CMC Markets Plc (CMCX) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the CMC Markets Full Year 2020 Results Call. My name is Constantinos, and I will be the operator for your call this morning. [Operator Instructions] I will now hand over to Peter Cruddas, CEO. Please go ahead.

Good morning, everybody. I'm trying to work out whether I prefer not to see your faces or to see your faces. I'm sure by the end of the presentation, I would have worked out the answer. And if you would like to know, I'll let you know. Anyway, I'm only joking. So good morning, everybody. First of all, thank you for dialing into our 2020 full year results presentation. This is for the year ended 31st of March. Normally, these presentations take about 30, 35 minutes. But today, because of the tremendous success of our last financial year, this should last about 4, 5 hours. This is the first time we have held our results presentation virtually. It's a shame that we cannot present a set of results face to face, but I'm hopeful that we will be able to again soon. For reference, we will be talking through the investor presentation, which we published to the CMC website this morning. So if you want to follow the slides, if you can go on to the website. And I'm sure most of you know, I'm Peter Cruddas, Founder and CEO of CMC Markets. With me today is Dave Fineberg, Deputy CEO; and Euan Marshall, our CFO. And we also have Matt Lewis, our Head of APAC and Canada, dialing in from Australia. I would like to touch on the busy year we have had, then I'll pass to Euan to cover the financials, and then David will cover client trading and market conditions. And Matt will talk about -- Matt Lewis will talk about Stockbroking, our Australian Stockbroking. And then finally, I'll wrap up on our strategy, and then we'll get into the Q&A sessions. So let's just kick on to Slide 3, please. Introduction, COVID-19 update and full year '20 highlights. As all of you are very much aware, the coronavirus pandemic has had a significant impact globally. And our sympathies are with everyone who has been impacted by the virus. At CMC, we are focused on supporting our staff and clients, and I'm extremely proud of the resilience and dedication shown by all of my colleagues. 2020 performance improved significantly as a result of the group's unwavering focus on our strategic initiatives which we have seen us -- which have seen us diversify the group's revenues, improve the client income retention and increase the number of active clients on our numerous platforms. This resulted in a net operating income increasing to GBP 252 million and profit before tax to GBP 98.7 million. I'm extremely proud of the technology and people of CMC, both of which delivered during this recent period of high trading volume, which is continuing into the start of the current financial year. However, I don't want this to take your attention away completely from the strong performance of the business before the coronavirus began to affect markets, given that we delivered strong underlying performance through the first 3 quarters of the financial year. We have demonstrated that we understand how our clients responded to new regulations, and our evolved business is able to thrive after tech changes, which I've always said are good for our clients and good for the industry as a whole. We have always invested to develop our technology and our people who are key to build in it. This gives us a valuable market-leading edge in our offering now and opens us to exciting opportunities in the future. Pleasingly, for our investors during these uncertain times, we are announcing a final dividend of 12.18p, which equates to a total dividend of 15.03p for the year. And we all know I love a dividend. This is in line with our 50% profit after-tax dividend policy, which continues to give us the ability to invest in the future of CMC Markets. So short intro for me, and I'd now like to hand over to Euan, who will crunch the numbers for you. Thank you.

