BGC Partners' CEO Discusses Q1 2013 Results - Earnings Call Transcript

| About: BGC Partners, (BGCP)

BGC Partners, Inc. (NASDAQ:BGCP)

Q1 2013 Earnings Call

May 2, 2013 10:00 AM ET


Jason McGruder - Head of Investor Relations

Howard Lutnick - Chairman and Chief Executive Officer

Shaun Lynn - President

Sean Windeatt - Chief Operating Officer

Graham Sadler - Chief Financial Officer


Jillian Miller - BMO Capital Markets

Patrick O'Shaughnessy - Raymond James

Niamh Alexander - KBW

Michael Wong - Morningstar


Good day, ladies and gentlemen, and welcome to the first quarter 2013 BGC Partners Inc. earnings conference call. (Operator Instructions) I would like to turn the call over Jason McGruder, Head of Investor Relations.

Jason McGruder

Good morning. Our first quarter 2013 financial results press release was issued this morning. This can be found in either the News Center or Investor Relations section of our website at During this call, we will also be referring to a presentation that summarizes our results, which includes other useful information. This too can be found in the Investor Relations section of our site.

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 results compared with GAAP results, 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, that we refer to the 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 on today's call will contrast the first quarter of 2013 to the first quarter of 2012.

I also remind you that the information on this 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 for 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 of a number of risks and uncertainties that include, but are not limited to the risks and uncertainties identified in BGC's filings with the U.S. Securities and Exchange Commission. We believe that all forward-looking statements are based upon reasonable assumptions when made.

Similarly, to extent that today's call contains reference as to potential value of certain assets, portions of our business and representations made as the accuracy of the assumptions or valuations, models or multiples used, and the evaluations are based upon assumptions of our profit margin, business conditions and actual or pro forma results of BGC. No representation has made that such values or multiples can actually be achieved upon disposal of business or assets or that any such valuation models or multiples will be adopted by others. Other risks include those related to possibility that the proposed NASDQ OMX transaction does not close in a timely manner or at all; the possibility and conditions to completion of the transaction, including SEDAR or required regulatory approvals are not satisfied; the possibility of any anticipated benefits of proposed transaction will not be materialized; the effect of announcement of the transaction on BGC's business relationships, operating results and business generally; general competitive economic, political market conditions, fluctuations and actions taken or conditions imposed by regulatory authorities.

We caution that it is impossible to predict actual results or outcomes or effects of risk uncertainties or other factors or anticipated results or outcomes and 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 to the complete disclaimer with respect to forward-looking statements and risk factors set forth in our most recent public filings in Form 8-K, 10-K and 10-Q, which we incorporate today by reference.

Now, I'd like to turn the call over to your host, Howard Lutnick, Chairman and CEO of BGC Partners.

Howard Lutnick

Good morning, everybody, and well done Jason. Thank you for joining us on our first quarter 2013 conference call. With me today in London are BGC's President, Shaun Lynn; our Chief Operating Officer, Sean Windeatt; and our Chief Financial Officer, Graham Sadler.

We recently agreed to sell our electronic benchmark on-the-run U.S. Treasury platform to NASDQ OMX for $1,234 million. This includes $750 million in cash upon closing and another $484 million of stock to be paid ratably over 15 years, provided that NASDAQ OMX taken as a whole produces more than $25 million in gross revenues each year. Due to the ease of this annual hurdle, we expect to receive the entire share earnout and we are currently exploring options to hedge the NASDAQ shares.

With respect to the use of proceeds, our objective is to increase both shareholder and bondholder value. Following the closing, we are likely to make accretive acquisitions and invest in organic growth in both of our segments, repurchase units and common shares, and/or repay debt. We do not expect to pay one-time special dividend, but we do expect to maintain our regular $0.12 common dividend for the foreseeable future.

As such, I'm happy to report that our board declared a $0.12 dividend for the quarter. We are confident in the sustainability of our current dividend and at yesterday's closing stock price, dividend yield on BGC is nearly 9%. We believe that this high yield demonstrates that the market does not fully understand the value of the assets of BGC. Graham will discuss the value of these assets in greater detail later on in the call.

With that, I'll turn the call over to Shaun Lynn.

