SNEX - NASDAQ

Good day, and thank you for standing by. Welcome to the StoneX Group Inc. Q4 Fiscal Year 2023 Earnings Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker, Bill Dunaway, CFO. Please go ahead.

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 thanks for joining our fiscal 2023 fourth quarter earnings call. During the fourth quarter of fiscal 2023, we saw a strong 33% growth in operational revenues despite generally moderating volatility, although we did see some really sharp moves in the interest rate markets. The extent and speed of the interest rate increases over the last 18 months is nothing short of historic, and has resulted in the general repricing of risk and financial assets across the board. While it would appear that the trajectory of interest rates may be flattening, I do not think we have seen the full force and brunt of these historic moves manifest themselves yet, and there's likely to be some further dislocation and financial stress as a result. This was a solid fourth quarter for us and a truly exceptional and another record-setting year for the company overall, validating our strategy and demonstrating the earnings power of our franchise. For the fourth quarter, we recorded operating revenues of $778 million, up 33% versus the prior year. Net operating revenues were up 4%, and compensation and other expenses were up 3% from a year ago, resulting in pre-tax income of $75.4 million, up 14% versus the prior year, which was a strong comparable quarter for us. Despite the increase in pre-tax income, a much higher effective tax rate, 32.8% versus 21.2% in the prior-year quarter, driven by discrete items and year-end adjustments in each period, resulted in a 3% decline in net income to $50.7 million, and a diluted EPS of $2.36, and an ROE of 15%. For the full year's results, the tax rates are relatively comparable at 26.2% for fiscal '23 compared to 25.3% in the prior year. Turning now to Slide 3 in the earnings deck, listed derivatives operating revenues were down 2%, largely due to a 3% volume decrease versus a year ago. Listed derivatives in our Commercial segment volumes were up 21%. However, on the Institutional side, the volumes, and this is a much higher volume business, were down 9%, leading to the overall contract volume decline. OTC derivatives operating revenues were up 22% off the back of strong volumes. Securities operating revenue was the most significant contributor, up 70%, although this number is somewhat distorted due to the much higher interest rates in our fixed income business. Carried interest on fixed income position is reflected in operating revenues, while the offsetting interest expense to finance these positions is not. The RPM, the rate per million numbers, have been adjusted to reflect this offsetting expense. Net operating revenue for the fourth quarter for securities declined 15%, primarily as a result of the rate per million declining 45% due to lower volatility and tougher market conditions in the equity business as well as a lower margin product mix in both equities and fixed income, both of these mentioned in previous calls. FX and CFD operating revenues were down 3%, with a higher RPM being offset by a lower ADV impacted by tougher new client acquisition environment internationally. Global Payments operating revenues were up 21% due to a higher RPM versus the prior-year quarter. Interest and fee revenues were up 110% versus a year ago as we compare to a lower rate environment in the prior year. Our FDIC sweep balances were down 40% as clients moved into higher-yielding alternatives, although our client funds on the derivatives side were relatively unchanged. Moving on to Slide 4. For the fiscal year as a whole, it was generally a very similar picture. Listed derivatives operating revenues were down 3%, largely due to a 4% decrease in the average rate per contract, largely coming from our Commercial segment. OTC derivatives operating revenues were up 11% off the back of strong volumes, which were up 20%, although the rate per contract declined 7%. Physical contracts operating revenues were up 26% versus the year-ago period, primarily as a result of the CDI acquisition at the beginning of the fiscal year as well as the growth in our biodiesel feedstock business. Securities operating revenue was again the most significant contributor, up 74% although, again, distorted for the higher -- because of higher interest rates, as I mentioned earlier. Net operating revenues in securities transactions declined 11% versus the prior year, as an increase of 52% in ADV was more than offset by a 40% decline in revenue capture. FX/CFD operating revenues were down 23% versus the very strong results a year ago, with ADV down 10% and rate per million down 12%. Global Payments operating revenues were up 24% due to both a higher ADV and RPM. Interest and fee revenue was up 331% versus a year ago, as we compare to a lower rate environment in the year prior. On an annual basis, our FDIC sweep was down 25% as clients moved into higher-yielding