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BGC Partners, Inc. (NASDAQ:BGCP)

Q4 2012 Earnings Call

February 14, 2013 10:00 AM ET

Executives

Jason McGruder - Investor Relations

Howard Lutnick - Chairman and Chief Executive Officer

Shaun Lynn - President

Sean Windeatt - Chief Operating Officer

Graham Sadler - Chief Financial Officer

Analysts

Jillian Miller - BMO

Rich Repetto - Sandler O'Neill & Partners

Niamh Alexander - KBW

Patrick O'Shaughnessy - Raymond James

Rob Rutschow - CLSA

Operator

Good day, ladies and gentlemen, and welcome to the fourth quarter 2012 BGC Partners earnings conference call. (Operator Instructions) I would now like to turn the conference over to host for today. Mr. Jason McGruder, Head of Investor Relations.

Jason McGruder

Good morning, everyone. Our fourth quarter and full year 2012 financial results press release was issued this morning. This can be found either at the News Center or Investor Relations section of our website at bgcpartners.com.

During today's call, we will also be referring to a presentation that summarizes our results and which includes other useful information. This too can be found in the Investor Relations section of our website.

Throughout today's call, we will be referring to results only on a distributable earnings basis. Please see today's press release for GAAP results. Please also see the section of today's press release entitled Distributable Earnings, Distributable Earnings Compared with GAAP Results and reconciliation of revenues under GAAP and distributable earnings and reconciliation of GAAP income to distributable earnings, for definition of these terms and how, when and why management uses them.

Unless otherwise stated, whenever we refer to income statement items such as revenues, expenses, pre-tax earnings or post-tax earnings, we are doing so only on a distributable earnings basis. Unless otherwise stated, all the financial comparisons we will be making in today's call will contrast the fourth quarter of 2012 with fourth quarter of 2011.

I also remind you that the information on today's call contains 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.

Such forward-looking statements include statements about the outlook and prospects for BGC and its industry as well as statements about our future financial operating performance. Such statements are based upon current expectations that involve risks and uncertainties. Actual results, performance or achievements could differ materially from those contemplated, expressed or implied because a number of risks and uncertainties that are included but are not limited to the risks and uncertainties identified in BGC's filings with the US Securities and Exchange Commission.

We believe that all forward-looking statements are based upon reasonable assumptions we have made, however, we caution that it is impossible to predict actual results or outcomes or the effect of risks and uncertainties or other factors on anticipated results or outcomes that accordingly you should not place undue reliance on these statements.

Forward-looking statements speak only as of the date when made and we undertake no obligation to update these statements in light of subsequent events or developments.

Please refer too the complete disclaimer with respect to our forward-looking statements and risk factors set forth in our most recent public filings in Forms 8-K, 10-K and 10-Q which we incorporate today by reference.

I now have to turn the call over to our host, Howard Lutnick, Chairman and CEO of BGC Partners.

Howard Lutnick

Good morning, everyone. I would like to wish you all a Happy Valentines Day. Thank you for joining us for our fourth quarter conference call. With me today are BGC's President, Shaun Lynn; our Chief Operating Officer, Sean Windeatt; and our Chief Financial Officer, Graham Sadler.

BGC's fourth quarter revenues were up 19.4%, driven by the continuing success of Newmark Grubb Knight Frank, which more than doubled its revenues to $148.7 million. NGKF's pre-tax distributable earnings grew by 32.6% to $12.6 million.

Our diversification into real estate services provided a substantial contribution to BGC's overall 2012 results and lessen the impact of challenging industry conditions across the global financial markets. Over the course of the year, industry volumes and volatility were lower, reflecting reduced trading activity by many large global banks.

Hurricane Sandy, which was devastating for the New York area, further affected the results of both our real estate and financial service segments in the fourth quarter of 2012. Some commercial real estate transactions were cancelled or delayed in areas impacted by the storm, while the financial services industry as a whole faced challenges for much of quarter due to Sandy.

BGC remained open by relocating our downtown operations uptown. I'd like to take a moment to compliment and thank our hundreds of employees, who worked tirelessly to limit the disruption to our business.

The hurricane devastated many families across the East Coast and we have been front and center, helping many of these families with money from our September '11 charity day. I am happy to report that our lower Manhattan office is now reopened and we expect to be completely back in our regular offices by the end of the first quarter.

The challenging financial volumes of the last three quarters were well below what anyone would consider ordinary. However, our volumes have rebounded since the beginning of the year.

With respect to real estate services firms, they generally have lower revenues and low profitability in the first quarter, and higher revenues and significantly higher profits in the fourth quarter. So we therefore expect the addition of NGKF to reduce the seasonality of BGC's overall quarterly results.

I am happy to report that our board declared a 12% dividend for the quarter. In addition, 96% of dividend that we paid last year were non-taxable, and we expect a majority of dividends paid this year to also be non-taxable. We are confident in the sustainability of our current dividend and yesterday's closing stock price, the dividend yield on BGC was 11%.