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, largely because of quantitative easing and other factors we have discussed in last few earnings calls. This once again resulted in generally lower volumes industry-wide.

So far in the second quarter, key volatility measures across rates, credit, equities and foreign exchange remains below long-term averages. Our market conditions were different, revenues for our Financial Services segment declined by only 6% in the quarter. This performance was much better than the 11% to 25% decline reported so far by our inter-dealer broker competitors. And we believe, we continued to gain market share.

Our overall Financial Services segment generated revenues of $323.8 million and $64.1 million of pre-tax earnings. A year earlier, this segment generated $344.6 million in revenues and $76.5 million in pre-tax profit.

Looking at results by asset class, BGC's revenues from electronic rates products increased by approximately 5% in the quarter, driven by strong growth in [certain] [ph] desks and interest rate derivatives, and European and Canadian government bonds, partially offset by decline in revenues from electronic U.S. treasuries.

To give you an idea of how much we think quantitative easing is currently holding down benchmark treasury volumes, while our overall fully electronic rates volumes declined by 6.1%, if one excludes U.S. Treasury, we were up by nearly 32%. Our credit revenues declined by 18.1%, which is a better performance than the comparable result reported by our peers. Our fully electronic FX volumes increase by approximately 37% and revenues increased by 25%. This growth exceeded to comparable volume figures reported by Reuters, EBS and CME.

Global equity markets also continued to be difficult, as equity-related volumes were down between 6% and 18% according to the OCC, ETCC and Deutsche Borse. In comparison, BGC's revenues from equities and other assets classes decreased by only 8.8%. Financial Services segment revenues from electronic trading, market data and software were up by 1.3% to $46.3 million or 14.3% of segment revenues in the quarter compared with $45.7 million or 13.3% of segment revenues.

As Graham, will discuss in greater detail, if one were to take out the assets we are selling to NASDAQ OMX, it would demonstrate our electronic trading business are growing at a significant pace. On this basis, BGC's technology-based revenues in the segment increased by over 11% to $22.7 million.

The growth of these newer products has exceeded most comparable industry volumes and we expect these higher margin businesses to continue to growth faster than our overall Financial Services segment. Over time, we expect to make up for the revenues and profits generated by the assets we are selling, as we continue to invest in and grow our other fully electronic businesses. BGC now offers fully electronic trading on approximately half of our 210 Financial Services desks compared with approximately 100 desks a year-ago, and less than 40 desks at the beginning of 2010.

We believe that the proposed NASDAQ OMX transaction is a strong affirmation about strategy to convert a significant portion of our pipeline of more than $1 billion per year in voice and hybrid financial brokerage revenues to higher margin fully electronic trading. This process creates substantial value and strong returns for our shareholders and employee partners.

With respect to the cost reduction, we selectively reduced Financial Services front office headcount, which lowered revenues in the short-term, but with improved profitability. We ended March with 1,641 brokers and sales people in Financial Services, generating average revenues of approximately $190,000 per broker in the first quarter. A year earlier, these figures were 1,761 brokers and sales people and approximately $195,000.

Turning to our Real Estate Services segment. Industry metrics continue to move in a positive direction in the first quarter. With respect to leasing, vacancy rates, asking rents, and net absorption rates improve year-on-year. Our NGKF research team believed that these leasing market trends will continue as the year progresses. According to Real Capital Analytics, overall U.S. commercial property sales volume grew by 35% year-over-year for the first quarter. While the CoStar said the commercial property prices were up by 5.1%, as of the most recent data.

The average capitalization rate or yield on commercial property versus 10-year U.S. Treasury rates continues to be very wide by so-called standard. And NGKF's research team expressed that this trend of sales volume increases will continue for an expended period of time.

Our Real Estate Services segment generated $74.8 million in brokerage revenues and $39.4 million in management services and other revenues. Overall, NGKF revenues were $114.2 million, while pre-tax earnings were $2.3 million. These results were substantial improvements compared with the year earlier.

Our Real Estate Services generated $43.8 million in brokerage revenues and $4.1 million in management services and other revenues. Overall revenues were $47.9 million and pre-tax earnings of $1.3 million.

