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It’s been a while but we are back with a new podcast. This time we speak to Justin Hertzberg, Co-Founder and CEO of FPFX. For those not familiar with the company, FPFX is one of the primary tech providers in the prop space. Justin was also a regulated IB in the US and UK for a long time so has a lot of experience working with brokers. You can listen to our conversation via the buttons below.
Swissquote is not a company that we have looked at much here before, despite the fact they’re a major player in the sector. They are also one of the few companies that has arguably achieved the sort of product mix that many companies appear to be trying to achieve. That being the case I figured we’d look through their latest results as there are some interesting points in there.
1. Interest income
Last year saw the company make a huge amount of money from interest. This has been a phenomenon we’ve seen across the industry, with Plus500 and IG Group both seeing marked increases to revenue derived from higher rates.
But Swissquote is interesting because it has managed to build up a far larger amount of AUM. Client assets totalled CHF 58bn ($64.59bn) at the close of last year. Of that amount, 15% was held in cash. Do the maths and that equals around CHF 8.7bn ($9.69b).
Because interest on accounts at Swissquote, across CHF, CBP, and USD, is way below short term yields on government bonds issued in those currencies, they have presumably been able to capture some of the spread there. Then you also just have higher rates on the company’s cash holdings.
The basic point remains that this is unlikely to be replicated to the same degree at other providers, purely because they have not been able to build up the level of AUM that Swissquote has.
This also tends to be somewhat beneficial from a share price point of view. If you can build up larger AUM then you can charge more predictable fees on that overall figure. You also now have higher rates, which I personally don’t think will go down. That marks for more predictable cash flows.
Part of the problem for CFD providers is that volatility makes cash flows unpredictable. This makes life harder for prospective investors, who may have to meet certain objectives (eg. paying a high dividend) and/or do not want to deal with the agro of shareholders asking them why they bought a company that is so reliant on volatility, something that’s very hard to predict.
2. CFD earnings were over CHF 100m
Swissquote made just over CHF 101m ($111.4m) from CFDs last year. The bulk of that was in FX (CHF 57.1m). A couple of points stick out here.
One is just how much of this is derived from the Swiss market, with CHF 83.3m of total revenues from the segment coming from the country.
It might be the case that the company just books a lot of revenue from its Swiss entity, regardless of where a client is coming from. But it fits with the fact that close to 90% of group revenues come from Switzerland.
That is the main reason why we haven’t looked at the company that much in this newsletter. The company has completely dominated the Swiss market but has not done a huge amount outside of it.
One exception to this is the Middle East, where Swissquote is generating increasing amounts of money in CFDs. This was the only region the company actually saw higher revenues from CFDs in 2023 relative to the prior year. Looking at how revenues also went up in precious metals trading, my guess is that a lot of that was driven by rich people in Dubai punting on gold.
3. Swissquote bought a South African broker
An interesting tidbit in the report was around the acquisition of a company called Optimatrade. This is a South African entity, which has historically acted as an introducing broker for Swissquote.
The acquisition means that Swissquote now has a direct presence in the country. We looked at South Africa before when we spoke to Scope Markets SA CEO Robert Van Eyden. The country is one of the many markets that leaves this author confusing. From a wider economic perspective things look bad. But then lots of brokers seem to be doing really well there.
4. Ex-CySEC Chair has shares worth $111k in the company
Something I was unaware of is that Demetra Kalogerou, formerly Chair of CySEC, is a board member at Swissquote.
Part of her compensation package appears to be in shares, of which she now has 390. At current market prices, and noting that Cypriots don’t pay capital gains on overseas securities holdings, those would be worth just south of $111k.
Still she’s got a way to go to catch up with Marc Burki. His stake in the company is worth north of $500m. My understanding is that Swiss residents do not pay capital gains on holdings like this.
Another interesting stat – the average Swissquote employee gets paid CHF 144,000 annually. Top level federal income tax in Switzerland is 11.5%. The highest rate of tax you can pay when combined with local taxes is 36%.
Why do I still live in the UK…?
5. Yuh is growing (but loss-making)
Yuh is similar to Revolut or other money management apps that allow you to save, make payments, manage money, and invest. Swissquote has a 50% stake in the company, with the other half owned by PostFinance.
We’ve looked at Yuh before and it’s clear that other providers want to build something similar, with IG being the most recent company to announce that it’s launching an ‘investment app’ that will presumably bear some similarity to Yuh.
Like its start up peers, Yuh is not profitable and Swissquote said it does not expect that to change this year either.
However, the average deposit size is now just under CHF 7,250 ($8,071). This looks far better than Monzo (£802) and Revolut (£360, yes, seriously). However, Revolut inflates its user numbers and I wouldn’t be surprised if Monzo does too, so those numbers may be higher in reality. Nonetheless, the point remains that people are depositing a lot more with Yuh than these guys.
This is basically a waiting game. The costs of the app look pretty low and probably won’t grow massively now that a lot of the core tech has been built. So the company can keep taking a small hit on it each year until assets grow to a level where the app is profitable. That’s probably the plan anyway.