With that, I'm happy to turn the call over to Shaun.

Shaun Lynn

Thanks, Howard, and good morning, everyone. In our financial services segment, volatility remained below historical averages across most asset classes during the quarter, resulting in lower volumes industry-wide.

In rates, activity remain muted due to quantitative using undertaken by major central banks. U.S. Federal reserve currently owns approximately $2.4 trillion worth of long-dated treasuries and agencies on its balance sheets, which are not being traded or hedged.

In addition, the Fed is expected to purchase another $85 billion per month of such assets through to the end of 2013. While revenues in our rates businesses declined by 6.5%. This is less than the 13% to 14% decline in interest rate product volumes for CME, Eurex, and Euronext.

We believe the central bank's positions eventually will be unwound when the economy improves, which will provided us with future tailwinds. We also believe rates markets will become more active over time as high levels of government corporate debt issuance around the world drive volumes upward in our voice and the electronic businesses.

BGC's e-brokered volumes and interest rate swaps, and other interest rate derivative products more than doubled. But they are relatively small percentage of our overall rates revenues. While corporate bond volumes reported to the Federal Reserve for the quarter declined 16% year-over-year, and ICE CDS revenues declined by 14%. Our credit revenues decline by 5.9%.

Global FX volumes was subdued in the fourth quarter. Quarterly average daily FX volumes declined by 16% at the CME, 23% at Thomson Reuters, and 30% at EBS. I am pleased to say that despite this backdrop, BGC outperformed the overall market. Our total FX revenues were down by just 0.5%, while our fully electronic FX revenues increased by almost 25%.

Global equity markets also continued to be difficult, as equity derivative volumes were down between 9% and 41% according to the OCC, Eurex, Deutsche Borse, and the CME. In comparison, BGC's revenues from equities and other asset classes, decreased by 18.5%.

Financial services segment, revenues from e-broking, market data and software were $14 million or 14.6% of segment revenues in the quarter versus $41.3 million or 14% of segment revenues. I'm happy to report that our revenues increased by more than 15% year-on-year in January 2013 for these technology based businesses.

BGC now offers e-broking on over 100 over 200-plus financial services desk compared with approximately 90 a year ago. We expect the number of e-brokered desk and the revenue they generate to continue to grow faster than our overall financial services business.

Our overall financial services segment generated revenues of $274.9 million and $35.1 million of pre-tax earnings. A year earlier, this segment generated $296.1 million in revenues and $58.2 million in pre-tax profits.

We had 1,721 brokers and sales people in financial services at the end of 2012, generating average revenues of approximately $158,000 per broker in the fourth quarter. A year earlier, these figures were 1,766 brokers and sales people and approximately $169,000.

Turning to our real estate services segment, industry metrics continue to move in a positive direction in the fourth quarter. According to real capital analytics, overall U.S. commercial property sales volume grew by 47% year-over-year in the fourth quarter. While the RCA Commercial Property Price Index was up by 5% for the same timeframe.

This strong volume growth, which are in part to the relatively high spread between the average capitalization rate or yield on commercial property versus 10-year treasury rates. As of yearend, RCA had spread at nearly 500 basis points compared with less than 200 basis points in 2007.

In addition, lower interest rates and the increased availability of credit have made commercial real estate borrowing easier for most buyers. As a result, NGKF's research team expects commercial sale volumes to continue to grow in 2013.

On the leasing side, vacancy rates, asking rents and absorption rates also improved. For example, the U.S. office market ended the year with vacancy rate of 15.7%, an improvement versus 16.4% a year earlier, according to CoStar and NGKF research. Our research team believes that the office vacancy rates will fall below 15% by yearend and the rental rates will increase by 2% to 3%.

Our real estate services segment generated $107.5 million in brokerage revenues and $41.2 million in management services and other revenues. Overall, NGKF revenues were $148.7 million, while pre-tax earnings were $12.6 million.

These results with substantial improvements compared with a year earlier, when real estate services generated $54.4 million in brokerage revenues and $2.7 million in management services and other revenues. Overall revenues of $57.1 million and pre-tax earnings were $9.5 million.

During the fourth quarter, NGKF corporate services was selected by both Nokia Siemens Networks and Cummins, Inc. to be their sole global corporate real estate supplier. Between these two companies, this represents hundreds of locations and tens of millions of square feet in over 100 countries around the world. We think that these wins are an excellent affirmation of the strength of NGKF's technology and deep industry knowledge.

NGKF had 807 brokers and sales people at yearend, which is more than double the year earlier figure of 381. Average revenue per real estate broker was approximately $131,000 in the fourth quarter, an increase of almost 21%. These improved metrics demonstrate the success we've had integrating Grubb & Ellis and Newmark, and we expect to further grow NGKF in 2013.

