Transcript of Analyst Investor Conference Call 

Moderator: Mr Nat le Roux
26 May 2006, 09.15

Operator: Please stand by. This is Premiere Global Services. We are about to begin. Good day ladies and gentlemen, and welcome to today's IG Pre-close Update Full Year 2006 Conference Call. For your information, this conference is being recorded. At this time I would like to turn the call over to your host today, Mr Nat le Roux. Please go ahead, sir.

Nat le Roux: Morning. Nat le Roux, I'm here with Tim Howkins. We're obviously very pleased with these results. They are significantly both ahead and above market expectations, and Tim will put a bit more colour on the detail of that in a minute. But I thought I'd start off by talking about my intentions and why I'm stepping down as Chief Executive. I've been at IG for a long time now, almost fourteen years in total, and I increasingly started to feel, over the last few months, that both my own prospects and the perspective of the business, that is really long enough and it's time to move on and do something else.

And in terms of selecting the right moment to announce that, I think we have now reached a natural point in the evolution of the business; and if you look at the challenges that we confronted four years ago, when I took over as CEO, those have been largely addressed, and I'll focus on three in particular: first of all, upgrading the technology and turning IG into a proper online business, and we have done that. We now do nearly 90% of all transactions online, as opposed to 20% four, four and a half years ago.

Now, the second was to stabilise trading income, by instituting more rigorous risk-management policies, and I think we've demonstrably done that. And the third was to end the dependence on earnings from the UK and actually implement some international diversification, and we've done that too. We now have a fantastic business in Australia, which is growing very, very fast; Singapore about to come on stream; and talks about others to follow after that. And, at the same time, we've gone through a whole corporate life cycle, from a public listed company to a private company, and back to public.

So certainly, to us, it feels like if there is going to be a change, this is a good time to make it. Tim has been very closely involved in all of these developments, and in the progress that we've made over the last few years. He's been Financial Director for seven years now. I think the change to Tim as Chief Executive is a natural one, but obviously there will be some sort of change in style, though, and that's probably a good thing. But as far as the strategic direction of the business is concerned, I think we see that in a very similar way, and I don't think there's any reason to anticipate that anything will alter.

So let me now hand over to Tim, to talk about the performance and then talk about the future.

Tim Howkins: Good morning. As Nat's already said, a good year: earnings of EBITDA are up by in excess of 42%, and I would stress the use of the words 'in excess' in the statement. Clearly we are still a few days away from the end of our financial year. Market conditions have been very good for us over the last few days: we've had very volatile markets, and we've had some very, very strong days. That does mean that predicting the results for the remaining few days of the year is perhaps more difficult than usual, because there is a bigger possible range of outcomes. But, as I say, I would stress the fact that we've used the phrase 'in excess of'.

42%: clearly a good result, but really, not that different to what we've seen for a long time. Over the seven years that I've been at IG, we've seen profits grow by a compound annual growth rate over that seven-year period of 45% and clearly, my challenge, stepping into the Chief Executive role, is to try and sustain these levels of growth in the coming years. I believe we've got a very good platform on which to build that future growth.

Just worth looking to the statement and the different areas of business: as we say, good levels of growth from the UK financial spread betting business; more than 30% growth. We saw really quite a dramatic rise in the rate of recruitment of new clients during the second half of the year. That began in January and continued to build through February and March. Last calendar year we were typically recruiting 650 to 700 clients a month. The run rate now is more like 1200 to 1300 a month, and clearly that's a very promising sign. The rate of client recruitments is a very good leading indicator of the future growth of the business.

In part, I think that was driven by our implementation of the more competitive foreign exchange spreads in the spread betting business in January. In part, I think it's an increase in recognition by the market of the strength of our market leadership. I think we've seen some figures from competitors over the last few weeks which have led us to the conclusion that perhaps we are even further ahead of the competitors in performance terms in the UK, than we thought we were.

Turning to Australia, again, a very strong period of growth: comfortably in excess of 100% growth from that business and, again, I think we're seeing stronger growth than some of the competitors in that business. The CFD business that we operate from our London office is becoming increasingly international. It now deals with clients from something like 85 countries worldwide and a lot of that business is driven by a network of introducers. We have something like 100 introducers, although that figure is possibly slightly misleading; probably only 50 or 55 of those are in any way significant. Some of the smaller ones have only introduced one client.

Areas that are particularly significant at the moment: we're seeing very strong growth of business in CFDs from Ireland and also from continental Europe. Continental Europe actually producing slightly more revenues than Ireland currently, although I suspect that will reverse over the next few weeks, as we're seeing a big inflow of Irish business at the moment.

