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Gain Capital Holdings Inc  (NYSE:GCAP)
Q4 2018 Earnings Conference Call
Feb. 28, 2019, 4:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good afternoon everyone and welcome to the GAIN Capital Fourth Quarter 2018 Earnings Conference Call. All participants will be in a listen-only mode. (Operator Instructions) After today's presentation, there will be an opportunity to ask questions. And please note, today's event is being recorded.

At this time I'd like to turn the conference call over to Mr. Nicole Briguet, Investor Relations representative of GAIN Capital. Please go ahead.

Nicole Briguet -- Investor Relations representative of GAIN Capital

Thank you, operator. Good afternoon and thank you to everyone for joining us for our fourth quarter and full year 2018 earnings call. Speaking today will be GAIN's CEO, Glenn Stevens; and CFO, Nigel Rose. Today's commentary will be accompanied by our earnings slide deck, which can be accessed via website on our IR website now or at a later time. Following their remarks we will open the call to questions.

During this call we may make forward-looking statements to assist you in your understanding our expectations for future performance. These statements are subject to a number of risks that could cause actual events and results to differ materially. I refer you to the Company's Investor Relations website to access the press release and the filings with the SEC for discussions of those risks.

In addition, statements during this call including statements related to market conditions, changes in regulations, operating performance and financial performance are based on management's views as of today, and it is anticipated that future developments may cause these views to change. Please consider the information presented in this light. The Company may at some point elect to update the forward-looking statements made today, but specifically disclaims any obligation to do so.

I'd now like to turn the call over to Glenn.

Glenn H. Stevens -- Chief Executive Officer

Thanks Nicole, and thank you all for joining us as we close the books on a strong 2018. Today we'll start with a review of our operational and financial highlights for the fourth quarter and full year, and then we will shift gears and share our longer term strategic plan, which we believe will drive growth and increase earnings over the next three years.

Going to Slide 3, 2018 was a year in which we set the foundation of our success for years to come. We made significant operational progresss, highlighted by innovative enhancements to our platform and a revamped marketing strategy. The results of our efforts are already being recognized in our performance and provide us the confidence that there is still significant runway for us to grow the platform and deliver value.

Let me take a moment to reflect on our progress over the last 12 months. We made significant strides in four key areas, starting with the product and customer service enhancements we delivered. We rolled out our new next generation web trading platform globally, and invested significantly in our mobile platform. We also launched a variety of improvements in the areas of on-boarding and payments, designed to improve the account opening experience for our clients, while providing them with better and faster ways to fund their accounts. We introduced new products and services for our high-value clients. A key highlight in this area was the launch of our new Direct Market Access, DMA offering in the fall.

We also expanded our relationship management services, and introduced a new rebate program to lower the cost of trading for almost active clients. After a deep analysis of our marketing ROI, we made the decision to significantly increase our investment in marketing in the second half of the year to complement these product enhancements. These investments delivered solid new account growth, with new direct accounts increasing 18% as compared to the second half of 2017. It's worth noting that we achieved this growth in a year marked with significant political and economic uncertainty, and overall relatively weak market conditions. These efforts enabled us to deliver strong organic growth during 2018 with full year revenues increasing 29% as compared to 2017 and a full year EBITDA improvement of $58 million or nearly tripling, reflecting the operating leverage inherent in our business model. In addition to these accomplishments, we had a very successful outcome on the corporate development front. In June, we announced the sale of our ECN business, GTX to Deutsche Borse Group for $100 million, with net proceeds of approximately $85 million.

With our solid operating and financial results and the proceeds from the sale of GTX, we were able to significantly increase shareholder returns. We returned approximately $80 million to our investors through repurchases, buybacks and our long-standing quarterly dividend, with Q4 being the 29th consecutive quarter where we paid a dividend. In all, I feel our accomplishments in 2018, highlight our commitment to delivering long-term value for not only our shareholders but also our customers.

Moving to Slide 4 and reviewing our customer metrics for the fourth quarter and full year It is clear that our efforts to drive organic growth are showing results. During Q4, our increased marketing investment help deliver strong new account growth, which was up 16% year-over-year and 12% on a sequential basis. Our trailing three-month direct active accounts in the fourth quarter were down slightly. However, the volume per active increased 26% in Q4 2018 as compared to the prior year period, and 33% up quarter-over-quarter. This led to an overall increase in volumes year-over-year, which indicates higher client quality.

Now turning to Slide 5. which is an update on the new European regulations that went into effect on August 1st. Our regulators in Europe and the UK introduced regulatory changes in the provision of CFDs, which lowered the leverage available to our retail clients from the UK and EU. Due to a successful focus on professional clients, we were able to minimize the impact of the new measures and protect the majority of our revenue from those clients that are located there. While active accounts in that region were down 33% versus the prior year, that loss in active accounts came from our lower-value clients, importantly trading volumes and client revenues were relatively unchanged from Q4 of 2017. Our team did a great job navigating these new ESMA regulations. And I point to these results as another example of our ability as a company to successfully manage the regulatory change.

On Slide 6, our financial and operational performance throughout 2018 reflects our initial success in driving our retail business through customer experience enhancements and increased marketing spend. In all, I'm very proud of how our team executed this past year. With 2018 now behind us, we're focused on the future, building on a strong platform we've established. I look forward to sharing more details on our go-forward plan a little later in this call.

Before I review our longer-term strategy and outlook, I will turn it over to Nigel for a deeper review of our fourth quarter and full year results. Nigel?

Nigel Rose -- Chief Financial Officer

Thanks, Glenn. The following figures reflect results from a continuing operations. Q4 2018 net revenue increased 27% year-over-year to $79.9 million as compared to $62.7 million in Q4 2017. For the full year, net revenue increased 29% year-over-year to $358 million compared to $278.2 million in the full year 2017. Q4 2018 net loss was $0.7 million and adjusted net loss was $4.6 million. Q4 GAAP EPS was a loss of $0.02 as compared to loss of $0.16 in Q4 2017, while adjusted EPS remained in line with Q4 2017 at a loss of $0.11.