Real estate services drove BGC's overall 17.7% increase in front office headcount to 2,528 brokers and sales people as of the yearend. BGC's total average revenue per front office employee was approximately $149,000. A year earlier, these figures were 2,147 brokers and sales people at an average of approximately $163,000 each.

With that, I would now like to turn the call over to Graham.

Graham Sadler

Thank you, Shaun, and good morning, everyone. BGC generated revenues of $436.3 million, up 19.4% compared to $365.3 million. This excludes a $52.5 million gain from the sale of BGC's investments in the London Metals Exchange. Our revenues from the Americas were up 57% to $233 million due to the addition of real estate.

Europe, Middle East and Africa decreased by 4% to $161 million, and Asia-Pacific revenues decreased by 14% to $43 million. Our European revenues were negatively affected by approximately $2 million due to the impact of the U.S. dollar strengthening versus the euro year-on-year.

Excluding the real estate services segment, our global October 2012 revenues were down by approximately 4% to $108 million. November was down by approximately 11% to $100 million, while December was down by approximately 5% to $80 million, all when compared with the year earlier.

Turning to expenses, compensation and employee benefits were $268.4 million or 61.5% of revenues. This compares to the $197.9 million or 54.2% of revenues. Our compensation ratio increased mainly due to the addition of NGKF. Since the commercial real estate services industry generally has higher compensation ratios, but lower non-compensation expenses as a percentage of revenue.

Non-compensation expenses were $132.8 million or 30.4% of revenues. This compares with $119.8 million or 32.8% of revenues. The increase in non-compensation expense is in absolute terms, which is largely to the addition of real estate and higher interest expense as a result of the June 2012 issuance of senior retail notes.

And looking back at 2012, we see that we began the year too optimistic with respect to financial services volumes, and allowed our overall expenses to rise along with those expectations. We also added significant expenses with the respect to the integration of Grubb & Ellis and Newmark, and their integration into our infrastructure.

We are now aggressively addressing our expenses and thus incurred a $7.4 million restructuring charge in the fourth quarter, primarily related to the elimination of more than a 100 front and back office positions in our financial services and corporate areas. As a result of this restructuring on our expense reduction program, we expect to reduce overall cost by total and approximately $50 million on a go-forward basis by the end of 2013. This reduction will include comp and non-comp expenses.

BGC's pre-tax earnings were $35.1 million compared with $47.7 million. Our pre-tax margin was 8% compared with 13.1%. Our effective tax rate for distributable earnings was 14.5% in the fourth quarter 2012 compared with the 11.7% a year earlier.

BGC's post-tax distributable earnings were $28.4 million or $0.10 per fully diluted share compared with $40.3 million or $0.16. Our post-tax earnings margin was 6.5% compared with 11%.

Our fully diluted weighted average share count was 337.2 million for the fourth quarter of 2012. This included a weighted average of 39.6 million shares associated with our convertible senior notes. A year earlier, our fully diluted weighted average share count was $292 million.

In both periods our GAAP fully diluted weighted average share counts were lower than those for our distributable earnings, because certain share equivalents were diluted with distributable earnings, but not for GAAP. As of December 31, 2012, our fully diluted share count was 341.7 million, assuming conversion of 39.6 million shares underlying the convertible senior notes.

With that, I am happy to turn the call back over to Howard.

Howard Lutnick

Thank you, Graham. Excluding real estate services, our revenues for the first 29 trading days through February 12, 2013, were about even with last year. And so far this year, our fully electronic businesses have continued to outperform our overall financial service results.

With respect to the first quarter, we expect to generate distributable earnings revenues of between $440 million and $470 million, which is an increase of approximately 9% to 16% compared with $403.9 million last year. This guidance includes the fact that this year we have two less trading days in the first quarter and one additional day in the second and third quarters when you compare that to last year.

We expect pre-tax distributable earnings to be between $45 million and $55 million for the first quarter and this compares to $58.2 million last year. We expect our effective tax rate for distributable earnings to be approximately 14.5% for the full year 2013 as compared with 14.3% in the first quarter of 2012, and 14.4% for the full year of 2012.

I'd also like to remind you with respect to real estate, the revenues and profitability tends to be lowest industry-wide in the first quarter and highest in the fourth quarter. We intend to update our first quarter outlook on or before the end of March. Over time, we expect the growth of our technology businesses, the strength of NGKF, and our focus on cost reduction to substantially increase this company's profitability.

So, operator, we'd now like to open the call to questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Jillian Miller.

Jillian Miller - BMO

Your revenue guidance for the first quarter seem pretty conservative to me, I mean at the high end, is that baking at 20% sequential decline in real estate revenue and assume kind of everything else is flat. Then you'd be kind of tracking to financial broking revenue down 5%, below 2012 levels. We're assuming a very strong January, so maybe you could just kind of help us understand what's making it a little bit more conservative. It sounds like maybe February is trending lower and signaling that some of the strength in January wasn't sustainable.

