flatexDEGIRO SE (FTK) Earnings Call Transcript & Summary

Dear ladies and gentlemen, welcome to the conference call of flatexDEGIRO AG. At our customers' request, this conference will be recorded. [Operator Instructions] May I now hand you over to Muhamad Chahrour, CFO, who will lead you through this conference. Please go ahead, sir.

Yes. Thanks a lot. Good morning, good afternoon, wherever you're located, dear friends, shareholders of flatexDEGIRO. It's a pleasure to have you on this call. Thanks for following our invitation. Actually, an invitation that was rather related to give you an industry update of last week's turbulences that was a bit also affected them actually, as I said, we didn't plan to make this part of this call affected then by our yesterday's ad hoc after our final figures of January were confirmed. So I'd like to spend a couple of minutes first before we go into the industry discussion to ramp up yesterday's ad hoc. As you've seen, we have been through massive January 2021. We've been through a massive year 2020. We set a new record for us as a group as well as in Europe. We were the online brokerage business with most retail transactions settled in 2020 in Europe. And we are very thankful and very happy that we were able to continue this growth path that we had in 2020 into 2021. January was an absolute record month for us, and we were able to win more than 130,000 clients in just 1 month. It makes me really very proud of our teams and our strategy that we have executed and implemented so well over the recent years. And a couple of you were joining who joined us years ago and were having this journey with us for a couple of years, remember, there were times when we were winning with flatex in the whole year, not even 100,000 clients. Now we do it in just 4 weeks. The continued traction and growth path is very, very important for our Vision 2025 to achieve a massive milestone and to continue to extend our market leadership position in Europe and to continue the penetration of the markets in Europe with the best possible offering to our clients and to the brokerage population. Obviously, that growth was driven, first and foremost, by an accelerated brand awareness. We started when we acquired DEGIRO in 2019. We started very significantly to extend and to increase the brand awareness of both of flatex and DEGIRO. And the investments that we have started with the last year are paying off now. We are evaluating the brand awareness of both brands in Europe again and again. And we see the pickup. We see the fruits that we can harvest now out of the investments we did over the last year. Plus, obviously, we had quite good months, still healthy levels of volatility in the market that help us a lot also to have quite strong trading activity by our client base. You know my perpetuum. You know my philosophy and the philosophy of my colleague, Frank Niehage. Trading activity is something we cannot estimate very well. We don't know what will happen over the year. Our duty as a management is to take care of 2 things, mainly to continue to run our machines and our teams, so IT and people as best as we can, plus to make sure that the growth path is followed pretty strictly by increasing the customer base. This is something we are in charge of and thus are super happy that we were able to achieve this growth in January. We are all financial experts, I would say. So we were always told never extrapolate January, something that we also did not do for the future. Nevertheless, we felt ourselves confident enough to update our guidance for 2021. Yes, it is a quick update after the release of the initial guidance. However, after seeing now on a daily base with what growth we grow day by day in customer acquisition, we feel super confident that we will achieve the targets -- the new target that we set yesterday for 2021. And we'll keep you here obviously posted latest with our quarterly updates. And if there are any reasons for another ad hoc, we will let you know via the ad hoc. The updated guidance for 2021 is, again, the guidance that was updated mainly due to the increased customer base and the accelerated growth of the customer base. We are still expecting the trading activity that is more conservative than the activity that we saw in 2020. Again, just because January was a great month in terms of trading activity, we will continue to be here humble, not unambitious, but humble with respect to trading activity. Yes. A big thank you to our teams that manage very, very well, the load over the recent days and weeks. It brings us back to the key fundamentals of this company, superior IT, stable systems, great capitalization of the company and the great structures and processes that have allowed us not only to onboard more than 130,000 clients, but also to manage to settle more than 11 million transactions. And especially with respect to last week's developments, a lot of investors have approached us with respect to what happens. And this was actually the reason for this call today to give you the chance to get a perspective from us, as flatexDEGIRO as an industry player of what happened last week. This is one thing. The other thing is, why it did not affect our business model and the stability of our systems. And third, what are the learnings going forward from what we have seen? I would like to start with statements that I used very often over the recent months and years when I was asked about 0 fee brokerage. And the statement has been always 0 fee brokerage is a business model where I'm still wondering about how these brokerage business models generate revenues. Obviously, I know how they do it. And -- but it's still, especially in the European environment makes it difficult