Plus500 Ltd. (PLUS) Earnings Call Transcript & Summary

Good morning, everyone, and thank you for attending our full year results presentation. I'm Asaf Elimelech, Plus500 CEO. And I'm here with Elad Even-Chen, our CFO. For those who have dialed in, this is a listen-only webcast, and you will hear the Q&A from the analysts in the room. As usual, we will take the Q&A at the end of the presentation. So please hold your questions until then. Let's start with the financial highlights on Page 2. We are pleased with our performance in the year, especially in such a period of change for the entire CFD industry. As we said at the time of our half year results, financial markets from February to April were very stable, but our continued investment in initiatives to retain and attract customers, together with the return of more normal trading conditions in the markets, has resulted in a much improved second half performance. This resulted in strong metrics in the second half compared to the first half, with a robust EBITDA margin as costs remained well under control, reflecting our low fixed cost base and large proportion of variable costs. As you can see from the slides, post ESMA, we are confident that we are -- we have seen stabilization of client trading patterns through the year. Turning to Slide 3. As you know, we have updated our shareholder return policy during 2019 to maximize the impact of our commitment to distribute at least 60% of net profit to shareholders, which will take place through a combination of dividends and share buybacks. At least half of the core 60% will be distributed by way of cash dividends. We are pleased with our ability to continue providing strong returns to our shareholders, and today we have recommended distribution that represent 100% of 2019 net profits. This includes the final dividend announced today of $40.8 million, the interim dividend already paid, the 2019 share buyback program of $50 million executed and a future -- further buyback program of $30 million announced today. As we have explained in the interim results in August 2019, our business model remains highly cash generative. And this policy allows us a greater flexibility to maximize shareholder value by utilizing capital in the most efficient way given the opportunities we are presented it -- with. I will now hand over to Elad to run through the detailed performance slides.

Good morning, everyone. I will now run through the operating highlights. You can see here that we've had a busy year despite the impact of ESMA. We saw an average of approximately 3 million transactions executed per month in 2019, along with an increase in average deposit per active customer of 19%. We think this is evidence of the strong trust and increased appetite to trade with us. We remain a market leader in our industry, retaining our market-leading positions in the U.K., Germany, Spain and Australia and other geographies as well. After period end, we were granted a license in the Seychelles, which will allow us to further expand our global reach. Notably, we've seen a good improvement in customer metrics for the second half with ARPU increasing by 39% versus the first half of 2019. While ARPU has partly benefited from the better trading condition in the second half, we believe the improvement in these metrics also reflect our continued focus on technology and innovation through the entire customer journey, as demonstrated by the recent upgrade of the web app platform along with our increasingly popular mobile and tablet offering, which saw 75% of trades in 2019. I'm also happy to confirm that positive momentum has been sustained in 2020, reflecting both good volatility in financial markets and efforts we have made to improve our trading platform and product offering over the past year. We'll have more on that later. Moving to Slide #6 as we begin to look through the details of our performance in 2019. The main point here is that the second half saw a strong performance across the board, with an increase in ARPU across all regions as we saw the benefits of targeting higher-value customers coming through together with the improved trading conditions. We are particularly pleased to see ARPU grow by 39% from the first half levels, especially in the U.K. and Europe, which bring confidence that the industry has stabilized following the implementation of ESMA intervention measures. Revenues from outside of the EEA continues to increase, representing 46% of the group revenues in the second half, which reflects well on our strategy to grow our presence in other geographies/regions. The second half performance has translated into our customer KPIs, as you could see on Slide #7, with a strong set of active and new customer numbers given the context that we are comparing with exceptional market conditions in 2018. While we did see a small reduction in new customers during the second half of 2019, we maintain a strong level of active customers. These solid KPIs also reflect the successful measures to reduce our churn rate, including the continuous efforts to improve the processes from customer onboarding to account funding. As our focus on recruiting higher-value customers continues, we can expect new customers to deliver stable and attractive average lifetime value, albeit accompanied by a slowly rising AUAC as a higher-value customer costs more to acquire. Slide #8 breaks down the cost base, showing how our lean and flexible cost base continues to allow us to maximize returns, as evidenced by our strong second half of '19 EBITDA margin of over 60%. As we've discussed before, less than 30% of our cost base can be defined as fixed, meaning we can adjust costs rapidly to respond to movements in the top line revenue and maintain a lean cost structure to always be aligned with our shareholders. As you know, marketing spend remained the single largest item of expenditure and one we continue to focus on as we recruit higher-value customer. The ability to flex our targeted marketing spend to respond rapidly to market conditions remains a significant driver of our attractive EBITDA margins. While marketing spend is discretionary, we see it as an investment in the future, assessing its level and returns in the same way as we would for any other investments. Processing costs are directly linked to the overall level of activity and our ongoing optimization measures, which fell year-on-year. That neatly brings me to the fact that our human capital is a key component to our high levels of productivity, ensuring that we remain a highly efficient business, and therefore maintain high levels of average revenue per employee.

