flatexDEGIRO SE (FTK) Earnings Call Transcript

Hello and welcome to the flatexDEGIRO Preliminary Results 2023 Analyst Call. My name is Laura and I will be your coordinator for today's event. Please note, this call is being recorded. [Operator Instructions] Today, we have Frank Niehage, CEO; and Dr. Benon Janos, CFO as our presenters. I will now hand you over to your host Frank Niehage to begin today's conference. Thank you.

Yes, good morning, everyone. A warm welcome here from Frankfurt. Together with me is my colleague, Dr. Benon Janos, our CFO; Achim Schreck, our Head of IR; and Dr. Thomas Lindner, our Head of Finance. I'm Frank Niehage and I'm happy to present and start with the commercial highlights out of last year, before I then hand over to Benon to shift gears and give you a bit more details and color on the financial results. Needless to say that last year was a challenging year, not only for us, but for the whole industry given the geopolitical situation both in Europe as well as in the Middle East. Further, interest hikes and high inflation caused irritation and challenges to the whole industry and obviously our clients. However, in such a challenging environment, we were happy to show further commercial growth leading to the second best financial result in our history of the firm, which we are a bit proud of to share with you today. As I said, Benon will later give you a bit more details on that. However, it was not only a strong year in '23, we even kicked off a very strong start in the first 2 months of this year, showing over 10 million trades in the first 2 months and seeing over 80,000 new clients coming onto our platform with over EUR 1 billion fresh money gives us a good level of comfort. And hopefully, we will show the best record numbers this year. Coming back to our regulatory aspects. We are very proud that we did hard work together with BaFin and our special auditor and managed to finish almost 70% of the relevant issues. And very positive I like to highlight that we have a general understanding both with the regulator as well as with Mazars that the key findings, the most serious ones will hopefully be resolved in summer this year and even better, if that is the case, then there will be no need for a further after audit. So this is very good news and thanks to all our employees who helped to get that done. And thank you very much again to the very helpful support both of the regulator as well as our special auditor Mazars who helped us to get the homework done. So all in all, it's a wonderful basis. So after our figures which are today only preliminary are fully audited, we can show you CET1 ratio exceeding 30%. And obviously, that will allow us then to continue with the announced capital allocation strategy, which we published end of last year, asking the Annual General Meeting this year to come up with 2 things, a minimum dividend and a share buyback program of 10% of our capital over the next years. So all in all, a positive outlook and we are happy to continue like that. Let me move over to the commercial growth in a bit more detail. And if we look back from '20 over '21, '22 into '23, we show the continuous growth in new clients which proves to us that the platforms both DEGIRO and flatex are very attractive. And if we combine it to the peers, we are proud to show over 2x growth in client growth and obviously that's not normal. We managed that client growth, although we reduced marketing spend. And to highlight again in '22, we spent almost EUR 50 million on marketing. We managed them well to reduce it down to EUR 34 million in last year and we will continue slowly to reduce it hopefully to EUR 30 million this year and we will continue to manage our cost in general very, very carefully. Further to commercial growth, I'd like to highlight that we saw over EUR 4.5 billion fresh money coming in last year and that although we don't pay interest. And that proves again both the client growth as well as the fresh money coming in that clients come to us because they want to invest and they don't want to save. We are not the saving platform. We are the investment platform. And even better, over 91% of the fresh money was then directly invested, again, proving that we are finding the right clients and we are thankful to our clients that they use the platform for investing. That then even led to the fact that the client increased their wealth with us highlighting a number below EUR 40 billion back in '22 and over EUR 51 billion, almost EUR 52 billion in '23 and the trend is further positive. And that's good that our clients are growing their wealth with us and that proves that investment does make sense in capital markets in these times. As I mentioned earlier, we had a challenging '23 industry-wide. So there's no surprise that the trades per client per annum were lower than the years before. And if we compare us again with our listed peers, I would say we are in the mid with an average of around 22 trades per client per annum. And obviously, that led to a reduction in trades when they were in '22, EUR 67 million, we only booked EUR 57 million, so EUR 10 million less than '23. However, our strategy to monetize our income per transaction is still on and we managed to increase average commission per trade from EUR 4.06 in '22 to EUR 4.13 in '23 and we will continue to improve it this year. Due to our balanced and mitigated business model and running a full-fledged banking setup, we were able to improve our interest income from EUR 71.5 million in '22 to EUR 136.3 million in '23. So proving that a lot and compensating the less trading activities. So especially in these times, it's helpful to run a business model like that. Let me move over to how clients perceive us and how about awards. I don't know whether it's a coincidence, but last year, we could present 7 awards in the German-speaking countries and at the same time, we got 7 awards in the international countries. So very respectful awards showing that the clients are happy with the platform. That doesn't mean that we can't improve and do better. We are constantly working on that and want to improve quality. But we also like to think at this point in time all the clients who trust us and who participated in those awards and thank you all for that. Moving over now to more details allows me to thank you all and to hand over to my colleague, the CFO, Dr. Benon Janos. Benon, the floor is yours. Thank you.