Thank you, Peter. And good morning, everyone. Reflecting back on our H1 results, prior to pandemic-related market volatility, CMC had returned to strong underlying profitability. This trend has continued into H2, then we experienced heightened market activity in the last few weeks of the year, which further increased client trading activity and profitability. As a reminder, we introduced 2 new KPIs in the first half in order to illustrate the drivers of our CFD revenue performance as transparently as we can, and we continue to report on these again today. To recap quickly, I'll turn your attention to the top left chart on Slide 5 where you will see CFD gross client income. This represents the spreads, commissions and financing that we charge our CFD and Spreadbet clients. The second new metric on this graph, client income retention, represents the amount of client's income we retain after rebates and levies and risk management gains or losses. In 2020, CFD gross client income was 11% higher than in the prior year at GBP 240.6 million. It should be noted that the last few weeks of 2020 included the COVID-19-related increase in market activity, which translated into significantly higher CFD gross client income and drove the increase in this metric. For the full year, we achieved 89% client income retention, which is higher than both H1, which was 82%, and our previous guidance of 75% to 80%. This was a significant improvement against 2019, and also more importantly, an improvement on 2018. David will touch on both of these trends later in the presentation. Moving on to the second graph. The combination of CFD net revenue of GBP 214.5 million, Stockbroking revenue, interest and other income gives us net operating income of GBP 252 million, an increase of 93% on prior year. Moving on to the final graph along the top, you will see the active clients increased by 7% to just over 57,000. The increase was driven by the APAC and Canada region, which had growth of 19%. ESMA region active clients were broadly flat against prior year as many retail clients in the ESMA region stopped trading in H1 last year as a result of the regulatory changes. Revenue per active clients improved significantly, up 81%, mainly due to the increase in client income retention. Moving on to profit before tax on bottom left. PBT increased to GBP 98.7 million with the improvement in net operating income demonstrating good operating leverage in the business. Profit after tax was GBP 86.9 million with an effective tax rate of 12%. Finally, this resulted in earnings per share of 30.1p. Moving on to the income statement on Slide 6. As I've just mentioned, CFD and Spreadbet revenue was GBP 214.5 million, 95% higher than the prior period. The majority of the growth in our client income against the prior year was driven by our APAC and Canada region where gross client income increased 23%. This region was not impacted by regulatory change in either period. In our ESMA region, gross client income grew by 3%. To note, the prior year comparative included 4 months of client trading prior to ESMA regulatory change. Encouragingly, our Stockbroking revenue has also increased significantly as it becomes -- as it continued to become a larger proportion of the group. It's more than doubled on the year to GBP 31.8 million with most of the revenue increase attributable to the ANZ Bank stockbroking relationship, which went fully live at the end of H1 2019. Our CMC Stockbroking business also saw a 40% rise in revenue during the period with market conditions assisting this performance. Note that we have disclosed our PBT for both the CFD and Stockbroking businesses in the bottom left, which were GBP 90.1 million and GBP 8.6 million, respectively. Moving on to Slide 7 to cover operating expenses, which are up GBP 17 million or 14% and as shown here before variable remuneration. Net staff costs have increased by nearly GBP 5 million as a result of lower capitalization of internal development costs and the recruitment of technology personnel during the course of the year. As a group, we remain focused on costs. However, some of our variable costs have also increased due to the increased client activity, as marketing costs, bank charges as we incur cost for depositing and withdrawing cash from their trading accounts and bad debts. Regulatory fees in our Stockbroking business have also increased as a result of the enlarged business. It's also worth noting that as well as the increase in stockbroking regulatory fees, our FSCS levy increased by over GBP 1 million year-on-year, which included a supplementary levy in Q4. Premises costs were down GBP 4 million due to changes in accounting standards where they have largely shifted to depreciation. Looking at the cost split between the CFD and the Stockbroking businesses, it should be noted that Stockbroking costs have naturally increased with the full year of ANZ Bank being included. Variable remuneration increased GBP 11 million following strong performance in 2020. While this is a big increase against a particularly weak prior year, it is relatively consistent with 2018. Let me now talk through the liquidity and regulatory capital position as at 31st of March on Slide 8. There are a lot of numbers here. So overall, we have maintained a healthy level of available liquidity to continue to invest and [ grow ] with the business. The group's balance sheet and overall regulatory capital remains strong with a capital ratio of 23.3%. And our core equity Tier 1 capital increased by GBP 44.5 million as a result of our increase in profit after tax and dividends given for the period. Total available liquidity in the bottom left strengthened by just over GBP 70 million during the period to GBP 268 million. Note that March is a relatively high point in our annual liquidity profile as during H1, we pay our full year dividend, proposed to be GBP 35 million and also pay the majority of our variable remuneration. Finally, let's turn to look at the outlook for 2021 starting on Page 9. As you would expect, the business has continued to benefit from market conditions at the start of the 2021 financial year. In the first couple of months and as we move into June, gross CFD clients' income has been around double that's experienced in the same period last year, and client income retention has remained strong. Our Stockbroking business has also benefited significantly from these conditions. It's important to note that the group has been performing very well prior to the prolonged increase in market volatility. And the Board remain confident in the underlying performance of the business when more normalized market conditions return. As we -- we are increasing our expectation of client income retention to be in excess of 80% of CFD gross client income. Finally, on net operating income, we do not expect assets to have a material impact in FY '21. Moving on to Slide 10. Operating costs, excluding variable remuneration, are expected to rise moderately year-on-year. Some of this is due to our investment in technology staff and IT infrastructure, which will partly be offset by capitalization, along with higher marketing spend. Our effective tax rate will increase from the 2020 level of 12% to above the U.K. corporation tax rate. This is due to the group having a limited amount of Australian tax losses now being unrecognized. Also, during these uncertain times, I'm happy to say that the group continues to maintain a strong liquidity profile, evidenced by the GBP 86 million increase in net available liquidity to GBP 189 million during the year. As a result, the Board remains committed to paying a total dividend of 50% of profit after tax. Concludes my review of the financials. I'll now hand over to David, who will cover client trading, market conditions and give you our COVID-19 updates.