Turning to Slide 9. This slide shows us our revenue split by customer tenure and demonstrate the success of initiatives to increase our numbers of long-term loyal customers. Indeed, the majority of Plus500 revenues continue to come from loyal customers who have strong trust in our platform. As you can see from the pie chart on the far right, in 2019, no less than 73% of the group's revenues came from customers who have traded with us for more than one year, reflecting the success of our ongoing customer retention initiatives and efforts to consistently enhance the overall customer experience. On the longer-term basis, you can also see the increasing value of our customers who have traded with us for more than 3 years, the gray and the dark blue segments, with the -- this combined segment growing from 15% in the financial year of 2016 to 27% in the financial year of 2019, which you can see on the right side of the slide. Equally of note, 11% of customers in 2019 have traded with the group for more than 5 years, a significant increase from just 2% in 2016. As a much younger business than our peers, we are pleased with the good progress with these matrixes says that we are presenting now. Slide 10 shows the distribution of our marketing spend per year and by channel. We continue to believe that the efficient marketing is an investment, not just a cost. We assess its effectiveness with a centralized, data-driven and dynamic approach, assisted by our advanced proprietary and marketing capabilities. As you can see, the majority of our investments remain in line, where our self-developed systems makes us an industry leader through the -- through our ability to effectively monitor return on investments on a real-time basis. In addition to our various online channels, our main off-line effort is successful partnership as the official main sponsor of Club Atlético de Madrid and the Plus500 Brumbies, which both continue to raise our brand awareness worldwide. On the next slide, I will continue -- we continue to see the results of our marketing spend with our track record of significant return on marketing investment continuing in line with the increase in average customer lifetime value. It should be noted that the return figures are as of 31st of December 2019, and we continue to increase our ROI. As you can see in this slide, we have realized approximately 290% return to date on our 2016 registrations and approximately 420% on our 2017.

Slide 12 is a quick reminder of our approach to customer execution. I think most of you are familiar with our core message that in common with our peers, we act as principal on customer trades. Plus500 is symmetrically exposed to clients' trading directions. As we've explained before, the model is, at its core, designed to facilitate client trading decisions, generating revenues by collecting dealing spreads and overnight funding charges. We internalize customer positions, offsetting long and shorts, with the ultimate resulting exposure being controlled with preset symmetrical risk limits. This is common practice in the industry. But it is the ability for our highly effective systems to mitigate downside risk that sets us apart from our peers. This means that while in the short term we can be exposed to volatility in customer trading performance, such as in the first quarter of 2019, over the long term it is expected to be broadly neutral. Customer income accounted for approximately 99% of revenues over the past 6 years. In short, 85% of trading days in 2019 generated positive net revenue. Perhaps most importantly, our exposure on the remaining 15% of days, where market movements were characterized by black swan events, was limited. As we did at the interims, we have provided the detail on our average daily result, which you can find in the appendix of these slides. On Slide 13, we analyzed the movements in customer churn rates, which have seen steady improvements over the last 3 years, finishing the second half of 2018 -- '19 at 31%. Remember that our churn figure includes customers who still remain on the platform but have not traded in the reported period. Aside from the positive impact of reduced leverage, the reduction in churn is the result of our ongoing technology-driven retention initiatives. From continued product innovation to the flagging of tradable events to our customers, our focus remains on best-in-class user experience and customer service. And this improved user experience and customer service come from some significant operational progress we made during the year. Slide 14 shows you some of the operational progress and new developments on the platform this year, including being the first major CFD provider to incorporate WhatsApp into our customer service offering. This is already overtaking email as a channel of choice, contributing to an overall improved user experience. You'll also recall that a new analysis package was added to our WebTrader, iOS and Android platforms during the year. In the period, we also added over 100 new instruments to the platform, many of which are unique to Plus500 and driven by news flow to customer demand. The introduction of new instruments feeds into our marketing efforts and is also a key driver in customer acquisition and retention. We are pleased with the proven ability for our algorithm to continually optimize our marketing spend, which will prove particularly important in our ongoing shift to target and successfully onboard higher-value customers.

