Annual Results Presentation 2008
IG Group Holdings plc
21 July 2008
Tim Howkins, Chief Executive: Good morning everybody. I am sure you have all had a chance to read the results by now so I won't labour the numbers. But as you will have seen, revenue was up 51% and that's really some way ahead of our, what is now a ten-year compound growth story of now 41%. So nudging up slightly.
Margin is still comfortably above 50% and that's five times the average for FTSE 250, so I am told. The dividend we have put up by 41% and that really reflects strong cash generation and our confidence in the future of the business. As it says here, current trading is strong. Well, what do we mean by that? Well, first of all June was a record month. Some, almost 10% better than the previous record month which was in April. Together June and July to date have produced fairly similar revenue growth to that which we saw in the year as a whole. But before you all rush out and update your forecasts too aggressively, it is probably worth saying that if you remember this time last year pretty much marked the beginning of the credit crunch and significant increase in volatility in the market. So the comps are about to get very much harder, I think literally tomorrow.
The client base has proved very resilient both in difficult markets and in economic downturn and that is a subject I am going to come back to in five to ten minutes. First however, I will hand over to Steve to talk a little bit more about the results and some of the main drivers of growth.
Steve Clutton, Finance Officer: Financial results and drivers of growth. Thanks Tim and good morning ladies and gentleman. Summary Income Statement. As Tim said, 51% growth in revenue falling through to 41% increase in PBT to £97 million. EPS of just over 20p and dividend for the full-year up 41% to 12 pence, representing 60% of earnings. We continue to deliver highly profitably growth, 53.5% EBITDA margin despite investing in four new businesses during the year, together with continued investment in IT capability which fuels future growth. The rise in betting duty impacted EBITDA margin by about 2.5 percentage points during the period. This abnormal level of betting duty reflects a small number of clients who suffered disproportionate losses on certain exceptional trades. I hasten to add that we generate less than 1% of our total gross profit from those clients.
Summary of revenue by business line. You can see revenue from the financial business has grown by 50% overall. UK financial spread betting continues to go from strength to strength and IG remains the market leader in the UK. CFD revenue has grown by 65% reflecting our increased geographic reach and penetration in new markets. Our Australian business more than doubled revenues over the year. And binaries, seen as an add-on product by many spread betting clients, has grown by 48%.
The sports business now represents only 6% of our total revenue. True to say that sports had a tough comparative, which included the Football World Cup. Adjusting for that World Cup impact there was some underlying growth during the year. We have taken steps to improve the performance of the sports business and have plans in place to enhance the sports platforms and websites during the first half of the current financial year.
Turning to cost drivers, this slide attempts to give an overview of the movement in our cost base from £54 million to £85 million during the year. On the left hand side the first three steps are all investment for future growth. £5 million investment in IT capability which ensures our IT platform and user experience remains first in class. and we continue to innovate. Both are important differentiators and growth engines. I’d just add that we expense all our IT development, we don’t capitalise any of it. The second step reflects our investment in new businesses, totalling £5 million. As I mentioned previously, we did have an exceptional year and started four new businesses in a compressed period of time. The introduction of MiFID in November which facilitated our moves into France and Spain coincided with the opportunity to buy HedgeStreet the US Exchange.
Third step is £3 million of additional marketing spend which clearly has helped the drive for client recruitment and education.
But clearly, growing revenue by more than 50% doesn’t come without a substantial increase in volume. The £7 million step represents the volume and volatility impact on costs. For example market data redistribution costs are partly variable with transaction volume and bank transaction charges scale directly with client activity. We’ve included in this amount volatility driven costs such as bad debt charge.
The next move is headed up inflation, £2 million. The main constituent of that is our annual pay award in June. And finally £9 million year on year cost growth is performance related bonus and LTIP costs.
We do know that there are a constituent of people who can obsess about our profit margin, but the fact is we don’t manage the business to a particular EBITDA margin. We think 53.5% EBITDA margin is very good in the context of all the initiatives that we are driving. So we remain focused on opportunities to expand the business and will continue to manage the business for long term profitable growth, whilst tightly managing costs.