2018 GAAP net income was $28 million or 2018 adjusted net income was $29.1 million. 2018 GAAP EPS was $0.60 as compared to a loss of $0.29 in 2017. Our tax rate for the year was 23% versus the 27% to 28% guidance we gave at the end of the second quarter due to some one-off items that arouse in Q4. Going forward, we continue to expect that tax rate for 2019 and beyond will be between 27% and 28%.

Turning to EBITDA. Adjusting out the onetime transaction benefit, Q4 2018 revenues were $11.8 million above prior year, offset by the increased in marketing expense which added to high variable overheads, resulting in EBITDA of $5.2 million against the prior year's $5.9 million. In terms of the onetime revenue benefit, during the quarter the Company received approximately $5.4 million as a participant in an industry-class action law suite. The class action involved foreign exchange pricing that was made available to industry participants including the company with respect to its hedging activities. It is important to note the activity that gave rise to the transaction had no impact on the pricing those offer to the companies retail customers.

Full year 2018 adjusted EBITDA was $86.5 million as compared to $29.7 million in 2017, equivalent to a margin of 24% compared to the prior years of 11%. In other words, 76% of the year-on-year incremental revenue growth in 2018 converted to EBITDA. We've added slide 25 to the appendix of this earnings presentation, which provides some additional detail regarding EBITDA performance for each of the reported periods.

Turning to the Retail segment. Results for the quarter and full year reflect a period of muted volatility and initial impact of increased marketing spend that commenced in the second half. During Q4, Retail revenue increased 23% to $64.9 million as compared to $52.8 million in Q4 2017. Total Retail revenue for the full year increased 31% to $311 million.

Average daily volume for the fourth quarter increased 10% to $9.7 billion. ADV for the year increased 5% to $10.1 billion. As part of our increased investment, marketing spend was up 77% during fourth quarter as compared to Q4 2017, which impacted this quarter's profit margins. Referral fees continue to decrease as a result of that focus on our direct business. Full year indirect volumes decreased 23% on 2017 in contrast to direct volumes which increased 20%. In addition, the referral fee cost per million reduced 13% on prior year. Segment profit increased improved 11% in the fourth quarter of 2018 as compared to Q4 2017, and more than doubled for the full year as compared to 2017, resulting in margins improving from 24% to 39%. Q4 2018 revenue per million of $97 was up from $90 per million in Q4 2017, while for the full year it was $115 compared to $93 in 2017. We continue to be Retail segment as a key driver of that business going forward.

Turning now to our futures business, revenues were $10.6 million for the quarter, up 12% from $9.5 million in Q4 2017. For the full year, future's year-over-year revenues improved 9% to $44 million. During the fourth quarter, we saw a strong uplift in average daily contracts with an increase of 28% year-over-year. For the full year, future's average daily contracts increased 16% as compared to 2017. During 2018, future's profit almost doubled to $6.2 million as did profit margins which increased to 14% from 8% in 2017. We continue to see potential for further margin improvement in this segment should interest rates increase further.

I'd like to take a moment to review our overheads and capital expenditures. The left hand chart shows the split between our fixed and variable overheads, highlighting as we've discussed in the past, the variable element that moves in relation to revenues and performance. During full year 2018, fixed overheads increased by slightly less than 3% to $3.7 million, which was driven by increased investment in technology as supporting organic growth strategy. The variable overheads increase was more notable, driven as it was by improved performance which impacted bank charges, clearing fees, compensation, bad debt et cetera, with variable overheads equating to 16% of revenues in 2018. With that said, overhead costs for 2018 came in slightly below at previous guidance at a $199.6 million.

In terms of 2019 and beyond, Glenn will provide some additional commentary later in the presentation, but our expectations are that their overheads will likely remain at similar level for the next few years. We previously guided to a reduction in 2019, but with the increase in marketing investment now plan to continue into 2019 and beyond, we intend to invest the previously planned savings in areas such as technology to ensure we can support anticipated additional growth.

Turning to capital expenditure, that decreased to $14.7 million in full year 2018 compared to $20.9 million the prior year, a reduction of $6.2 million or 30%. This is in line with our previous guidance of $14 million to $16 million per year, and we anticipate remaining of these levels going forward.

Shifting to our capital strategy, we continue to focus on four key priorities; required liquidity reserves, corporate development, quarterly dividends and our share buyback program. GAIN continues to maintain a strong liquidity position, which is $316 million at the end of Q4 2018, an improvement of 46% over prior year. This represents a like-for-like 30% increase after adjusting for an impact of the share tender on the sale of GTX. We had ample liquidity for Corporate Development opportunities and have now completed 11 transactions since our IPO in 2010. This includes of our GTX business which generated net proceeds of approximately $85 million, and we continue to be well positioned for future opportunities should they arise. We remain committed to actively returning capital to shareholders including through dividend payments and share buybacks. As such, our quarterly dividend of $0.06 will be paid on March 29th.

As Glenn mentioned earlier, this represents the 29th consecutive quarter we have paid a dividend. In addition to dividends, share buybacks continue to be a strong focus, particularly as we feel our shares remain undervalued, and in 2018 we returned approximately $80 million to our investors. During the fourth quarter, net proceeds from the GTX sale helped fund our Dutch auction under which we repurchased almost 6.4 million shares of common stock at $7.84 per share. We also continue that quarterly share repurchase program during Q4, buying back almost 300,000 shares at an average share price of $6.85. This leaves us with approximately $24 million also and available for additional repurchases during 2019.

Before handing back to Glenn, let me just take a moment to recap our 2019 expectations that we've already touched upon. Once we expect modest volume growth, that will be tempered by return to more normal RPM, in line with our long-term expectations of $106 compared to $115 we saw in 2018. Noting also that we'll see a material increase in our retail marketing spend from $35.4 million in 2018 to estimated $52 million in 2019 consistent with our Q4 2018 run rate. This represents the increase of almost $17 million or 47%.

