IG Group Holdings plc
Interim Results Presentation 2006

22 January 2007

Tim Howkins, Chief Executive: Good morning and good morning also to the people who are dialling in from New York, which is very brave at this time of the morning; it is 04.30 there. 

I would like to begin, for those of you who haven't met him, by introducing Steve Clutton, who is our Finance Director. Steve joined us as Finance Director on 2 October which was obviously a happy day for me because it meant that I could step properly into the CEO role.

You have all presumably had a chance to go through the figures so I won't labour them too much at this point. Turnover as you will have seen is up by 44% and that is really continuing what is beginning to look like quite a long-established trend now. You will have heard me say in July that for the eight years to May we saw a compound annual growth in revenue of 40%. So turnover up 44% for the six months is really continuing that trend. And it is encouraging that that growth has really come from across all the parts of the business. As we indicated to you when we last stood up here in July, this was a period of significant investment for the future both in terms of capital expenditure and in terms of increased costs on marketing and head count in IT, and that is a subject which Steve will return to in about three slides' time.

It has been a busy six months for our international expansion. I'll claim Singapore even though we strictly opened that at the end of the last financial period, but obviously marketing only really began to kick-in in the current period, and also opening an Italian desk based in Southwark and a German office based rather more conventionally in Dusseldorf. Again a subject I will return to a little later. This weekend saw the launch of two new initiatives, TradeSense and IG Forex and I will return to those later.

But first of all I will hand over to Steve to talk about current trading.

Steve Clutton, Finance Officer: Good morning ladies and gentleman. So the growth trend continues. I think Tim challenged me to come up with a more novel slide than this. One that you have seen in the past and I make no apologies for showing the same. It is a fantastic story and I feel very privileged to have joined the IG team recently at a point when the business is showing continued growth and excellent prospects. You can see revenue up 44% on the corresponding period last year, translating to £29.6 million profit before tax and 6.2p of EPS. That is a 45% increase in PBT and a 43% growth in EPS. Worth just noting that betting duty shows a relatively high jump for the corresponding period last year. It is payable on client losses and as such varies with client performance. True to say that coming into the first half of this year we saw the end of a long run of client profits. Put simply, clients haven't been so lucky and hence the increase. We had previously flagged this period as one of significant investment. I will go into that in more detail in a subsequent slide. The increase in cost has led to a slight degradation in margin. That said, we still show some 54.5 % EBITDA margin. 

So where has our overall 44% top line growth come from? It is very pleasing to report that it has come from across the board. All parts of the business have contributed. Our core UK financials business is up 49% on the same period last year to £41.5 million. Australia and Singapore have delivered 39% growth. We flagged during our pre-close statement that this is a fall from what we have seen recently and that has been driven by a temporary lull in the first quarter. Australian clients spent some time recuperating after the May/June market correction. However it is encouraging to report that growth in the second quarter returned to more historic levels and we are pleased as to how the business is developing there.

Overall the Sports Business grew by 37% to £6 million. The period benefited from the June Football World Cup and also growth in our business making markets into betting exchanges which was negligible in the previous periods. 

Turning to our costs; this half has been one of significant investment for future growth, particularly in IT and in marketing. In the IT area we completed equipping two big data centres and increased the number of staff in the department to around 110. This investment in capacity and infrastructure will ensure that we are well placed to handle growth in the business in terms of transaction levels that we hope to achieve over the next few years. Our investment in people gives us the resource to maintain and develop and enhance our systems to provide our clients with the best possible user experience. And we continue to believe that the strength of our platform is a key differentiator. You will also see that we have increased our marketing expenditure to about £3.3 million. This reflects activity in Singapore, where we opened an office in April; Italy, where we brought on a new Italian desk; and Germany. Together with an element of extrabet spend that wasn't there a year ago. In addition we have increased spend in our two largest established countries of UK and Australia. For example we recently ran ads in The Sunday Times and plan to again in the current half.