Having talked to the year-on-year movement. I don’t intend to go into detail on this slide, but it is worth touching on the uptick in bad debt incident in H2 flowing from market volatility. High levels of volatility have clearly benefited the top line and we think, in that context, the level of bad debt charge around 2.2% of revenue is acceptable. We continue to be conservative in our provisioning and robust in our recovery process, recognising that at times it can take a while for debtors to liquidate assets to pay us.
You can see from this slide that the most significant element of our cost base is people. Looking forward to our current year, and putting performance related bonus and LTIP costs to one side, our expectation is that the salary line will increase by approximately £10 million. That number is broken down into approximately £5.5 million from FY08 exit run rate- remember that investment in new businesses fell mostly in the second half of last year. About £2 million for the June pay award and around £2.5 million for planned headcount growth.
In terms of other costs, well we would expect other non performance related costs to increase in the range of £5-10 million, clearly depending on top line and volume growth. This includes increased marketing spent impact of new FY08 businesses for the full year.
The key lead indicator for the business remains client recruitment. You can see from this slide that the rate of recruitment continued to build throughout the year. Overall client recruitment was up 82% on the previous year and in the last quarter, the average monthly recruitment rate of spread betting clients was three times that of three years ago and in CFDs it was five times that of three years ago. These growth rates reflect IG’s brand strength and increasing market reach. Some 36% of May’s recruitment was from outside the UK. Client education plays an important part in recruitment and in the final quarter, we launched our Webinar programme in the UK. Tim will touch a little bit on that later on.
Just a word on market volatility. Clearly higher levels of volatility have had a positive impact on client recruitment which has flowed through to revenue growth. Clients are attracted to interesting markets and often trade the story. Our financials business has seen revenue growth through dips in volatility over the past two years as you can see from this slide. And in particular more recently when volatility fell off in April, we enjoyed a record revenue month. We continued to see the benefit of volatile markets flowing through into the current year.
While UK financial spread betting remains our core product, contribution from our CFD business which is the main product outside the UK, has increased to 37% of total Group revenue. Total overseas revenue nearly doubled during the year to £49 million and we continue to see very strong growth in current regions of focus.
At that point, I will now hand you back to Tim, who is going to talk about client behaviour in a challenging market. Thank you.
Tim Howkins: Client behaviour in a challenging market. This has been a very common theme of investor questioning over the last 6-7 months. How is the client base going to hold up in the face of both difficult markets and difficult economic conditions? So a few slides which hopefully go some way to allaying at least some of the concerns about that.
First of all just a quick look at, who are the clients. This is looking at our UK spread betting client base. Our typical client is 37, he is male. He works in a managerial or professional capacity or runs his own business. He absolutely doesn’t work in the City. As it says here, only 2.2% are city based clients. That is as measured by people who get compliance copies sent to their compliance department. Maybe there is some under reporting in that, but I think you can say with some confidence that less than 5% of the client base is city based. And as I said, overwhelmingly male. In the year just ended 11% of new recruits were female. That is up from 9% the year before and 4% six years ago. So there’s a progressive shift there.
The right hand graph shows the distribution of client savings declared on their application form when they first became clients. The light blue for FY02 and the dark blue for FY08. And the typical client falls in this group with between £10,000-50,000 of savings. From all that I think you can conclude that they have got at least some reasonable financial cushion from at least mild to moderate economic downturn.
This shows median client balances and those of you who were at the last analyst presentation six months ago, will remember there was some concern that the client balances number in the balance sheet had fallen. This is just demonstrating that actually over time, the median level of client balance has been, which obviously isn’t distorted by the 3-4 very big clients. The median level has been very constant over the last, this is eight months. And that is despite some pretty choppy markets through that period. So within that eight months period you have got really quite difficult markets in January, March and June. And you can see very little fluctuation in median client balance through that period.