As just discussed, overheads will be similar to 2018 levels, while we anticipate CapEx will remain in line with our previous guidance of $14 million to $16 million per year. Finally, we continue to believe our 2019 tax rate will be in line with our original guidance of 27% to 28%.

And with that, I will turn it back over to Glenn to discuss our long-term strategic priorities.

Glenn H. Stevens -- Chief Executive Officer

Great. Thanks, Nigel. As promised, we would like to spend the remainder of this call discussing our strategic growth plan and introducing target metrics for 2021.

On Slide 13 you can see the key to unlocking further value for our shareholders over the long term by accelerating growth, which we will grow top line revenue and increase earnings. As we kickoff 2019, we are embarking on the three-year strategic plan with four key pillars. First is our level of marketing investment. Over the next three years we intend to increase our marketing activities globally to drive an increase in new accounts and customer trading activity. This investment will be supported by continuous conversion optimization efforts. By improving the percentage of marketing leads, which convert to new accounts, we will achieve an even greater ROI on our increased marketing spend. Second, we're going to leverage our powerful brand assets in FOREX.com and GAIN Capital, to compete on a global scale and grow market share by targeting two distinct customer segments: experienced active traders and retail traders. Third, we remain focused on innovating the trading experience for all our customers, delivering best-in-class trading platforms, decision support tools, and delivering new ways in products for our customers to trade. Lastly, our strong focus on premium clients, which will be achieved through our brand strategy and a development of product and services tailored for experienced traders. Collectively, these initiatives will help us with customer acquisition, retention and engagement, and ultimately drive stronger financial results.

As we've said before, our marketing investment will be a key accelerator of organic growth over the next several years. Based on our results to date, we're confident in our ability to maintain our efficiency and ROI at the higher investment levels. The chart on the left on Slide 14 shows the breakeven on our marketing investment. Here we're looking at the breakeven for the first period of increased marketing spend, which was the second half of last year 2018. And comparing that to the trailing 12 months period ended June 30 2018 or the most recent period prior to our increased marketing spend activities.

After six months of increased marketing spend, we continue to observe a similar return on investment, as we grow our overall new account numbers. In addition, the cost per acquisition for our new accounts remains in line with expectations, which is benchmarked against three-year account revenues. Also, with 54% of total 2018 revenues from loyal clients with a tenure of more than three years, new cohorts are expected to deliver a long tail of revenue even beyond our ROI benchmark. In terms of setting expectations about marketing spend this year, we expect our 2019 spend to remain at Q4 2018 run rate or about $52 million per year, as Nigel mentioned, and increasing further in 2020.

On Slide 15, removing to show leveraging of powerful brand assets. As we shared in the past, we have a unique opportunity to grow share in existing markets and increase our addressable markets, in the future by leveraging our brand, target two distinct customer segments, experienced active traders and a broader retail investor group. For experienced active traders who trade multiple asset classes and demand high-quality tools, competitive pricing and personalized service, the GAIN Capital brand is best positioned to meet these customers' needs, and allows us to fully leverage our reputation as a trusted, low capital light global provider. The GAIN brand will be built on our existing customer proposition and global regulatory footprint with some exciting new products and service enhancements based on the extensive customer research we have done to help inform our strategy.

The punchline here is that there will be a retail facing GAIN Capital brand in the market later this year. This will replace our City Index brand we currently operates in several markets. The plan is to launch the GAIN brand first in Australia later this year, followed by global rollout that will continue into next year. In parallel, we'll continue to invest in our FOREX.com brand, which we've had in the market now for over 15 years, and which enjoys very high brand awareness globally. With the FOREX.com brand, we will continue to build on our already successful track record of targeting self-directed retail investors looking to trade FX and most other popular global markets, using our cost-efficient customer acquisition model along with a highly automated on-boarding and funding experience.

The reach and brand awareness of FOREX.com affords us global expansion opportunities, including new language offerings to support our entrant -- entrance into new regional markets. Because we are operating from a single technology stack now, the majority of our investments in trading platforms, tools and other products and services will be leveraged across both brands, affording us economies of scale and greater operational efficiency. That's a good segue to the next slide, which is all about our commitment to providing our customers with best-in-class products and service and overall trading experience. This is critical to our ability to drive client acquisition and engagement and retention as evidenced by the large contribution that comes from our long tenured clients.

We will continue to enhance our market-leading suite of trading platforms and tools by continuing to develop our new HTML5 web trading platform, which was launched globally in the second half of 2018. Also providing ongoing support for popular third-party platforms with a beta launch of MT5 expected in the first half of this year, and delivering best-in-class decision-support capabilities that are seamlessly integrated into our trading experience.

We also plan to increase the range of markets we offer. While we currently offer customer access to over 10,000 markets across FX, indices, equities, cryptos and commodities, we do see an opportunity to expand our product range based on client demand, and have built strong capabilities in that area that we can leverage over the next few years. It is easy for us to add new markets now, including the latest IPOs and EPS. We're continuing to monitor the products our customers are looking to trade and add new ones as necessary. We also see opportunities to do more cross-selling of our existing futures offering as well.

In addition, our scalable technology infrastructure can support future expansion into other asset classes, including cash in exchange traded derivatives. In 2018, we launched our FX Direct Market Access offering, the first true prime of time agency execution model for retail traders, and we're looking to add enhanced options offerings soon.

We've been talking for a while now about our focus on our most loyal and valuable clients, and that focus will continue over the coming years. We have been building our capabilities in this area to improve our ability to attract and retain this type of client and we've invested quite a bit over the last year to build a global relationship management team, premium account packages and pricing and other products and services tailored just for this group.