to understand how this should be on a sustainable base possible. Zero-fee brokers have also one thing in common that distinguish them from the rest of the pack. And it's applicable both, I think, in the U.S. as well as in the European environment. But first and foremost, they seem to attract a much younger population, a much younger population that is maybe more thrilled to the type of environment we saw last week that are trading in smaller amounts and higher frequency than maybe more mature people. And that leads -- or that might lead to situations as we saw them last week. The evidence is there. I think you're all aware of that, that the average age of Robinhood's client base is significantly below 30 years. Ours is significantly above 35 years. And this gives you a certain understanding of what the mechanisms, what the portfolio of clients look like, what the activity profile of each client bases look like. We have seen last week strong movements in certain assets, which is nothing usually untypical for brokers. Obviously, the price movements of the assets were super exciting and rather an exception to the rule. But in terms of volume traded, in terms of the demand in assets with respect to load, with respect to number of clients being involved was relatively high, but nothing that online brokerage business models are not able to handle in normal circumstances. And what we've seen was that especially with certain type of brokers, and the volumes increased massively with a big buying overhang that led also to a high level of clearing and settlement payments. This was one of the main issues that also Robinhood has disclosed. And usually, I say you have to imagine to make it a bit more into an anecdote. You have to imagine that you are running a bar. And in this bar that you're running entrances for free, assuming it's a dense club. And all the other dense spots around you, they charge fees, but you do not charge entrance fees. So you attract automatically people that are maybe more, let's say, front-price stingy. And when they walk in, they go, they have fun, they enjoy the evening. Unfortunately, something we haven't been able to do over the last year. But they enjoy the evenings, and they have their drinks. And the first difference is that usually the prices of these drinks are higher than the drinks in clubs and bars where maybe the owners ask for an entrance fee. The biggest issue that happened was that with an increasing volume and increasing number of people, who were visiting maybe the first time or second time or third time such a club, they started to ask for drinks that were usually not in the stock of these owners. And these owners, these bar owners, they are usually supplied by someone that brings the drinks. And these suppliers usually request collateral margins because they supply you with drinks, and you sell these drinks, but you pay your supplier 2 days later. This is what we all know and what we refer to as the T+2 settlement. And this T+2 settlement results always and again the same issue if volatility and volume increased both in one and the same asset. So if the demand for a special drink, which is not wine or champagne or beer, which is the normal type of menu drinks that you're having, but when these people start to ask for whatever apple juice or rosewater, and the demand for rosewater explodes, volatility explodes, so that your supplier of rosewater will ask for higher and higher and higher collateral margins because the amount itself, the nominal amount that he's delivering is increasing plus due to higher pricing movements and the risk for the settlement increases for him. If something happens to your bar between the night where your clients are drinking the drinks and 2 days later when you pay your supplier. So what we saw there was nothing surprising actually, that you get also as brokers, some kind of margin calls from the clearing houses that you should be better prepared off. And it seems like there were a couple of brokers that didn't prepare that well about that, which I refer to not having a doorman, not having the right risk mechanisms to take care of these situations. Now if we take this, what happened and try to apply it on flatexDEGIRO and why is it not possible to happen or why didn't happen, fortunately, with flatexDEGIRO. It's again, as I always say, not because we are better enough because we are faster enough because we are smarter. It's just due to the type of business model we are running. First, the fees that we charge to our clients act somehow as gatekeeper. We know that we most probably do not win the millennials that love to have everything for free. Like everything is for free for millennials, whether it's social media, whether it's Google, whether it's -- whatever it is. And if you don't pay the product, you are the product, but they are fine with that circumstances. But those type of clients are not the clients that we attract first and foremost. Thus, the number of this type of clients that can have an impact on your volumes and that can have the kind of swarm impact on your business model is not given with us. Less than in total 10% of all clients with flatexDEGIRO were holding stock of, for example, GameStop in their security accounts. And on a daily liquidity basis, it was usually something between 10% to maximum 15% of the total liquidity that went into these stocks with flatex or DEGIRO, which is one of the most important things. We have a heterogenous model, heterogenous client pool that is not following any swaps. You never -- we are never safe of having maybe at any time this type of movement, then we have our dormant. We have our risk mechanisms. So what we did, for example, immediately at day 1 when the