I think the other thing that stands out from this slide is the amount that clients are playing with at any one time is not large. In other words the amount they are risking you can see for new clients it is just over £400. For slightly more established clients it is more like £500 and if you compare that to the £10-50,000 of savings that they tell us they have got, they really aren’t risking very much of their money at any one time. And I think that perhaps gives some clue as to how they are surviving through difficult markets. They are being quite cautious and taking it relatively steady, relative to the amount of money they have got.
We have looked before at client churn and I won’t spend long on this slide. You have seen versions of this before and this is really just updating it for another year. The pattern is really unchanged which is you have seen quite a steep initial fall away of clients and then it becomes slower over time. What is much more interesting is the right hand chart. The blue bars show the number of clients that traded in each subsequent financial year of those that traded for the first time in FY02. The red line shows the revenue generated by that cohort of clients. And I think what you can see there is that after a couple of years, the revenue we generate from a group of clients settles down and reaches steady state. And actually from this group the revenue we generated in FY08 was almost exactly identical to the revenue generated from the same group of clients in FY04, despite the fact that over that period some of those clients have given up. The clients that remain become stronger and stronger. And I think that tells you that there is genuine long term annuity value in the client base.
We have seen increasing diversity in what our clients want to trade. There has been a progressive shift over the last year into equity indices. And that’s really driven by volatility. That is what you trade to get an exposure to volatile equity markets. I think among the investment community, people are worried that our clients are predominantly long of single stocks. And that is certainly true of those clients that trade single stocks. Really two points to make here. First, in all the other asset classes which make up roughly two thirds of our revenue, there is absolutely no directional bias. Clients are as likely to go short as they are to go long of equity indices, or currencies or commodities. And then secondly, even in single stocks, as it says here, the whole periods are incredibly short. The median hold period for a stock position, this is actually for our Australian client base because that was the easiest one to measure, is three days, with a quarter of share positions closed on the same day as opening. So very short term duration trades. And I think there is a clue there, it really isn’t stupid to be long at a single stock if you are holding it for such a short period, even in a Bear market.
The other point to make is that really very few clients only trade shares. Only 8% of our revenue came from clients who only traded shares with very nearly 70% of our revenue coming from clients who traded multiple asset classes.
And then finally, the graph on the right demonstrates that as markets have become more volatile, clients have made increasing use of stocks to manage their risk. And that is another reason that they are not doing themselves too much harm in current markets.
I will now hand back to Steve to talk a few more financial bits and pieces.
Steve Clutton: Additional financial information. Revenue per client trend- we thought we’d add a graph this year. This really highlights the trend in revenue per client across the different client bases. You can see blue line here which is UK financial spread betting. And the overall theme is that of convergence. We have mentioned this before- the expectation that the different client bases will trend towards the longer term average that we see in the UK spread betting client base of approximately £2,000 per client in a six month period. Now there are a number of factors coming into play here. So you will see that the Europe CFD number includes higher end Irish clients and you can see the dilution impact of a growing direct retail client base coming in through Germany, Italy and Spain and France. That is falling from a higher number. In the UK the client base naturally segments. The larger more professional type client using CFDs, which explains the higher number on the red line. And coming from the other end as it were, the Asia Pacific number shows the expected pattern of income per client rising as retail clients build experience.
I won’t go into the detail behind the previous graph, but include it here for completeness and for those who use it for modelling.
Risk management in quality of earnings is a familiar slide with a familiar story. The volatility of revenue remains in a tight range despite heightened market volatility during the year. Our model is to capture transaction fees and we continue to hedge the vast majority of client positions. It is quite rare for us to have loss making days and when we do it is typically on a holiday in a major market, this or both sides of the Atlantic. That is when there is much lower client activity. And we had three of those days during the last financial year, but they were all pretty small losses.
