StoneX Group Inc. Q4 FY2023 Earnings Call

Good day, and thank you for joining us. Welcome to the StoneX Group Inc. Q4 Fiscal Year 2023 Earnings Call. All participants are currently in listen-only mode. After the presentations, there will be a question-and-answer session. Please note that today's conference is being recorded. I will now turn the call over to your speaker, Bill Dunaway, CFO. Please proceed.

Good morning. My name is Bill Dunaway. Welcome to our earnings conference call for our fourth quarter ended September 30, 2023. After the market closed yesterday, we issued a press release reporting our results for our fourth fiscal quarter of 2023. This release is available on our website at www.stonex.com as well as a slide presentation, which we'll refer to on this call and our discussions of our quarterly and year-to-date results. The presentation and an archive of the webcast will also be available on our website after the call's conclusion. Before getting underway, we're required to advise you, and all participants should note, that the following discussion should be taken in conjunction with the most recent financial statements and notes thereto as well as the Form 10-K to be filed with the SEC. This discussion may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 as amended and Section 21E of the Securities Exchange Act of 1934 as amended. These forward-looking statements involve known and unknown risks and uncertainties, which are detailed in our filings with the SEC. Although the company believes that its forward-looking statements are based upon reasonable assumptions regarding its business and future market conditions, there can be no assurances that the company's actual results will not differ materially from any results expressed or implied by the company's forward-looking statements. The company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Readers are cautioned that any forward-looking statements are not guarantees of future performance. With that, I'll now turn the call over to Sean O'Connor, the company's CEO.