Thank you very much, Frank, and good morning, everybody from my side as well. As Frank mentioned, 2023 has been the second best year of our history and I have a pleasure of now providing some more detailed financials as well as giving you our outlook for 2024. We did see some remarkable developments in the past year. For the first time in many years, interest levels continued to rise sharply. Most indices, however, climbed up the wall of worry. For most investors, 2023 marked a much-needed comeback when it comes to both stock and bond market performance after a brutal 2022. BigTech and the artificial intelligence bandwagon in particular was largely fueling the S&P 500 positive performance in 2023. Yet retail investor activity declined in the last year compared to 2022, which can be mostly attributed to 2 factors, low volatility and high interest rates. Firstly, general volatility in the stock market declined throughout the year. Using the CBOE volatility index, VIX as a yardstick, the year started around a vol level of 20 and declined throughout the year to about 15. Secondly, let's take a quick look at one of the most important financial ratios, the price/earnings ratio. General overnight bank deposits, or overnight federal debt to use other words, of the Eurozone trades at 4% to 4.5%. That relates to an inverse P/E ratio of 22 to 25x. For the U.S. markets, U.S. deposit/debt traded P/E ratio of 18% to 19%. While tech firms were in an isolated manner easily able to clear that hurdle, it was much harder for the broader stock market to rise. Our adjusted revenues in 2023 grew 6% to EUR 391 million. For the fourth quarter stand-alone, we were able to show a revenue growth of 14% year-on-year, up to EUR 100 million. There were no adjustments in the revenue number 2023. However, in 2022, adjustments of EUR 34 million were non-operationally added to the revenue line from releasing provisions for the long-term incentive plan. I will come back to the point of adjustments later in the presentation. Commission income declined by 14% in 2023 to EUR 235 million. However, we were able to grow commissions in the fourth quarter of 2023 by 5% to EUR 55 million compared to Q4 of 2022. As mentioned in my introductory statement, the full year decline was driven by lower trading activity of retail investors, which was 25% below last year's level. That also means that a good 10 percentage point of the decline we've been able to compensate for by growing our customer base and improving the average commission per trade. The remaining reduction in commission income was overcompensated by interest income, which grew 91% to EUR 136 million year-on-year and 77% to EUR 55 million in the fourth quarter of '23 compared to the fourth quarter of '22. As in the past, flatexDEGIRO has maintained its strategy to not pay interest on cash deposits. The fact that we've been able to attract over EUR 10 billion of net cash inflows onto our platform over the last 3 years, despite rising interest levels, shows our strength as an execution-only online broker with a focus on trading active clients. Let us take a look at the earnings before interest, taxes, depreciation and amortization EBITDA. EBITDA declined 23% year-on-year to EUR 140 million. The respective comparison for the fourth quarter shows a decline of 8%, which is largely due to the release of provision for the long-term incentive plan in 2022 that I already mentioned. If we adjust for the long-term incentive plan, adjusted EBITDA grew 7% to EUR 154 million for the full year and was up 27% in the fourth quarter of 2023 compared to the fourth quarter of 2022. All those EBITDA numbers fully include noncash markdowns in real estate investment that I have given more details on in the Q3 2023 earnings call. They also include special effects such as generous onetime salary hikes due to general inflation pressures over the past 3 years and fines paid to the regulator as well as the Italian competition authority AGCM, which, as you know, we are challenging in court. Let me give you an update on the real estate investment. For the full year, the noncash markdowns of those investments totaled EUR 11 million, the vast majority of which were taken during the third quarter. There were only marginal changes in Q4 of 2023. Provided that the general interest rate level does not rise unexpectedly, we do not expect any meaningful effects in 2024 either. We were able to beat our 2023 adjusted revenue guidance of EUR 38 million by generating EUR 39 million in revenue. We were able to grow both, our adjusted EBITDA and adjusted EBT margin slightly year-on-year and we were effectively on target compared to the guidance issued early 2023. Technically, we were 50 basis points shy of 40% on the adjusted EBITDA line. Without the aforementioned noncash real estate markdowns, the fines and inflation compensation, the respective margins would have been several percentage points higher. For the past year, we have shown the IFRS segments FIN and TECH in our annual statement. When we release the annual report, you will find a new segment reporting, which we are introducing to further enhance