Sports business also showing good growth: 30% up, and that's probably the best annual growth that we've reported this millennium. We've got now three distinct sport lines: sport spread betting; fixed odds, which is both binary betting and the newly launched Extrabet; and market making into betting exchanges, and all three of those business lines have contributed to that growth.

Turning to the new initiatives that we've launched in the last couple of months: Singapore finally got its licence and launched in April, and that's going as well as we hoped. We've opened more than 100 accounts so far, and we're getting a good reception locally. Extrabet we launched right at the end of March. This is our new fixed-odds offering and that's also going well - we've opened something like 2700 accounts so far. The market campaign is just beginning to build momentum in the run up to the World Cup; and clearly the World Cup is going to be a significant accounts opening opportunity to us. I think I'd stress that it is an accounts opening opportunity rather than a revenue opportunity. These accounts are individually quite small, so we really need to build quite a large client base before this line of business becomes material to us. But I think we have the opportunity to do that through the World Cup.

As we say in the statement, neither Extrabet nor Singapore will deliver material revenues in the current year, and it really is only a month in, a month or so in, too early to give any sensible guidance on the future for those two businesses. We certainly hope that by the time we announce our results in July, we'll have a much better feel for the potential of those businesses, and we'll update the market then.

I've touched on the fact that current market conditions have been very good for us. Clearly we thrive in volatile markets, although we're also able to deliver very strong growth in non-volatile markets, particularly through our binary products, which is much more suited to non-volatile markets. We've had some very profitable days and I'd also stress that we've had no loss-making days at all through this period. Risk management is very strong and it really is very rare for us to have a loss-making day. I think, in the whole of 2005, we had only three.

A question a couple of people have asked me this morning: have we had any significant bad debts in these market conditions? And the answer is, as far as we know so far, nothing of any significance. Clearly, some clients have a lot of money; in a lot of cases, the clients are simply giving back some of the profits that they've made over the previous six-month period. So while losses clearly are upsetting these clients, I don't think there are that many clients who are in a very bad condition.

Looking to the future: we have Australia and the UK, both producing very strong levels of growth, and I think we can sustain that growth, really, for some time to come. It's important to note that the rate of client recruitment actually accelerated in the last year, in the UK, and that clearly is a strong leading indicator. Beyond that, we have some very significant opportunities worldwide. I've touched on Europe; we are looking to do more in Germany, in particular, and possibly in some other countries across Europe. Ireland, I think, is going to become an increasingly important market to us over the coming months, and beyond that I think we really are just at the beginning of our international expansion.

So, as I say, I'm very much looking forward to taking on the challenge of becoming Chief Executive. I think we've got a great opportunity ahead of us, and I certainly hope that we can capitalise on it. At this point, I'd like to throw the call open to questions.

Operator: Thank you. Ladies and gentlemen, today's question and answer session will be conducted electronically. If you would like to ask a question, please press the star, or asterisk, key, followed by the digit 1 on your telephone keypad. Please ensure that the mute function on your telephone is switched off, to allow your signal to reach our equipment. If you find that your question has been answered, you may remove yourself from the queue by pressing *2. Once again, please press *1 to ask a question. We will pause for just a moment, to allow everyone to signal for questions.

As a reminder, if you wish to ask a question, please press *1. Our first question comes from Richard Taylor of Citigroup. Please go ahead.

Richard Taylor: Yes, morning. Two questions, please. Firstly, on the market making on exchanges. Can you give us an idea of how material that's become, in terms of sort of an elementary basis? And are you on Betfair yet, or is it just on Betdaq? And secondly, just a point on your cash as well, please. In the event of no deals occurring in the industry, can you give us an idea of your sort of time frame for putting the cash to use elsewhere than it just running up the balance sheet? Thanks.

Tim Howkins: Morning, Richard. Market making on exchanges is going to contribute a few hundred thousand to the revenues of the second half, so it's a growing source of revenue. It's clearly not that material yet to the business as a whole. As to whether or not we're on Betfair, I'm afraid a confidentiality provision prevents me from answering that question.

In terms of what we're trying to do with the cash, I think there is still some possibility of industry consolidation. There's certainly a sense that some of the competitors are quite tired and falling increasingly behind, both in terms of technology and in terms of their ability to grow their client base. I'm not sure they fully realise yet what an appropriate valuation for their businesses is, and so I think we are still some distance apart. Whether that gap closes over the next year or so, and we make some acquisitions is very difficult to comment at this stage, but it certainly feels that if that story does play out, it will play out within the next 12 to 15 months, I would guess. So I think that's an appropriate time scale before we think about altering our stated dividend policy or returning cash to shareholders in other ways.

Richard Taylor: Okay. Many thanks.

Operator: Thank you. Our next question comes from Jason Streets of UBS. Please go ahead.