Thanks, Bill. Good morning, everyone, and thank you for joining our fiscal 2023 fourth quarter earnings call. In the fourth quarter of fiscal 2023, we experienced a robust 33% growth in operational revenues despite generally decreasing volatility, although we did observe some significant fluctuations in the interest rate markets. The rapid and extensive interest rate hikes over the past 18 months have been unprecedented, leading to a broad repricing of risk and financial assets. While it appears that interest rates may be stabilizing, I believe we have yet to fully witness the impact of these historical changes, and there may be further disruptions and financial strain as a consequence. This was a strong fourth quarter and a truly remarkable year for our company overall, affirming our strategy and highlighting the earning potential of our franchise. For the fourth quarter, we reported operating revenues of $778 million, which is a 33% increase compared to last year. Net operating revenues increased by 4%, while compensation and other expenses rose by 3% compared to a year ago, leading to a pre-tax income of $75.4 million, up 14% relative to last year, which was also a strong quarter for us. Despite the rise in pre-tax income, a significantly higher effective tax rate of 32.8% compared to 21.2% in the same quarter of the previous year, resulted in a 3% drop in net income to $50.7 million, a diluted EPS of $2.36, and an ROE of 15%. For the full year, the tax rates were relatively similar at 26.2% for fiscal '23 versus 25.3% in the previous year. Turning now to listed derivatives operating revenues, which saw a 2% decline mainly due to a 3% decrease in volume compared to a year ago. While volumes in our Commercial segment increased by 21%, the higher volume business on the Institutional side saw a 9% decline, contributing to the overall drop in contract volume. Conversely, OTC derivatives operating revenues rose by 22% due to strong volumes. Securities operating revenue was our largest contributor, increasing by 70%, though this figure is somewhat skewed by the elevated interest rates in our fixed income business. Carried interest on fixed income positions is included in operating revenues, while the corresponding interest expense to finance these positions is not. The RPM numbers have been adjusted to account for this offsetting expense. Net operating revenue for the fourth quarter in securities dropped by 15%, primarily because the RPM fell by 45% due to reduced volatility and challenging market conditions in the equity sector, as well as a lower-margin product mix in both equities and fixed income, as discussed in prior calls. FX and CFD operating revenues were down by 3%, with a higher RPM offset by reduced ADV due to a more difficult environment for new client acquisition internationally. Global Payments operating revenues rose by 21% because of a higher RPM compared to last year. Interest and fee revenues surged by 110% compared to a year ago as we were comparing to a lower interest rate environment from the previous year. Our FDIC sweep balances decreased by 40% as clients opted for higher-yielding alternatives, although our client funds on the derivatives side remained relatively stable. As for the full fiscal year, a similar trend persisted. Listed derivatives operating revenues declined by 3% mainly due to a 4% reduction in the average rate per contract, primarily from our Commercial segment. OTC derivatives operating revenues increased by 11% due to strong volumes, which were up by 20%, despite a 7% decrease in the rate per contract. Physical contracts operating revenues increased by 26% compared to the previous year, largely due to the CDI acquisition at the beginning of the fiscal year and the growth of our biodiesel feedstock business. Securities operating revenue again was our main contributor, climbing by 74%, though it too is influenced by higher interest rates. Net operating revenues from securities transactions decreased by 11% compared to last year, as a 52% increase in ADV was more than outweighed by a 40% drop in revenue capture. FX/CFD operating revenues fell by 23% compared to the exceptionally strong results of the previous year, with ADV down 10% and RPM down 12%. Global Payments operating revenues increased by 24% due to both a higher ADV and RPM. Interest and fee revenue was up by 331% from a year ago, comparing it to a lower rate environment last year. On an annual basis, our FDIC sweep decreased by 25% as clients transitioned to higher-yielding options, while client funds on the derivative side increased by 25%. Summarizing our fourth quarter and full-year fiscal results, we recorded operating revenues of $778 million, a 33% increase compared to the previous year. Net operating revenue was up by 4% after accounting for interest expenses related to fixed income trading. Total compensation and other expenses rose by 3% for the quarter, leading to a net income of $50.7 million, down 3% from the prior year, and diluted EPS of $2.36, down 5%, with a 15% ROE. As noted earlier, the tax charge was significantly higher at 32.8% versus 21.2%. Pre-tax earnings for the quarter were up by 14% compared to the same quarter last year. Average client float stood at $7.8 billion, which is down 10% year over year but up 1% from the previous quarter. Our financial performance was enhanced by increased interest and fee income on our client float as short-term rates rose during the period. Our average yield on this client float was 372 basis points for the year and 422 basis points for the fourth quarter. The yield on our client float was impacted by some interest rate swaps we entered into around two years ago, which will begin to roll off in the upcoming quarters and should improve our yield, assuming interest rates remain unchanged. In comparison to the previous quarter, our operating revenue showed modest growth, whereas net operating revenues dropped by 7%, fixed compensation rose by 2%, variable compensation decreased by 14%, and net income declined by 27%. In summary for the full fiscal year, we achieved record results in nearly every metric. Our operating revenues reached a record $2.9 billion, up 38% from last year. Net income reached a record $238.5 million, an increase of 15%. Our diluted EPS for the full fiscal year was $11.18, a 12% rise. Our ROE remained at 19.5%, even with equity growing by 53% over the last two years. We concluded Q4 '23 with a book value per share of $66.31, which is an increase of $13.61 or 26% compared to the previous year. Moving on to the segment summary, during the quarter, segment operating revenue increased by 32% and segment income grew by 20%, with strong performances across all of our client segments. In our Commercial Client segment, segment income increased by 10%, with a 12% rise in operating revenues, bolstered by strong results from OTC derivatives and higher interest rates, although this was offset by lower revenues from physical commodities. Our Institutional segment saw revenues rise by 65%, resulting in a 22% increase in segment income. The foreign exchange business had a very successful quarter, benefiting from favorable interest rates, despite challenges in the securities sector, especially on the equity side. Even though operating revenues in our Retail segment decreased by 9%, segment income grew by 39% due to effective revenue capture on the digital trading platform and reduced non-variable costs. Some of these cost reductions resulted from moving certain functions, like the digital marketing group, to central overhead for leverage across the organization. Global Payments operating revenue increased by 22%, and segment income rose by 32%, driven by a 26% boost in revenue capture. For the full fiscal year, segment operating revenue increased by 37% and segment income grew by 13%, reflecting strong performance across all client segments, except for Retail where income dropped by 60% compared to the exceptionally high performance in the prior year. These results are solid, but as we've stated repeatedly, we adopt a long-term perspective on managing and growing our company. We believe the best approach to evaluate our results and progress is to assess longer-term performance over periods like trailing 12 months, rather than focusing on individual quarters in isolation. Lastly, regarding our trailing 12-month financial performance by quarter, these figures have been adjusted for the accounting treatment related to the CDI acquisitions, as outlined in our previous disclosures and shown in the reconciliation provided at the end of the earnings deck. The chart on the left illustrates our trailing 12-month operating revenue over the past nine quarters, showing a consistent and strong upward trend as we steadily expanded our reach and capabilities. Our operating revenues have grown by 74% in this timeframe, representing a 32% compound annual growth rate. Likewise, our adjusted pre-tax income has significantly increased at a 37% compound annual growth rate. The bar graphs on the right depict our adjusted net income, which has risen by 79% over the past two years, corresponding to a 34% compound annual growth rate. The dotted line shows our ROE, which has remained above our 15% target, despite a 53% growth in our capital during this period. With that, I'll hand it over to Bill Dunaway for a more detailed discussion. Bill?