alternatives, while client funds on the derivative side were up 25%. Turning now to Slide 5, and a summary of our fourth quarter and our full year fiscal results. We recorded operating revenues of $778 million, up 33% versus the prior year. Net operating revenue was up 4%, and this is after interest expense, including interest related to the fixed income trading mentioned earlier. Total compensation and other expenses were up 3% for the quarter. This resulted in net income of $50.7 million, down 3% for the year -- from the year prior, and diluted EPS of $2.36, down 5%, and a 15% ROE. As I mentioned upfront, there is a much higher tax charge this year, 32.8% versus 21.2%. On a pre-tax earnings basis, the quarterly results were up 14% versus the prior-year quarter. Average client float was $7.8 billion, down 10% from a year ago and up 1% from the immediately prior quarter. Our financial results were boosted by higher interest and fee income on our client float as short-term rates increased over the period. Our average yield on our client float was 372 basis points for the year overall and 422 basis points for the fourth quarter. The yield on our client float was adversely affected by some interest rate swaps we entered into about two years ago, which will start rolling off in the coming quarters and should boost our yield, assuming, of course, no change in interest rates. In comparison with the immediately preceding quarter, our operating revenue was up modestly and net operating revenues were down 7%, fixed compensation was up 2% and variable compensation was down 14%, and net income was down 27%. Looking at the summary for the full fiscal year, this was a record year for us in almost every metric. Our operating revenues were a record $2.9 billion, up 38% over the prior year. Net income was a record $238.5 million, up 15%. Our diluted EPS was $11.18 for the full fiscal year, up 12%. Our ROE was 19.5% despite equity having increased 53% over the last two years. We ended Q4 '23 with a book value per share of $66.31, up $13.61 for the year or 26% versus the year ago. Turning now to Slide 6, which is our segment summary, just to touch on a few highlights before Bill gets into more details. For the quarter, segment operating revenue was up 32% and segment income was up 20%, with good performances across all of our client segments. In our Commercial Client segment, segment income was up 10% off the back of a 12% increase in operating revenues, with strong results from OTC derivatives, and of course, higher interest rates, offset by lower physical commodities revenues. Our Institutional segment realized a 65% increase in revenues, which translated into a 22% increase in segment income. Our foreign exchange business had a very good quarter, and of course, we benefited from the positive impact of interest rates. This was offset by a tougher environment in securities, particularly on the equity side. Despite operating revenues being down 9%, our Retail segment delivered a 39% increase in segment income due to good revenue capture on the digital trading platform and 23% lower non-variable costs. Some of this cost reduction is as a result of certain functions, such as the digital marketing group being moved to a central overhead to be leveraged throughout the entire organization. Global Payments operating revenue was up 22%, and segment income was up 32%, driven by a 26% increase in revenue capture. For the full fiscal year, segment operating revenue was up 37% and segment income was up 13%, with strong performance across all of our client segments, except Retail, where segment income was down 60% against the exceptionally third prior-year performance. These are solid results, but as we've said repeatedly, we take a long-term view on how we manage the company and grow our franchise. As such, we believe the best way to gauge our results and progress is to look at longer-term performance, such as trailing 12 months, rather than specific quarters taken in isolation. Turning to Slide 7, which sets out our trailing 12-month financial performance by quarter. These numbers have been adjusted for the accounting treatment related to the gain in CDI acquisitions, as disclosed in our prior filings and which appear in the reconciliation provided on the last page of the earnings deck. On the left-hand side, the bars represent our 12-month -- our trailing 12-month operating revenue over the last nine quarters. As you can see, this has been a smooth and strongly upwards trend as we have steadily expanded our footprint and capabilities. Our operating revenues are up 74% over this period for a 32% CAGR. Our adjusted pre-tax income likewise has grown significantly at a 37% CAGR. On the right-hand side, you can see our adjusted net income in the bar graphs, which is up 79% over the two years for a 34% CAGR. The dotted line represents our ROE, which has remained above our 15% target, even though our capital has grown by 53% over this period. With that, I'll hand you over to Bill Dunaway for a more detailed conversation. Bill?