Turning to the brand awareness on Slide 16. This is to remind you that we remain the top CFD provider in the U.K., Spain and Germany, as well as being Australia's best CFD platform, as rated by the well-followed Investment Trends, which is considered one of the key research providers to foreign exchange and CFD brokers globally. Our online chat functionality has already been recognized in the U.K. as the #1 platform based on customer satisfaction with lower response time an important tool for customer retention. On the next slide, and a quick reminder to the global growth opportunities available to us outside of these core markets is on Slide 17. These, I must say, haven't changed and include: firstly, leveraging our strong international brand and improving the brand awareness globally through the marketing activities that we are having; secondly, product extension enabled by further development by our technology platform; and finally, enhancing customer acquisition rates and improving retention levels. Strategically, there are still additional global markets where we are either not present or have very small, limited share of market with great potential. We have the technology capability and the platform and the HR to enable us to expand our product offering, extend our customer life cycle or deliver additional revenue streams. Inorganic expansion remain a potential route for growth. However, such opportunities will be carefully assessed to ensure they add value, offset against our priority to return capital to our shareholders. Despite all of this, we see great potential in continuing to do what we do best and what we already do. We are clearly improving our engagement and retention rates, and this will provide core growth going forward. Moving to the regulatory section on Slide 19. It's just a reminder of the breadth of our regulatory framework, which enable us to operate in success -- operate successfully in a number of key global markets. We are overseen by some of the world's most demanding regulators, and protecting and enhancing our framework remains a key aim of the business. On the next slide, #20, we lay out some of the recent or upcoming developments of the regulatory environment. I know there is a lot of interest about what's happening in Australia, where the Australian regulator, ASIC, issued a consultation paper last year setting how they'll propose restrictions on the sale and marketing of CFDs to retail customers, which we expect to come into force during 2020. We anticipate a similar impact to the industry, as seen in Europe, and expect similarly rapid adjustment to the changes when they are brought in. As a reminder, Australia is an important contributor overall to Plus500, so we are focusing on how to mitigate any impact there. And of course, the U.K. left the EU in January 2020. We believe we are well prepared for the various scenarios here following the transition period, which are supposed -- supported through our separate -- our EU license in Cyprus. In summary, we believe that our flexible business model, optimized cost base and technological capabilities are key competitive advantage for us, giving us the confidence that Plus500 has the ability to adjust rapidly to the potential changes in Australia, as it has done in the past, so that the impact is not a constraint to our long-term growth ambitions.

Moving on to our financial in more detail on Slide 23 -- 2. You can see from our income statement that our efficient cost structure has allowed us to maintain attractive EBITDA margins, 54% in 12 months and 61% in the second half of 2019. Costs remain flexible and well controlled. Financing expenses fell as a significant proportion of the company's cash is held in U.S. dollars, which helps to reduce the impact of currency movements. The group tax rate for 2019 has reduced due to the level of group profits and translation from local currency into U.S. dollars, which resulted in an increased level of profits taxed in lower tax rate jurisdictions. In terms of balance sheet on Slide 23, we remain a debt-free business with a strong balance sheet, which has enabled us to withstand the period of recent change, continue to invest in the business for future growth and to continue to maintain our attractive shareholders' return. We believe retaining a strong balance sheet is a competitive strength and of real benefit to shareholders. As always, client funds are held in dedicated and segregated accounts with highly reputable banks, in line with industry best practice. Customer deposit at the end of the period were up by 52% to around $163 million, which is a good measure of potential customer activity as trading opportunities present themselves. On Slide 24, you will see that Plus500 remains a low-capital-intensity, high-cash-generative business. All internal investment spend is expensed and profit is converted rapidly to cash. During the period, we delivered a high operating cash conversion of 88%.

So turning to the final section of the presentation. I will review now the summary and the outlook sections, starting with Slide 26. As you know, Plus500 is, at its core, a technology business. We have a competitive advantage in the market, thanks to our highly skilled teams who drives our innovation and R&D, with an understanding that our customer needs and preferences and the ability to upgrade our functionality to retain and appeal to more sophisticated traders. During 2019, we continued to focus on the recruitment and retention of highly skilled employees. We believe our human capital resource is our most valuable asset and a key element to our technology leadership, which drives so much of the success of the business. So why is technology so important to us? Slide 27 highlights our sustained leadership in innovation and R&D is a key driver for growth, a key driver for our flexible cost base and a key driver for customer retention. Technology, at the heart of this is our propriety platform solution, is what allowed rapid development and enhancement to our overall offering. So we will keep on investing in both technology and our engineering talent pool. We serve to reduce response times and prevent costly manual interventions to improve functionality and customer service as well as to enhance the end-to-end trading and user experience, as we have done in 2019 through the successful introduction of new onboarding platform and product features, which were all well received and widely adopted as the year progressed. On the next slide, our innovation and technological advantage also form a key part of our marketing activities. As our focus stays on analytical and data-oriented marketing initiatives, on a high level, our marketing efforts include various online and offline channels, supported by our in-house self-developed systems. As you can see in Slide 2019 (sic) [ Slide 29 ], we provide a couple of examples of the utilization of our marketing capabilities to provide creative deliverables which emphasize the Plus500 brand strengths and allow us to react fast to market events and interest of customers in order to create better customer engagement from acquisition to retention. So in conclusion, on Slide 30, the outlook remain a positive one. We are encouraged by the momentum we saw in the second half, and this has carried over into 2020 with customer trading patterns adjusting following the ESMA measures. Our customer retention metrics are improving along with the length of our customers' tenures. We remain well prepared for any regulatory changes with our flexible business model, technological advantage and optimized cost base, allowing us to adjust rapidly to any future regulation. And while it remains early in the year and our performance will also depend on financial markets and news, we remain confident in our prospects and that we will continue to deliver strong financial and operational results. Now before we take questions from the room, we thought we would give you kind of a first look of some of our new creative marketing content. I must say those are still in a -- not finalizing and production stage. So enjoy. [Presentation]