transparency. The FIN and TECH segments effectively reflected the B2C and B2B business that the group has focused on historically. As we have shifted and evolved our business model to an online broker, we are replacing the old segments with the new segments, flatex and DEGIRO. One important note, though, while the names suggest that these segments represent precisely the brands flatex and DEGIRO, this can only be a rough approximation. The segment flatex includes, for example, flatex and ViTrade operations, all credit and treasury operations that do not fall explicitly under the DEGIRO brand and outsourcing solutions. IT services are allocated to the segments based on revenues. In any case, the new segments more properly reflect the way we run and manage our business and enable you to get a better and clearer view on our core business. The first transparency initiative was, by the way, at the beginning of 2023 when we introduced monthly KPI figures. The new segments now represent a second step. A third and fourth measure will now be introduced in a moment when we move to the outlook for 2024. We are aiming for the best year in our financial history in 2024. What now follows is a brief comment on adjusted earnings. In this presentation of the 2023 financial results, I have used the word adjusted or adjustments 11 times so far. Adjustments add complexity to financial statements that we would like to avoid in the future where it is possible. As more than 50% of the long-term incentive plan is executed, we will absorb those costs going forward as normal operating personal costs. We expect the future annual impact on the profit and loss statement to be smaller than in the past. We will continue to show the details on adjustments on a like-for-like basis to allow for comparison of '24 to '23. The adjustments will, however, be deemphasized to allow for simpler and more transparent headline key figures. So no adjustments is the third transparency improvement. The fourth one is on the financial KPIs we focused on. We have used the EBITDA metric over the past years. Historically, the metric comes from a period some 10 years back when flatexDEGIRO's earnings power was substantially lower. The group had no integrated IT department and no banking license. It was simply a different company back then and the metric has served well. Below EBITDA comes depreciation. Depreciation is a relevant line item for us being a highly vertically integrated company. We are happy to have this high level of internalization and happy to invest. It gives us freedom and allows us to act quickly. The regulatory reapplication of credit mitigation techniques to automation within 10 months would not have been possible without full control of our IT. We also know that we would currently end up paying more for outside IT than in-house IT development. Naturally, the growth of the past also increased the depreciation line, mainly due to the DEGIRO acquisition. We will now move forward and deemphasize EBITDA in favor of net income accompanied as needed by financial metrics below the EBITDA line, such as operating income, pretax income or earnings per share. We, therefore, also provide our outlook for 2024 with a clear focus on top and bottom line as follows. We aim for revenue growth of 5% to 15%, i.e., a revenue range of EUR 410 million to approximately EUR 450 million for full year 2024. The goal is also for net income to grow between 25% and 50% for a range of EUR 90 million, close to EUR 110 million. This is our top line and bottom line outlook for 2024. So to repeat, the net income line includes all costs and depreciation, effects from all long-term incentive plans, any markups or markdowns from investment activities and no adjustments of any sort are made in the guidance numbers we are presenting. In the planning for 2024, we are also not relying on any tailwinds from the market. While trading activity at the start of the year has been okay so far, as one would expect in this seasonally good first quarter, it's way too early to project a sustainable uptick in the trading activity of retail investors already. It might happen once interest rates come down, but as we said, it might. We do not want to get ahead of ourselves, so we currently plan with a similar retail trading activity in 2024 compared to 2023. With regards to such potentially lower interest rates, that would of course also have a countering effect on our interest income, which we are mindful of. We plan in general with very similar average weighted interest levels in 2024 compared to 2023. While 2023 started low and ended high, we expect the reverse for 2024. Please feel free to reach out to Achim in Investor Relations if you would like to discuss some of your assumptions. But as Frank already indicated, yes, January and also February has been favorably and above our assumptions. However, the year is long and there is another 10 months to go. Nevertheless, we are confident that we can continue to grow our customer base and grow in general our brokerage franchise. I would now like to hand back to Frank for a quick update on the successful resolution of BaFin findings.