GameStop shares started to increase in volatility, we took down, for example, the LTVs for margin loans down to 0. So we were not taking any more -- any GameStop shares as collateral for months. Second, it's not only about the type of clients that you service, it's also how you service your back end. And it's something that I would love to highlight as well. Unfortunately, online brokerage businesses have become more and more considered out of e-commerce or out of e-commerce glasses. But online brokerage is a very sophisticated business that you have to understand deeply, especially if you do execution settlement and clearing in-house, which we do. And when you have these things in place, and you see that you're having a buy overhang on a certain assets, you should start to mitigate these things much, much earlier. And this is, fortunately, again, we didn't have that issue. But if we would have that issue, we come back to a situation where I have to say we're sitting on EUR 0.5 billion of equity. We are sitting on EUR 2.5 billion of liquidity that would allow us at any time to provide the necessary and inevitable cash collaterals to our counterparties and to our clearing houses, if needed. But it's not the only issue. This was one type of issues -- one type of issue. The other type of issue was many brokers were not able to handle the load. So it was literally a technological problem. And also here, I don't want to say we are perfect during these days, especially around GameStop. I think every broker had their difficulties, especially also with the market makers and the exchanges that also had a couple of downtimes. However, we were managing at that day an uptime of 99.5% plus. So we're very -- I think both DEGIRO and flatex where total over these 2, 3, 4 days less than an hour down. And what is important for you to know is that it's, again, not because we were doing things in a better way. We were just preparing for these things for years. And again, here, investors who are with us for a longer time, they know how much we invested, continuously invested into our platform and continuously invested into our hardware. We started 2019 to move out from our old server plants into new server plants. We are running our own data centers, which are state-of-the-art. We've invested over the last 3 years more than EUR 30 million into technology, into people for technology, and into hardware. And we are now able to cover this load, especially because of these investments we did in advance. And as I always also say, like with good sailors, you better prepare your sailing boat when the sun is shining. And you don't start to look for ropes and for your sails when you see storms coming nearer. You have to prepare the ropes in advance. And this is what we did over the last years that helped us massively to survive the storm in great shape. So covering all this up, I think it brings us down to 3 important points that are, from my perspective, in the end, life crucial for an online brokerage business. The first one is to operate an information technology platform that is big enough to ensure stability also during peak times. And this is something that we at flatexDEGIRO have made sure over the recent years and that we will make sure with best efforts, whatever it takes, whatever it needs to try to keep our uptime above 99.9% for our clients. But this means as well that we have to continuously invest that we have continuously build and have -- that we have continuously to develop our people to be prepared for these type of peaks. And by the way, there is no organic growth that we are going through. And again, we don't want to extrapolate January. But if the next 11 months will be only half as good as January, we will then end up the year with 500,000 to 600,000 new clients. So we will end up the year with almost 2 million clients, and that means 30% more load on our machines. And this is something we have to take care of. We will take care of as we did in the recent years. Second, it was absolutely the right strategy to focus our branding, our marketing, our -- the whole positioning of flatexDEGIRO to clients in the age between 30 and 45, 50, not only because these clients are usually the clients that are much more sustainable investors and much more sustainable traders. But it's also, I would say, the type of cohort that is maybe less affected by movements as we've seen last week. We will continue also with our products like flatex-next to penetrate the mass markets in Europe, but always with this important and necessary perspective on what are we winning, what type of clients are we winning. And as much as 0 brokers might win, it's great for them. But again, for us, it's more important to continue to have a sustainable, stable and sticky and loyal customer base for the future. And third and last, but not least, will come back to something that I also very often refer to capitalization. We are perfectly capitalized both in equity and liquidity. We are operating our business model after the 2020 figures will get audited on core Tier 1 capital ratios of 15% plus, which will make us to operate the whole system, the whole franchise, the whole business with almost 30%, 40% more capital -- more core capital and more liquidity than what is needed from a regulatory perspective. It was very important for us to highlight these things and to highlight to our investor base these things. I know you will have most probably the one or the other question. So I would love to make use of the next 20 minutes to give you the chance to get a great understanding or a better understanding of certain questions or certain things that are crossing your mind. And would love to give you the chance to enter with us into Q&A.