Graham Sadler

January was up about 10% and February has run lower, so down about 8%. Although for example, yesterday it was up between 4% and 5% higher than the prior year. So basically if you take it as a whole and that's why we sort of highlighted it, the business is running approximately even to last year. And when you guide from where we are, I mean I've given you exactly where we are now, saying, we're going to be plus or minus 5% is kind of in the ballpark. So I mean that's our example.

And it is also important to realize that real estate business is the slowest in the first quarter and profitability is the lowest. And it's low and slow, even taking off the EST at the end. But that just comes back in the fourth quarter. So you can see on numbers in real estate that we made last year. We expect to make more money this year. And I think what you'll see is it's just more heavily weighted toward the fourth quarter than earlier.

Jillian Miller - BMO

And then, the FSA review for you guys ended, and I guess I was expecting more of that to flow through the non-comp expense line this quarter, but that caused actually in entire sequentially. So maybe you can just kind of walk me through what contributed to that and what you're expectations are for the first quarter?

Howard Lutnick

There was all sorts of issues with respect to Sandy in the fourth quarter. We haven't sort of tried to take them out and highlight them. It was what it was. And it required us to move our New York office uptown, that on top of a continuing integration of Newmark. And Newmark did because this is the second year, and we have to satisfy everything for Sarbanes-Oxley for Newmark at the end of this year.

So there's just a substantial amount of work that had to go on to sort of bed these things down and take care of them, plus Sandy. But we do expect as we've said, we have two cost reduction program going. We have what Graham pointed out was $50 million in cost reduction that should end up with first quarter 2014 cost reduction of $12.5 million run rate. So that would be $50 million a year. And that you will start seeing in the second quarter.

Obviously, it will be done by the end of the year, so that our run rate in '14 will be lower. But you'll see it start kicking-in in the second quarter for sure. And then we do have what Graham discussed last quarter, which was our reduction of non-compensation expenses. A part of that of course is in the $50 million and then part will continue thereafter. But some of those things are just structurally. We have leases expiring and other structural issues that as they come up we will reduce our non-compensation expense.

Jillian Miller - BMO

Maybe there is one regulatory question. It sounds like kind of a sticking point in the SEF regulation that's being finalized is a disagreement at the CFTC with respect to the five coat minimum requirement. And I just wanted to kind of get your thoughts on, how you think this is all going to play out? What impact that might have on your business? Like if we see that five coat requirement skilled back to three, is that a good thing for BGC, is it bad thing, because it's pushed towards electronic trading, I'm not sure how to kind of interpret it?

Graham Sadler

We are a multiple buyer, multiple seller marketplace. So we display quotes to broad ranges of people. And so I don't think we have a strong opinion between whether it's three or five. As long as the regulations are consistent with the law that was passed by Dodd Frank, I think we are well positioned. So the law is fine. We wait reading the regulations, but I don't know of anything with respect to three or five that would have a considerable impact on us.

Operator

Your next question comes from the line of Rich Repetto.

Rich Repetto - Sandler O'Neill & Partners

I guess my question have a little bit to do with the cost reduction and you help clarify it, Howard, by explaining those two programs. But I guess looking at the real estate margins, and I know it is a people-intensive business. Can you talk about what's pointing towards real estate and what you could potentially do with technology to improve the margin there?

Howard Lutnick

The cost reductions that we can drive most clearly across our businesses are in back office technology efficiency. Systems work and integration of all of these offices and all of these different brokers on to a data collection systems and processes that are much more efficient, both economically less expensive, people less expensive, and more efficient and more accurate.

So I mean that is part of what we are spending money on, part of the integration that we have invested heavily in, and part of which we need to aggressively end the continuing expense, and get the benefits of that, which we've invested, and harvest that which we leaved invested into our bottomline.

As Graham said, we spent more than given what the market volumes gave us, and then we should enter and we are going to move aggressively to harvest the benefits of what we've invested in. And make sure that those costs are ruled out of the company and that we drive our bottomline.

Rich Repetto - Sandler O'Neill & Partners

And then, I know everybody interested in the dividend, so can you just update us on what the policy is here now. It's $0.12 I believe and your guidance look somewhere around, while it was $0.12 last quarter and you didn't quite earn on a distributable earnings basis. So what can we expect going forward I guess as the policy?

Howard Lutnick

Our policy is not changed and we are confident that our earnings, given our real state business and our view of volumes in the financial services will be well in excess of that. And we will settle into a place, where we are very comfortable with our dividend, and it will feel very consistent to our policy.

Real state is low profitability in the first quarter, and so you're not seeing a financial service business. And strangely since we bought Grubb & Ellis and integrated it, the financial service volumes fell and the real estate business was there. But the combination of the financial service business being a reasonable, or ordinary, or normal, or any other kind of word you want to do.