As a reminder, commercial Real Estate Services firms tend to be the least profitable in the first quarter and the most profitable in the fourth quarter. We therefore expect margins for our Real Estate Services segment to greatly expand on the first quarter levels at the remainder of the year. Because we purchased certain assets of Grubb & Ellis at a bankruptcy last year, NGKF collected $21.5 million during 2012 not related to the ongoing NGKF businesses. This increased revenues across the second, third, and fourth quarters of last year.

In order to help you better analyze these periods and to provide a context to a year-over-year results for the next four quarters. We have broken out these NGKF revenue figures for you in our earnings presentation.

Real Estate Services had 894 brokers and sales people at the quarter-end, which is more than double the year earlier figure of 409. Average revenue per real estate broker was approximately $84,000 in the first quarter compared with the $113,000 a year earlier. Average revenue per real estate broker decreased largely due to Grubb & Ellis acquisition.

In addition, we changed the way we categorized certain Real Estate Services front office employees, which increased brokerage headcount and therefore mathematically decreased revenue per broker sales person in that segment in the second quarter of 2012 through to the first quarter of 2013. This change had no impact on BGC's revenues or earnings or even distributable earnings or GAAP.

NGKF drove BGC's overall 16.8% increase in front office headcount to 2,535 brokers and sales people as of year-end. BGCs total average revenue per front office employee was approximately $154,000. A year earlier, these figures were 2,170 brokers and sales people at an average of approximately $180,000 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 $449.8 million, up 11.4% compared with $403.9 million. Our revenues from the Americas were up 32% to $219 million due mainly to the addition of Grubb & Ellis.

Europe, Middle East and Africa was flat at a $182 million, and Asia-Pacific revenues decreased by 13% to $49 million. Excluding the Real Estate Services segment, our global January 2013 revenues were up by approximately 9% to $127 million. February was down by approximately 11% to $107 million, while March was down by approximately 15% to $102 million, all when compared with the year earlier.

Turning to expenses, compensation and employee benefits were 61.7% of revenues compared with 55.6% of revenues. Our compensation ratio increased mainly due to the growth of NGKF. The commercial Real Estate Services industry generally has higher compensation ratios, but lower non-compensation expenses compared with our Financial Services segment.

Non-compensation expenses were 28.3% of revenues, which was an improvement compared to 29.9% of revenues. The decrease in non-compensation expenses are due largely to lower professional and consulting fees, partially offset by expenses related to the addition of Grubb & Ellis and higher interest expense as a result of the June 2012 issuance of senior retail notes.

We are on target to reduce overall costs by a total of at least $50 million on a go-forward basis by the end of 2013 as compared with the second half of 2012 run rate. This reduction will include comp and non-comp expenses.

BGC's pre-tax earnings were $45.1 million compared with $58.2 million. Our pre-tax margin was 10% compared with 14.4%. Our effective tax rate for distributable earnings was 14.5% in the first quarter 2013 compared with the 14.2% a year earlier.

BGC's post-tax distributable earnings were $38.5 million or $0.12 per fully diluted share compared with $50.9 million or $0.19. Our post-tax earnings margin was 8.6% compared with 12.6%.

Our fully diluted weighted average share count was 357.5 million for the first quarter of 2013. This included a weighted average of 39.7 million shares associated with our convertible senior notes. A year earlier, our fully diluted weighted average share count was 302.9 million.

In both periods, our GAAP fully diluted weighted average share counts were lower than those for distributable earnings, because certain share equivalents were diluted with distributable earnings, but not for GAAP. As of March 31, 2013, our fully diluted share count was 360.3 million, assuming conversion on the 39.8 million shares underlying the convertible senior notes.

I would now like to take a moment to discuss how we view the valuations of some of the assets of our company. With respect to the $750 million cash consideration from NASDAQ OMX, we currently expect to a tax rate of approximately 20%. This one-time item will be excluded in our calculations for distributable earnings.

With respect to the $484 million in NASDAQ OMX stock, we expect the tax rate around 15% for the foreseeable future. We currently expect to include approximately $32 million per year related to this receipt of stock in our calculations for distributable earnings. We expect this transaction to close mid-2013.

With respect to the value of our real estate business, we compare it to as publicly traded peers. NGKF has generated pre-tax earnings of over $45 million for the trailing 12 months just ended. Its North American listed peers trade up between 18 and 21 times calendar year 2012 net income. Using our 15% tax rate in these multiples, we believe that the market would value NGKF between $700 million and $800 million.