So all this expenditure is really targeted at growing the top line. You can see the movement in other lines. I won't go into them in any detail. The impact of headcount increases, flows through staff costs, recruitment and office space. We have mentioned earlier that we took an extra floor in our London office and we have moved to a larger office in Melbourne. And there is an element of cost which is volume related, such as market data and bank transaction charges.

Turning to our UK financial business, this slide shows the number of client transactions. It is our core business and comprises UK financial spread betting through our IG Index brand and CFD trading through our IG Markets brand. It is predominantly a UK client base, but there is an increasing element of overseas clients. This slide shows that there was a spike in the spring driven by the market volatility which has been followed by a return to the upper growth trend of some 55% compound over the last two and a half years. November recorded the second highest level of transactions on record, some 500,000 which is also reflected in that month's revenue. This growth has been achieved during another period of relatively low market volatility.

So what has driven this growth? Well I believe it is firstly client recruitment which continues to be very encouraging. Secondly brand leadership and recognition of IG's superior technology and product breadth. And thirdly growth in the CFD side of the business, in particular, introduced business. 

This slide shows quarterly account opening for our financials business. Clearly account opening is a key lead indicator and underpins the growth coming from both our spread betting and CFD businesses. You may recall that spread betting account opening in the second half of last year showed an extraordinary level of growth, in part we believe driven by our decision to cut spreads in January '06. While spread betting monthly account opening has fallen back from those highs, it is still well above the corresponding period last year, some 28% higher. So it is encouraging to see that our largest and longest-established business continues to grow. 

Our financial business is becoming more balanced. UK spread betting business is predominantly UK retail clients, whereas CFD business deals with a worldwide client base of market professionals and retail clients. We reached an important milestone in September when, for the first time, as a result of a significant growth in the CFD side of the business, account opening for CFDs exceeded UK spread betting. It is early days for our three new operations in Singapore, Germany and Italy, but it is encouraging to report that they accounted for some 11% of new financial accounts opened in November. Singapore delivered about £80,000 of revenue in that month and collectively those three areas, about £175,000.

Our non-UK revenues are growing strongly. You can see from this slide that our UK CFD operation handles clients from approximately 70 countries throughout the world and over the period CFD revenue grew by about 80% to £11 million. A significant driver of this growth was introduced clients, which has more than doubled over the period. I think this reflects the impact of our slick product and service offering coupled with a better motivated and focused sales force following the introduction of a revised bonus scheme. Nearly half of our CFD revenue, serviced from London is being generated from clients outside the UK and this number is growing. Non-UK revenue grew by 108% on the same period last year to £5.4 million and of particular note is the growth from our Irish clients. 

Turning to Australia, you can see from the chart on the left that 2600 clients dealt in November 2006. And this was almost double that of November 2005. Over that period the monthly transaction count tripled to nearly 90,000. During the six months to November '06, we increased our level of marketing expenditure and reduced our headline commission rate to more competitive levels. And in late August the Australian Stock Report began to introduce their clients to us. This relationship has since produced significant new client flow. All of these initiatives have helped to increase the client recruitment in Australia which is now running at over twice the rate of a year ago. 

Turning to revenue per client; a lot of numbers on this slide and one that you have seen for the last few presentations so I don't intend to dive into the detail. Just a word of caution in that it is an attempt to split UK financial revenues from CFDs and Spread Betting. I say attempt, because the numbers can only be approximate as we manage our business on a single unified book basis, all the hedging is together and it is impossible to precisely split out the two revenue lines, but it is a good approximation.

I will highlight a few points as follows. The spread business has held up well. We were part-expecting a drop from the highs of the second half of last year and it is good to see continued momentum. I think the UK spread betting business continues to benefit from the ongoing maturity of the client base, that being the longer the client stays with us the more the client transacts. The mix impact of larger clients can be seen in the CFD line our most profitable client base. And in Australia the income per client has dropped with the influx of new clients from the Australia Stock Report during the latter half of the period. There were more than 800 more clients trading in November than there were in August of last year.

And finally it is clear that the overall income per client has reduced in the half due to the substantial increase in sports extrabet clients who were worth only a fraction of our financial clients.