Thank you, Euan. As Euan has just talked us through, FY '20 is a very strong year financially and particularly within the CFD business. So I'll start my section by running through the CFD results in some more detail to help explain the drivers for this performance. Looking at Slide 12. The table and chart shows client income and net CFD trading revenue by half year, comparing this year's results to last's. Starting with the table at the top, we have seen an 11% increase in gross CFD client income during the year. This refers to the spreads, financing and commissions, which clients pay to trade and is the metric that we use to monitor the levels of client activity during a given period. As you can see here, the year-on-year growth was driven by the second half of this year with client income relatively stable each half up until this point. As you remember from previous updates, we updated our risk management strategy in the final few months of FY '19 due to a combination of market conditions and client behavioral changes, which meant our hedging strategy is no longer providing optimal returns. The aim of these changes was to: firstly, utilize the evolving data science models and optimizing internalization; and secondly, to use smarter hedging strategies to ensure lower execution costs and minimize the market impact. Fees, in conjunction with other enhancements, improved the proportion of these client costs that were able to retain this revenue and ensured hedging costs were roughly GBP 1 million lower per month than before the changes were made. I'm pleased to see the significant improvement in our client income retention percentage, which is up to 89% in FY '20 from 51% last year, giving a net CFD trading revenue of GBP 214.5 million. The graph in the bottom left-hand corner of this slide summarizes our performance half on half since 2018, highlighting the deterioration in client income retention in 2019, which led us to review our strategy and the subsequent strong recovery that we've seen this year. Turning now to Slide 13. As mentioned throughout today's presentation, we saw a strong revenue growth during FY '20 driven by a combination of 2 factors: one, the changes made to our risk management strategy; and two, the increased client activity in the final few months of the year. This slide shows how each of these factors have impacted our results. As I mentioned on the previous slide, the main aim of our risk management strategy was to improve the proportion of client income retained as revenue. This percentage is marked by the gray dots on the slide. As you can see, there is a marked improvement between the first and second bars with client income retention below 50% in H2 2019, averaging at just over 90% throughout the first 3 quarters of FY '20. With client income levels steady throughout the first 3 quarters, revenue growth up until the end of Q3 was driven by this improvement and was reflected in the positive trading update issued to the market in this period. This retention was above guidance and we believe above average. So as Euan mentioned earlier on, we are now confident in that it will be in excess of 80% in future quarters. Moving on to the final column, which shows Q4 gross client income and retention. In this period, revenue growth was instead primarily driven by the increased client activity in light of the COVID-19 pandemic, with gross client income around double that's seen during the rest of the year. Client income retention dropped slightly amid the extreme volatility, but we were pleased to see that changes made to our strategy delivered strong results even in these unusual conditions. Note that we made no changes to our risk management approach during these more volatile periods. Slide 14 provides some additional detail around the client behavior that we've seen following the COVID-19-related market volatility. The chart at the top is rebased to the FY '19 monthly average post-ESMA implementation and simply demonstrates the impact of the Q4 volatility on gross client income as clients found a number of opportunities to trade. Gross client income in March was around 3.5x higher than the average driven by our clients trading higher volumes than usual and by the underlying illiquidity in the market, which meant the spreads are often wider than you would usually see. We were, however, able to offer very competitive pricing during this time due to the continued focus and resilience of our pricing capabilities. The bottom chart shows the impact of increased market volatility on new client acquisition with the number of new client accounts around 2 to 3x higher than the average in the final quarter of 2020. The combination of these new clients and existing clients reactivating their accounts mean that active clients were significantly higher in the final couple of months of the financial year. Moving to Slide 15. From a group's perspective, our priority during this unprecedented time has been to look after our key stakeholders, our staff, our clients and our shareholders. In relation to staff, our people are our greatest asset, and we have been supporting them to remain safe by all working from home. Strong company performance has meant there's been no need to furlough staff or reduce our permanent headcount in any location due to the pandemic and has similarly meant that there has been no need for us to apply for a government-assisted program or payment holidays. While staff is slowly beginning to return to some of our global offices, in line with the local guidance, all staff of our London office remain at home and that's strictly necessary. The structure of our business means they are able to continue in this way for as long as needed. Next, our clients. Our platforms saw record volumes, and we are pleased to report that the strength of our technology meant that we are able to handle this increased demand and meet our clients' needs without any CFD platform outages. Finally, we look to provide continued reassurance to our shareholders. We remain in a strong liquidity position and with a cash surplus that will allow us to be confident in our ability to deal with any unforeseen circumstances, such as those experienced in the past few months. The changes made to our strategy have been vindicated in this year's results, showing that we are not reliant on periods of extreme market volatility and able to deliver sustainable revenues in more normalized conditions. The strength of our technology has helped us through this period of global uncertainty and will also see us emerge from it in a stronger position than ever. I'll now hand over to Matt Lewis, who's Head of our APAC and Canada region, who will run you through this year's results for our Stockbroking business.

Thank you, David. Good morning, everyone. Today I'm going to walk you through the performance of the Stockbroking business. So if I can focus your attention to Slide 17. As you can see, this business has become a much more meaningful part of the APAC region and also of the overall group with strong growth seen across all key metrics over the year. FY '20 was a significant year for Stockbroking with a clear step change in overall financial performance, which is predominantly due to the full year inclusion of the ANZ white label partnership versus the 6 months of activity we saw in the 2019 numbers. We've seen the benefits of the successful implementation of this deal with net revenue from this part of the business up 157% to GBP 22.3 million. Now if I turn your attention to the graph on the top left-hand side, you can clearly see steady quarterly growth in this part of the business since the first stages of the go live, which were in July 2019 for the intermediary migration, apart from a slight dip witnessed in Q3, driven by lower demand due to the unprecedented bushfires throughout the country and a sharp dip in volatility of the local market. Outside of the ANZ partnership deal, our core net revenue from our legacy retail business increased 40% to GBP 9.5 million with favorable market conditions throughout the year driven by low interest rates and rising equity markets, encouraging client trading and asset allocation away from traditional cash. Like the core CFD business, the broking business has also benefited from the exceptional market volatility in Q4, which saw increased client activity across all key metrics. The pie chart in the bottom left-hand corner is to help show the different client types, which make up our Stockbroking revenue. ANZ and St. George are both Tier 1 bank white label partnerships where the counterparty is able to use our platform and technology but retain their own brandies. And these, along with our other CMC Partners, make up our B2B or institutional business. In total, we service 149 partner relationships, including the majority of Tier 2 banking partnerships in Australia, financial planners, boutique investment companies and advisory firms, with 20 new relationships onboarded throughout the year. CMC Retail refers to our legacy direct business to client B2C offering. Moving now to the Stockbroking outlook. I'll focus on Slide 18. In addition to a strong operating performance, CMC is now the second-largest retail stockbroker in Australia and the largest white label provider in the country. In the second half of the year, the business also became the #1 retail and wholesale options provider in the market with revenues from this asset class growing 53% following an extensive build-out of our online options offering, a fantastic achievement in a short amount of time. Externally, over the year, CMC was awarded Money magazine's Best Feature-Packed Online Broker. And we've also been awarded, importantly, the Canstar Online Share Trading Broker of the Year for the 10th consecutive year, both of which are a great testament to the team's ongoing efforts, the overall proposition and our global pedigree in this space. We've also seen continued growth in the value of our client base with revenue per client, or RPC, rising steadily over the past few half year periods, as shown in the graph to the left, as we see clients trade a wider range of products with us. Core to the strategy and driving these increases is our technology. We've delivered a number of enhancements throughout the year, including the development of a smart order router, leading to better execution for our clients and lower costs for CMC. We've also delivered and rolled out enhanced end-of-year portfolio statements. And importantly, we've implemented a single sign on between our CFD and Stockbroking platforms, which allows clients to switch effortlessly between the 2 products, all of which will add value in 2021 and beyond. Looking forward, we expect to continue growing by improving our offering to extract more value from the business that we already have in place. A key area of focus for us will be in international share trading, an area growing in popularity with further markets and enhanced order functionality to be delivered and rolled out to our client base. Currently, international trading makes up only 1% of our turnover overall. However, it contributes circa 11% in revenue, clearly an area we see a big opportunity. As this is a higher-margin product, we tend to see that clients who trade both international and domestic equities with us generate an overall higher RPC, so we expect the growth seen in the bar chart to continue. Finally, we're also very excited to launch a new stockbroking app, which we expect to go live in the second half of this financial year. Mobile offering is a growing selection driver of providers and a channel we're expecting to drive greater acquisition, retention and further strengthen our overall offering. Thanks, everyone, for your time today, and I'll now hand you back over to Peter for a strategic update.