Looking ahead, the GAIN Capital brand is foundational to our future events in this area as our goal with this brand is to be the top choice for sophisticated active traders globally. The GAIN brand proposition is being purpose built. With this type of client in mind in order to arrive our ability to acquire this type of client and to increase their engagement with us, resulting in higher volume and higher revenue per client.

The next slide provides a view on how each of these strategic pillars contributes to our growth. Based on our planned increased marketing investment, we expect to generate a significant increase in new accounts. We have modeled the expected improvement from our conversion optimization efforts, which will further increase the number of new accounts, boosting volumes and revenue. The launch of the GAIN Capital brand as a retail trading brand will help us successfully attract and retain experienced active traders and is expected to deliver higher volumes and revenue per client. In addition, our focus on premium clients is expected to increase revenue per active and build client tenure further. These retail growth metrics combined with a stable futures business, all build to a significantly higher 2021 revenue target.

Slide 19 provide some more guidance on our operational and financial targets for 2021. On the operational side, we expect new direct accounts to increase in the range of 38% to 42% and retail volumes to increase in the range of 30% to 35%. Assuming this operational growth and our longer-term expected RPM of 106 in 2021 we expect revenue in the range of $420 million to $460 million. Our overhead costs expected to remain in the range of $190 million to $200 million, our EBITDA margin to be in the range of 30% to 35%, and EPS in the range of $2.15 to $2.40 per share.

In closing, during 2018 we delivered significant shareholder value, and began laying the groundwork on several of our long-term organic growth initiatives, including increasing our marketing spend and enhancing our customer experience. We're excited for the multiple levers we have to pull to accelerate our growth and grow the top line, and we look forward to reporting on our progress in the coming quarters.

With that, I'll turn it to the operator for questions.

Questions and Answers:

Operator

Ladies and gentlemen, at this time, we will begin the question-and-answer session. (Operator Instructions) And our first question today comes from Kyle Voigt from KBW. Please go ahead with your question.

Kyle Voigt -- Keefe, Bruyette & Woods -- Analyst

Hi, good evening.

Glenn H. Stevens -- Chief Executive Officer

Hi, Kyle.

Nigel Rose -- Chief Financial Officer

Hi, Kyle.

Kyle Voigt -- Keefe, Bruyette & Woods -- Analyst

So the first question is just on the regulatory environment and I appreciate the disclosure on the UK and EU client volume up 2% year-over-year in the fourth quarter. If we kind of back into what the remainder of your client base and what the volume growth was for the remainder I think was about 15%, so I guess it's outside of the UK and EU. Is that disparity between 2% volume growth and the 15% volume growth I just quoted, is that disparity the right way to think about how big the regulatory impact roughly was likely to volumes?

Glenn H. Stevens -- Chief Executive Officer

I'm not sure 100% I follow. So we have commented in the past on the potential impact from ESMA in terms of revenue. We haven't broken out in terms of volume, but I'm not sure the 15% we -- because the total -- the... (multiple speakers)

Kyle Voigt -- Keefe, Bruyette & Woods -- Analyst

10%, so I was just asking what the remainder was growing? So I was trying to isolate like what was the impact this year and basically is it done on a go-forward basis?

Glenn H. Stevens -- Chief Executive Officer

Well the impact is done on a go-forward basis yes because the recharacterization of all those clients was done prior to the August 1st regulation change. So it'll be a step function down if you will and then this is your new baseline, and that baseline has been established since August 1. So to some degree five, six months past that date expectations are this is kind of the new normal in that market. But I'm not -- but I'm trying to answer your first question, maybe I think Nigel is going to answer.

Nigel Rose -- Chief Financial Officer

Yeah. So I think the 10% that you're talking about is total Q4 ADV -- Q4 2018 ADV or the Q4 2017. Is that right?

Kyle Voigt -- Keefe, Bruyette & Woods -- Analyst

Correct.

Nigel Rose -- Chief Financial Officer

Yeah. And then on Slide 5 where we talk about UK and EU we're saying for those, that subset, their volume was up 2%. So within the 10% growth was the 2% growth from UK and Europe. Is that the right way to look at it for you?

Kyle Voigt -- Keefe, Bruyette & Woods -- Analyst

Yes. So I mean you disclosed the European volume. So if you back into what all the volumes were from outside of Europe, it looks like those volumes grew by about 15% to get to into that blended (multiple speakers)...

Nigel Rose -- Chief Financial Officer

Weighted average of 10%, yes. I think that's the right way of looking at it. Yes.

Kyle Voigt -- Keefe, Bruyette & Woods -- Analyst

So is the variants I'm saying between that 15% growth and 2% growth, that's likely how we should view what the impact was from the regulatory environment on your volumes in the fourth quarter? I'm just asking if that's the good way to think about it?

Nigel Rose -- Chief Financial Officer

Yeah, I think that's the right way of thinking about it certainly Kyle. fourth quarter was the first full quarter, and so yes I think that's a fair way of looking at it.

Kyle Voigt -- Keefe, Bruyette & Woods -- Analyst

Okay. Thank you. And then the long-term RPM guidance of 106, I mean last quarter you quoted a long-term RPM guidance of 100 to 105, just wondering why the increase in the long-term expectations?

