Stonex Group Inc. quarterly report, Q3 FY2023

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StoneX Group Inc. — Q3 FY2023 Form 10-Q

Reporting period: Three and nine months ended June 30, 2023; fiscal year ends September 30. Amounts are in U.S. dollars unless stated otherwise.

Business context

StoneX operates a global financial-services network across Commercial, Institutional, Retail and Global Payments segments. Its activities include trading, execution and clearing, client financing, physical commodities, securities and payments. The company serves clients in more than 180 countries.

Financial performance and position

  • Q3 revenue: Total reported revenue declined 21% to $15.05 billion, largely reflecting lower gross physical-commodities sales. Operating revenue, which deducts physical-commodities cost of sales, rose 47% to $776.9 million; net operating revenue rose 17% to $435.9 million.
  • Q3 earnings: Income before tax increased 33% to $94.5 million and net income increased 42% to $69.5 million. Diluted EPS was $3.25, up from $2.37.
  • Nine-month results: Total revenue decreased 11% to $44.22 billion, while operating revenue increased 40% to $2.14 billion and net operating revenue increased 12% to $1.22 billion. Net income rose 21% to $187.8 million; diluted EPS was $8.82 versus $7.52.
  • Drivers and expenses: Higher short-term rates substantially increased interest and fee income on client balances: Q3 rose to $92.2 million from $21.5 million, and nine-month income to $281.8 million from $40.2 million. Interest expense also rose sharply, including fixed-income trading and client-deposit costs. Q3 compensation and other expenses increased 13% to $341.4 million.
  • Segment trends: Q3 segment income rose to $207.9 million from $171.1 million, led by Commercial ($117.0 million versus $72.5 million). Institutional segment income was $45.1 million versus $47.7 million, and Retail declined to $17.2 million from $26.3 million. Global Payments rose to $28.6 million from $24.6 million.
  • Balance sheet and debt: Total assets were $21.93 billion and stockholders’ equity was $1.33 billion at June 30. Outstanding borrowings totaled $763.9 million, including $422.6 million in loans and $341.3 million of senior secured notes, net. The notes bear 8.625% interest and mature in 2025.
  • Liquidity and cash flow: Cash and cash equivalents were $1.40 billion. Cash, segregated cash, cash equivalents and segregated cash equivalents—a measure that includes client funds—totaled $5.78 billion, down $506.5 million from fiscal year-end. Nine-month cash used was $394.8 million in operating activities, $38.9 million in investing activities and $87.6 million in financing activities. Operating cash flow is affected by trading, collateral and client-balance movements.

Material changes and unusual items

  • Management attributed Q3 growth to increased commodity volatility and client activity, stronger OTC and physical-contract revenues, and higher interest income resulting from rising short-term rates. Physical-commodities gross sales fell, illustrating why management emphasizes operating revenue rather than total revenue.
  • Institutional securities operating revenue grew with higher trading volumes, but tighter spreads and product mix reduced securities revenue per million. Retail FX/CFD activity weakened: Q3 volume declined 25% and operating revenue declined 21%.
  • The nine-month results include a nonrecurring $23.5 million gain on the October 2022 CDI acquisition. CDI contributed $24.0 million of net operating revenue and $12.3 million of net income in the nine-month period. The acquisition’s purchase-price measurement period remained open.
  • Nine-month expenses included $13.4 million of severance, principally related to a Global Payments reorganization; Global Payments’ severance included $10.0 million. The company also reported $3.3 million of accelerated share-based compensation associated with departures and reorganizations.

Outlook, risks and contingencies

  • The filing provides no numerical earnings or revenue guidance. Management stated that available cash, operating cash flow and borrowing capacity should meet liquidity needs for the following year, and that it intends to renew or replace facilities as they expire.
  • Committed credit facilities totaled $1.155 billion, with $392.1 million outstanding. Some facilities were scheduled to expire within 12 months after June 30, 2023. The company reported compliance with financial covenants and subsidiary regulatory capital requirements at quarter-end.
  • Key exposures include market and commodity-price volatility, counterparty and client defaults, margin-call funding needs, interest-rate and foreign-exchange movements, and reliance on banks, credit lines, vendors and third-party technology. The filing highlights risks from financial-institution failures and vendor cyber incidents.
  • Following a January 2023 cyber incident at vendor ION Group, StoneX restricted certain UK clients’ listed-derivatives trading; the company said it continued to assess the incident’s impact.
  • For the 2018 OptionSellers-related client deficits, the company reported a net receivable of $20.8 million and an allowance of $6.6 million. Arbitration outcomes and future collections remain uncertain; management considers a material adverse outcome remote.
  • The company authorized repurchases of up to 1.0 million shares through September 30, 2023; it reported no repurchases during the quarter.

Important facts for investors to verify

  • How much of the earnings improvement is sustainable if short-term rates decline, and how interest income compares with related interest expense and client funding costs.
  • Whether Institutional securities spreads and Retail FX/CFD activity stabilize, and whether Commercial growth depends on elevated commodity volatility.
  • Cash available for corporate use versus segregated client funds, and the liquidity impact of collateral and margin requirements.
  • Facility renewals, borrowing availability, covenant headroom and the maturity/refinancing plan for the 2025 senior secured notes.
  • Final CDI purchase accounting and gain recognition; developments in OptionSellers arbitrations and collections; and the ongoing impact of the ION vendor incident.