Just touching on counterparty risk management. We have split the slide into market counterparties and client counterparties. We hold cash at our hedging brokers for margin requirements and we also have cash at various deposit banks. At the end of May we had just over £250 million at brokers and 93% of that with counterparties rated A1 or above. At the same date we had just over £470 million at banks- all of those counterparties were rated A1 or above. As part of the credit review process, we review credit limits very regularly and mitigate risks by diversification using nearly 40 different counterparties.
On the right hand side we talk about client counterparty risk and that is managed through a strict process. Each account is assigned a limit which determines the total amount a client can risk as a deposit. Concentration limits are applied. For example, a client cannot take an underlying position of more than 1% in any company. And this is also considered from a firm-wide level, i.e. a collective exposure from all clients to a single stock. Margin rates reflect liquidity and volatility. They are increased when and where appropriate. For example, we increased banking stocks in crude oil margin rates earlier this year, given the volatility in those sectors. And higher margin rates are applied to larger or concentrated positions, such that individuals could be margined well in excess of headline rates. In addition, clients manage their own risk. Tim has already mentioned the use of stops. In the final quarter of last financial year, 61% of UK financial spread betting accounts, were opened as limited risk accounts, where a client has to deposit cleared funds on an account and put a guaranteed stop on each trade, such that any loss cannot exceed the margin on that account.
Free cash, capital and dividend policy. Added a little bit more on the top of this slide under working capital. We often get asked about our cash position. And one way of looking at our cash position is to consider the hypothetical situation where all clients close their positions. Clients would be repaid from amounts held at brokers and cash balances. On that basis, our own cash has increased by approximately £50 million over the year to £152 million. £135 million of the reduction in client balances (which are shown in amounts due to clients) over the year was driven by a very small number of clients who in total accounted for less than £1 million of revenue during the year. As Tim mentioned earlier, average client balances have been stable throughout the year.
Regulatory capital requirement has increased over the year as the business has expanded, albeit at a slower rate than profit growth. Our surplus rate capital position has increased to just shy of £67 million at the year end. And that reduces to about £37 million taking into account the proposed final dividend.
I will pass you back to Tim.
Tim Howkins: I have talked about TradeSense before, which is our client educational programme which we launched about 18 months ago. And the reason I have talked about it is it has been a fantastic driver of client recruitment. The year just ended saw the completion of the process of rolling that out internationally and it is now available to all of our clients worldwide in their local language.
And then moving the education subject on. We have built an increasing programme of both seminars and webinars. Again, leading that from the UK but rolling it out increasingly across the world. And just to give a sense of the scale of that programme. In the UK alone last month, we had more than 1,500 attendees to one of our seminars or webinars. And we are aiming to roll out a programme of similar scale in every country in which we operate.
52 weeks ago today, we launched PureDeal in the UK. And that was very definitely again responsible for a step change in our rate of client recruitment and again we have now completed the process of rolling that out across all of our sites internationally. Since then we have been making incremental improvements and you can see a few of those listed on the screen. iPhone Dealing, which in some countries has been available for 3-4 months. Some countries only launched the iPhone with the new iPhone 3g a couple of weeks ago and where that happened we launched this new dealing service with a marketing fanfare. You can see the German version there.
Trailing stops and Bungee Bets are both different ways for clients to manage their risk, particularly attractive in volatile markets. And then the latest innovation actually launched properly since the year end is DealThru Charts, which is the ability to deal directly from a chart. And most of our clients are inherently chartists or technical analysts. So this is a feature that is proving very popular albeit quite complicated.
Each of these innovations is an opportunity to communicate, both to communicate in marketing messages as you see here and an opportunity to talk to our established client base and engage with them, get them trading more. And we see this as an important part of our competitive differentiation this strategy of innovation. And very much this continues to further our market lead. And I think it also helps to continually raise the barriers to entry.