I will be starting with Slide number 8, which summarizes our consolidated income statement for the fourth quarter of fiscal 2023. Sean covered many of the consolidated highlights for the quarter, so I will just highlight a few and then move on to a segment discussion. Transaction-based clearing expenses declined 1% to $68.6 million in the current period, while introducing broker commissions increased 5% to $39.2 million in the current period, principally due to increased activity in our Commercial segment, both in listed derivatives as well as a result of the CDI acquisition, which was effective October 31, 2022. Interest expense attributable to trading activities increased $175.6 million versus the prior year, primarily as a result of the $138.7 million increase in interest expense related to our Institutional fixed income business and a $27.2 million increase in interest paid to clients on client balances, both of which were a result of the significant increase in short-term interest rates. Interest expense on corporate funding increased $1.7 million versus the prior year, also as a result of the increase in short-term interest rates, but partially offset by a decrease in average borrowings. Variable compensation declined $17.3 million versus the prior year and represented 28% of net operating revenues in the current period compared to 33% of net operating revenues in the prior-year period. This decline in variable compensation as a percentage of net operating revenues is a result of the significant increase in interest and fee income earned on client balances as compared to the prior year, as this revenue is typically not included in variable compensation payouts. Fixed compensation increased $17.3 million versus the prior year due to a 14% increase in headcount, resulting from the expansion of our capabilities among our business lines as well as in support areas to facilitate this business growth, the effect of annual merit increases and a $1.7 million increase in share-based compensation as compared to the prior year. Fixed compensation increased 2% versus the immediately preceding quarter. Other fixed expenses increased $6.8 million as compared to the prior year and $4.7 million versus the immediately preceding quarter. As compared to the prior year, non-trading technology and support increased $3.2 million, trade systems and market information increased $1.9 million, occupancy and equipment rental increased $1.5 million, and travel and business development increased $1 million. Bad debt expense, net of recoveries increased $2.1 million to $6.5 million in the current period versus $4.4 million in the prior-year period, and was relatively flat with the immediately preceding quarter. The increase versus the prior year is principally related to an increase in bad debt expense in our physical ag and energy business, which was partially offset by a recovery in our Institutional futures and options business. Net income for the fourth quarter of fiscal 2023 was $50.7 million, which represents a 3% and 2% decline versus the prior year and immediately preceding quarters, respectively. Moving on to Slide number 9, I will provide some more information on our operating segments. Our Commercial segment added $22.3 million in operating revenues versus the prior year, however, declined $45.2 million when compared to the immediately preceding quarter, which was a record one for this segment. The increase over the prior year was driven by a $10.9 million increase in OTC derivative operating revenues, most notably in agricultural and soft commodities. In addition, interest earned on client balances increased $19.5 million as a result of a significant increase in short-term interest rates. Average client equity declined 22% versus the prior year, primarily as a result of lower margin requirements due to the decline in market volatility. These increases were partially offset by a $9.4 million decline in operating revenues from physical transactions despite the acquisition of CDI earlier in the year, principally due to decreased activity in biodiesel feedstocks this quarter, which had been a large contributor to the immediately preceding record quarter in this segment, as well as a decline in precious metals revenues. Fixed compensation and benefits increased $2.9 million versus the prior year, however, declined $900,000 versus the immediately preceding quarter. Other fixed expenses increased $2.6 million, including increases in travel and business development, professional fees, selling and marketing and depreciation and amortization. Bad debt expense increased $5 million as compared to the prior year, and as I mentioned earlier, was primarily related to our physical ag and energy business. Segment income was $88 million for the period, an increase of 10% over the prior-year period. However, a 25% decline versus the immediately preceding quarter. Moving on to Slide number 10. Operating revenues in our Institutional segment increased $167.9 million versus the prior year, primarily driven by $125.3 million increase in securities operating revenues compared to the prior year period as a result of a 57% increase in the average daily volume of securities transactions, as well as the increase