Given the value of our real estate business and a reasonable net asset value for the after-tax amount we expect to receive from NASDAQ OMX, were much achieved as the market is assigning virtually no value at all to the remainder of BGC. This is despite the fact that if on exclusive assets we are selling, our Financial Services segment generated approximately $1.1 billion in revenue over the trailing 12 months and earned almost $150 million.

As we detailed on our first quarter earnings presentation, embedded in this segment are our higher margin, faster growing technology based businesses. These businesses consist of our revenues related to fully electronic brokerage, market data and software solutions in the Financial Services segment.

As you can see from our presentation, these businesses as a whole generated pre-tax earnings margins' between 50% to 54% for the past three years and most recent quarter. If one excludes the assets the company is selling to NASDAQ OMX, our technology based revenues increased to compounded 27% a year from 2010 to 2012. For the trailing 12 months just ended, our retained technology-based products generated $80 million in revenues and pre-tax margins of over 45%.

When thinking of evaluation for these remaining businesses, we look at the current potential profitability and growth of these products. The total consideration of the NASDAQ OMX transaction which analyst estimates at 22 times trailing earnings, multiples for publicly traded electronic trading platforms of 21 times 2012 earnings and the recent multiples we have seen in various analyst notes, the potential electronic trading M&A targets in our centre. Based on these inputs and a 15% tax rate, our retained technology-based businesses by themselves could be worth around $650 million to $700 million.

Finally, our remaining voice and hybrid business generates $1 billion in revenue and approximately $110 million of pre-tax earnings on a trailing 12 month basis. Clearly, this business remains very valuable. As we continue to execute our plan to convert a significant portion of our over $1 billion in annul voice and hybrid revenues to fully electronic trading and sell increasing amounts of market data related to the same. We hope the market will come to understand the existing value, and potential multiple expansion this business brings to the company.

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 April 2013 were up by approximately 9% compared with the year earlier. There were 22 days in April of this year versus 20 days a year ago. And therefore on a daily basis, April was down 1% comparatively. Our fully electronic businesses continue to outperform our overall Financial Service results.

With respect to our second quarter outlook compared to a year earlier, we expect to generate distributable earnings revenues of between $435 million and $465 million, which compares with $465.1 million from last year. We expect pre-tax distributable earnings to be between approximately $42 million and $53 million for the second quarter and this compares to $55.9 million last year.

We expect our effective tax rate for distributable earnings to be approximately 15% and this compares with 14.5% with second quarter of 2012. We intend to update our second quarter outlook around the end of June. Over time, we expect the growth of our technology based businesses, the strength of NGKF, and our focus on cost reduction to substantially increase the company's profitability.

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

Question-and-Answer Session


(Operator Instructions)

Sean Windeatt

Operator, could you please introduce people before their questions. Thanks.

Unidentified Analyst

Anyway, first question just on the guidance. So the guidance and I believe it doesn't include eSpeed is that correct, for the next quarter?

Howard Lutnick


Unidentified Analyst

Then the bigger question is, as you evaluate the uses of cash from the proceeds of eSpeed to NASDAQ. So can you go through like what were the merits and the non-merits of not doing a special dividend versus the other alternatives that you outlined?

Howard Lutnick

We think our ability to invest the proceeds accretively are great that are in front of us. We have opportunities in acquisitions across both segments and we can buyback units and shares, and we could repay our debt, all of which would be accretive, if done correctly, accretive to our shareholders. And we think the opportunities for us to earn substantial money on the redeployment of this capital, I think are very exciting to the company.

Unidentified Analyst

I knows it's going to put you on the spot, but if you had say a year from now, how you deploy the after-tax $600 million or so, would it be a a-third, a-third, a-third or would you tilting - are acquisitions and investments a bigger portion than say buyback or repaying debt or how do you look at it?

Howard Lutnick

I guess opportunities come as they come. We obviously, as Graham went through, think company is undervalued. And so you made note in our press release that the board has authorized both initially an increase of reauthorization for us to repurchase up to $100 million worth of shares and upon the NASDAQ OMX transaction closing that authorization climbs to $250 million. And so the board has authorized the company if it so chooses to buyback shares clearly, because we think the share price does not fully reflect the value of the company, as Graham went through.