Thank you, guys. I quite enjoyed that presentation. Matt, well done. Before I just get on to Slide 20, I'd just like to say well done to Euan, David and Matt, have all stepped up into enhanced roles this year. Matt joined the Board, David is Deputy CEO and Euan joined the Board as well. And thank you. You've done a great job. Great job. So we're on to Slide 20 now. So I'd like to go through the values which are core to CMC. Firstly, our clients, obviously, are key to everything we do, and our business is built around them. And we educate our staff to provide the best service for our clients, which has resulted in a 78% client satisfaction score, the highest-rated in the industry, and we have won more than 200 awards globally, not last year, but since time began. At CMC, we lead with quality. We hire the right talent and invest in research, testing and feedback to ensure that our offering is quality over quantity. We continue to explore new opportunities to improve our products and services via our in-house development teams. In 2020, we achieved a 99.95% CFD platform uptime, which included the period of volatility driven by the COVID-19 pandemic. We looked to set standards by putting frameworks in place, which allow us to test and learn, while continuing to deliver a quality service for clients. We continue to roll out updates in our technology in order to continue to progress our award-winning platform and maintain the reputation we have with our clients. Finally, here, I want to touch on some of the work we have been doing with our local community and on environmental matters as well. At CMC, we think we have a duty to the local community, and we engage with charity throughout the year across our offices. We have partnerships with Action for Children in the U.K. and Learning LinkedIn Sydney. This involves a guaranteed donation, and each of our staff can give one day a year to take part in fundraising events or become involved in the charities' activities. We also sponsored 3 internships for students from disadvantaged background via Making the Leap Charity. At CMC Markets, we are committed to minimizing our environmental impacts, and we have focused efforts on reducing waste, improving energy efficiency and to reduce our overall carbon footprint. Examples include reducing travel by using video conferencing and removing disposable cups to reduce landfill. We encourage our employees to engage with this initiative via an intranet page and also ask them to put forward other ideas for future initiatives. So now we're going on to Slide 21. I think we're okay. Yes. So Slide 21 is strategic update. So -- and there's a lot to talk about, really. I mean we can't get through it all today, but we'll have a go anyway. So last year, we outlined the core pillars of our strategy, which are laid out on this slide: growing in our deep and established core markets, growing our institutional offering and optimizing our client journey through digital initiatives. We've made significant progress against these initiatives this year, which place CMC in an excellent position to continue to deliver throughout 2021 and to drive future value for our stakeholders. First, looking at our established markets in the U.K., Germany and Australia. All has delivered a strong performance, and our Australian business performed particularly well and now accounts for 27% of net CFD trading revenue for the group. We are not the dominant player in any of these markets, but we are, by far and away, the highest-quality service offering. This helps us continue to attract new clients and develop deeper relationships across different products with the clients we already had. This gives us confidence in the growth -- the great growth opportunities so we continue to focus on developing our brand and products to become the provider of choice across these regions. Next, I'd like to touch on our institutional offering. The ANZ Bank white label Stockbroking business has performed extremely well and continues to grow. And the Stockbroking businesses continue to onboard more B2B relationships during 2020. Our CFD institutional business, which provides liquidity services and both a white- and gray-label solution, also continues to grow. And we're expanding our focus outside of the U.K. and Europe to help do this. And finally, our client journey. We put our clients at the center of everything we do, and we employ and train high-quality staff to ensure best-in-class client service for our 57,000 active, I should say, CFD clients. It doesn't include stockbroking. This has been reflected in our March rating of 4.5 out of 5 stars, 4.5 stars out of 5 on the customer review website Trustpilot, which is amongst the highest in the industry and is a great reflection of our team's hard work, which benefits from the continued improvements we have implemented throughout the year. Having an in-house development team allows us to do this quickly and efficiently. And we also look to third-party tools to identify areas for improvement where relevant. Slide 22, please, the next one. Strategic update, developing our technology. Turning to Slide 22. Our technology is key to winning business in this highly competitive market, and we are continuing to invest so that we remain ahead of our competitors. 2021 will be a significant year of investment, particularly focusing on developing our institutional or B2B business technology. We are, firstly, investing in our core pricing, risk management and trading infrastructure. The main benefits of this project will be to reduce latency, which will benefit both us and our institutional clients and to provide us with a smarter analytic capability. In turn, this will allow us to make better informed risk management decisions and further reduce our hedging costs. We're also developing our proprietary technology to create a multi-asset class solution for our institutional client base. This includes providing our clients with a comprehensive product range, which will be available via one single account and hosted on our Next Gen platform. This project is a perfect example of our strengths coming together, our people researching and developing products, fit for use by our customers on our platform and reducing our reliance on third-party providers. There are a number of projects which the team are excited about over the medium term, and we're looking forward to what we can bring to the market. So next slide is the last slide, and then we'll open it up to Q&A. I think we've been going 35 minutes, that's not too bad. So strategic update, now we're talking about outlook. So to conclude, we have delivered strong results in 2020 and built good momentum looking into 2021 and beyond. The team has collectively worked hard on reaching milestones in our strategy, which is reflected in a strong 3 -- first 3 quarters of the year as we repeatedly output performed market expectations. We delivered record profits in 2020 and reiterated our commitment to paying out 50% of our profits after-tax in dividend. April and May have continued the momentum built in 2020 with market activity remaining elevated. And although there is some uncertainty around the timing of regulatory changes in Australia, we are well prepared for the measures previously suggested by ASIC. We continue to support regulatory change, which we believe makes the market and the industry a fairer place for our clients and creates a market which we are well suited to perform well in. We have a loyal base of high-valued clients, many of whom have traded with us for years. And looking forward, we are excited by the many growth opportunities our markets provide and which our technology gives us an edge in. We will continue to diversify, and having proven ourselves with the ANZ Bank deal, we are looking forward to what more we can do in this space. We recognize that continued investment is key to ensuring that the group maintains its competitive advantage, and we are well positioned for what 2021 will bring. And I'd like to take this opportunity to thank the CMC team for their continued hard work to deliver a great year and position us for the future. Thank you. Right. So that's the end of the presentation. And I think we'll throw it out to Q&A now.