Turning to risk management, the slide I am sure you have become accustomed to. Anyway the red line measures revenue volatility and you can see that it's oscillated around the 0.5 level for the past two years or so. The message remains the same: that our approach to hedging has not changed and we are comfortable with the current variability of income. There were no loss making days in the calendar 2006. Clearly hedging is a balancing act and you totally eliminate variability of income if you do too much of it, but it is at a cost. Consequently we will continue to keep our global exposure limits under revenue. You will recall that the last change we made was about a year ago. 

I will now pass you back to Tim, thank you.

Tim Howkins: Thanks Steve. Turning to sport. I think it is very easy for our sports business to be overshadowed by its big brother, the financial department. But as you can see 37% growth in the current six months and that is following on from 33% growth for the last full financial year. So we have now got an 18-month track record of really very good growth. So I think it is a mistake to treat sport as the poor cousin. And that is particularly the case when it comes to allocating IT resource. Historically the sports department has had to compete with the bigger financial department for resource and we have addressed that now by forming a small separate team of IT people who will only look at the Sports Department, thus removing that conflict. And you can see some of the affect that applying technology to sport has had. The business of market-making on betting exchanges is now a business that over the last four months, up to and including December, has averaged £150,000 a month of revenue and that business really is entirely IT driven. We set prices using our pricing engine. We then effectively plumb our pricing engine into the exchange's API and that business is highly profitable because it has really very little incremental cost. The extrabet business, the fixed-odds business that we launched in the spring is still very small, but has shown some encouraging signs of growth over the last few months. We have got an excellent in-running offering, particularly in football and we are very often best price in quite a number of markets. Encouragingly, The Racing Post have just agreed to start including us in their price comparison tables. And I think that is important because that is the source that a lot of journalists turn to when writing about sport. So we hope that that will continue to highlight our good prices in coming months.

We have had a pretty busy weekend in launching two new initiatives: TradeSense, which I will talk about now; and IG Forex, which I will talk about in one slide's time. TradeSense is a training programme for new clients. It is a six-week programme of training materials that you can see on the screen and also, I feel a little like an author showing off his new book, but this is what the clients get. This is mailed out to them. They get the pack and the first two lessons when they open an account. Two weeks later they get another two modules, and two weeks after that they get another two modules, and then at the end of the course they receive their dealing handbook as they effectively graduate from the training programme. And through that period for the first two weeks they are on a minimum bet size of 10p a point. And that compares to £2 a point for instance on the FTSE. So a dramatic reduction in bet size for the initial couple of weeks. They then go up to 20p a point for two weeks and then 50p for two weeks. And why have we done this? Well really three reasons. Our market research indicates that the overwhelming reason that discourages people from opening a spread betting account is a fear that it is complicated, and we hope that by providing some training, some support and smaller minimums, we can encourage more people to take that first step of opening an account. Secondly, once people have opened an account, a surprising proportion, it is about 40% actually never trade, and we hope that again by softening the initial process we can encourage more to start trading. And then finally, once clients have started trading the first few weeks are absolutely crucial. About 20% of the clients that start trading with us stop again within the first three weeks, about another 5% in the next three weeks. So those first six weeks are absolutely vital and we want to nurture that client base as much as we can. And clearly, if we get this right, then there is a potential triple whammy. We get more clients opening accounts; more of those accounts converting to trading accounts. And the trading accounts continue to trade for longer and become valuable. And, as Steve said earlier, a long-established client is disproportionately valuable. So the more you can do to build that established client base the better.

Clearly if this is a success then we intend to roll it out elsewhere in the world and the next obvious place to go is Australia, because it won't need translating into a foreign language. And we will wait a month or two just to make sure that this does work and iron out any bugs and then we will roll this out to the Australian operation.