Glenn H. Stevens -- Chief Executive Officer

Well one of the things that we've been talking about kind of intermittently throughout the last few quarters is some of the positive strides we've made some on of our revenue efficiency from some of the more quantitative elements that we've infused into our processes. So it's a combination of optimizing our hedging to reduce some costs. It's also, as I said, using a lot more driven efforts to see how we can optimize the way we get our hedging done throughout order types through small order routing, and initially that was -- that model was rolled out at the end of Q1 of last year into Q2 in FX only. And what we have guided back then was that the model will be continue to rollout across other products. We're still in the process of doing that. And the model has remained in place for FX and it continues to show the benefit that we had hoped for. And now we're working for some other asset classes where it makes sense. So primarily two things: one is that overall if our product mix stay the same, then we make an assumption with the same product mix that's what our long-term RPM would be, and it does move a little bit 1% or 2% over time, and we're also trying to reflect kind of a trailing 12-month, a trailing 24 months. And if you look at that channel that it's in kind of between 100 and 120 over that longer period of time we've seen edge up a little bit with each kind of passing quarters. So and we also do analysis to see that the efforts we've made on the client side, on the hedging efficiency side, all those kind of cost and benefits that they have a general net effect of the positive. So that is the primary drivers for us being heartened by moving it up. However, if we're start to see a product shift toward more of a higher RPM products, so let's say we started to gain more traction in a market where, for example, in the US you have FX only and in Singapore you have a multitude of products, and our Singapore volume started to increase vis-a-vis anything else, and that multi-asset RPM is higher, and so that will start to pull it up. Does that make sense?

Kyle Voigt -- Keefe, Bruyette & Woods -- Analyst

Yes it does. Last question for me is, just on the the really strong new direct accounts, you get that slide I think it's on Slide 4. And really interested in last two quarters we have seen really strong metrics there, but I guess the chart right below that the 3-month active direct accounts had declined over the last three quarters each quarter and really has moved all that much since 1Q 2017. So I'm just trying to understand what's going on there? If there has been either higher attrition in the last quarters along with the higher new accounts or whether these clients are opening accounts and just not trading here?

Glenn H. Stevens -- Chief Executive Officer

Yes. So I'll point to a couple of items. On that same page on the upper right is a chart that shows direct volume per active, so you can see the pickup there in volume per active. The other thing to your point about trailing 3-month actives with the ESMA change, with the smaller clients who would count as active customer, so we don't do awaited active customers, number of active customers. So if you have a small account be active or a large account be active, then they would count the same. So when we had to reclass a bunch of clients as everybody did after ESMA, then you had a section of smaller clients that want joinings, which mean they were inactive or didn't stay with us, because they didn't qualify as professional clients as they didn't stay with us. So those would all be active clients that no longer on the books because they tend it to be the smaller ones and that's why you don't see the commensurate hit in volume or revenue per client and all those. And that's also our statement about kind of quality over quantity and so we can see that pretending toward higher quality clients is a good thing. So yes you will see or you have seen that adjustment and that's the other point we made that kind of post-ESMA we had a steady state and we've seen kind of from our own matrix that adjustment post-ESMA and then it stabilizes and then has stabilized, and then you build in the other. So if you look for example our January trailing 3-month active increased. So that's building new clients, but that step function down you pointed to is really reflecting the ESMA change.

Kyle Voigt -- Keefe, Bruyette & Woods -- Analyst

Okay. Thank you.

Operator

Our next question comes from Dan Fannon from Jefferies and Company. Please go ahead with your question.

Daniel Fannon -- Jefferies -- Analyst

Thanks. I guess just on the longer-term outlook, can you talk about what the overwriting kind of environment is you're assuming? Is it consistent with 2018? And then obviously it's predicated on account growth and there are from more sophisticated accounts. So I guess where do you see the biggest opportunity to take share, whether that's region or customer or competitors, can you talk a bit more about that?

Glenn H. Stevens -- Chief Executive Officer

Okay. So in terms of the environment first, part of our estimate or assumption with our RPM, the RPM isn't something you pick, it's something that's an output right? But it's a reflection on what the environment is. And clearly in an environment that has higher wall around in various products, because again every time we talk, you have to think about kind of G-mix, you think about regular mix, which is what we talk about our G-mix, and when you talk about the longer term you say, well, sometimes you get multiple sets of products, metals move, energies move, equity indices move and currencies move, and then you end up with a higher RPM like we saw with the 115. And then the other side of it is that, if you end up with a scenario where whole bunch of an (inaudible) that's what you've in the past we posted 93s and that's kind of period-over-period range. Our assumption here is that mix to your point will be normal. Yes, if 2018 actually was higher than normal and if you want to use trailing multiple years of trailing 12 months, that for the full year 115 was higher than our normal 100 to 105. We edged it up a little as I said here, because we just had 115 in 2018, and also because we look at some of the product mix and we looked at some of the political environment going forward. And so of course we're making a bit of assumption in terms of what we think it's going to look like. There's Brexit, there's Trump, there's interest rate change, there's other unrest globally, there's a lot of things going on which may or may not deliver higher-than-normal or lower-than-normal, but our assumptions are relatively normal market condition.

And in terms of how we can grab share, couple of things. Number one, we did actually put in our plan there the launch of our new brand, the GAIN brand, and so that's already geared up by design to take share of the premium marketplace. So it doesn't necessarily need legions of new customers, but it actually needs high-quality customers. And that brand is being worked on position and then ready to rollout to do just that. Another accompaniment of that is our unique DMA access account the Direct Market Access account, that's first in its kind and very unique to our customers and so that's another way to grab market share for that higher profile active professional type customer. We don't have a peer in that space. And again that won't be applicable to masses of clients, but it will be applicable already as we already have clients signing up on that. And that drives that kind of quality over quantity idea gain. So positioning the brand with the commensurate products and services that go along with it is one way to enhance our market share globally. And that brand by the way is situated to be able to working in all of our markets Asia-Pac and UK-Europe and US.

And then the other part that we mentioned is actually not necessarily to grab more share, because part of that is our materially higher market spend that we alluded to, you can see that function up in the last two quarters of the year. And our expectation is to maintain that higher level throughout this year and beyond. And the early results are very promising. And if you look at that how it's going, we may end up with some additional features and new clients are coming into our market. And then the other part of it is, besides the spending is the conversion optimization. So even at higher level of lead generation, you can convert a higher percentage of those who is funding through more intuitive on-boarding experience, that even if you don't get the comments or talk from the spend over that you might want, you can still improve things by converting more of the funnel.