Our real estate business, which is substantial and successful, delivering in the second, third and the much stronger fourth quarter, I think you will plus layer on top of that our cost reductions rolling through the company. I mean, you're going to see a very profitable and successful company that can easily maintain in our view, our $0.12 dividend.

Rich Repetto - Sandler O'Neill & Partners

The last thing, Howard, I guess on Dodd-Frank, I guess two part. The question is the headwinds I thinks people see, they see opportunities, they headwinds. And the headwinds, be in it maybe your client base could be pulling back a bit and the other, products potentially going to future. So could you comment on, I guess maybe you talked about opportunity but maybe in the headwinds, what do you think and how do you plan to combat them?

Howard Lutnick

Well, look Dodd-Frank and as the regulations come we will read them and go from there. Our expectation which we have discussed is that volumes on the world will not dissipate. They just will not. Issuance is gigantic and ever increasing, bank lending has and with Basel III may well stay at a lower level but that means securities issuance will grow because no one expects global economic growth of developed countries to decline precipitously over the course of the rest of our lives. So growth requires borrowing, borrowing will require more securities issuance and those securities will trade.

If the volumes of the large banks decrease then the volumes of other non-banks will increase. Once upon a time, we used to talk about broker dealers as if some how they traded and now we talk about banks all the time because most of the big broker dealers became banks, but you should not assume that there won't be new classes of those that buy and sell securities, whether those are big buy site firms that hire all the people from the big banks or some other form of companies that form themselves as broker dealers, hedge funds or otherwise. There will be significant trading on in and across our businesses which are in and across the world.

So I think our volumes will be good overtime. I think quantitative easing is an oddity. When quantitative easing stops, right then issuance show dramatically increases, the effect of issuance, so it dramatically increases that that will change the cadence of these businesses generally to the good. Not least of which is when they start to sell their instruments. Sooner or later, the fed will sell their instruments, and they will become one of the largest issuers on the universe themselves, as sort of second tier U.S. treasury, you have the fed, you have European Central Bank, I mean these are just new issuers coming.

So I think overall the business will be fine. And the overall fundamentals will be fine. And then the question is who will be trading it? We have pointed out over numerous Analyst Days and other periods, the scale and size on the business that we don't yet participate in, meaning, banks to their clients is multiples larger than banks-to-bank. And any leakage of that business and any extension like you said three quotes, five quotes or any other models like that will just improve the size of the business in which we operate.

So I think the fundamentals that we had is what keeps us optimistic. What day that occurs, we don't know but generally speaking we are optimistic structurally gong forward. With respect to futures, number one, there are lot of brokers of futures, and we are a broker of futures and we make money brokering futures, that's number one.

Number two, the reason we invested in ELX, and having a future's exchange would be that, we can provide our clients with a regulatory structure that is very much in line with the views of Dodd-Frank, right. And we're very much be able to meet their particular needs and their particular decides of how to create products and market those products to their clients.

It is a great asset. It is an asset that is underappreciated. You couldn't go and get one today, you can't just go in the shelf and just get one. You can't get one, that's integrated to all the banks. That has the OCC as a clearer. I mean it is a great asset that is yet to have produced its value nonetheless, but it is an asset that BGC is very, very happy to be an owner of and to owning it together with a number of its bank clients. We think it is an opportunity. Maybe that opportunity will emerge more clearly as the Dodd-Frank rules come out. But it is an opportunity nonetheless.

And I think lastly the vast majority of credit and rates are the spoke and they are just not the topic of future. So there were a lots of products that can be futures, right, the homogenous ones, the easily traded ones, but all the rest we'll still require some customization and I think those will business will remain.

So great opportunity in futures, but I think we are extraordinarily well positioned, if that emerges, which it may well in part to capture a part of that, and I think our market share in those things will dramatically increase because of our substantial investment in these kind of thoughts, this kind of structure in ELX, in the technology. These are investments that you've seen us make over many years that we think are very, very valuable.

Operator

Your next question comes from the line of Niamh Alexander.

Niamh Alexander - KBW

I see you're picking up deals in kind of the brokerage business, well, it's not brokerage the financial services as well as the retail. Are you seeing a bit more capitulation by the smaller firms and we've been talking about for a while now as the rules approach, these smaller firms just don't have the capital or the money needed to invest in the technology. Are you finally seeing some more capitulation there?

Sean Windeatt

Yes we are, without a doubt. For some of the smaller companies it's quite difficult with the challenges of the SEF rules, and the capital requirements from regulation perspective, that's impacting on the market as a whole. And we've seen a lot of opportunities in the last six to 12 months and we expect that we'll be seeing lots more of that going forward.