in interest rates. The increase in securities ADV was driven by an increase in client volumes in both equity and fixed income markets. As Sean mentioned earlier, the increase in interest rates also led to a significant increase in securities-related interest expense for the period, which I'll touch on momentarily. Interest and fee income earned on client balances increased $34.4 million versus the prior year as a result of the increase in short-term interest rates as well as a 10% increase in average client equity. This was partially offset by a 40% decline in the average money market and FDIC sweep balances versus the prior year. Interest and fee income earned on client balances was up $8 million versus the immediately preceding quarter. The rise in short-term interest rates drove $171.8 million increase in interest expense versus the prior year. Interest expense related to fixed income trading and securities lending activities increased $138.7 million and $5.1 million, respectively, as compared to the prior year, while interest paid to clients increased $23.9 million. Segment income increased 22% to $55 million in the current period despite an $800,000 decline in net operating revenues as variable compensation declined $6 million, other fixed expenses declined $3.3 million, and we had a favorable variance in bad debt expense of $1.5 million versus the prior-year quarter. Also contributing to the increase in segment income, we received a $2.1 million FX-related antitrust class action settlement during the current period. Segment income increased $9.9 million versus the immediately preceding quarter. Moving on to the next slide. Operating revenues in our Retail segment declined $9.4 million versus the prior year, which is primarily driven by a $7.3 million decrease in FX and CFD revenues, primarily as a result of a 13% decline in FX/CFD average daily volume, which was partially offset by a 4% increase in rate per million as compared to the prior year. The current period was relatively flat with the immediately preceding quarter with Retail segment operating revenues increasing $900,000. Segment income increased 39% to $28 million in the current period despite the decline in operating revenues as variable compensation declined $2.8 million, fixed compensation declined $4.2 million and other fixed expenses declined $5.4 million. The decline in fixed compensation was partially driven by FX hedge gains on positions we established to hedge compensation expense in some of our foreign jurisdictions. The decline in other fixed expenses was driven by a $1.9 million decline in selling and marketing as well as a $2.5 million decline in depreciation and amortization. Segment income increased $10.8 million versus the immediately preceding quarter. Closing out the segment discussion on the next slide, operating revenues in Global Payments increased $9.9 million versus the prior year, driven by a 26% increase in the rate per million as compared to the prior year. Segment income increased 32% to $32.3 million in the current period as a result of the growth in operating revenues, which was partially offset by a $200,000 increase in fixed compensation and an $800,000 increase in other fixed expenses as compared to the prior year. Segment income increased $3.7 million or 13% versus the immediately preceding quarter. Moving on to Slide number 13, which represents a bridge between operating revenues for the fourth quarter of last year to the current period across our operating segments. Overall operating revenues were $778 million in the current period, up $194.6 million or 33% over the prior year. I've touched on the variances in the operating segments for the $3.9 million positive variance in unallocated overheads, is primarily related to FX revaluation gains, as well as FX hedge variances, partially offset by a decrease in interest income. This variance is primarily covered in the segment discussion I just walked through, so I'll move on to the next slide, number 14, which represents a bridge from 2022 fourth quarter pre-tax income of $66.4 million to pre-tax income of $75.4 million in the current period. The negative variance in unallocated overhead of $24.5 million was primarily driven by a $15.5 million increase in fixed compensation and benefits as a result of a build-out of our compliance and IT functions to support our continued business growth as well as the incremental costs associated with the acquisition of CDI. Finally, moving on to Slide number 15, which depicts our interest and fees earned on client balances by quarter as well as a table which shows the annualized interest rate sensitivity for a change in short-term interest rates. Interest and fee income net of interest paid to clients and the effect of interest rate swaps increased $15.1 million to $46 million in the current period as compared to $30.9 million in the prior year. This represents a $2.1 million increase in the immediately preceding quarter, primarily driven by an increase in short-term interest rates. As noted in the table, we estimate a 100 basis point change in short-term interest rates, either up or down, would result in a change in net income of $16.8 million or about $0.81 per share on an annualized basis.