Daniel Fannon -- Jefferies -- Analyst

Okay. Then just to clarify. So there's no M&A assumed in this guidance, and then with that I guess, Nigel, what's the share count just to get kind of the EPS, like what are you assuming for kind of capital return perspective over during that time period?

Nigel Rose -- Chief Financial Officer

Yes. So the model we had assumed the sort of run rate we're seeing in 2018 is around sort of $4 million a quarter.

Daniel Fannon -- Jefferies -- Analyst

Okay, got it. Okay. Thank you.

Glenn H. Stevens -- Chief Executive Officer

You got it.

Operator

Our next question comes from Rich Repetto from Sandler O'Neill. Please go ahead with your question.

Richard Repetto -- Sandler O'Neill -- Analyst

Yeah. Good evening, Glenn. Good evening, Nigel.

Glenn H. Stevens -- Chief Executive Officer

Hi, Rich.

Nigel Rose -- Chief Financial Officer

Hi there.

Richard Repetto -- Sandler O'Neill -- Analyst

Yeah. So I guess the question is on the marketing and what you've laid out, I guess I'm struggling a bit -- I can see the direct accounts in the bar start on Page, I think it's 5, but can you help us sort of see the higher return I guess from this accounts on Page 14 when you talk about the spend, I'm not -- I'm confused on what are we looking at? What's on the axis? What's on the Y-axis, and I guess the month I get, but what're you measuring here? The act of revenue that actually coming from that client?

Nigel Rose -- Chief Financial Officer

The lines there are looking at measuring the difference between the marketing spend to acquire the customers and the revenue those customer generates. So it's a net of those two numbers. So as you really appreciate, when you first start you spend the money, you get some customers in generating revenue, and then you bring in more and more customers, and then at some point there is a point in time reach, which is represented by the dotted horizontal line where your -- the revenue from the customers you have acquired is paid back the marketing spend and then beyond that we have sort of in the positive territory and you're getting a positive return on that marketing investment.

Glenn H. Stevens -- Chief Executive Officer

So I think what's important Rich on the takeaway here is that, very similar to maybe a discount equity of broker model where you have a cost of acquisition and then you have the lifetime value of a client. In the past we have illustrated as an example of we have acquisition costs and then we have a lifetime value of client based on the transaction volume overtime. And what we've used is a 3-year time value, because the 3-year value is very representative of our clients relationship with us. However, we've also alluded to the fact that we have a big chunk of customers over 50% that are longer tenure than that. And so arguably that's a conservative measure, because it doesn't stop at three years. We have quite a few clients participating and contributing after three years. But for the purposes of this study and to illustrate our confidence about the higher marketing spend, the blue line or the longer line is supposed to show trailing 12 months up to the point when we decided to make a material increase in spend. So that's the idea of the second half of 2017 and the first half of 2018, so that's 12 months and then to start Q3 we significantly ramp to marketing after a lot of studies and a lot of work and a lot of analysis, and then we tried to show the green line there to say, well here's the first six months of that higher level of spend. And what we would want to see is a similar path, because it means that our capacity to spend that money effectively is experiencing the way we wanted to. If that line was below, then you would say geez, for whatever reason deficiency or the marginal benefit of the extra marketing spend isn't working well. And so the idea was infer to be better than that line here that would be great, but the reality is that, if its similar type of marketing approach we wanted to have the same to illustrate that capacity in the market. So we wanted to show there was, well here is the previous year, full year, and then here's the first six months of our experience. So of course we don't want to show this graph after the first month or three, and we don't want to wait for two years either, so that's what we have shown here. And then the end there is the first month, 12 months later and two years later, and then the break even point is just to show, hey here's where that payback from the acquisition cost starts to kick in, and of course it stays about that over time. At any movement, if it -- if the customer stays longer beyond three years, that's additional value from that initial marketing dollar. And if we start to see inefficiencies in the market then, as we provide updates, that greenline will start to go under the black line. Did that makes some sense?

Richard Repetto -- Sandler O'Neill -- Analyst

I get the general concept where I think were I'm getting thrown on. Is that, like, if this is per unit, I guess, maybe sort of makes sense, but the thing that's different here is that, compared to say just a second half to the first half of the year, almost doubled marketing spend, and I don't see how that, I guess, I'm not seeing how maybe it travel up the curve in the same time frame, but I'm just not seeing how that equated equal back to either doubling new direct accounts or doubling volume or anything like that?

Glenn H. Stevens -- Chief Executive Officer

Well couple of things. Keep in mind that it is per unit, and so that's the compare spend, and so it's a spend on per month. So this is six months of spend, and you look at how the revenue curve is generated from each months of collection of activity. So you have-so we started to spend in July, you have customers that came in arguably connected with that spend in July, and you look at their experience post-July up for the six months. So and then you do the same thing for the next month, and you pile all those curves on and collectively they build that unit curve of all those cohorts. And then the other piece is the concept that this is not total clients, these are all new clients coming from that marketing spend. So it's on margin with that.

So the thing is that we're trying to say that, again, if you are doubling the spend, our unit breakeven, meaning the cost per acquisition per client and the time it takes to breakeven and go positive has actually remained the same.

Nigel Rose -- Chief Financial Officer

Yeah. Just to add to that, maybe to -- just to extend the point. If the blue line for example where you spent $25 million in marketing and that was represented by the blue line we paid back in nine months. And the green line is representing a $50 million annualized spend and it pays back in nine months. Within nine months time, in the same period of time, we effectively got probably twice the customers, twice the revenue, all now paying back after nine months versus spending $25 million nine months later you've only got -- they're paying back, but your only getting half of the revenue, you're getting when you're spending $50 million, and they payback in nine months.

Glenn H. Stevens -- Chief Executive Officer

And that's why we put the model in to show, that's the whole reason for adding the model with the additional marketing spend to show our expectations are as this will play out for our financial.