The US is a slightly different operating model to the rest of our new businesses, in that it is not our conventional CFD offering. We have got two businesses there, IG Market inc offering foreign exchange and HedgeStreet which we acquired back in December offering currently exchange rated binaries. Both of these businesses are in their very early stages. IG Markets only started trading in late April. HedgeStreet started in February but with a very limited product set and we have been progressively increasing the offering over the last few weeks and there are more changes to come.
I have been pretty encouraged by the early signs that we have seen but both these markets are in too early a stage to say very much about them at this stage. So this is something I will talk about more in six months time.
Everywhere else we operate, the business is a CFD business. You can see from the graph that the two most recently launched businesses, this is showing the number of clients dealing in each month starting with the first month of operation from when each of these offices began. The red line is France, the blue line the darker blue line is Spain. And you can see both of those on a very rapid growth curve. And roughly speaking, both of those are in line or ahead of where Australia was after two years of operation. And they are certainly growing faster than our other businesses. Germany, I don’t know if you can see in the graph, but it had a flat period between month 6 and month 13 but since then it is really on the same sort of growth pattern as the rest of the businesses, that is the grey line. And the other one that stands out is the purply line which is Singapore which is now on a very steep growth curve.
I mentioned in the statement that we are opening an Italian office in the autumn. At the moment we cover Italy from a desk based in London, which we set up pre-MiFID. MiFID makes it much easier to establish a physical presence in Italy. That won’t significantly change the cost base that we have covering Italy, because the most significant cost is marketing and we are already doing that. But it will make it easier for us to open accounts particularly more retail orientated accounts. In particular, because it allows us to operate a tax deduction scheme for Italians which for various reasons is apparently particularly popular in Italy.
Looking to the future, there are a number of new markets that we would like to be in. Some of those are difficult or indeed currently impossible from a regulatory perspective so I won’t give you the long list. One of the ones that is easier from a regulatory perspective is Japan and I have mentioned that before. We are still giving active consideration to how best to tackle the Japanese market.
So, in summary. Strong client recruitment is the main driver of our growth. Overlaid by the impact of volatility in the shorter term. We have seen very strong growth continuing in both the UK and Australia which are our more mature markets. And we have seen a very rapid start for both Spain and France with the other newer offices in Singapore, Italy and Germany also making very good progress now.
The US business, we expect to be slower to get into profit than any of those other businesses, but the early signs are encouraging and I think long term, there is a very interesting opportunity in the US.
We continue to evaluate overseas opportunities and I have shown you a few slides which I think helped to explain why at least so far our client base has proved itself very resilient to both market conditions and the prospect of economic downturn.
Trading since the year end has been very, very strong. And overall as it says, the business is very well positioned for the future.
Very happy now to take any questions starting off in the room. Could you please raise your arms and wait for someone to thrust a microphone into your hand before speaking.
Question and Answer Session
Question 1
Chris Hay, Close Asset Management: Three quick questions if I may, firstly on the Sports Division, where are you looking to take that? And may you potentially be looking to lose it at some point? And secondly, I just saw your bad debt charge has been creeping up, £4 million to £1.5 million last year. Is that something to do with your taking on clients who other companies wouldn’t take on and will you be looking to invest in your background checks? And thirdly, you said that people dealing in shares are predominantly long, can you give any breakdown into the long and short, what percentages?
Answer: The sport is a cash generative and profitable business. It is becoming a smaller percentage of the whole. So clearly we keep it under review. But as I say it is still generating profits at the moment.
Bad debts. I certainly don’t think it is because we are taking on any lower calibre of client, I think it is much more that in volatile markets, clients are more likely to find themselves in trouble simply because the movements are greater and we haven’t wholesale increased our margin rates. I don’t think we need to do anything to change the way we vet clients from a credit perspective. I think it is just inevitable that more volatile markets means a greater instance of bad debts. But I think 2.2% is perfectly acceptable in volatile markets vs 1.5% in less volatile markets. And the third question was?
Chris Hay: Long/short in single equities?
Answer: It varies by market. Certainly in some of the newer markets we have seen a greater appetite for shorter which I think is an indication that the earlier adopters tend to be the most financially sophisticated. Overall the single equity book is 90% long.
