number of accounts that don't actually trade or trade for a short period and then fall off, there seems to be a big opportunity to increase stickiness. Can you comment a little bit more about TradeSense and how that is increasing stickiness and where you see that developing?

Answer:  We don't really have enough data yet to assess long term stickiness.  It is certainly increasing conversion rates by a few percentage points, but not dramatically.

End of presentation