[Operator Instructions] The first question is from the line of Ben Bathurst with RBC.

I've got 3 questions actually, starting with a couple on risk management. So if it's okay I would like to draw your attention back to Slide 12 where you show the sort of CFD client income. Just on that slide, first question is about the line showing the risk management gains and losses there, where I think this time, you haven't split out the contribution from client trading revenues or gains and losses versus CMC's own hedging profits and losses. I'm wondering if you could just potentially give some color on whether that GBP 13 million positive in H2 '20 has come from client losses or from hedging profits. Next question, again on Slide 12, is around hedging costs. So those have remained sort of remarkably stable, I think, through 2019 and 2020 at around the GBP 11 million or GBP 12 million level. Just looking forward, I wonder what sort of a stable ongoing run rate for hedging costs would be. Is GBP 12 million the right number? Or should we expect that to move around with CFD income in the future? And then the third question, if you don't mind, is just on market share. Obviously, you haven't been alone in reporting elevated trading during the sort of the COVID-19 crisis. I just wondered if your sense is that you've taken market share during this period. And in particular, whether or not you've managed to take market share in the area of higher-value clients that you particularly focus upon?

Okay. So it's David here. So regarding the Slide 12, so throughout the presentation, we talked about the improvements that we've made to our risk management. So -- and that's what reflected in the actual gains for this year. So from our side, there's been continued investment, not just in the pricing, but also the way we hedge as well. So -- and it's that continued investment which has actually seen those gains. Because as you know, we're managing the net exposure. So obviously, that P&L is comprised of both client side, P&L and hedge side P&L. So it's through this investment whereby we've managed to make sure that our hedges are far more efficient. Then you were asking about the hedging costs about being more stable. So yes, as we saw, it's GBP 11 million, which has come down from prior years, pleasingly maintain that low level. It would be nice if it was to be that same level in the years going forward, but it's also reflective of the flow that we received. So we've got quite diverse flow that we received from our client base. So it's not all just retail. It's made up of institutional business, a lot of API flow. So depending on that level of flow that we receive and how quickly we need to hedge that in the market depend -- will reflect on those hedging costs. So we've made a lot of investment in the way we hedge. So we've talked about it before, minimizing the market impact, so not unnecessarily paying spread away into the underlying was -- is one element, being smarter about how you work the orders, but also making sure that we completely analyze all the flow that we receive. So certain flow is more sharp in nature, then we will need to react quicker to hedge that in the market. So that was what Peter was alluding to as well in terms of looking at any latency and continuously investing in the technology. So in summary, it'd be nice if those costs were to remain at that level, but it all depends in terms of the market conditions in the flow you receive going forward.

Can I just add to what Dave said, I don't think we can really -- we didn't wake up a year or 18 months ago and say, "Well, let's change things." What we did was what was coming together was the technology that Dave and the team have really developed to improve pricing to eliminate a lot of latency and to really understand the type of flows that we were receiving. Where I think -- so that just improves our efficiency anyway. Where I think we've got a little bit of help was the changes in the ESMA regulations because what we saw was a better quality of flow because if you're a low-value, retail-type client, there are better terms out there with our competitors. And what we got was we got a stabilization of our risk book, and everybody focus on our risk book. If you look at the areas where there's real growth, tremendous growth is in our long risk book. So for example, our Stockbroking business, where trades go directly onto an exchange, our B2B business where we're building sort of DMA platforms that go straight through to prime brokers or to exchanges as well. But what I've seen is the quality -- the changing quality of the risk flows that we receive. The regulations have eliminated a lot of volatility from low-value, highly leveraged clients. And it's a much more attritional flow of business where we're able to maximize or minimize our hedging costs.