And it's a positive because it gives us an opportunity to move into new sector, new areas and that we've always spoken about, which is energy, commodities, and it gives us an opportunity to look inside that company to basically stream down some of the areas where we want to upgrade area staff, people and go into new products. So yes, we see it as an opportunity. And I think we're going to expect a lot more of that over the course of the next 12 to 18 months.

Niamh Alexander - KBW

Do you have the capital to be buying these businesses or is it mostly kind of the stock deal that you're looking?

Sean Windeatt

We have both opportunities open to us. The way we like to acquire companies is, they must be accretive, they must invest with us, we make sure that they're our partners and they work with us to build the business. And there is an earn-out over many years for any company. That's how we look at it.

Niamh Alexander - KBW

I guess on the same subject of the acquisitions and if we look at this quarter versus a year ago, you posted 19% revenue growth. You just play usually in the brokerage industry given the volumes industry-wide, especially in financial services, but that's still not translating to earnings per share for shareholders. I mean, distributive EPS is down 60%, like most of the revenue growth is diluted in terms of the shareholder dilution.

So how do you make sure that these deals are more accretive going forward? I know the cost reduction effort can help a little but 50 on a billion five is not going to help a whole lot. It is going to help a little. So maybe help me think about the pace of dilution, the shareholder issue, the share issuance is that going to slow going forward or how to think about the metrics for these deals to make sure that they are accretive?

Graham Sadler

What is most difficult for us is that we acquired Grubb & Ellis right at the beginning of the second quarter and went to its integration, which went up brilliantly for us. And we really felt it, it would display a tremendous earnings for our shareholders and right at the same time the financial service volumes started to decline and declined relentlessly through the course of the year.

And so you have never seen the combination of our financial service business acting reasonably and normally, coupled with our real-estate business at delivering earnings. We layer on top of that a cross-cut. You've just never seen at the second quarter the revenues for financial services were lower than they've been in years, and years, and years, third quarter lower, fourth quarter lower again then you had the oddity of devastating effects for Sandy as moving out of our offices.

And then you move into the first quarter where we're seeing more normalcy with respect to financial services. And you have the first quarter of real-estate, which if you go take a look at the industry-wide and all of the players in real-estate you will see the first quarter is by fart the worst quarter, more seasonal than even our business would be.

And so you've not yet seen it and so we are very anxious to show you the second quarter of our company, if financial service volumes remain normal, ordinary, reasonable any other word you want to put on it, and you get to see our real-estate business on top of that. Together with the beginnings of our cost cuts, you are going to see the company that we run, and one of the problems that people talk about is this quarter-on-quarter comparisons on things, we invest to make our shareholders money.

We are our shareholders, our employees are our shareholders. We expect to drive our business to maintain our dividend and to grow it. And I think we are very excited for the opportunity of the second quarter. And even more excited about the fourth quarter, because we do not think that there will be seasonality anymore, because the real-estate business will make up for the financial service business seasonality and we think that will become a very strong and steady growth BGC.

Niamh Alexander - KBW

And then I guess the other thing is that your competitors, they're getting a quite lot of negative price with regards to the LIBOR investigation and I believe NDS are a topic too. I mean you're in the space, your name hasn't come up, I mean what are you doing internally to kind of make sure there is no issues to be concerned about there or have you kind of launch some internal enquires, how should we think about BGC in this space?

Shaun Lynn

It's easy to think about BGC in this space. We did not broker those products, so we did not employ people who did that. And therefore, we were not associated with that business. Good or bad, but we didn't have any revenues associated with that business either so. I wouldn't suggest it's such a good thing but we are not associated with that. I feel very badly for those companies that are involved in this but we are not.

Niamh Alexander - KBW

And then normally moving forward, you don't participate in those either?

Howard Lutnick

Yes, we do in the X, but with regards to the investigations and not that I'm the expert, we feel that going back to when we're talking about the LIBOR situation or the rate fixing situation, we were not part, we didn't broker those instruments at that time.

Niamh Alexander - KBW

And then just lastly, wholly on the topic of regulation, what I guess is its world we're in, especially this year with everything changing. Actually finally, changing but the financial transaction tax proposal listing in Europe that these 11 member states looking to impose it, not only in those countries but like if any product is traded anywhere that originated in those countries or any entity based anywhere, and at least a headache that this could involve, but help me think about the potential impact on your business, if this still go ahead and get implemented?

Sean Windeatt

So far the financial centers, it has not really gained any traction. The U.K. has been clear and concise in their disagreements of that as a business. The Prime Minister of Ireland, as an example said that would never happen in Ireland, because they consider themselves a business-friendly place where they wish financial service firms to go to.

The same has been generally said in America, it doesn't mean that a few Congressman and Senators can say it and gets a nice press out of it. but I don't recall there being a broad groundswell in American fort. There will be outliers and there will be some clients of ours who suffer there will be some clients of ours who suffer the consequence of that sort of tax but capital is fundable.