The other thing we did over this busy weekend was launch IG Forex which is a website dedicated to foreign exchange. Foreign exchange has become increasingly important to us over the last four years. It has gone from about 8% of revenues to about a little over 20% over the last four years. And most of that growth has come from the spread betting business rather than from our non-betting or CFD business. And I think there are several reasons for that. If you go to the IG Markets website, it feels as if the emphasis is on shares (equity CFDs) and the trading interface feels as if it was written initially for equity trading which frankly it was. And what foreign exchange traders are used to seeing on foreign exchange specific websites is a presentation much more like the one you see on the screen which is our new platform, where you have got the ability to queue up multiple deal tickets so that you can have all your favourite currency pairs on display ticking away and then one-click dealing when you are ready to deal in any particular currency pair. This platform also uses new technology. Specifically it doesn't use Java. And Java is becoming an increasing issue, because it is now quite rare for a new PC to ship with java installed. And we will be rolling this technology out across the rest of our websites and freshening up the dealing interfaces through the course of 2007. Having a foreign exchange specific offering is clearly a necessary step in any attempt to approach foreign exchange in the rest of the world and that is a subject I will come back to in a minute. 

Continuing the theme of 'it's been a busy weekend', it has been a busy weekend for our German office. We attended two seminars in Frankfurt on Saturday and Sunday. They were run by third party, both were attended by roughly 600 people at each, and out of that 300 people have given us their name and address details so we can follow them up and hopefully turn them into accounts over the next week or so. And to put that into context, the current run rate of account opening for our German office is something like 50-60 a month. So potentially 200-300 from a single weekend is really quite a big step change in account recruitment. I think this sort of seminar is going to be an important route to market in both Germany and Italy. We have continued to do direct marketing in both territories. Initially we have found that that produces really quite a small return in new clients. But we think it is important to continue to do it to support the other marketing activities that we are doing, including seminars. We are also signing up introducers in Germany. We can't sign up introducers in Italy and that is one of the many peculiarities of the current regulatory environment around Europe. Each country is slightly different and has different regulatory rules. And those of you who heard me talk before will no doubt have heard me mention MIFID before, the Markets in Financial Instruments Directive. That is coming up in November; 1 November. And it is intended to harmonise financial regulation across Europe. That means we have got about 40 weeks to get ready for it. And if you recall, when we opened in Australia, it was a change in their financial services legislation which allowed us to open in Australia and we were literally the first overseas company to get a license under their new licensing regime. We intend to be equally speedy off the mark in Europe. MIFID has only very recently been finalised so we are only now at the point where we can start to examine each territory, look at their rules, look at their likely customer base and begin to recruit as necessary.  So this is a subject that we will return to in the summer and I will certainly be talking a lot more about how we have advanced our plans for Europe when I see you again in July.

Obviously there are a number of different ways we can enter any market and just look at some of the things we have done already. In Ireland we have approached it by introducers and we effectively have no specific offering for Ireland. We just deal through introducers. Singapore and Germany we have taken the route of opening a local office. Italy we have taken the route of opening a sales desk in Southwark. And clearly all of these are possibilities for anywhere in the world. The other possibility of course is acquiring something that has an existing client base that might be interested in our products. And that is not necessarily just a direct competitor. There are broader businesses you might think about. For instance there are a number of trader education businesses out there who typically sell clients a training programme, but also introduce those clients to a CFD provider or an FX house. And when looking at any new territory, we look at all these possibilities before deciding which is the right way to go.

So in summary, we have now got established businesses in both the UK and Australia. And both of those are showing very good growth. We have got much newer businesses in Singapore, Germany and Italy which I think demonstrate that the model is capable of being replicated elsewhere in the world and all of those are showing some encouraging signs, albeit they are all quite small at the moment. With TradeSense we have just done something to enhance the recruitment, conversion and retention of clients in the UK and in due course in Australia. The IG Forex offering gives us the ability to approach those countries and there are several, the US, most of Asia, where regulation allows you to do foreign exchange, but not equity CFDs. And then finally MIFID is a big opportunity and certainly one we intend to seize with both hands.

Very happy now to answer any questions you have got, starting first with questions from the room.

Question and Answer Session

Question 1

Saurabh Mukherjea, Clear Capital: A couple of questions. Firstly on the recent experience in Australia over the last six months, how shall we look at that?  Is that a story about IG susceptibility to market sentiment? Or is it more a story that yes there is market sentiment, but it is important for you guys to fight back through marketing spend and cuts to the fee rate?