Question 2
Gurjit Kambo, NUMIS Securities: Good morning, just in terms of white labelling. I know you mentioned about 14% of your revenue in the financial business is now white labelling, could you perhaps give us some more flavour on what initiatives you have? You know Japan, is that going to be white labelling? Is that going to be an office? That would be quite helpful.
Answer: Certainly a significant component of our revenue is from introducers rather than just white labels. There are essentially two possible introducer models. One is where the introducer is providing an advisory or discretionary management service. And the other is a true white label platform, where our platform is being provided to the end client who is taking his own investment decisions. We have currently got more of the former than we have got of the latter. We are in talks with a number of the big online stockbrokers across Europe and we are also talking to a couple of players in Japan.
Question 3
Nitin Arora, Noble Group: A follow up on white labelling. Could you give us some colour on the structure of one or two big partnerships of your white label partners? And secondly any plans of extending your white label partnerships in the UK? We can see that a number of your competitors, Cityindex, CMC, London Capital have been getting a number of white label partnerships.
Answer: I am certainly not going to share the commercial terms of any of our white label arrangements with you. The arrangements we have got with advisory brokers: the end client is typically paying a higher level of commission than our standard commission and a proportion of that is rebated to the introducer effectively to compensate them for providing the advice. In terms of the UK market, we have always avoided offering spread betting white labels in the UK. And our rationale there is that we are by far the dominant player in the UK market. And it doesn’t seem to make commercial sense to us to compete with ourselves at a lower margin. Yes, some of our competitors have done that with some of the online stockbrokers in the UK. But I think, you have got a very different situation in the UK to what we think is happening in Europe. In the UK the online stockbrokers turned their back on CFD’s and spread betting for a long time and I think a lot of their active client base therefore moved to come to us and our competitors direct. So I don’t think actually there is a big prize to be had in the UK market. I think, if it happens early enough, the potential prize in some of the European markets is much greater because that migration hasn’t yet happened.
Further question: And what do you think for the likes of Ladbrokes and the betting houses? They are also offering spread betting to white label partnerships. Do you think there is any opportunity there?
Answer: I don’t think it’s as large an opportunity as some of our competitors might like to make out. Certainly our experience is that there is very little crossover between a sports client base and a financial client base actually in either direction, but particularly low from sports to financial. Because it is a different, the clients come to it with a different mindset. The sports client is doing it as a leisure activity and I think subconsciously that means that he accepts there is a cost to that leisure activity. Whereas the financial client is coming to it as a serious investment proposition. So I don’t see there is a big pot of gold sitting in any of the fixed odds bookmakers to cross sell them a financial product.
Question 4
Daniel Havercroft, Investec: Just a couple more questions on the bad debts. I am sure you are probably fed up with them already. You mentioned obviously in limited instances you had actually increased margins. It sounded like you perhaps needed to think about a few more increases, given the increase in bad debts. Anything likely to happen there? Also just in terms of the last downturn, what sort of quantum of increase did you see in bad debt as a percentage of revenues? And do you think that might be a guide to what we might see if markets continue to perform poorly over the next twelve months?
Answer: We certainly are not planning any more margin changes. The changes that we made were specific to the banking sector in particular which was clearly something that was particularly volatile and if other sectors become volatile then clearly we would look at increasing those margin levels. But as things stand today, we are not envisaging any changes.
In terms of the history of bad debts, I think in the ’98,/’99, ‘99/2000 financial year, which was actually a rising market, bad debts were running at something between 4-5% of revenue. But that was back in a pre-internet era when clients could not fund their account online, when most of our margin payments were made by cheque. So the cheque’s in the post was a very commonly used excuse which actually means, please don’t close down my position, I am hoping that it will go back up. We stopped taking cheques for margin payments of over £10,000 I think sometime in late 2000 or early 2001. And pretty much overnight that halved the incidents of bad debts. And I think that because our credit regime was changing so much through that period, I am not sure you can read anything else into that experience. But certainly for the last downturn, we were seeing falling incidents of bad debts. But as I say, it was for reasons other than client behaviour.