Richard Repetto -- Sandler O'Neill -- Analyst

Okay. So then the next question is, you said that marketing would go even further up in 2020 and 2021. So could you give us a little feel or are we talking 5% up or given the increase that you're seeing, can you give us a sort of a feel?

Glenn H. Stevens -- Chief Executive Officer

Yes, that will be performance based, Rich. I mean, the whole departments are observing this, and having the data, and having the ability to track it almost in real time is the benefit of -- what we did say is, we're encouraged by the initial results in the first six months of an increase in marketing spend. I don't standing here today expect we have another material step-up like this. However, the whole idea is to say that, if the marginal benefits from the increased spending continues to pay dividends, then that's funding that. So for example, if you go from kind of $52 million to $55 million run rate for this year and we see that that's paying dividend over the time period, Nigel mentioned, is paying off, then yes you might go from $55 million to $65 million, but you wouldn't do it without the supporting evidence, and you wouldn't do without it being funded by the success. And the benefit here is that, as you start to reach certain inefficiencies in certain regions, so this is a global approach, but we bring it all away down to a regional basis. There might be some mix to shift for in some cases, some markets would absolutely warrant that increase that you've mentioned, and in other markets it might warrant a decrease. So those are the levels that we pulled optimize it. It's not just a blanket, hey spent $20 million more, which market is showing the best use of that additional spend.

Richard Repetto -- Sandler O'Neill -- Analyst

Okay. And then the last question would be, I guess on the RPM, I know you put in improvements to probably take volatility out and stabilize it some more. We still see them pull back, what appears to be pretty ball to markets in the 4Q. So I guess the question is, how do you -- how did those enhancements that you did to the market-making program, how would you judge or evaluate them given that the RPM did go down versus a volatile environment overall?

Glenn H. Stevens -- Chief Executive Officer

So the program and the effort and the client driving RPM was never expected or designed to have impact over short period like a quarter. It was designed to have longer-term impact, so that we could see a positive trend over time with all things being equal, would we end up with the better RPM. You still going to be subject to tailwinds and headwinds of pockets of wall or not. I think I would deferral a little bit, if you look at the wall in Q4, that was pretty concentrated to quite a small amount of time for the bulk of Q4. I don't believe particularly even equities are in currencies we had that kind of movement, it was pretty concentrated to the back into Q4 as a matter of fact maybe a couple of weeks. So it terms of saying that, hey what happened even though you had volatility in Q4, I'm not sure I would say that that necessarily described the whole quarter.

The second thing is, as you know, we're made up of both the currency, volatility measure to see those general mix, and those can run in tandem or not. And so with that together, you look at our product mix still and sometimes our customers will whether it's a trend or whether it's volatility will be drawn to one set of products or another, because they are all in our platform and are available, we'll see our customers gravitate toward one another and that will help drive it.

I think the main take away here is that we have seen some -- we've actually built in some improvements for the 12-month trailing, that's the 106 kind of going from a 102 -- 100 to 105, 102.5 up to 106, so it's a nice move up, but it's a gradual move up and continue to make some benefits as I mentioned earlier.

Richard Repetto -- Sandler O'Neill -- Analyst

Okay. Can I squeeze last one. Since we're reported late in the quarter with two months through the quarter, can you just give us a quick view of how the profitability of the RPM is going?

Glenn H. Stevens -- Chief Executive Officer

So Rich, wouldn't be you calling if you didn't ask, so that's good, (multiple speakers). But I mean ultimately we reported our January metrics, I think that many people in this field started off the year with some lower levels. If you look at the level of the civics, ad you look at the level of the vics, the January numbers were lower than December. As we get into the second part of this quarter if you will, I think by some measures February has shown a few pockets by the same token, I think, again just kind of natural observation with all the different markets, seems to be a little bit of comp for stone two. We got a bunch of things in horizon with Brexit and with plenty of comings and goings in multiple markets. So yes, so I guess the answer would be, we've seen some progress, and by the same token we started the quarter with the software January. And so we see how the quarter plays out. I mean it's almost two months in if you will by the same token as you rightfully noted in Q4 of last year with some pockets of volatility within a quarter, those can work out OK too.

Richard Repetto -- Sandler O'Neill -- Analyst

Okay. Thanks, Glenn.

Glenn H. Stevens -- Chief Executive Officer

You got it.

Operator

And our next question comes from Ken Worthington from J.P. Morgan. Please go ahead with your question.

Ken Worthington -- J.P. Morgan -- Analyst

Hi, good afternoon. And thank you for taking my questions. Maybe the first just follow up on something that Rich said. The impact of the quant in hedging strategy, you've seen very large swings in RPM historically. My impression is the hedging would have a real impact in reducing that sort of revenue volatility, and so the way you just described it was -- it wouldn't necessarily show up in anyone quarter with over multiple quarters you would see a decline, which makes me feel like there's not a big impact. So maybe if you could redescribe the magnitude that you think your hedging in quant strategy will lower the volatility of RPM over time?

Glenn H. Stevens -- Chief Executive Officer

Sure, Ken. So the first way to answer is that, when we measure it full effectiveness, it will be when it has fully been integrated into all of our products. So, for example, when we rolled it out in Q2, and we applied it to the major currency pairs where there's a lot of volume, we've seen improvements -- significant improvements in measures like Sharpe ratio, daily P&L, variations, things like that. So by some small unit measurements, it's doing what is supposed to do, and again not day-to-day, not even month to month, sometimes not even quarter-to-quarter, but overtime, it showing improvements.

For example, when you go back to, I guess it was maybe Q3 of 2018, there was a big disconnect in the Turkish lira, which led to some other products that also kind of bumped out. Those products weren't even under the -- and we had mentioned back then those products were under the program. And for example now, our equity industries and are single stock equities are also not into the program yet. There is time to develop the models and time to deploy the models and test the models and make sure it all works, so every quarter that goes by, we fold in another product set or too with the design of saying that as we get into this year we tried to see how that goes.