Answer: All that really happened in Australia was that the clients had a bit of a rest because they lost some money in a market correction. And actually exactly the same thing happened in the UK, but the UK client base was much more mature and had seen it happen before. So the UK client base sat on their hands for two to three weeks. Whereas the Australian client base sat on their hands for six to eight weeks. And I think it is just a difference in maturity profile of the two markets.

Further Question: So you guys had already planned an increasing marketing spend and the fee rate got eventually implemented?

Answer: Yes

Further Question: And then if you look at slide 10 where you guys take us through revenue per client, one interesting feature of that slide is that if you look at the newer areas you have gone into: financial binaries, sports spread betting, sports fixed-odds, that the rates per client are much lower as you guys have shown us very clearly. Now on the presumption that it costs roughly the same to service a client, does this have implications for your margins going forward?

Answer: I think going forward you would expect to see more growth coming from the financial business than from the lower margin, sports and unregulated businesses, simply because you are growing a number which is already bigger to start with. The evidence that we have looking for instance at the revenue per client from Australia, that is lagging a year or two behind the revenue per client from UK spread betting, but it is the same sort of order of magnitude. So I think the message is that anywhere we go to offer the regulated product you would expect revenue per client to eventually reach UK-like levels.

Further Question: So financial product is pretty much similar although rates stayed at similar levels regardless of geography?

Answer: Yes. The oddity that you have got is that the UK CFD business shows a much higher revenue per client. That is because effectively the UK client base segments themselves and the retail clients gravitate towards spread betting, which means that the UK CFD population is disproportionately represented by high net worth individuals, introducers and institutional clients.

Question 2

Daniel Havercroft, Investec: Just if you could give us some initial signs of the trade activity levels of the German and Italian clients that you have signed up? I know it is early days. Also MIFID was mentioned as an opportunity. Are there likely to be any costs given that we now have the regulations out? And in terms of your IT recruitment, quite a bit of activity in the first half, will there be much more recruitment activity in the second half?

Answer: Very early to say, but there is nothing to make us think that an Italian client or a German client is any different to a UK client in terms of initial size of trading. The third question was about IT headcount which I think will go up a little more but certainly by nothing like the increase we have seen. I think we are now up to an IT department of about 110 and I would be surprised if it went much beyond 120 over calendar 2007. And the middle question I am afraid I completely forgot?

Further Question: It was MIFID, an opportunity but are there any likely costs involved?

Answer: The obvious costs are anywhere we decide to open an office there is clearly a cost associated with that in terms of both the space and head count, but they are quite small. The Singapore office has six people in it. The German office is the same sort of size and that is the sort of size you would start off with. And the other cost is there wouldn't be any point being in a country and not marketing it, so every country adds 70-80,000 euros a month of marketing expense. That is the sort of level we are spending, certainly in Germany.

Further Question: But it is not going to impact the current business from a cost perspective? You have got all the systems, controls and everything else in place to handle the new MIFID regulations?

Answer: Yes

Question 3

Katrina Preston, Bridgewell: Hi there. I wanted to ask about the big increase in the betting duty and I wondered whether the losses experienced by your clients have been concentrated in any one division, for example sports versus financials? Whether we should therefore expect to see a greater incidence of client churn? And also the implication is that there is almost like an exceptional gain in turnover from those losses. And is there a figure you can put on the amount of turnover that maybe we shouldn't expect to recur?

Answer: You have got to look at sport and financial differently. The sport business, the revenue that we report simply take 10% of that for spread betting, 15% for all the fixed-odds business and that is the betting duty cost and that has gone up simply because our revenues have gone up and it has gone up particularly from market-making on exchanges which is fixed-odds and therefore 15% betting duty on that. So you can fairly easily reverse that out of both sets of numbers. The bigger growth is from the swing of financials. And it is not so much the clients lost a lot in this period, it is actually that they lost very little in the previous period. They had a particularly long run of profitable months from October or November of 2005 through to spring 2006 and it is that that suppressed the betting duty cost of the previous year.