[Operator Instructions] And the first question we received is from Ms. Ravishanker of Morgan Stanley.

This is Shamoli Ravishanker from Morgan Stanley. Thanks very much for the presentation, it was very useful. I just wanted to ask about your view on how regulation over retail trading might change in view of last week's event, was an unprecedented situation with different opinions from the various stakeholders. But do you think it was enough to attract increased scrutiny over retail trading practices?

Thank you for your question. There's always a difficult question when these things happen, how regulators should act, right? And I unfortunately see very often, the consequence is that regulators tend -- should try to regulate symptoms, not the sources of the issues. And as we think that you should go back to the sources of these issues, we would love, yes, to get a better level of regulation with respect to retail clients. That starts with questions like should you allow 0 fee brokerage, because 0 fee brokerage is never 0 fee for the clients. And I think this has been evidenced now a couple of times, neither directly nor indirect. What do I knew it directly I mean if you do a trade for 0 fee, you as a client should know that there's someone in the system trying to make money with that. Otherwise, the broker that is offering you the 0 fees could not refinance that 0 fees. There is an alternative source of revenue. And this alternative source of revenue is somehow you. So yes, a higher transparency of how brokerage businesses are generating revenues is super welcomed. And I think here as industry leaders and experts, we as brokerage companies, especially well the larger ones and the larger ones and the more incumbent ones, irrespective of the fact that we are maybe a challenging incumbent and not an incumbent that is sitting in their own juice. We believe that there will be most probably on a certain point where regulators will start to rethink these situations. Second, to make sure that brokerage businesses are capitalized to handle peaks. And the capital requirement ratios have increased over the recent decade. I think we are all aware of that. But again and again, there are a lot of players that are finding ways to get around these capital requirement ratios, something that also the regulator should and will most probably have a closer look to. But the worst thing that could happen is that regulators regulate brokerage from a retail perspective. We have to regulate the institutional brokers, the online brokers to make sure that they fulfill all the requirements to be able to handle these kind of situations. And this is, I think, something that we might expect as always, when things go wrong, that regulators tend to try to find ways how to avoid that it happens again. But what we saw, especially with 2, 3, 4 brokers taking down the buy side for certain assets is unprecedented and has to be, first and foremost, analyzed and we should get the right intelligence out of this analysis to avoid that these things happen in the future. I think there were multiple issues that happened during this week, so last week, were not linked to each other, but together were quite dangerous for the system.

The next question we received is from Benjamin Kohnke of Stifel Europe.

The first question has already been answered that was around regulation. So thanks for your view on that one. Second one, really on basically what you call the doorman and the initiatives you've been -- you're taking there. I mean, obviously, it's going to be very, very difficult for you to turn down clients as they want to become new flatex or DEGIRO customers. So I guess asking that in a different way, do you consider -- do you evaluate changes to your pricing structure to basically implement that doorman and maybe even earlier than you had previously envisaged? And could that be, I don't know, not a big opportunity for you there?

Thanks for your question, Ben. I think it's important to distinguish between the doorman and the free entrants. With doorman, I didn't mean the pricing. The pricing is for me the free entrance to the club. This is something that has been in place with us for 50 years. We have a pricing in place. Clients have to pay per trade. And if you have EUR 500 to go the whole day long and short, so in and out, into GameStop. And for each trade, you pay EUR 5.90, you must probably make yourself up the question, how often should I do this? And how much return can I do? Because every trade would cost me like 1.5%, right? So the trade per se becomes more or becomes less attractive for clients by having pricing in the business model. What I meant with doorman is that I was super surprised that certain brokers continue to run the type of trading knowing that this will end in massive volumes on one side. And this is something where we most probably would have reacted much faster. As I said, we did it even to the extent where we were involved, like taking down GameStop, Nokia, BlackBerry, et cetera, has collaterals for margin loans. So to avoid having people that are having whatever EUR 50,000 in GameStop to take whatever another EUR 20,000 in a margin loan to do even leverage trading on GameStop. And these things were -- it seems like were not implemented by peers and competitors in a timely manner. I mean one of these players had the issues on day 1 of GameStop going crazy. It was the third day, I think, that the GameStop was traded in and out, where 1 or 2x the market cap per day went over the counters. So this is what I meant with doorman to have a closer look on your machines, a closer look on to your processes. And this brings me back to what I said in the beginning that unfortunately, online brokerage is here and there, getting viewed as an e-commerce business, which it is not, absolutely not. It's one of the most regulated industries. And I think it's not a surprise that none of the large, big players had these issues, but rather the smaller 0 fee brokers. So maybe it's not only a question of pricing, it's only maybe a question of intelligence about what's going on there and not only building fancy or nice platforms that attract people to do and to follow trading habits and structures that could endanger the whole business.