On your final point then as well on the -- on market share, assuming your maybe talking about B2C market share there because we're obviously more diversified in just looking at retail. But however, we really focus on the premium and high-value segment within B2C. So it's very hard to compare between competitors around success in gaining market share on a regular basis. So the only thing we can say on that really is that we're confident that we have the ability to retain our existing client base around the good longevity we have in those clients and also potentially acquire new clients through switching or new to market. And the main things there are similar to what Peter has already been saying around concentrating on ensuring we have the right product offering, we have the best technology platform that we can have and also ensure that we have very, very good client service.

Yes. And I think the amount of clients you sign up is relevant if you have a different business model to us. We never get precious about how many clients that we sign up because if you look at the value of our clients and the tenure, on average, our clients are with us 3 years, which is really high for this industry. But one of our clients -- our revenue per client we published is just under 4,000. If you look at the revenue per client, and I haven't looked at revenue per client, as a churn is better than a low-value client, I mean, it's probably 10% of that. So we would rather sign sort of one quality client who's going to be with us for 3 years than 100 clients that are go into churn and burn and be gone in a few weeks. It's not our big business model. It's not why we've invested huge amounts of money in technology. And if you look at our diversity, the fact that we have a growing B2B business and a growing stock market business, it shows that we're not dependent upon clients trading a CFD risk book. It's still a major source of our income, but we are leveraging off of this great technology, and we are retaining quality clients that will generate for us incremental attritional income throughout the year. It's not our business model to sign up thousands of clients. We don't want to do that unless they're quality clients. We've been talking about Project Tuna now for how long, 5 years? Project Tuna, you remember that one? It's still there. We're still fishing for Tuna.

The next question is from the line of Vivek Raja with Shore Capital.

A few questions for me, please. The first one, just to clarify, the client income retention guidance of above 80%, I assume that's now your through-the-cycle target rather than the near term? Just wanted to check that. The second one, going back to Slide 12 and the previous question on hedging costs, David, your answer sort of alluded to hedging costs being partly determined by the amount of flows that you're seeing at a given point in time. And I'm just checking here. So if you're doing sort of roughly GBP 2 million averaging hedging costs per month between H1 and H2, the flow is obviously quite a lot higher in the second half. So I just wondered if you could perhaps explain that and really how we should think about hedging costs in future. And then the last question, perhaps for Euan. Your cost guidance, and obviously, cost before variable remuneration, should we think of this as a new base? And I'm mostly thinking beyond 2021. Or perhaps if you could just again pull out, and I think you did reference some of this in your commentary earlier on, which parts of those costs are more linked to activity levels, so where there may be some scope to reduce if activity levels do slow in future periods?

Yes. So I'll take the first 2, and then I'll hand over to Euan. So regarding the client income retention above 80%. So yes, the reason we're confident in keeping it above 80% is obviously what we've seen this year in terms of not just our investment in CMC and our improvements, but also that of the market conditions. And so what we did see is in Q4 is obviously the spike in volatility. And whilst we have taken it down slightly from that of March, we are still seeing activities across the major asset classes and January in the market. So whilst volatility continues to be at healthy levels because as we said before, we don't want extreme market volatility. As we look forward and the potential volatility ranges, that's why we're confident in maintaining above 80% retention. Then in terms of the hedging costs. Yes, so in terms of the numbers themselves, I was referring, obviously, to the flow that we're receiving. So during periods of higher volatility, you will naturally see higher turnover. With greater turnover, you see greater levels of offset within the book, so buyers and sales equaling each other. So increased volatility leads to increased 2-way flow, which leads to increased internalization. So that again will help that percentage number. Looking forward, obviously, the investments that we're doing, that we spoke about earlier, are all designed to improve our hedging capabilities. But as I said before, it's making sure that you minimize market impact so you're not unnecessarily paying away spread. So that is the -- absolutely paramount. Then the next point is making sure that you get -- when placing hedges, that you get to market as quick as possible so that you're not having any erosion in terms of the spreads and the market risk component. So that's why our asset investment on our side. And -- so looking forward, it's hard to put an exact number as what our hedging costs are likely to be because it's all about the type of flow that we receive.

Yes. And on your question on costs, see that gives away along 2021. Yes, we've already disclosed we're saying we're expecting a moderate increase in costs from the FY '20 levels before variable remuneration. So the drivers of that are, firstly, we've seen an increase in market activity. And with that, we would naturally expect to increase our marketing spend during those periods. So you'll see a little rise there. We've also talked about a lot about our investment in technology. So what you'll see is an increase in our salary costs related to people that we are recruiting in order to deliver those technology initiatives. And secondly, we've invested in infrastructure as well, so you'll see some OpEx increases in the IT cost line item. And then from a variable cost perspective as well, you probably see what is variable from a market activity perspective. We see -- we've seen big changes in our bank charges as a result of the market activity because we incur costs for clients depositing and withdrawing money from their accounts. And that -- and we cannot pass that on to clients, and therefore, that increases our costs. And we occasionally see the changes to our regulatory fees in our Stockbroking business because that's market -- transaction related. And thirdly, we occasionally see, depending on the volatility in the market, we sometimes see a bit more bad debt as well.

