Diversification: Key to Success

The war in Ukraine, soaring inflation, turbulences in the energy market, interest rate hikes, prolonged impact of the pandemic, tectonic shifts in global politics: these are just some of the challenges that the international economy, including the capital market, has been facing for a long time. How to generate stable revenues and recurring income under such conditions? How to make informed decisions in uncertain circumstances? How to develop corporate strategies and make them resilient to potential shocks?

These are just a few of the themes we have considered when defining the GPW Group’s new strategy for 2023-2027. The strategy is based on three main pillars of growth: trading, data and technology, and new business models. Compared to GPW’s previous strategy, which put core business on a par with new initiatives, the new strategy focuses on core business but in a very different way. Diversification of revenue streams is key as it will increase financial security, competitiveness and predictability of the GPW Group’s results, as well as the flexibility of our operations.

More than a trading platform

It is a global trend that stock exchanges no longer operate merely as financial instrument trading platforms but are entering new business segments. For instance, the sale of technology and data services and products accounts for 72 percent of revenues of the London Stock Exchange and 42 percent at the New York Stock Exchange. The current proportion for the Warsaw Stock Exchange is 16 percent of revenue but our long-term goal is to increase the share of GPW’s new business segments.

We know that revenue diversification is one of the key risk management tools, especially under volatile market conditions. Entering new business segments will give us more flexibility and the capacity to adapt to change. Moreover, diversification will strengthen the competitive advantage and market position of the Warsaw Stock Exchange. This is crucial because the entry barriers in our industry have shrunk considerably in recent years. We operate in a large economic space where each company can choose where to issue shares or bonds in the EU. While we have maintained a strong 15-16 percent market share in European IPOs, new products and services can be an additional argument in support of choosing our stock exchange.

This is why the key growth drivers under our new strategy include the development of core trading platforms as well as new data products and services. The latter are expected to boost our revenue by PLN 101 million over the next five years, accounting for 30% of the GPW Group’s profit. Meanwhile, we will continue to implement the existing projects which are already generating significant revenues for GPW.

GPW: a technology vendor

One of the pivotal projects launched under the previous GPW Group strategy is the Polish Digital Logistics Operator (PCOL), where the GPW Group established a new subsidiary, GPW Logistics, a transport and logistics service provider. The initiative combines GPW’s competences in the development of trading platforms, trade clearing, and data analytics. The PCOL project is developing software based on artificial intelligence to optimise the day-to-day operations of logistics and forwarding divisions of shipping companies. GPW Logistics generated significant revenues of PLN 4.13 million in the first quarter of 2023.

Another example of GPW’s successful business diversification is the Telemetria Operator project aiming to build a multi-module auction platform for the comprehensive handling of transactions in the media market based on dynamic ad insertion (DAI). Once again, the Warsaw Stock Exchange (via the newly established company GPW DAI) is leveraging its experience as operator of a financial instrument trading platform in a new industry, which is very profitable. The TV advertising market in Poland is estimated to be worth around PLN 4.49 billion per year. According to conservative estimates DAI’s potential is an additional PLN 660 million per year thanks to, among others, higher fees for viewer-profiled advertising.?

The commercialisation of our technological solutions, developed by GPW Tech, generates additional revenues, as well. Both the proprietary trading system GPW WATS and specialised tools: TCA Tool (an application for analysing the micro- and macro-structure of the market) and GPW STORK (a tool for detecting market abuse), have been successfully launched in the global technology market. Regrettably, the pandemic delayed the commercialisation of our projects by several months.

International diversification

The results for the first quarter of 2023 clearly demonstrated that the deployment of our core competences in new business segments was the right decision. As a result, we are becoming less dependent on the conditions in the global financial markets. Consequently, our revenue was PLN 112.3 million, the second highest quarterly revenue in the history of the GPW Group.?This was due in part to significant revenues from new business lines, such as GPW Logistics, GPW Tech and the Armenia Securities Exchange, which accounted for around 10 percent of our sales.

This latest initiative, following GPW’s acquisition of a majority stake in the Armenia Securities Exchange, was finalised at the end of 2022 and is already providing a tangible financial advantage. In addition, access to a new market allows us to reach new customer groups and increase the sales opportunities for our solutions. This not only opens space for marketing activities but also helps to strengthen the Armenian market with our know-how based on more than 30 years of experience of operating in a challenging market and business environment.

This successful example of diversifying revenue streams while entering a foreign market corroborates our conviction that it is essential in unstable times to keep eyes open for new opportunities, act out of the box, closely follow new trends and the competition. Importantly, successful diversification hinges on good planning, market analysis, adjustment of the strategy to current conditions, as well as smart management. The case of GPW proves that such a strategy pays off.