Gain Capital Q1 Net Revenue $75.8M -8.6% over Q4, yet Trading Volumes Stronger

New Jersey headquartered Gain Capital Holding Inc, (GCAP), operator of numerous brands including online brokerage Forex .com, has just reported Q1 earnings ahead of its live broadcast scheduled for 5pm EDT.

The company disclosed its total revenue after the market close for its first quarter of this year, and will hold a conference call in less than an hour, Forex Magnates is planning to cover it live, with this post scheduled to be updated in real-time (refreshing the article will show the latest changes).

From a Quarter-over-Quarter perspective, Q1 2014 highlights compared to prior Quarter (Q4 2014):

• Net revenue of $75.8 million in Q1 2014, down from $83.0 million in Q4 2013
• Net income of $1.6 million, down 62% from $4.3 million in Q4 2013
• Adjusted EBITDA of $9.5 million, down 30% from $13.7 million in prior quarter
• Retail OTC trading volume of $566.3 billion, up from $508.0 billion in Q4
• Institutional trading volume of $1.3 trillion, up from $1.1 trillion in Q4

From a Year-over-Year perspective:

• Net revenue of $75.8 million, was up 52% from $49.8 million
• Net income of $1.6 million, or $0.04 per diluted share, compared with net income of $4.3 million, or $0.11 per diluted share
• Adjusted net income* of $3.3 million, or $0.08 per diluted share
• Adjusted EBITDA* of $9.5 million, up 27% from $7.5 million
• Retail OTC trading volume of $566.3 billion, up 31% from $431.8 billion
• Institutional trading volume of $1.3 trillion, up 46% from $889.9 billion
• Futures contracts of 1,609,796, up 26% from 1,282,066
• Total retail client assets of $805.9 million, up 76% from $456.9 million

Q1 2014 Retail and Institutional Volumes Higher Both QoQ and YoY

Despite the lower net revenue reported for Q1 the company saw higher trading volumes for the period both on a year-on-year perspective and over the prior quarter, as retail OTC rose $58.3 billion or 11% higher over Q4, as seen above, and totaled $566.3 billion for Q1 2014. Institutional volumes were also stronger reaching $1.3 trillion for the first three months, up 18% over Q4's total of $1.1 trillion, an increase of $200 billion quarter-over-quarter.

Forex Magnates recently covered when GCAP released its 2013 annual report, and when its final month in the last quarter had shown a recovery over February’s drop. This increase in March may have helped the company avert a worse quarter-over-quarter change (compared to Q4 2013), as was just revealed.

From a year-over-year perspective -which may be less important to short-term speculators of the firm's public stock- the figures reported today will also be compared for the sake of gauging the firm's direction over that time frame as well, as Q1 2013 is compared to the quarter reported today. It’s noteworthy to recall that January 2014 had started off strong for the company when compared MoM and YoY, with nearly 40% increases respectively, although net revenue wasn't sufficient enough to beat the total of the prior period as both net revenue dropped almost ten percent, and net revenue hit even harder, as shown above.

Recent Related Activity in U.S.

Recent news that could be excluded in the results, since they occurred in the second quarter, although some of which were talked about by the firm's CEO who commented in the official press release as seen below, and which could be mentioned about in the call later, include the acquisition of Galvan Research, and the green light by the CFTC for the company’s swap execution facility under the GTX SEF entity, both announced in April, and shortly after the firm's CEO cashed-in about a tenth of his stake in the company. GCAP shares were trading near $10.00 today then closed down sharply falling over 3% or 30 cents as the closing bell approached on the NYSE. GAIN's Board of Directors declared a quarterly dividend of $0.05 per share, to be paid on June 20, 2014, to shareholders of record as of June 12, 2014, as per the official press release.

The company's key competitor in the U.S. FXCM also reported its operating metrics for Q1 today,as well as its April volumes, after it officially announced just yesterday that it had acquired FXDD's US client base - news that first broke from Forex Magnates after a deal was being inked.

A handful of US brokers remain to compete for market share as the space for retail FX could still become attractive if a period of regulatory easing, such as that suggested today by Federal Reserve Governor Daniel Torullo, and recently proposed deregulatory initiatives in Australia, if applied to FX, where capital markets in places like the U.S. could see competition reopen to a larger number of small to medium-size firms, and to a potentially wider audience.

For now that scenario remains unlikely to occur anytime soon, with only the fittest Forex Dealer Members able to comply with the current regulatory capital and compliance demands of the NFA and CFTC, as retail FX industry consolidation continues in the U.S. following the transfer of FXDD's U.S. clients to FXCM.

Narrow Range Muted Financial Results for Q1, yet Operating Metrics Strong

Commenting in the official press release today from GCAP, the firm's CEO Glenn Stevens said, "Trading conditions in the first quarter, particularly the major currencies' narrow trading ranges, resulted in a challenging quarter for our retail OTC business, which muted our overall first quarter financial results."

Mr. Steven added in the statement, "However, our operating metrics remain strong, with trading volume, active and funded accounts, client assets and futures contracts all experiencing double-digit growth over the first quarter of 2013 and strong sequential growth. We are very pleased with our ability to continue to attract customers and provide them with world-class service, which we expect will translate into growth in our financial results when trading conditions improve," and concluded,"Our commission-based business, which includes our institutional and exchange-traded futures businesses, showed strong growth in the quarter and continue to drive our revenue diversification efforts. These complementary businesses represented 39% of our overall revenue for the quarter."

Mr. Stevens also commented regarding the recent deals the company made, and spoke about the GFT acquisition, among others, "The completed acquisitions of Global Asset Advisors and Top Third Ag Marketing and pending acquisition of Galvan Research will contribute to the further expansion of our commission-based revenue, and we expect these transactions to be accretive in 2014."

Excerpt of Highlights During Earnings Call

During the conference call, Mr. Stevens reiterated the effect of lowered Volatility on the company's results, while highlighting the strength of his firm's volumes moving higher despite the challenging conditions. He said the firm is focused on a 50/50 sales model with half the business focused on direct sales methods, and the other half via intermediaries such as Introducing Brokers and partners. In addition, the firm's GTX business was said to have a robust pipeline and expanding as "a venue for choice for people wanting to operate in an ECN environment."

The company's futures business is growing with a 20% YoY increase in customer assets to $164 million, explained Mr. Stevens during the call. An increase in interest rates globally was expected to add to the firm's bottom line as it would create volatility, and a divergence in rates could aid to bring the carry trade back and make it more appealing, described by the firm's CEO before handing over the call to the company's CFO, Jason Emerson who spoke about cost-savings initiatives underway and which are expected to save the company several tens of millions during 2014.

These cost savings were connected to the GFT [acquisition] related synergistic effects, and the consolidation of offices in the U.K and Japan, as subsequently explained in response to an analyst's question, during the call. Mr. Steven replied to a different analyst explaining how the momentum in growing volumes, helping the company acquire market share is causing a chain reaction where the momentum begets momentum, and dealers wanting to join as well, after certain volume thresholds were met, and also cited EBS, ICAP and companies like Reuters and how he wasn't sure whether their recent respective drop in volumes was being reflected in Gain's increase in market share, and shortly after those comments the call concluded.