Jason Streets: Good morning. Two things. On the sports side, is that the function of results, or volume, or both?

Tim Howkins: Morning, Jason. It's primarily a function of volume. Volume has grown in the sports spread-betting business and in the fixed-odds business, and clearly, a year ago we didn't have the exchange business at all, so it is primarily driven by volume.

Jason Streets: Great. The other one was just on binaries. I mean, we've seen such strong rate on a sort of core spread betting and CFD business and binary seems to have fallen slightly into the shade. What is going on there? Is the binary comparable with the rest, or is it just a sort of backwater people dabble in when the markets are less exciting?

Tim Howkins: The picture that has emerged is very definitely that the UK client base views the binary product as an adjunct to the remainder of the financial product set, and that when markets are not volatile, they're more likely to trade the binary. When markets are a bit more volatile, the same sort of clients are much more likely to trade daily Wall Street. And clearly, markets have been more volatile over the last six months, and particularly over the last couple of months. So we've seen less business in binaries and more business in those markets. I think the best way of looking at the binary is that it provides some hedge to our revenue stream for less volatile market conditions.

Jason Streets: Yeah. One last one: did I gather correctly that you're forecasting 45% growth compound for the next few years?

Tim Howkins: Clearly we're making no forecast at all. We leave that to the expert analysts out there.

Jason Streets: Thanks.

Operator: Thank you. As a reminder, if you wish to ask a question, please press *1. Nathan Wong of Merrill Lynch has our next question. Please go ahead.

Nathan Wong: Hi there. Just a few questions. If possible, would you be able to give an indication of the numbers of clients dealing in a period? I'm not sure if you've released that; I may have missed that. The next question is market share in Australia. Could you give some sense of how you're positioned with your major competitors, whether you're sort of narrowing the gap, or whether you're pulling ahead? Just a bit more clarity would be helpful.

Another question: if you could give some indication of your surplus capital position, that would be helpful. And two more: what's the profitability been like in binaries? Because I think before you said it was a little bit disappointing, given your revenue growth. I wonder if that sort of changed in the second half? And finally, I think you mentioned there was some increase in activity due to your spread narrowing on the FX side. If you'd try and explain a bit more whether that's going to come across into other products, that would be useful. Thanks a lot.

Tim Howkins: Thanks, Nathan. Quite a long list of questions and I hope that I caught all of them. I'll take them in reverse order. Profitability of binaries: we have essentially, in the second half, made profits in line with the volume of business, so there isn't an issue there with profitability of that business.

Surplus capital: I think I'd prefer to wait until the final announcement to give that figure, particularly as we haven't yet reached the end of the month. I think giving a figure for April wouldn’t be particularly helpful.

Competitive position in Australia: clearly we're seeing some competitive information from one of our major competitors, CMC, over the last few days in that respect. Quite clearly, they are currently larger than us, but also, quite clearly, we are growing at a substantially faster rate than them. They reported growth of the order of 40% in that market for their last financial year, and as we said, our growth would be comfortably in excess of 100%. So I think we are catching them up quite fast, and if you plot the two growth curves, I think we are quite likely to overtake them within the next couple of years.

And I'm afraid, in your quite long list of questions, I've forgotten what the first one was.

Nathan Wong: Just the number clients dealing in the period. I think, if you could give that, useful; otherwise I'll just wait till the end of the year.

Tim Howkins: Again, I think I'd rather save that data until we can present it in context at the end of the year. Giving a single number for the whole client base really isn't that helpful. I'd rather not start breaking down figures into that level of detail.

Nathan Wong: Okay, I think the other question was just about kind of spread just across the board and not just in FX...

Tim Howkins: There has been a general trend over the last couple of years of us bringing down our spread levels to be fully competitive with some of the other operators, who have historically marketed themselves simply on the premise that they are the cheapest. That is no longer the case in the markets which are spread sensitive, and those are the ones the clients trade very short term, so currencies, daily indices, and so on. We are fully competitive in all of those markets, and there is no sign of appetite from the competitors for further spread reduction. So I think we are now on a level playing field in terms of spread. And as we said before, generally we've found that the effect of a spread cut is, at worst, revenue neutral, and quite often, revenue positive; because we see enormous elasticity of demand, so that volume increases by enough to more than compensate for the loss of margin.

Nathan Wong: Okay, great. Thanks.

Operator: Thank you. As a reminder, if you wish to ask a question, please press *1. Gentlemen, at this time we have no further questions. I would like to hand the call over to you for any additional remarks.

Nat le Roux: I don't think there's anything more to say. Thank you very much.

Tim Howkins: Thank you. Goodbye.

Operator: Thank you. Ladies and gentlemen, that will conclude today's conference call. Thank you for your participation. Have a great weekend. You may now disconnect.