And these countries will learn that if you make rules about capital, capital can swiftly move to other places, in other areas and other jurisdictions and it will do. And these things just happen and so I think that it is a negative. I'm not saying it's not a negative to the business. I'm just saying it will be much more muted than people think and movement of capital will reduce whatever impact it will have as they work around it overtime.

Operator

Your next question comes from the line of Patrick O'Shaughnessy.

Patrick O'Shaughnessy - Raymond James

So if I can kind of go back to Dodd-Frank and it seems like the biggest potential impact on you guys would be interest rate swaps and to the extent that interest swaps trading volume decreases or moves on to exchange. Can you provide what percentage of your rates revenues interest rate swaps actually represents?

Graham Sadler

As an overall percentage of our business?

Patrick O'Shaughnessy – Raymond James

Of your rates business?

Graham Sadler

We don't share that out.

Howard Lutnick

Look, we can take a look at it and consider whether that would be helpful statistic to put out there but the issue is we have a broad global interest rate swaps business across many, many, many currencies. And so I guess if you focus on just dollar swaps, U.S. dollar swaps, we can take a look at that and see if we can put that number out there for you.

Patrick O'Shaughnessy - Raymond James

I just think the thought is that rates are about 33% of your total brokerage revenue. If only 10% of that is rate swaps then any relation is not big deal, if it's half of that or larger maybe it's a bigger deal. So any size you could do would be useful.

The second question I have is on your employee headcount growth, so we're seeing kind of the headcount trickle down a little bit over the last few quarters, both on the financial services side and the real-estate side. I had imagined that the real-estate headcount reduction is just kind of functional integration. And some folk say, hey, this isn't the place for me. From the brokerage side, the financial services brokerage side, and if we look back at '07, '08, or '09, a lot of your topline growth came from market share gains.

You're hiring brokers away from competitors. You were growing your headcount and you were able to leverage that on top of climbing industry volumes. Right now, with you broker headcount kind of stabilizing, it seems like you're more reliant on industry volumes that turnaround rather than it be in the market share story. So how do you think about that right now?

Sean Windeatt

Not that way. But we expect a couple of things. Just on your first point, I just want to point out to you that interest rate swaps in Europe as a business is a larger industry than the U.S. So just as a comparative number, just something to talk about going forward. And then with respect to headcount, average revenue per head drives our bottomline and as we have highlighted on this call, we are focused on our bottomline.

So average revenue per head matters to us and we are calling the lower producing brokers and making sure our administrative staff is both properly sized and we are as efficient technologically. So as we implement technology, we should be able to have more efficiency in our back office.

Now, usually that would not, in most normal market conditions, the growth of our company would not require us to drop headcount. We would redeploy those heads doing other things in the business and take that opportunity to be more efficient but we wouldn't need to cut your heads but your percentages would improve, your bottomline margins would improve.

The volumes that we saw the last three quarters of the last year caused us to change our view. And we are going to reduce our headcount and reduce our costs as we have discussed. We did have a bulk up with respect to integration. And we are going to reduce that ongoing. And that is true.

With respect to once we reduced the lower performing brokers, and get our average revenue per head to a number that we think is appropriate, we expect to drive revenues initially through electronics and then we will continue to hire and acquire accretively, as I think Shaun said the opportunities for us to acquire other firms in coming our way, the cost of regulation are growing. The cost of technology is growing and our ability to acquire other companies or hire first-class staff feels better now than it's felt in quite some time.

So sometimes tough markets bring an opportunity. They do bring a tough period but they also bring an opportunity and we think our average, our revenues can come and will come from market share gains driven by quality staff and extraordinary technology. And we expect to drive those and use those technology growth numbers, which were now was just under 15% of our revenues, and then make sure we are driving our bottomline based on those technology investments, and make sure we get the benefits of those electronic modifications to our bottomline, and that we don't keep an overtly large broker staff as we move things electronic to drive those bottomlines and that's part of what we are focused on.

Patrick O'Shaughnessy - Raymond James

And then one last one from me, so with your new expense reduction targets that you talked about today. Does that change Graham's target for non-compensation ratio. I believe he had said that over time, he want to get it down to 25%. Does that 25% go lower at this point?

Shaun Lynn

The non-comp target is still there. It's just that $50 million which we draw out today, is a mixture of comp and non-comp, and the non-comp pace will come towards the $50 million in our overall non-compensation target.

Operator

And your next question comes from the line Rob Rutschow.

Rob Rutschow - CLSA

We saw on the residential side larger clients doing some tax motivated selling, I'm wondering if you guys saw any of that in the commercial side and how you would kind of adjust with those that that against the loss of activity due to Sandy?

Howard Lutnick

Yes, generally there were transactions motivated by the end of year, one of as example of those, as we closed two real-estate firms, Smith Mack and Frederick Ross right at the end of the year, because the timing of tax change sort of helped spur along. I mean they were well underway anyway, but we were able to get them done with a hard end date, which was very helpful.