Yes. As I mentioned earlier, we already managed to free up our regulatory capital last year with improving the credit risk mitigations. We are further focusing on the most severe and relevant F4 findings, which as I said earlier, are scheduled to be resolved in summer. We agreed with both BaFin and the special auditor for Mazars that once that has been resolved, no after audit is necessary. And again, that's a very good result, so that's our focus. And the rest of the other findings are by 70% resolved. So all in all, this is quite positive. May I allow myself one more comment? As we already said, we started strong in January and February, but we like to stay under promise and over delivery in general as we all don't know how fast the geopolitical situation both in Middle East and in Europe might be resolved and we all keep crossed fingers and pray for this. We obviously believe there is going to be a decrease in interest rates this year, but we all don't know when this is going to happen. I would say rather in the second half of the year, but we don't know. And we see a decrease in inflation rate, which is positive, but we don't know whether it is going to stay low and how low it is going to stay. So this all in all leads us to the assumption rather stay focused and cautious and under promise and over deliver, and we hope that you understand that with respect to our guidance as well.

Just 2 quick final slides from my side. At the end of September when BaFin approved the reapplication of the credit risk mitigation techniques again, we provided you an update on our capital structure and requirements. Since then, thankfully, not much has changed, but the outlook has become clearer. We would like to quickly use this opportunity to confirm and reiterate that we are on track to expect the common equity Tier 1 ratio to rise well above 30% once the full year 2023 net income has been recognized in our regulatory capital base. This comfortable position allows us to follow through with our capital allocation strategy as announced in December. We intend to ask the next Annual General Meeting in June for the authorization to buy back up to 10% of our share capital. This authorization would be valid for technically 5 years. Initial size and timing of the share buyback program once approved by the Annual General Meeting and by the regulator as well will then depend on inorganic growth opportunities, market conditions and ultimately, of course, on our share price level. However, from today's perspective, there is a clear management view to make it a sizable element of the capital allocation, much more, of course, than the minimum dividend that we will additionally ask the general meeting to approve. I thank you for your attention, and we would now be happy to answer any questions you might have.

[Operator Instructions] We'll now take our first question from Andrew Lowe with Citi.

My first one is just on the assumptions behind the NII guide. It's helpful levels of detail. It seems to imply to me that you're looking for about EUR 135 million with your assumptions of flat rates and the balances that you've given. If you assume EUR 50 million of other income, then that implies EUR 260 million to EUR 300 million of commission income. So just checking those numbers, sort of broadly consistent with your thinking. And if you then take the commission income at the midpoint of that, say, EUR 280 million, then as per your guidance on the activities and customer numbers, that implies EUR 4.35 per trade versus EUR 4.14 in 2023. So is that sort of correct in your thinking and what gives you confidence that you can drive the increase in the commission per trade for next year? The second question is, do you think it's fair to assume that your cash balances are likely to be stickier than some of your other peers given you've got smaller average balances and heavier trading, which perhaps means that they've got a greater liquidity requirement?

Maybe I can start with a general comment on why we believe that we can still improve monetization per income per trade. We are working on product and services initiatives such as U.S. option trading, late and early U.S. trading at DEGIRO, securities lending and further services. And those hopefully will contribute in the second half of this year and are not yet reflected in the numbers. So that will definitely have a positive impact. But with respect to your details, I hand over to Benon, who will help you to understand how the figures work.

Andrew, a quick question first, or a quick answer to your second point. Do we think that the cash balances are stickier? We think they are stickier and we feel okay with them. We have never gone wild. We have never used an interest rate fee or an interest rate as a mechanism to attract new clients. So clients are used that they are not receiving any interest on their deposits and the number has been slowly but steadily going up. We think that the problem will also be smaller once the ECB starts to cut rates. So we feel quite okay with our strategy to basically hang on and focus on our trading element of the equation. On your first question on the precise mathematics. I think I would add that probably overall the interest line is a bit on the low side that you mentioned, the EUR 135 million, whereas the average commission per trade is maybe a bit on the high side. So there is a slightly different view or slightly adjusted view that we might have. But like always, it depends on so many things over the next 10 months. Ultimately, the total number of the clients' deposits in our bank are one of the leading factors and they are just extremely difficult to predict.

And we'll now move on to our next question from Panos Ellinas with Morgan Stanley.

So my question is around the average trades per customer guided for similar to 2023. Just wondering what's the basis there, what's the mix you're assuming in terms of markets? And how shall we think of the 12% customer growth and any potential dilution in the average trades per customer, given new customers take time to pick up versus reactivation of existing clients? So how shall we think about the mix? That's my first question. My second one is on the gross profit margin. It has been fluctuating a bit quarter-on-quarter. So I'm just wondering what's the sustainable level going forward? These are my 2 questions.