With that, I'd like to turn it back over to Sean. Thanks, Bill. Turning now to Slide 16, which sets up high-level strategic objectives that we have been focused on for the better part of 15 years now. We have included the slide before and went through it in some detail at the end of fiscal 2022, so we thought maybe a review and a quick update would be appropriate. First, building our ecosystem. We want to stay relevant to our clients, both existing and new clients, by adding products and services and creating the best financial ecosystem to connect them to the global financial markets. I believe StoneX is now becoming known as a growing and best-in-class financial services franchise. We continually invest in our ecosystem by acquiring talent, either individuals or teams, as well as investing in technology to expand our products and capabilities to better serve our clients. While these investments result in increased costs and expenditures, oftentimes well in advance of the ultimate benefits being achieved, they are essential to achieve the strategic objective. None of these projects in isolation will result in a significant change to our current growth trajectory and certain of these initiatives may not be viable in the long run. However, in aggregate and over time, we believe that these initiatives will bend our growth curve upwards. In addition, because many of these initiatives are digital in nature, we should see operational leverage and scalability start to kick in as well, and a steady improvement in margins as a result. Our fixed income group has strategically diversified into a broad spectrum of fixed income asset classes. This approach has proven to be highly beneficial, especially in recent quarters, and provided resiliency to our revenue streams amid the fluctuating interest rate environment. Notably, there has been a distinct shift in perception among institutional investors and top industry talent alike. We are now increasingly being recognized as a growing and successful fixed income franchise with the capabilities to compete alongside Tier 1 players. On the equity side, we've now launched and continue to grow our electronic market-making platform on the domestic NMS equities, leveraging our long-standing institutional relationships of over 20 years from the international equity side. We enhanced our institutional prime offering with the launch of a multi-asset cash-compliant custody solution, coupled with new financing capabilities, which include repo financing and securities lending, under the banner of our London-based StoneX Institutional Prime product. We also bolstered the growth and the capabilities within London Prime services through some key hires. These product expansions and major appointments are in line with our continued investment in our technology platforms across trading, regulatory reporting, middle and back-office operations, all designed to augment client engagement and to drive growth within our securities and prime offering. The crypto market has gone through some unpredictable changes recently with consolidation, and we expect a smaller, but more regulated market to start to emerge. We believe this market will be best served in the long term by well-capitalized and regulated firms such as StoneX. We have also made some crucial new hires for our StoneX Digital Initiative, our wholly-owned subsidiary of StoneX that specializes in providing institutions with access to digital asset trading, custody and services. We plan on offering non-custodial spot execution, borrowing and lending, and OTC bilateral derivatives to global institutions down the road. Carbon trading is another growing market and our primary role to date would be to provide our clients with access to select carbon trading instruments. In addition, we have a role in educating our clients on how best to participate in this marketplace. Many of our agricultural clients are potential sources of carbon credits, which can be monetized. We have made good incremental progress over the last year and have a small, but growing revenue stream and client base in carbon. We continue to add new trading venues and exchanges to our ecosystem to better serve our clients. StoneX recently became members of the Nodal Exchange, which offers renewable fuels and pollutant contracts to support an increasing focus on corporate sustainability and carbon neutrality. We're also in the process of joining the ASX Exchange in Australia and evaluating other potential trading venues. We have been expanding our capabilities and expertise in physical commodities to provide a comprehensive service from risk management to logistics and supply chain management. Several years ago, we started to assist our biofuel refinery clients with the efficient sourcing of physical inputs in addition to risk management of those inputs and risk management of the resulting outputs, aligning them to more efficiently operate their facilities. Over time, we have now become a significant and recognized player in the biofuel and renewable biofuel industries in the U.S. At the beginning of this year, you may remember we acquired CDI, a physical cotton brokerage business. We saw the opportunity to make further inroads into the cotton vertical by offering physical cotton brokerage and trading and risk management together as one service. This was a well-priced transaction that resulted in immediate gain being recognized on acquisition and has exceeded our first-year financial expectations. We have also validated the original thesis as we have seen market share gains in both physical cotton brokerage, as well as on the risk management services. We have made significant progress in integrating this business and are excited about its prospects in the coming years. We continue to believe that there's a sizable opportunity for us to expand our self-directed offering to include all of the StoneX products and capabilities, from CFDs to stocks, crypto, precious metal, coin, payment, futures and foreign exchange. Doing this will dramatically expand the addressable market for our self-directed platform. While we have made good incremental steps, we are definitely behind where we should be in this project and are focused on accelerating our progress here. On the international side, we're on the final testing to launch cash trading in international equities for all clients in the coming quarters. This platform already offers over 15,000 OTC products designed for active traders, and these same clients will now have access to investment products directly on our platform. This not only expands our product offering to clients, but allows us to target a much larger universal potential client base. We're also leveraging this platform to provide our commercial clients with access to OTC hedging products. In the U.S., the regulatory framework adds significant complexity to offering a multi-asset class trading platform with different regulators, legal entities and related protocols and challenges. During the year, we launched StoneX One as our U.S.-based self-directed platform, allowing trading in equity, equity options as well as listed derivatives. This platform is active, and we are incrementally marketing it to existing clients. We are seeking to have payments, physical gold coins to both international and domestic StoneX One platforms, making this a very unique asset class execution capability. We continue to offer new OTC products to address client needs and have invested in our technology stack to do this faster and more effectively. We are now introducing dozens of new products every month, some of which are new and industry-leading, which add both incremental value as well as positioning StoneX as a leading innovator focused on adding value to our clients. The next strategic objective for us is we are a client-centric business, and we need to constantly work at growing our client footprint into new markets and expanding our market share where we have existing clients and cross-selling all of our growing capabilities to our existing clients. We also seek to serve new client segments and channels. We have all the capabilities to service clients of all types and have a large addressable market in front of us, with very low market penetration currently. Obviously, as we enhance our ecosystem, we are able to offer a more compelling value proposition to our existing and potential clients. We have grown our client footprint significantly over the last 10 years, assisted by a positive industry environment. There has been significant consolidation at the small end of the market as increased regulatory costs and capital