Further question: And just on the number, if you look at bad debts in the second half as a proportion of revenues from the financial business, it is about 3%. Is it appropriate that I compare it to just financials revenues? Or is there some reasonable level of bad debt from sports clients as well?
Answer: There is a bit of sports bad debt in that, concentrated on a couple of abnormally large clients.
Further question: And 3% as in the second half, obviously substantially more than we saw last year. That coupled with the fact that you are opening a lot more limited risk accounts with the fact that you know more of your clients are using stop losses. Is that number not concerning?
Answer: No, clients opening limited risk accounts is partly driven by appropriateness testing post MiFID- they default into that type of account. I think that all helps the bad debt management process. And as I said earlier, we do chase people quite vigorously and we have a pretty good record of recoveries. We have had some recently from quite a large bad debt from two years ago. So it can take a while. But I think we are comfortable at that kind of level, given the levels of volatility that we’ve seen.
Further question: Just as a final point. In terms of our modelling going forward. Would you expect us, should we be pencilling in 3% bad debts as a proportion of financial revenues for ’09 or is it likely to revert back to sort of more normal levels?
Answer: I think it depends on volatility. Clearly volatility has an impact on revenue. So you really have got to look at the two in the round.
Question 5
Will Howlett, FBK: I just wanted to ask a quick question on the LSE and their plans to make, to start a dealing platform, CFD dealing platform. I just wondered what sort of competitive threat that might cause to be?
Answer: I don’t think it is a competitive threat to us at all. It is aimed purely at the institutional market. I don’t think there is any way that a retail client can access it directly other than via somebody like us and we are certainly not going to offer.
Question 6
Patrick Hargreaves, Goldman Sachs: Two quick questions. Firstly on duty payable. You mentioned at the start that that was partly a function of some exceptional results. Do you mean exceptional in the context of the volatile markets or exceptional notwithstanding that? And secondly just on Australia, obviously a spectacular result. I just wanted to get some colour on why you feel that market is going so strongly at the moment?
Answer: Yes, the reference to exceptional was exceptional both in the size of the client’s positions and in how badly they then performed.
Further question: You would expect 6% to be the very much top end of the range?
Answer: Yes. The second question was Australia. We have certainly not done anything different in Australia to deliver this level of revenue. I think it is still a business in its fairly early stages of development and therefore no reason why it shouldn’t deliver actually very high levels of growth. It just tells you that, you know, the gestation period of the market is quite protractive. We have been going for six years there and it is still growing at quite high levels of growth.
Question 7
Richard Taylor, Citigroup: Can you give some indications to what size currency benefit you had in the revenue line in the year? And secondly just on the client cash balance issue, given that they have such large cash balances, can you explain why those individuals don’t account for a proportionate part of the revenue line?
Answer: On the first one, sterling is clearly depreciated against Euro and Australian dollar over the year. Roughly speaking, with just shy of £50 million of non UK revenue, we would estimate probably about £4 million in the revenue line for depreciating sterling.
Further answer: I think there are a couple of reasons why those clients account for disproportionately small revenue relative to their size of cash balance. One is that the larger the client, the more likely they are to negotiate significantly better terms than our standard terms. So in terms of financing, a typical retail client would be paying 2.5% over Libor. The largest clients might be paying 50-60bpts but our cost to borrowing is 25bpts. So actually the margin we are achieving is something like a 10th of the size. And the second reason is that those very large clients tend to be very long term hold rather than very active trading. So you are not getting regular hits of commission. All you are getting is that small financing charge for the duration of them holding open the position.
Tim Howkins: If there are no more questions from the room, we will see if anybody is still on the line to ask questions online? No I think they have all gone. Thank you very much. As always we will now take our microphones off.
End of presentation