So first question on the transaction per customer. So when we look at the year, we make the first assumption that the average trade per customer will remain the same. And then, however, of course, we account for the average growth that will come in, in terms of new customers. So not a bad representation of our thinking is effectively taking the 22 and then adding a small factor that comes on top due to new clients. And you mentioned 12%. Whether it's 9% or 12% or 10%, that's, of course, a bit too much of a precision, but the general thinking is exactly the one that we're having. And on the gross profit margin, the gross profit margin is driven effectively by 3 elements. It's by the cost that trades have, so the high-cost trades. Then there are trades which are less expensive. That's 2 elements. And actually, there are also a few one-offs. So some of the markdowns that we have had in investments are also reflected in that line, not all of them, but some of them, which makes the line in general a tad more volatile than you would maybe take away when you look at our normal operating business. So the mix of commission to interest income is also a very important last point. The more interest you make, the smaller your cost of goods sold because that's typically a very high-margin business. And for this year, looking at the rate that we have seen in 2023 or slightly below is probably not a bad idea or not a bad assumption.

And we'll now move on to our next question from Mengxian with Deutsche Bank.

So several questions from my side as well. First one is on the customer deposit. So you are expecting for EUR 3 billion customer deposit on average for 2024 and this is much lower compared to your year-end balance. So what is -- I'm just trying to understand what is the reason for your conservatism on that? And if possible, can you tell us where the customer deposit stands by the end of February? And the second question is regarding to the monetization rate. If we look at the Q4 numbers, the commission income per trade declined to slightly above EUR 4 in this quarter. What was the reason for that? And what is your assumption for the commission per trade for next year? And the last question is, can you walk through with us again with the cost projection again? So how much increase do you expect for the personnel and marketing? You said in the last conference call it should be around EUR 35 million again. And what is the expectation for the other expenses?

Should I start with marketing?

Please.

Actually, we gave us a budget range between EUR 25 million and EUR 35 million for marketing of this year, aiming for EUR 30 million, which would lead to a reduction of EUR 4 million versus last year. And then with respect to the financial questions, I hand over to Benon.

Yes. With respect to customer deposits, your first question, yes, we are higher than what we have issued. That's indeed the case and we are certainly cautious here. We stand at the end of February around EUR 3.5 billion. That's something that we will communicate in our monthly statement. And we have had now 2 months with a meaningfully higher base than expected. However, during the period last year when interest rates or the period of the last 18 months when interest rates rose, we've seen a small fluctuation in the deposit base and we simply did not want to extrapolate too much going forward. So far, it looks very healthy and we have certain comfort that, that number is probably too low, but only 2 out of 10 months are done so far. So yes, you certainly can attribute that to conservative planning. With respect to the marketing projections, as Frank already elaborated, the range has been set a while ago. We did our financial planning and now that the activities in the first quarter have been spent and marketed and planned, there is, as Frank alluded to also, already a certain element of conservatism as we are likely to spend rather EUR 30 million than last year's number. And on the monetization, it's really hard to look at monthly numbers with respect to trades per customer or even quarterly numbers. Some of the invoices that we receive are annual invoices. And while you can split some of them down to monthly levels, it's hard to do for everything. So I think a real proper representation is to look at half year figures or annual figures. We intend to grow the monetization rate. We have seen price increases at the heel that were put into effect in the middle of last year. So on a full-year basis, this will have effect. But I would probably suggest to look at longer time frames and not smaller time frames when it comes to those numbers. We feel okay and we see no surprises in our business.

And regarding to the cost, what do you expect for personnel costs and fees for 2024 and the other operating expenses?

So we plan for these costs not to grow. We have had -- I would like to take a second to answer the question. We have had over the last 3 years a jump in revenues, of course, and jump in client base, a jump in revenues, but also a jump in costs. There are a few elements which are worthwhile highlighting. Number one is the fact that inflation, of course, kicks in and we tried to keep our employees happy and we were more generous maybe than the average bank by raising salary levels as a one-off adjustment to their salary base at the beginning of this year. In fact, we raised salaries by 8%. What we have also done is we added a lot of people due to the BaFin findings and regulatory positions. However, what's also quite clear, we want to finish the calendar year '24 with fewer people on board than we had at the beginning of the year. And that shot easily overcompensate for any small hikes that we will have in salary things. So we will be way more focused to manage our operating cost line this year compared to last year. Last year, we could not do that to the extent we wanted given the requirements that were put on us mainly by the regulator. As we are slowly shifting gears from talking too much about regulation and hopefully talking more again about commercial focus, that will also allow us to be a bit more disciplined on the cost side.