We are seeing and are being presented with really first-class opportunities to acquire companies and employee very, very talented brokers, across our segments. And I think we have lots of opportunities to grow our businesses at very healthy margins, very, very healthy margins.

And the interesting thing about the NASDAQ transaction in the treasury business was that, because of quantitative easing, the treasury business was not growing. So it was highly valuable, high margin high-multiple business that was not growing, because of quantitative easing. And so there was an exogenous event that was holding it down. And as we saw from the Fed, they continue to hold it down.

And so from a dollars and cents perspective, our ability to invest this money in growing businesses is something that very much excites this company. That on top of the fact that we are well on top of the idea of converting our voice and hybrid businesses to fully electronic and drive those margins again.

I mean there is excitement running through this company now, because you know, that our employees are owners of this company. You know, our employees are partners. And you know how much they now clearly understand, as they move this business electronic, a portion of it will go right to them, because they are completely aligned with our shareholders, and there is palpable excitement in the air here as we are driving it.

And I want to be crystal clear on management, it's on it and our employee partners are on it. And I think you are going to see great things as we move our voice business over to electronics. It is our technology and I think we have spectacular opportunity in front of us.


Your next question comes from the line Jillian Miller of BMO Capital Markets.

Jillian Miller - BMO Capital Markets

It sounded to me like you are maybe hinting that some of your other electronic businesses might be possibly acquisition target at some point in the future and then potentially even in the real estate business because you don't feel that it's undervalued, right now. And then just wondering like what electronic businesses are actually large enough and kind of self contained enough that they would be illogical acquisition. eSpeed was very unique in its market share. And then separately, you've started to build out the real estate business, but its still relatively early stages. So I am just wondering how long you feel like you need to give that before its mature enough that you might potentially look to divest it?

Shaun Lynn

With regards to the other markets, we did the same thing. We think that our FX platform as we have today and also a non-U.S. government bid are both at the brink of becoming ready. We continue to invest. We continue to grow and expand in these businesses and at the right time, we may consider a similar thing.

Howard Lutnick

So with respect, so basically our foreign exchange, and non-U.S. government bond business are stand alone businesses. They stand in and of themselves and they are based on our technology and they are capable of a transaction. We are not offering them, but we are expressively saying they are capable of a transaction if we so chose. But they are growing rapidly as Graham described and they are continuing to grow rapidly and they do not have the quantitative easing holding them down. And so we think those numbers will continue to improve and as they grow that way, we have a long way to go with them and those are great opportunities.

With respect to the real estate business, the answer is we are a value-driven company. That is our objective. Our objective is to earn our shareholders more money and whatever the best way to do that we are going to do that. We think our real estate business is doing very, very well. Our ability to invest in and grow in brokerage business, I think is clear and apparent. And I think we have tremendous opportunity to grow the real estate business.

Our objective on the phone calls today, with Graham was to point out to you the map of the value of our enterprises and the value of that which we are growing. Our job is to make more money and drive earnings to the bottomline and create asset value. And sooner or later, we need to achieve that asset value either within BGC or in other way. And so while none of these businesses are "for sale" that is not the point. The point is I want to make sure and Graham wanted you to understand that these things are of tremendous value.

I guess it was difficult for us to explain to you how much the treasury business was valuable over all these years. We have said it multiple times, but because of quantitative easing, the business was not growing, so it was not obvious, right. But we are expressing again today the assets of this company are superb and much, much more valuable than our current stock price delineates and that's why our board has authorized a share repurchase program to grow to $250 million once the NASDAQ OMX transaction closes.

Jillian Miller - BMO Capital Markets

And then just to clarify, the $45 million of revenue that you've cited for Newmark over the last 12 months, did that include the $23.5 million, I guess, like a one-time gain or some non-recurring revenue or was that separate from that like a normal run rate.

Graham Sadler

It was $45 million of profits that those are pre-tax profits. There are $21.5 million of revenues was included in that, but that was not $21 million of profit. So it was just revenues effectively we collected on behalf of and in part on behalf of company and on behalf of But we would expect the profits of Newmark to grow substantially from there. So that's not sort of an elevated number.

