IG Group braced for 17% revenue drop in FY19

Spread betting and contracts for difference (CFD) provider IG Group Holdings has forecast a 17% year-on-year decline in revenue for the 2019 financial year, primarily due to a drop in over-the-counter revenue (OTC) in the European Union.

In a pre-close trading update, IG Group said that revenue for the 12 months to May 31, 2019 is likely to amount to £475m (€538.3m/$599.6m), compared to £569m in the previous year.

IG Group said that this projected decline is manly due to a 26% dip in OTC leveraged revenue in the ESMA region, with OTC leveraged revenue for the rest of the world up by 2%. 

The provider noted both of these figures are underlying changes, adjusting for clients that previously contracted with a UK entity and are now trading with an entity outside the ESMA region.

Operating costs for the year are expected to drop slightly from £290m in FY18 to £285m in 2019, including variable remuneration of around £28 million, down from £36m last year.

However, IG Group has forecast that operating profit for the full year is likely to come in at £190m, some way short of the £281m in the previous year.

IG Group is seeking to improve this performance, with CEO June Felix setting out a number of key strategic choices for the business, including four growth levers that will be deployed to drive growth.

The four levers are based around expanded distribution channels; operating as a global business with more local focus; looking at segmented target markets; and developing multi-product offerings.

For the purposes of developing and presenting its strategy, IG Group has opted to split its existing businesses into two groups: core markets and significant opportunities. This has been applied to segments previously reported, but with Asia-Pacific split into Australia, Singapore, Japan, and other Asia.

“The actions that we have taken over the last two years have resulted in the company successfully navigating the introduction of the ESMA measures,” Felix said.

“IG has experienced significant change and will continue to do so in the future driven by regulation, shifting patterns of wealth, and the continued evolution of financial markets around the world.

“I believe that IG has the capability to adapt and thrive in these evolving markets and I am excited by the opportunities we have identified and confident that the company will return to growth after FY19.”

In terms of deploying these levers, planned activity includes expanding into new products in the European Union; leveraging the combination of Nadex, the RFED and Daily FX in the US; focusing on product localisation and marketing in Japan; and developing partnerships to access these markets in other Asian markets.

IG Group has also cited a potential opportunity to participate in the leveraged securities market for retail clients in Hong Kong. The provider will establish a local business development team to pursue partnerships and assess this new opportunity.

Should these plans go as hoped, IG Group expects additional revenue of £60m.

Meanwhile, CFO Paul Mainwaring has set out a number of medium-term financial targets from the implementation of its new strategic plan.

Core market revenue is forecast to grow at a rate of 3-5% per annum over the medium term, with significant opportunities set to boost revenue by £100m to around £160 million by FY22.

Assuming these targets are achieved, revenue for FY22 will be some 30% higher than in FY19.

However, the provider has noted that operating expenses, excluding variable remuneration, are likely to increase by £30m in FY20, primarily as a result of additional investment in prospect acquisition to promote the IG brand, to grow the size and quality of the client base, and establish the new businesses in the EU and the USA. 

In the years following this, operating expenses, excluding variable remuneration, are likely to increase at a lower rate than revenue.