StoneX Group Inc. — Form 10-Q Summary
Reporting period: First quarter of fiscal 2023, the three months ended December 31, 2022; comparisons are with the three months ended December 31, 2021 unless noted. Balance-sheet comparisons are with September 30, 2022. StoneX is a global financial services network serving commercial, institutional, retail and payments clients. The filing reports physical commodity sales gross, so operating revenue and net operating revenue are more useful measures of performance than total revenue.
Financial performance and position
| Metric | Quarter ended Dec. 31, 2022 | Prior-year quarter / change |
|---|---|---|
| Total revenue | $13.012 billion | $14.341 billion; down 9% |
| Operating revenue | $654.8 million | $450.5 million; up 45% |
| Net operating revenue | $382.0 million | $313.8 million; up 22% |
| Income before tax | $95.6 million | $52.5 million; up 82% |
| Net income | $76.6 million | $41.7 million; up 84% |
| Diluted EPS | $3.62 | $2.04 |
| Cash flow from operations | $1,046.7 million provided | $600.2 million used |
| Cash flow from investing | $17.8 million used | $7.3 million used |
| Cash flow from financing | $88.6 million provided | $241.5 million provided |
Net income included a $23.5 million non-taxable gain on the acquisition of CDI. The effective tax rate was 20%, versus 21% a year earlier. Compensation and other expenses rose 19% to $309.9 million; non-variable expenses increased, while variable expenses were 54% of total non-interest expenses, down from 57%.
At December 31, total assets were $19.832 billion and stockholders’ equity was $1.177 billion. Cash and cash equivalents were $1.252 billion. Cash, segregated cash, cash equivalents and segregated cash equivalents totaled $7.411 billion, including client funds and securities subject to regulatory segregation and not equivalent to unrestricted corporate cash.
Outstanding borrowings totaled $922.1 million: $582.3 million in loans and other lender borrowings and $339.8 million in senior secured notes, net. The notes bear interest at 8.625% and mature in June 2025. The company had $1.105 billion of committed credit facilities, with $546.0 million outstanding under those facilities. It reported compliance with its financial covenants and regulatory capital requirements.
Material changes and segment performance
- Institutional: Segment income increased to $62.0 million from $31.9 million. Higher securities activity and interest and fee income supported growth; interest expense also rose substantially.
- Commercial: Segment income increased to $82.8 million from $65.5 million, reflecting increased client-balance income, physical trading activity and the CDI acquisition.
- Global Payments: Segment income rose to $32.3 million from $24.5 million, supported by higher payment volume and rate per million.
- Retail: Shifted to a $4.2 million segment loss from $23.4 million income. FX/CFD revenue fell 41%, which management attributed to lower volatility, tighter trading ranges and reduced activity in larger markets.
- Revenue mix: Interest and fee income on client balances increased to $86.2 million from $8.3 million. Securities operating revenue rose 91%; FX/CFD operating revenue declined 32%.
Outlook, commentary and risks
Management described continued inflation and higher short-term interest rates, with market volatility lower than during much of fiscal 2022. Strong activity across many products and higher client-balance interest income benefited results, while narrower spreads affected listed and OTC derivatives and FX/CFD contracts. The company provided no specific earnings or revenue guidance. Management said available cash, operating cash flows and borrowing capacity should meet anticipated liquidity needs for the following year, and said it intends to renew or replace facilities scheduled to expire within the next year.
- Vendor cyber incident: On January 31, 2023, ION Group notified StoneX of a cybersecurity incident that made certain back-office trade-processing services inaccessible. StoneX restricted UK clients’ listed-derivatives trading and said it was assessing the impact. The filing identifies vendor disruption and cyber risk as potential threats to revenue, costs, client service and reputation.
- OptionSellers matter: A $23.2 million net receivable remained from client account deficits, with a $6.8 million allowance. Arbitration and collection efforts continue; outcomes remain uncertain. Management viewed a material adverse outcome as remote.
- Market, credit and liquidity exposure: Trading and clearing activities involve counterparty default, margin and collateral needs, and market risk from interest rates, commodity prices, foreign exchange and securities. Regulatory requirements can restrict transfers of subsidiary funds to the parent.
- Acquisitions: CDI was acquired on October 31, 2022 for approximately $42.7 million, subject to an earn-out and final purchase accounting. CDI contributed $14.0 million of net operating revenue and $9.1 million of net income in the quarter. The company also completed the acquisition of Colombia-based Incomm on February 3, 2023; consideration includes a contingent earn-out.
Important facts for investors to verify
- How much of the quarter’s earnings growth is repeatable without the $23.5 million CDI acquisition gain, and how CDI performs after acquisition accounting is finalized.
- Whether client-balance interest income remains strong if short-term rates decline, and how higher rates affect funding costs and fixed-income trading.
- The financial, operational and client impact of the ION incident, including the duration and scope of trading restrictions.
- Collections and arbitration outcomes for the OptionSellers receivable and whether the allowance remains adequate.
- Renewal or replacement of credit facilities approaching expiration, covenant compliance and the availability of unrestricted liquidity under stressed conditions.
- Whether Retail performance recovers as volatility and FX/CFD spreads change, and whether operating costs continue to grow faster than revenue.