And I'm sure that that occurred a generally. I don't know that people actually did transactions that they wouldn't otherwise have done, but I think what happened is that it helped push them to a final date. NGKF does not have, when we brought new market did not have a large capital markets business where the sale of buildings. We are investing in building that business presently, it is much, much larger now.

And so I think we will participate much more in the growth of the capital markets, which is the term for selling buildings as opposed to leasing them. We are adding to that mix, something that most of the other firms don't do, which is we will raise capital for people who wish to buy buildings, we will raise them equity, and we will help them raise debt. And those two things make us an interesting capital markets company in NGKF. And that come with our sophistication of the ways of Wall Street and finance.

So BGC has infused in NGKF, much more serious capital markets people by hiring, the people who run our capital markets business have come from Nomura's capital markets, real-estate capital markets and examples like that hiring across from Deutsche Bank, hiring from world-class institution into NGKF to grow that.

So that was a key part of the market in the fourth quarter. Our capital markets business is relatively small. Also relatively New York centric, which was I guess impacted the most by Sandy's and since we are so New York centric, now because we are of a certain size in capital markets, I guess, it pushed off some transactions for us more as a percentage than may be others.

Rob Rutschow - CLSA

Also had a question on the traditional brokerage business. It seems like Dodd-Frank kind of consolidating some of the swaps activity at the larger dealers. Are you seeing any pricing pressure from those clients?

Sean Windeatt

Well, the swap business has always been consolidated on the large dealers, because that's the way the business work. The business of swaps was non-democratic. You either had these scale, growth, size, gigantic in nature to be a swap counter party who could warehouse risk and buy and sell swaps or you could just do a swap for yourself.

So there were 10, 12, maybe 14 firms that could actually buy and sell swaps and every one else was a client. And so futures will democratize that business and allow broker dealer who can trade in treasuries and corporate bonds cannot trade in swaps. They cannot.

So those firms will be able to and so the ability just to have central counter party clearing, non-discriminatory central counter party clearing will democratize swaps, and you can have central counter party clearing that is non-discriminatory in over the counter products. And that's Dodd-Frank says to do.

And it is in corporate bonds. It is in equities. It is in U.S. treasuries and now it shall be in interest rate swaps and we think that singular change gets way too little focus because the futures exchanges get an enormous amount of press but the democratization of central counter party clearing in interest rate swaps will make the interest rate swap business a bigger business for firms like ours.

Rob Rutschow - CLSA

That kind of leads me to the second part of question, just on how are you guys progressing in terms of getting more dealer to client activity or participating in that part of market?

Howard Lutnick

Well, timing is everything. We need to read the regulations to see what they say but the democratization I just spoke of is really what it brings in all of our current clients. So of all of our clients around the world only as I said roughly a dozen of them are really swap market makers. That's about it.

And maybe you can add regionally some banks, a regional, but they're not global in nature. But the rest of our global client base cannot make markets and interest swaps. Just the marketization of the business by having central counterparty clearing in swaps, will allow any of our clients to transact in that business, because they can buy them in the morning and sell them in the afternoon or hold them overnight and post margin.

And that difference will does not even require us to do a single transaction with the buy-side firm. It just allows us to do much, much more business with the clients we already have. Then we will see what's the rules are for regulation, and how the market will play itself out, for what role banks can have with their current clients.

And we will read it with great interest, because in the world of multilateral buying and selling, we are experts, banks are not. And they are not good at doing things very, very efficiently across broad spectrums of clients for agency fees. That is just not what banks are good at, because they bring much, much, too much capital to the party.

We are an efficiency low-cost, multi-buyer, multi-seller marketplace company, that's how we think. Big giant banks with a $100 billion in capital should never have those thoughts, because they will never get an adequate return on their capital if they have those thoughts. They are market makers. They are make spread. Those are the kind of thoughts that they have.

And when driven to be an agents, right, that will fundamentally change, who does what to whom and why. And what everybody forgets about is, why? We are good at low-cost multilateral transactions. Banks are great at market making, using there capital to earn a spread, those are different things.

Rob Rutschow - CLSA

Last question, I think your non-cash comp for 2012 was maybe around $125 million ballpark. Can you give us any guidance on what we should think about for non-cash comp for '13?

Howard Lutnick

I don't think we've given that guidance before. We'll look at it and see if we can. We'll examine it for you, and if we think it's a good number to put out there, then we'll put it out for everybody. We'll take a look at the questions and see if it's helpful both, A, that we can guide; and B, that it's helpful to put it out there. We'll consider that.

Operator

And there are no further questions at this time.

Howard Lutnick

Well thank you all for joining us today. And each of you, I hope has a very happy Valentines Day. So thank you all. And we'll see you again next quarter.

Operator

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.

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