burdens have rendered smaller monoline players unable to earn acceptable returns on capital. On the other hand, larger banks have seen capital requirements for trading businesses steadily increase under the Basel regime with additional new capital charges under current consideration. We see this trend continuing, and many clients will be looking for new brokerage and trading relationships. We believe that our unique global financial ecosystem allows us to be the counterparty of choice and places us in a strong position to win additional market share. We have continued to invest and grow our EU presence post-Brexit with an expanding office in Frankfurt to service our existing European-based clients and allowing us to more effectively market to new clients in Europe, which may not be adequately covered post-Brexit. We have dramatically expanded our product capability in Singapore, adding fixed income, foreign exchange and commodities expertise, which should allow us to increase our market penetration in Asia. We've also expanded our licensing to facilitate broader payments and securities offering. Our payments business has also launched its platform focused on small and medium-sized Brazilian enterprises looking for a more efficient way to make international payments to both G20 and non-G20 countries. We have launched our new digital payments platform for corporates in Europe, and we'll aim to expand this geographically. We are also adding international payments capability to all of our existing internal platforms on the commercial side, further embedding ourselves with these existing clients. On the security side, we have historically had little client penetration outside of the U.S. despite our global product offering in both equities and fixed income. We have now added a small team in Asia and bolstered our presence in London. In addition, as you've heard earlier, we are bolstering our capabilities in London to enable a more fully-fledged offering there. We'll not be able to achieve the necessary growth and scale unless we continue to embrace technology to digitize our offering. This will not only enhance client engagement, but increase scalability and margins. This initiative requires a rethink of our processes from front to back and has been underway for some years now, but has accelerated recently. Many of the product initiatives mentioned above are digital in nature, so I won’t mention them again. The advantage of digital offerings is that it dramatically expands the addressable market. Every client anywhere is a potential client, and it offers scalability and operational leverage to enhance margins. We are increasingly using technology on the trading side. Many of our trading platforms are designed to aggregate trading flow and internalized spreads so we can maximize the client revenue opportunity and minimize our hedging costs. As we gain critical mass in trading volumes, the impact on revenue capture can be significant and should further drive margins. We also spend considerable effort providing technology to help our clients be more effective, and in turn, become stickier to us. During the year, we launched and expanded a StoneHedge for our grain merchandising clients, which has now gained significant traction. This new platform provides trading efficiency on our side and embeds us as a critical partner with many of our most important clients. We continue to enhance our digital platform for OTC and structured products to allow our commercial hedging clients to run intricate scenarios to determine the best product for their needs and instantly get quotes. A lot of these projects are underpinned by the success of our data lake, which allows users to come to one place to get normalized data from our many systems of record. Instead of multiple point-to-point connections to these systems, information can be accessed from one place in near real time in an easily consumable form. We continue to see validation of this approach as many of our internal departments as well as our client-facing platforms can easily stand up applications. We continue to build and enhance the data lake as we expand our business. Our risk management team has made really significant strides and is able to more easily aggregate and analyze data with real-time monitoring of risk across the organization. Also, our accounting team completed their conversion to a new accounting and HR system, and we are already seeing dramatic improvements in efficiency and effectiveness. We have a number of projects underway throughout many of our support areas to better use technology to create efficiency and scalability in our infrastructure, which over time should drive operational leverage. These include contract management systems for the legal team, technology to better track and monitor internal audits and operational risk issues, and also a major project to automate our compliance and KYC monitoring. Finally, our business is supported by capital, and we need to underpin our growth with internally generated capital, access capital markets when appropriate and approach acquisitions in a disciplined manner. The most important thing we can do is to create a capital runway for our continued growth. This is why we focus on ROE. It is interesting to note that 10 years ago, we had a little over $300 million in stockholders' equity and only a slightly lower number of shares outstanding as we do now. Over this 10-year period, we have more than tripled our shareholder funds, acquired over 15 businesses and significantly expanded our client footprint, largely financed organically from retained earnings and the unbelievable power of compounding. During this growth, we have largely achieved our 15% ROE target. Certainly not every year, but on average over the period, it's pretty close, if not higher. This has happened despite the investments we have made in technology and infrastructure, the cost of developing new capabilities, the integration of a large number of acquisitions and despite low interest rates for extended periods of time. Achieving our ROE target will continue to be our north star, and we believe as we digitize our platforms and gain scale, that margins and ROE should start to increase. So, let's move to final Slide 18 and wrap the call up. So, in summary, this was another strong quarter with good market conditions and solid results across all products and client segments. As we mentioned earlier, we achieved earnings of $50.7 million, diluted EPS of $2.36 and an ROE on stated book of 15%. This quarter capped the best fiscal year in StoneX history, with earnings of $238.5 million, a diluted EPS of $11.18 and ROE of 19.5%, and 20.9% on tangible equity. Our stated book value per share is now $66.31, up $13.61 or 26% over last year. When our performance is viewed through a slightly longer-term lens such as trailing 12-months over the last two years, which evens out quarterly anomalies, our results continue to show strong upward trajectory, growing our operating revenues at a 32% CAGR and our adjusted net income at a 34% CAGR. We continue to see strong growth in our client base. This has been driven in part by increasing capital charges being applied to the trading activities of larger banks under the Basel regime and smaller players being squeezed out by higher regulatory capital costs. We believe that this constructive market environment, combined with the outlook for good general market volatility and current levels of interest rates, puts a real tailwind behind our business for the next year or so. In fiscal 2024, we believe we will see an accelerated cadence of delivery on our platforms as we continue to more tightly integrate our offerings by client type and make it more engaging for clients to interact with our growing financial ecosystem. We continue to invest in our financial ecosystem, expanding products, capabilities and talent. We have a unique and comprehensive ecosystem with a very large addressable market in front of us. While we have good market share in certain niche segments of the market, lots of white space remains in areas where we really have client relationships and demonstrable capabilities and now need to monetize these opportunities. One thing will always be constant for the StoneX team, we will continue to dedicate ourselves to better serve our growing client footprint around the world by providing them with the best financial ecosystem and client service to access the global financial markets. In closing, I'd just like to say the management team and I are extremely proud of the talented StoneX team who continue to propel us to new heights.