That's just what you would classically consider 12 months trailing number irrespective of the revenues. We just wanted to put the revenues in perspective. So when you're doing a comparison year-over-year, you don't see something that doesn't make sense to you, but the profitability of this business will dramatically grow going forward. We are confident of it and excited about it.

Jillian Miller - BMO Capital Markets

And then on the share count, I was little bit surprised that how much it increased this quarter. I think last time I talked to you, you said that $10 million to $12 million increase each quarter was generally realistic as a run rate, but the ending share count as of March was on the $20 million higher than December. So I am not sure if this is like a new run rate or if there is something unusual going on in the quarter.

And then related to that, I think in your published remarks, you mentioned that you were looking at the partnership enhancement program potentially to modify it, so maybe you could just give us some detail on what you can do there and where you think you can get that run rate, share count growth to shake out that after you're done?

Howard Lutnick

We had year-end competition in the first quarter, but you are right on the topic that is very much on the plate in front of the management team, which is we are reexamining the partnership enhancement program. Our partners do own a substantial amount of stock. We think in partnership units, we think we are a very stable company because of that and we are going to reexamine that and address our share count issuance and we would expect that rate of growth to decline.

So we are on that. We are examining it. I don't think I have particular numbers to put on it, because it is in a state of reexamination right now, but we would expect our rate of growth issuance, which was coming under a detailed and scrutined and we're really scrutinizing it. We would expect it to decline over time as we reexamine it. And we have reapplied different formulas and different structures.

Jillian Miller - BMO Capital Markets

So to clarify just based on the fact that you're not paying year-end bonuses, you would expect the share count increase in the second quarter versus the first quarter to be smaller than the sequential increase we saw in the first quarter versus this fourth quarter?

Graham Sadler

I would expect that to be lower than the first quarter, yes.


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

Patrick O'Shaughnessy - Raymond James

So my first question I think is about your second quarter outlook. I remember on your first quarter call, which was really only couple of months ago that you kind of seem to be pointing towards the second quarter where everything was going to come together, seasonally stronger quarter for the real estate business and the defense services business, should continue some of the momentum that you saw in the first quarter.

And you were really optimistic about what your earnings powers going to look like in the second quarter. And I think your outlook that you guys talked about today, it doesn't really reflect the optimism. So can you kind of talk about what may have changed in the last couple of months that may have taken your view down a little bit?

Howard Lutnick

I think that's why Graham highlighted them on his comments. I mean, at the end of January, we had seen a 9% growth in revenues. And we saw a sort of a rather stable business environment up to more traditional level that we had seen in the years before. We then saw February, March see double-digit declines from year ago periods. And it tempered our enthusiasm because of the map. When we guide forward from here we know that while April is up 9% notionally on a day-by-day basis it's down 1%.

So basically going back to last year and say, okay, we're down 1% if you take sort of the 1%, 2% sort of range that ends up being our guidance in Financial Services for this quarter. Is that disappointing? Yes. But you know that we guide what we see, right. And so at the end of January, what we have been presented with was 9% up, right.

And it felt good. And then volumes declined in the industry-wide, there was much we could do about it other than as Sean went through, increase our market share as compared to others and have less of a decline. So it doesn't feel good, it's nice to say, but doesn't feel good when you have less of a decline. But the real estate business, will come back strong and its margins will be up big in the second quarter and they will effectively overwhelm the decrease that the Financial Services segment sees.

And you're right, am I disappointed that I don't get two businesses operating on reasonable cylinders at one time? Yes. I find it very disappointing that the spectacular real estate business, you never get to see it, because as it comes out in the second quarter, the Financial Services business decline somewhat because of overall industry volumes. But when they hit together it will be an extraordinary company. And it will, of course, present tremendous earnings, cash earnings and power for the company.

Patrick O'Shaughnessy - Raymond James

And then kind of digging into the real estate business, first quarter the year-over-year comp was a little bit messy just because you are still kind of building out that business. But for the remainder of the year, how comfortable are you that the commercial real estate business is going to see revenue growth on year-over-year basis for that the last three quarters?