Right. Sorry for making up free entrants and doorman there. But in terms of your entrance fee, you're not sort of evaluating. I mean I know you're evaluating it all the time, but you're not considering faster moves on raising your entrance fee?

Yes. Not at this moment. You're totally right. We always said with respect to DEGIRO acquisition that it is and it could be a supporting factor, but we also said we are going now, first and foremost, for growth all over Europe. And we'll take the chance at a later stage to rethink and to analyze whether the equilibrium between growth and price is the best one that we are having in place or whether it might make sense to shift this point to the right or to the left.

The next question we received is from Marius Fuhrberg of Warburg Research.

Actually one question with regards to your guidance. I mean you raised your guidance to quote implicit numbers with the actual amount of customers for the Europe and 2 million or 1.9 million in the midpoint. In this context, looking at your Vision 2025, it appears -- or the vision appears quite, I would say, conservative. And what did you -- don't you think it is was time to overthink Vision 2025 as well? Or do you wait until you have more sight on how the customers develop over the next 1 or 2 years?

Yes, indeed. I mean first, we communicated the Vision 2025 last summer, I think on the circumstances, where none of us has foreseen the accelerated growth, first. Second, it was I think closely -- or shortly before we closed even with DEGIRO. So a lot of things have changed since then. This is what I would like to say. But it is the vision of the company. I think this is the more important point than the point that it is Vision 2025. Vision is, for me, more important than timing. And you can imagine, not only as a manager of this franchise and company but also as a large shareholder. Frank and I will be the most happy person and people if we can achieve our vision much faster than 2025. So however, we say, this was the first one. Let's see how time progresses. Let's see how things progress. Let's see whether -- what we truly believe, whether the customer growth is sustainable also over the next months. I'm very -- I'm feeling very confident, but I don't have the facts yet. And as soon as we believe that the journey is going to be an accelerated journey, we will definitely, sooner or later, maybe we'll keep the vision, not maybe, we will keep the vision, but maybe we will have to adjust the time line.

Okay. Understood. Maybe one follow-up on my -- on the guidance of new customers for 2021. Could you provide a split between flatex and DEGIRO? So where do you aim for most of your new customers?

I think also something here that we were in the -- we have communicated it very clearly. We will not provide any split between the 2 brands. Together, as the pan-European leading online brokerage business, we will have by the end of the year, if everything goes right, between 1.8 million and 2 million clients. And again, we are following an absolute growth strategy, and we are taking care of achieving the best and highest value per client while spending the lowest and most efficient client acquisition costs. And whether it's in the end a Dutch client, a French client, an Italian client, a Spanish client, a Portuguese client, an Irish client or Nordics client or German client or an Austrian client, I absolutely do not care.

And the next question we received is from [ Alex Nieberding ].

Yes. Can you hear me?

Yes.

Okay. Good. I have a question about your custody fees. You recently imposed a 10 basis point custody fee. Are you tracking transfers of securities out of existing accounts to see how your customer base is reacting to that?

So first, we didn't implement the custody fee recently. We did it more than a year ago, and it was in early 2020 -- no pardon me, it was in early 2019. So there's no reason to see today any assets that are going out. We are growing strongly in AUCs and assets under custody. We are growing massively in clients as we have communicated. In 2020, we won 550,000 gross clients. In the first month of 2021, we won 130,000-plus clients, which is for me the evidence for the point that people do not change their habit because of 10 basis points of custody fee. And knowing that the average custody amount of our clients is EUR 25,000. We're talking about EUR 25 per year, which is EUR 2 per month. So with only one single trade that you would do per month, you would amortize all prices that you would have paid with our incumbent competitors.

Okay. So that makes sense. That's consistent with your customer segmenting then. I wasn't aware that the average deposits and custody was EUR 25,000. That answers the question.