Our first question will be coming from Daniel Fannon of Jefferies LLC. Your line is open.

Thanks. Good morning, gentlemen.

Good morning, Dan. How are you?

I'm doing well. Thank you. To start, this quarter, the revenue environment was still good. Actually, just looking at revenues growing year-over-year, this is the first time I remember variable compensation being down in the context of while revenues are growing, and obviously, fixed was up. But I just want to make sure, as I think about the component of variable versus fixed going forward, and if there's been any change or if there are changes as we think about payouts or how you're compensating employees that will drive just more shift towards fixed versus variable over time?

Sure. Dan, I'll start at a high level and then let Bill join in. The best way to understand variable compensation is to relate it to net operating revenues. Our gross operating revenues are calculated before accounting for interest charges and brokerage and exchange fees. If you look at our net operating revenue, it was up around 4% or 5%. You should consider variable compensation in relation to that, as that's how most payout calculations work. Additionally, we are continually investing in teams and expanding initiatives, which often means incurring costs before we see revenue. As revenue begins to come in, variable compensation can replace some of those costs or create offsetting revenue. Over time, if we stopped investing in new products and teams, variable compensation as a percentage would decrease as we would either terminate initiatives or see them become successful with corresponding revenue. There can be fluctuations from quarter to quarter based on the performance of these new initiatives. I'll stop there and let Bill add anything he wants.