Howard Lutnick

We think they will receive revenue growth and they will see substantial earnings growth. So we wanted to make sure we pointed out to you, that some of the revenues that are not continuing as part of the business that we're part of the Grubb & Ellis acquisition, we sort of highlighted and you could see them in the presentation to so you have better apples-to-apples comparison. The real estate business is just more chunky. So sometimes you'll get a big transaction in this quarter versus the next. But over the course of the year, we are highly confident that we will have revenue growth and that our earnings growth will outpace the industry.

Patrick O'Shaughnessy - Raymond James

And then, I guess, following-up on Jillian's question about your share dilutions. So if you guys are reexamining the amount of stock that you showed, so is it kind of a fair assessment to say that you're probably going forward maybe issue or pay people more in cash and less in stock is that kind of the thought process?

Howard Lutnick

Yes, but we think we can reduce the overall amount of compensation as well. We have more than two levers and since you've been talking with us for a while you know that it was the tradition in the Financial Service space and when peoples contracts expire they renegotiated and got upfront payments that needed to continue to be amortized. As both the industry has evolved and our partnership enhancement program has evolved, our necessity to pay people in that fashion is declining.

And it maybe time for us to execute that model, which will not only allow us to pay as a relative percentage more cash than shares, but if the gross amounts of the overall businesses compensation model also comes down, it will not seem so stocked, that on top of which that they become more and more reliant on our technology and the electronic portion of our businesses make it much more sticky for them to stay here, because we are a proprietary deliverer of technology.

And I think, one thing is important when we did the NASDAQ OMX transaction, it came with the underlying technology that is not something that any of the other companies can say that they have. So when you rent technology to someone else, it is just much more difficult to get value out of it. We've built our own technology. You know the concept. You have heard us say many, many times, built and paid for, it should became very clear as a value proposition in the NASDAQ OMX transaction, and it would be clear where we'd ever do and when and if we do another transaction.

Patrick O'Shaughnessy - Raymond James

And then lastly from me, just kind of an update on the legal regulatory front, it seems like some of the rate fixing probes involving inter-dealer brokers have broadened a little bit. Can you basically reconfirm that you guys don't have any exposure in any of those probes?

Howard Lutnick

Yes, I'll reconfirm it.


Your next question comes from the line of Niamh Alexander of KBW.

Niamh Alexander - KBW

Can we go back to the acquisitions, because you have a big amount of cash coming in and what other kind of sizable deals that you kind of have in your sights and either segments and inter-dealer broker space or in real estate space or maybe something else that we're not thinking about, but you guys are right now or should we be thinking about maybe more kind of smaller incrementals?

Howard Lutnick

I think a number of things have happened. The incrementals we have been pursuing some slightly larger than others, but we are pursuing them all the time if they are accretive. I think what has happened with the NASDAQ OMX transaction, it is maybe clear to some larger players that we maybe a natural partner both from an economic standpoint and from a technology standpoint. And so there are just more opportunities presented to us. I don't know when and if any of them will happen and what they will mean, but it is clear that we will use our money to invest in our business accretively and we do not find it stressful.

Given the fact, I remember NASDAQ is going to be paying us $32 million a year in stock for the next 15 years and Graham has said, we expect to put that in our distributable earnings number. We really not making up that much money from the eSpeed benchmark on the on-the-run treasury business and with $750 million to invest, I think we will do extraordinarily well.

Niamh Alexander - KBW

But Howard then, I am just trying to understand the landscape a little bit better here. I have got the sense of in the real estate there maybe weren't big deal opportunities from compared to what you did. I mean what you did were, kind of, you bought one out of bankruptcy and other one was maybe in kind of less healthy financial condition or what not. So there were some great opportunities and from here it's more incremental. But in the inter-dealer broker space, I was positive that there is certainly some scale benefits by partnering with some of big, the top five partnering up, I mean do you agree with that view?

Howard Lutnick

Lets go for the first part, which is the real estate business in America is gigantic and we have only just begun. And there are plenty of opportunities in American real estate business across a wide variety of spaces for us. And if you go and look at the broad businesses of the public peers, you would see enormous opportunity there for their scaling size. And then you should not count out the rest of the world. We are global company. And that the fact that we are only in the U.S., so foreign real estate leads you to a dramatic opportunity say for the rest of the world. So that would be number one.