Question 4

Nathan Wong, Merrill Lynch: I have got about five questions. I will do them one at a time. Could you just refresh me what the reg. cap requirement was for the end of this half?

Answer: At the end of this half we had £27 million of surplus of regulatory capital.

Further Question: You always have this step up in costs as you have expanded, I mean is that, is it a case of putting a lot of costs up front and associated revenues to come later? Or is it basically in line with how you expect it?

Answer: There is certainly a timing issue in terms of marketing. Because we have spent more marketing in Germany and Italy than so far we have generated in revenue, but we have only been there for a couple of months and that balance will change pretty quickly. If you look at what happened in Singapore, that business covered its costs in about August and was profitable by September and is now achieving the same sort of margin as the rest of the business. So there is not that long a lag before an individual territory gets to proper levels of profitability, but clearly there is a period when costs run ahead of revenue.

Further Question: So presumably we should, I mean if business continues as it is, there should be some sort of margin expansion in H2?

Answer: If business continues as it is, yes.

Further Question: Have you got any other regions you are planning to explore for next year? You have had this step up as you reached further regions this year. Is there going to be another step up next year?

Answer: We have dropped some fairly broad hints about Europe. I am not going to say too much about which countries we are likely to be in Europe, but it would be quite surprising if we weren't in several countries in Europe by the end of calendar 2007. And now that we have got foreign exchange websites we can look elsewhere in the world as well.

Further Question: But we shouldn't expect a similar sort of step up in costs as we had this year?

Answer: At the point we enter new countries, there will be a step in costs for new office and new marketing. What I don't think you will see again is the infrastructure step, if you like, of taking an IT department from 80 people to 110. I think the next growth of the IT department is 110 up to 120 over the next few months and then probably it plateaus. 

Further Question: Just looking at the growth in the CFD business, the UK looks like it is going to be at least a £12 million revenue pot. Do you see Ireland becoming that sort of size?

Answer: There is certainly more to go for in Ireland. All that business is introduced and I suspect those introducers will always want to introduce to more than one provider. But I certainly think we can grow it reasonably substantially from where it is today.

Question 5

Richard Taylor, Citigroup: Three questions please. Firstly on the sport side. Quite a few of the fixed-odds bookies are looking at this market much more with in-running and stuff like that. It doesn't seem to be affecting you at all, are you noticing anything changing there?

Answer: No, I think if anything that focus on in-running helps us because we have a much better in-running service than most fixed-odds bookmakers so it focuses the mind of punters on the importance of that.

Further Question: The seminar you mentioned in Germany, whereabouts does it actually take place and how many cities and how often do these sort of seminars occur?

Answer: The one we were at over the weekend, well the two we were at over the weekend were in Frankfurt. I think he does seminars about every 5-6 weeks. And he tours Germany.

Further Question: And you would anticipate to go to all of these?

Answer: We would certainly hope so yes.

Further Question: And finally, sorry if you have mentioned it already, but you split the labour cost increase obviously, but could you talk about how that splits between IT spend and the spend on overseas cost increases?  Whatever the increase is, I think about £2.5 million or something, how that splits between IT and overseas?

Answer: Well in terms of head count a good 50% of the increase over November '05 was IT. I think we put on an extra 100 people in total of which about 55 were in IT. It was about 20-odd who went into the various overseas operations: in Australia, Germany and adding our Italian desk.

Question 6

Will Robbins, Numis Securities: Now that your surplus is up to £27 million and clearly is going to go higher in the second half of the year, do you want to make a brief comment on the capital structure of the business and say something about potential M&A if there is any?

Answer: £27 million isn't actually that much. The number swings around a bit from month to month. But that doesn't include the dividend which we are going to pay which is about £6 million. So it is not as if we are sitting on a huge pile of regulatory capital that we desperately need to return to shareholders tomorrow. Clearly as time goes on that regulatory capital surplus will get bigger. I think as we come into the summer we will be thinking about appropriate capital structure. 

Further answer: M&A. As I said it is one of the possible ways of entering a new territory. Another way of entering new territory is organically and when considering any new territory we look at all the alternatives before deciding which one works.

End of presentation