If you look at the FX standard deviation, for example, over the same period, that's lower by 16%. So there's an example of lowering the standard deve on the part of the program that's subject to this. So if you take the old one, compare it to the new one over the same period, that's one measure. So as I said, the Sharpe has improved, standard deviation has improved, and the other products are not on my mind yet. And that's also part of the reason why we -- without putting it out kind of wall on this or variation on this, but we get the side benefit of a net improvement as well.

Ken Worthington -- J.P. Morgan -- Analyst

So maybe to help out a little more, you did and RPM was like 97 this quarter, do you have any guess of what that might look like? And that 97 is both your new kind of long-term average RPM and maybe the former RPM. What might this have looked like if these strategies were fully deployed?

Glenn H. Stevens -- Chief Executive Officer

I mean, I think that -- let's put it this way. If the strategies were fully deployed across all the asset classes, I think our model assumption is for 106 longer term. So arguably, and that is with the model fully deployed across all the asset classes. So Q4 arguably would -- by design would look closer to that longer-term average. However, over a short period if there was a product set within there, whose wall either was up or down, the 97 could have been 117, because I'm stretching, but let's say 110 or it could have been 90 because of particular products that kind of with out of that. I mean, ultimately in terms of all the wall, it's kind of -- because the different product sets that are driving this sometime you can have one stick out in the quarter up or down, and if it's a chunky part of our volume, it will drive short-term RPM regardless of the model. Because the model is not going to have neutralized lower vol or higher vol in let's say equities or in currencies something like that.

Ken Worthington -- J.P. Morgan -- Analyst

Okay, thank you. Thinking about the three-year outlook, can you tell us the assumptions that you're making for account attrition? Maybe where has attrition really been? And do you expect it to change between where it's been more recently and where you would expect it to be in 2021? Is that one of the drivers here as well, maybe beneath the surface to your other assumptions?

Glenn H. Stevens -- Chief Executive Officer

I think that if you look at Slide 16 and -- 15 and 16, they don't address it or not calling out on that. What I'm saying is that, improving our trading experience and kind of solidifying the two brand assets we talked about for us to gain capital. The purpose of that is to extend the tenure of the client, to improve retention, and those two arguably are supposed to improve the attrition rate. And so to answer your question specifically, our model builds in a modest improvement in attrition against historical trends, because of these changes we're making if you will, improvements, enhancements that other than clients exiting the market for reasons we haven't discovered yet, we want to reduce switches, reduce other reasons why they try to make them more sticky, because higher value clients are definitely more sticky and you see that. And so making distinct improvements to our higher-value premium clients by design will give us a better tenure and a higher stickiness or retention rates for our clients too.

Ken Worthington -- J.P. Morgan -- Analyst

Great. And then lastly, so in your three-year outlook, really guiding to three things, big new account growth, flat RPM and flat expenses. So there are assumptions behind these driving these outcomes. If your assumptions prove to be overly aggressive or overly conservative, which of the drivers do you think would be off and why? And I guess this goes along with where do you feel most confident and least confident in these outcomes that you're suggesting?

Glenn H. Stevens -- Chief Executive Officer

Well, on our expense discipline, we're pretty confident that we can manage that effectively, because the kind of multiple expansion or the leverage ability in our inherent in our business model such that those expenses are pretty clearly not going to be dragged up by higher business levels and volumes customers were have you. We've modeled out quite a bit of our capacity from a technology perspective to absorb big spike inactivity in volumes of new customers by automating a lot of the processes, for example on the FOREX.com brand, we're able to scale that effectively because it's doesn't -- it's not going to take a whole ton more reps and things to handle these more customers have them on board. So in terms of expenses, I think we're really confident about saying, hey we can manage that effectively. We're not expecting any surprises there. And as a matter of fact, we're expecting positive surprises, because we have opportunities to be other quick alone transitions or figure out better ways to even reduce our cost base. We're constantly searching for that. So that's number one.

In terms of the marketing spend, again that is a voluntary spend. We haven't booked three-year contracts at levels were set and that's it. So of course, when you say confidence we're confident that that's going to pay off or otherwise we wouldn't be spending it. But in terms of having the recompense to be able to change that level commensurate with profitability in revenues, you can -- that's I said, we can invest in even higher levels doesn't make sense or invest at lower level doesn't make sense. And that again can happen on a regional basis on a brand basis, there's own its level, it's not a one-shot global, these actually are collective additives of different models within that.

The last one I guess is the 106. And that's a relatively, we would argue representative sample of one, two, three, five, seven years with RPM even to get a feel for it. We have some built-in underpinnings of improvement that we alluded to before about the more quant-driven strategy of using for hedging and modeling and data analysis. But of course you can look back at 10 years worth of any markets and try to get a feel for what the vol look like if you want to break it into one-year chunks, and say jeeze, we did have a 2017 in there, did we have a 2006 in there? Picking out some years in particularly low vol, and so with that little kink in the time line, sure but just as easily you can end up with a year that's an outside vol year 2016, 2008, would have you. And so over three you can end up with all three. A medium one is expected a higher than expected and a lower than expected, but that's probably the one we can't control, and, but the good news is that we have some levers to pull to navigate around it.

Ken Worthington -- J.P. Morgan -- Analyst

Okay. Great. Thank you very much.

Operator

And ladies and gentlemen, with that, we will conclude today's conference call. We do thank you for attending today's presentation. You may now disconnect your lines.

Duration: 65 minutes

Call participants:

Nicole Briguet -- Investor Relations representative of GAIN Capital

Glenn H. Stevens -- Chief Executive Officer

Nigel Rose -- Chief Financial Officer

Kyle Voigt -- Keefe, Bruyette & Woods -- Analyst

Daniel Fannon -- Jefferies -- Analyst

Richard Repetto -- Sandler O'Neill -- Analyst

Ken Worthington -- J.P. Morgan -- Analyst

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