Can I just add one point about the -- looking at these numbers, the logical thing to think about is to think about the COVID period and the impact it had on the numbers. But from an operational point of view, going into the lockdown period with an uncertain time for us because effectively, we saw the stock markets dropped 40% across the board. We saw -- we had to send everybody home and work remotely from home. And we have to operate the systems, so we saw record turnover, record trades and record log ons and so on. And we came out of that period with flying colors to be honest because it really showed that the investment that we've made in technology over a very long period of time really pays dividends. And if it wasn't for that investment, we wouldn't be talking about these numbers today and winning the Canstar awards and all the awards that we won. So I don't want that to get lost in these fantastic numbers. It was the fact that we were up and running, we were servicing clients, we were working from home, 100% staff at one stage were working from home, we didn't go on to the furlough schemes and government help, and we have been recruiting during this period. And we have been paying all salaries, and bonuses have been paid as per normal. So I just wanted to reflect on the period because it just brought it back to me what a uncertain period that was and how well the teams really adapted and how we were able to operate the business 100% as normal remotely.

The next question is from the line of Paul McGinnis with Shore Capital.

A quick question on the dividend policy. I wonder could you give us some detail around the Board discussion on dividend policy, just in terms of how you balance perhaps investors' desire for some predictability as to what the payment might be versus allowing yourselves the flexibility in terms of what profits -- how profits might vary to allow you to still invest? That was question one. And then second one. I mean what's been impressive about that new risk management policy, it's not just the fact that it's led to higher retention, but it's more been the consistency of that retention of the gross revenue now in fairly different market conditions as well. So what I was wondering is -- I mean how volatile can it be over a much shorter period, say, weekly or monthly? And is there any particular market conditions under which you think that it wouldn't be helpful and where we'd see it perhaps towards the bottom end of the range?

Yes. So...

Yes. Go on Euan.

So on the dividend point, it's a good one around balancing shareholder and investor appetite because every investor has a different appetite for different dividend policies. But at the same time, we do obviously listen to our shareholders. And what we also have to do is balance that internally with the fact that we want to ensure that we maintain an adequate amount of liquidity within the business to ensure that we can operationally run as we need to. And also as and when opportunities arise, we have the ability to quickly act upon those opportunities as well.

Can I just add to that, Paul? Look, it's clear you don't need to have numerous exams to see that we have surplus cash on the balance sheet. You do know we got surplus cash. Euan?

Yes.

We are sitting on a cash pile of money. But -- and the question comes up all the time and it's a normal question, what are you going to do your surplus cash? Now we've had this question for the last couple of years. If we paid out a special dividend in the last couple of years, we wouldn't be seeing the profits that we're seeing today because we have had a massive investment program here, and we've got one going for the future. And we're more excited about opportunities that are out there, and we're hoping we're going to be sharing some with you in our July -- end of July update. But there's a lot of opportunity for us. And the Board feels that the cash is better spent within the company because over a period of time, we will see tremendous opportunities and tremendous growth. And so it wasn't discussed about anything else other than we stick to our policy, which we've done 50% after-tax to shareholders. I think it's slightly varied here and there when we topped it up or something. But -- so that is the policy. Euan?

Yes. So -- and then going on to your second question about the increase in retention. So not to repeat myself, but obviously, what we saw before, the gross CFD client income was steady throughout the halves. And then obviously, H2 was accelerated by the Q4 volatility. So obviously, we've seen volatility slightly tapered down. So in terms of that gross client income, that concern has been more stabilized looking forward. But the retention is obviously what we are focusing on. And as I said before, if you -- the amount of time and effort and focus that's been put in by the teams, by the quants, the data scientists and amongst others to really analyze the flow that we're receiving. In terms of the data set we have at CMC, it's extremely rich, right? We are consuming the distribution and recording like 2.5 billion price ticks per day. And that's going back for years in terms of the way we record the data, and that's just on the pricing side. The data is all well and good, but you have to do something with it. So that's where the core focus has been to extrapolate more value from the data that we have and make sure that the decision making is based on data not motion or just because of market conditions, that it's based on intrinsic data. So for us, we are very pleased in terms of what we've seen here. We'd like to maintain these levels. But obviously, they are akin to that as the market condition. Like I've said before, increased volatility leads to increased 2-way flow, which leads to increased internalization. So where you start to see some of that volatility reduce slightly, that's why we're holding above 80% for the client income retention. And then your point about how volatile it can be. So I think it would be more volatile if we were just doing a single asset class. And I know we've spoken before in terms of market conditions, and we -- going back a few halves, we saw the impact of quiet markets and what it can do to revenue. So from our perspective, if we saw a contraction or a narrowing of daily price ranges across all asset classes, that would obviously reduced turnover and potentially could affect things in terms of the outlook. But we're not seeing that. It's very rare that you will see all asset classes contract. You might see, for example, quiet FX markets. But we offer circa 10,000 instruments on the platform. We've got clients around the globe. We've got institutional flow, retail flow. So from our perspective, if we can have a diverse client base, a diverse asset class, and markets will forever be moving somewhere, that is what we look to capitalize on.

We'll have a follow-up question from the line of Vivek Raja with Shore Capital.

Sorry, me again. I had a couple of questions. The first one was on the bad debt charge. Just wondered if you could please specify that. And then the next question is about the Stockbroking or let's say, sort of B2B more broadly. Revenue growth there seems to be very broad based, obviously, activity per client as well as new white/gray label partnership additions as well as presumably just sort of penetration within the ANZ account. I just wondered if you could just try and help us think about that little bit and how we should think about revenue growth in that area in the future. And obviously, in the context of your statements saying that over time, you would expect the B2B part of the business to be a greater proportion relative to the CFD B2C.

I'll take the bad debt one before handing over to Matt on the Stockbroking opportunity. So bad debt was around GBP 2 million higher than year-on-year. That's obviously only driven by non-ESMA retail clients because ESMA retail clients cannot go into debt. It's a factor of market volatility as well and it's a general increase in debt across a large number of clients. So it's more of the general provisioning policy that we have there. Over to Matt.