I will be starting with Slide number 8, which summarize 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 client 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% -- $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 ranching of predictable 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 terms 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 offer 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 clients. 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'll not 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] (ph) 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 system for 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, put 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. So with that, let's open the line, operator, and see if we have any questions.

Certainly [Operator Instructions] 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?

Yeah. Dan, I'll start just at a high level, and let Bill jump in. So I think, Dan, the best way to think about sort of variable is to correlate it to net operating revenues. Our gross operating revenues are before the interest charge, and obviously, you know there's kind of an accounting anomaly there on the fixed income side. It's before interest charges, it's before sort of brokerage and exchange fees. So, if you look at our net operating revenue, it was up, I guess, 4%, 5%, something like that. I don't have the number right in front of me. And I think you should look at variable related to that, because that's really kind of how most of the payout calculations work. And then, I would say one other factor. As I mentioned, we're always investing in teams of people, expanding initiatives. And oftentimes, we have some of those costs hitting before we have revenue. As the revenue starts to hit, you start to get variable comp to replace some of that -- or you get offsetting revenue, let me say it that way. So over time, if we just stopped investing in new products and new teams, you would see variable comp come down as a percentage because you would start to see those initiatives either be terminated or become successful, and you had offsetting revenue. And sometimes, there are a little bit of leads and lags on that, so you can see a little bit of fluctuation from quarter-to-quarter just depending on how those new initiatives are running through. But I'll stop there, and let Bill add anything he wants to add.

Sure. I mean, Sean, I think you nailed most of it. The only comment I'd make is, so looking -- focusing on a percentage of net operating revenue is the way to do it. And I think if you look at historically, we've probably been in the 31% to 32% of net operating range for variable comp. What you do see, and I tried to point it out in my section of the call today a little bit, as the interest and fee income on client balances has increased here, particularly year-over-year, that typically does not fall into variable compensation calculations. So you'll actually see variable comp as a percentage of net operating revenues kind of trend down a little bit as a percentage as interest and fee -- or client income goes up. We'll have conversely the opposite effect, if it goes the other way. So, I'd say the really low rate environment that we have been in, in the last two or three years or prior to the last 18 months, I should say, I think you're looking at probably like 32% of net operating revenues as a gauge and probably more like 29% to 30% in the current environment, if that helps.

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. And then a lot of discussion, Sean, just about what you're doing, digitizing expenses, getting more efficient initiatives, a lot of opportunity for growth. I guess in the context of the fixed expense budget as you think about next year and how -- what the puts and takes around all the things you're doing, and what that ultimately means from kind of how we should think about 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 -- just so we get a sense of what the -- normalize or what the actual expense was versus the recovery?

Yeah. It was, I think, a $1.5 million recovery in the Institutional segment, I think, is what we saw. You can kind of see if you look at the -- or $1.3 million, I guess, as I'm looking at the earnings deck here.

Okay. All right. Thank you. And then just one more on, I guess, expenses -- the recent news around the litigation associated with BTIG and some of the claims made within that. I know it's early, but I was hoping you could contextualize the businesses this impacts and any kind of first -- kind of outlook or comments on it.

Okay. Well, obviously, we can't comment on pending litigation. So -- but what I will say is we are aware of the complaint that was filed earlier this week. It seems to us that this action is more focused on media and attracting publicity than anything else because it appeared in the media before the complaint was even filed with the court. So, they went to press first. We're reviewing the complaint, but at this time, we don't believe any of these allegations of any merit. So, we will defend ourselves, we believe we're in a good position, and we don't think there's any merit. So that's about all I can tell you at this point. We're 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. Well, we never plan for acquisitions. I know that always sounds strange when we say it, given that we've done like 30 acquisitions. We always focus, first and foremost, on sort of the organic growth of our ecosystem and opportunity. And as I said, it's a very constructive environment, we believe for organic growth. I mean, I think the banks are going to be hit with another big capital charge. There was a big conference that the FIA held about that. They believe it could really affect the sort of trading and clearing business at the big banks as it has. That will just accelerate that, so that's good news for us. So that's our primary focus. That said, we do like to be in the pipeline. We included in most of the transactions that would be sort of sized for us, I think we see most of them. And I would say there's definitely been more interesting opportunities of late than there was probably over the last two years. As I said repeatedly, as we were sort of during the COVID years, things were crazy, people were having sort of big bumps in revenue, and obviously, multiples got to kind of hysterical levels. So at that point, we just didn't see anything that was even remotely interesting. I think we're now in a more normalized environment, and I think the push to consolidation continues. Smaller firms are struggling and they have to do something, and those are the kind of opportunities we tend to see. So, I think we're sort of back to a more normal cadence. But having said that, I don't think there's necessarily anything on the horizon that we think is close or sort of -- or could be meaningful, but we're definitely looking at more stuff, if that answers your question.

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.