Sure. I think you summarized most of it well. The only point I'd add is that focusing on a percentage of net operating revenue is the correct approach. Historically, we’ve been in the 31% to 32% range for variable compensation. However, as interest and fee income on client balances has significantly increased, especially year-over-year, that typically doesn't factor into variable compensation calculations. This means that variable compensation as a percentage of net operating revenues may trend downward as client income rises. Conversely, if client income decreases, we could see the opposite effect. So, considering the low rate environment we've experienced over the past two or three years—prior to the last 18 months—32% of net operating revenues is a reasonable gauge, but in the current environment, it’s probably closer to 29% to 30%, if that is helpful.

Okay. I mean, I'm just looking at this quarter where variable on a net operating revenues basis, there is a bit of a divergence. There's nothing...

It's like 28% or so. No, nothing meaningful there.

Okay, there's been a lot of discussion about digitizing expenses and implementing more efficient initiatives, which presents significant growth opportunities. Considering the fixed expense budget for next year, could you explain the factors that will influence the decisions you're making and what that means for fixed expense growth?

Okay. So unfortunately, when you try and digitize and make your business efficient, you end up spending more money in the short term with the hope that eventually when these things kick in, you'll see some of the scale benefits emerging. So, we have been investing in a lot of these initiatives and other similar initiatives for a period of time now. I think we're sort of at max expenditure points on those initiatives right now. I don't see us taking on any other major new initiatives, and our hope is now that some of these initiatives we start to see on the back end, us gaining efficiency. Now I don't think that means the fixed cost will go down. I think what we should hope for is we can handle greater volume and growth without our cost increasing lockstep. I mean that's really what we're hoping for. It's scalability rather than seeing the costs come down. But we are not anticipating a significant increase in fixed costs. I mean, we've got an inflation push, and inflation is obviously higher than it's been for a while, and we'll probably see somewhere between 3% and 5% sort of embedded growth in those fixed costs. But we're not anticipating a sort of a step change in our fixed costs at this point. I think we took that step change a couple of years ago already.

Okay. And then one more on expenses. Bill, you mentioned a positive offset within bad debt. Can you clarify what the normalized actual expense was compared to the recovery?

It was a $1.5 million recovery in the Institutional segment, or $1.3 million as I see in the earnings deck.

Thank you. I have one more question about expenses, specifically regarding the recent litigation news related to BTIG and the claims involved. While I understand it's still early, could you provide some context on the businesses affected and any initial thoughts or outlook on the situation?

We cannot comment on pending litigation, but we are aware of the complaint that was filed earlier this week. It appears that this action is aimed more at garnering media attention than anything else, as it was publicized before being filed in court. We are currently reviewing the complaint, but at this point, we do not believe the allegations have any merit. We will defend ourselves, confident that we are in a strong position, and maintain that there is no validity to these claims. That's all I can share at this time. We are looking into it.

Understood. Okay. Thank you. And then I guess one more just on the environment. You have a lot of things that you mentioned you'd like to do and will do around expanding your client footprint as well as geographies and products. Can you talk about the inorganic opportunity today given the market volatility? And what that is presenting itself or not in terms of more opportunities? And how active is the pipeline for new transactions today versus kind of earlier this year?

Sure. We don't specifically plan for acquisitions, which might sound odd since we've completed around 30 of them. Our main priority is always on driving organic growth within our ecosystem and seizing opportunities. Currently, we believe the environment is conducive to organic growth. The banks are likely facing another significant capital charge, as discussed in a recent conference that the FIA hosted. This could seriously impact their trading and clearing operations, which has been beneficial for us. While our primary focus remains on organic growth, we also want to stay aware of acquisition opportunities. We monitor most transactions that align with our size, and recently, we've noticed more enticing prospects compared to the previous two years. During the COVID period, the market was unpredictable, with revenues fluctuating wildly, resulting in inflated multiples. At that time, we didn't see any appealing opportunities. Now, the market seems more stable, and there's a continuing trend towards consolidation, as smaller firms are finding it challenging and need to take action. This creates opportunities that we typically look for. We're returning to a more typical pace concerning potential acquisitions, but I don't think there's anything immediate on the horizon that stands out as particularly significant. However, we are certainly examining more potential opportunities.

No, that's helpful. Thanks for answering all my questions.

Thank you, Dan.

I'm showing no further questions. I would now like to hand the call back to Sean for closing remarks.

All right. Well, thanks, everyone. It was a long call today. I appreciate all your attention. And I guess on a final note, I'd just like to wish all of those in the U.S. a happy Thanksgiving, and to everyone else, a great holiday season, and we will speak to you in the New Year. Thanks very much. Bye-bye.

This concludes today's conference. Thank you for participating. You may now disconnect.