Thanks, Euan. Vivek, in terms of the broking B2B focus, I guess, twofold in terms of the growth. The obvious one is adding partnerships, onboarding new institutions, ranging small, medium, large. Obviously, the larger opportunities, say, in ANZ style, are fewer, and they are a larger lead time. But at the same time, the institutional team are continuously working on onboarding some of the small to mid-opportunities. I think also, though, outside of that, it is important to highlight that the existing business retail, but also the B2B business, there's a lot more value to extract out of that. So not all of the partners take all of the products at the same time. We roll out our international offering to some of the other Tier 2 white label banks we help them with their marketing and promotion of that based on our retail learnings, which instantly adds greater revenue. And that's the same to some of those more adviser-led B2B businesses as well that not everything is instantaneous. We roll out our options' product, our international product one by one to those that are willing to consume it to expand their client base as well. So that's introduced new markets on their side and then corresponding we're the beneficiaries of a greater product range and increased value and revenue to us.

Yes. I think -- can I just add to what Matt said there. I mean we work very closely with Matt in Sydney, Dave, myself, Euan. And we've seen this ANZ deal really develop, but not just the ANZ deal because what was discovered is that just when you sign a white label transaction, you think, well, okay, what's the flows, Euan needs to model it into our income. But when you start engaging with the partner bank or broker or wealth fund manager, you start building stuff for them, like we're building a mobile app for one of our white label banks. It really does help drive business. And we've seen that on the ANZ deal. I mean we expected it to produce a certain amount, and it produced more because clients get used to a better platform. They like our platform. They like the functionality and stuff. So when we sign a white label, we don't just actually sign it and walk away and say, "Right, we'll see you in 5 years." We develop -- we keep developing it with them because there's so much value within these relationships, and that's what we do.

We've got a couple of questions on the line, from the webcast. The first question in Portia Patel at Canaccord. Do you have a target for new clients in the CFC business? In the normalized period from a volatility perspective, would 5,000 to 6,000 be a reasonable assumption over a 6-month period?

Yes. So we don't -- kind of what we've said in the presentation earlier, as Peter was alluding to particularly as well, we don't necessarily have a target number of active or new clients. It's all about the quality and the longevity of those clients. However, during kind of normalized market conditions, yes, the 5,000 to 6,000 looks about right from what -- to answer the question directly.

Okay. And then we've got 3 questions from Stuart Duncan at Peel Hunt. First question, how much do you expect to spend on technology this year?

Oh, good question.

So it's an interesting one. This depends on how -- what you look at from technology. If you're looking from a perspective of personnel costs, we've already invested and recruited a significant amount of technology personnel towards the end of the last financial year. So we are investing there, and the -- we will see a moderate increase in costs year-on-year from a personnel perspective because of that investments. We're seeing around a 20%, 25% increase in technology staff year-on-year. And secondly, on the -- on kind of the pure infrastructure side, which you absolutely require in order to deliver what we want to deliver on the B2B side, we're probably going to see around a 10% increase in IT costs there, which we had GBP 21.5 million in FY '20.

Okay. Next question, do you expect -- well, with client numbers growing in FY '21, what does that mean for marketing?

What do you mean...

Probably, spend.

Spend?

Again, we look to spending more during times of market activity because our cost of acquisition decreases during these periods because there's more potential clients actively looking at onboarding onto the platform. But again, it comes back to making sure that we're looking in the right places for the kind of clients that we want to have. It's all about client and longevity, as we were saying earlier.

Yes. I mean just to add. I mean we don't look at marketing, why we looked -- sounded a little bit confused by the question is because marketing now is different to what it was 5 years ago. We've still -- we've invested in our IT spend over the last 3 years, a lot of money in the client journey. And we're learning a huge amount about client journey, what they're looking for, what attracts them, even then things like on the app stores. So we're getting more value out of our marketing spend. In real terms, we're going to spend more money, but because of the value that we're gaining through understanding and how to actually sign up a client quicker and then retain them and develop with them is adding real value to the business. But we have to spend money on marketing. It's all accounted for.

Okay. Final question before we wrap up, still from Stuart Duncan. On Slide 35, why does the broker margin requirements fall so sharply?

So a lot of that was a factor of the market conditions as at that point in time. So we're in the middle of a massive sell-off in the equity markets, and there's a fair amount of broker margin requirements around our equity instrument products. So in that big sell-off, clients were selling off as well on their kind of holds for equity positions. But thankfully, and happily, we can say that clients, as the market started rising again, they had their positions rising and broker margins also increasing to similar levels to you would have seen for the rest of the financial year on that slide.

Yes. And what I'd add to that is that when we see the equity sell-off, your equity -- client equity book does reduce, but it's not just clients closing out positions. It's also clients initiating shorts. So from their perspective, if they've got physical holdings, and they're using CFDs as a hedge, they'll be shorting the market, so that will offset against the longs that exist in your book. So we expect our equity books as well as others to contract in periods of higher volatility and into -- to grow again whenever normalized conditions return.

So I think that wraps everything up. The next -- well, first of all, thank you all for logging on, and thank you for your interest, and it's much better seeing you in the real. So because there's more interaction and stuff like that. So -- but the next update is the end of July, which will be our first quarter update. We are hoping by then that we can invite you into the office, let's hope so. But that's not up to us, it's up to the government. In the meantime, best wishes to you and all your family, and please stay safe and look forward to seeing you soon. Thank you. Bye-bye.

Ladies and gentlemen, this concludes today's conference. Thank you for joining, you may now disconnect. Goodbye.