And then number two, the consolidation of the big players in the IDB space is always a possibility. We have a unique asset and that we have the best electronic trading platform in the space. So if it's had to do with real-time electronic trading and the world is going forward, we have that asset. Another asset, which does not get much notorietyis that in the Dodd-Frank world, one talks about futures exchanges all the time with respect to interest rates swaps and credit derivatives.

I would remind you all that BGC has a large share of a futures exchange called ELX that I think is a tremendous asset in value for us, both going forward for ourselves and is possibly a tremendous allure, if there is a transaction to do with one of the other brokers. But that would be up to them. As you know, the brokerage business is run by smart, capable, strong personalities and they will need to make their own decisions on what they're open minded for or not.

Niamh Alexander - KBW

Are you a bit more open to it now?

Howard Lutnick


Niamh Alexander - KBW

And on the core, just in the Financial Service, I shouldn't say core because real estate is clearly part of the core now, but in the Financial Services segment, in your discussion with your customers and they are under a quite a bit of pressure themselves, they are still letting some people go and they are dealing with such an amount of new rules and the business conduct rules, all these kind of things, are kind of putting a little bit of pressure in increasing transparency obviously on the pricing. So are you starting to see any pressure on your rate card or are you having any of those kind of discussions lately with your customers where you're starting to see a little bit of push back?

Howard Lutnick

Well, we only see customer discussions on rate cards and pushback, would you say every four hours?

Graham Sadler


Howard Lutnick

And that's been for how many year Shaun?

Shaun Lynn


Howard Lutnick

So Shaun and I have been in this business for a long time together, decades together. I don't remember a four period where that wasn't the topic. But the idea for us, clearly, is to present our clients, with the opportunity to dramatically reduce their costs by electronics, and to dramatically reduce the cost, to increase their efficiency.

So number one, cut the cost; two, increase your efficiency; and three, the possibility of partnering without us to create new and exciting opportunities in this space. And those three things put together is how we use any conversation a client wants to have with us. To really try to hit our goals and theirs as a win-win scenario and we have those conversations all the time. Each and every day we try to have those conversations.

And so it's a low interest rate environment. It's difficult for our clients as and we talk to them all the time and try to find ways that we can help them and be successful to them and be helpful, and be successful for us. And we think the number one way that's going to be achieved is by more and more usage of our technology to execute transaction for them and for us, and what works for us best is that our key brokers, our partner employees.

And they know that the economics of that transaction will work with them as well. And that is the key thing. It may have taken us too long to get here, right. And we've invested lots, and lots of money to get here, but we are here and the assets that we have, all of them for ELX all the way through to our technology will help us get from here to there in a way that would just be superior to all your alternatives that I know.

Niamh Alexander - KBW

And then, just a few things. I am just surprised to see it's not in the discontinued ops, because you've announced that, you are selling it and its growing. So maybe next quarter for help us out with our modeling, you kind of take it out there. And then the other thing is you said you don't think the stock is fairly valued. You think the stock should be more highly trading higher. And if I follow that true, there is $250 million repurchase authorization coming, but we should not be expecting insiders to be cashing out here, right. Because if you really think you own the vast majority of 68% that's not public, we should not be looking for a big insider cash out if you really do think that the public stock is not fairly valued, would you be waiting or should we be looking for some of that to be allocated for kind of converting units and people cashing out.

Howard Lutnick

I have not sold a share and I don't expect too. I think that the company is and the senior management of the company thinks that the company is undervalued, clearly, so and the board thinks so that's why it authorized the share repurchase. We have lots and lots of partners who own share. And if any of them sell some shares it's not generally of consequence to the firm. So I can't speak to that. Part of having a broad policy where every employee of the company has shares, right, it leads to your definition of insiders. Each and every one of our employees has share and they get compensated, part of their compensation in shares in every year. Some of their shares vest and if they chose to sell in, they chose to sell them. That's up to them.

So if that was the point, I think the point of today's call was to making clear that we think that company is undervalued and we can't understand. And now even more clearly with the NASDAQ transaction coming in, and the 15 years of payments on NASDAQ stock and the $750 million in cash, it should be crystal clear that there are dividend and we try to make that point today is sustainable and strong at $0.12 a quarter and we just don't understand why our company would trade at north of an 8.5% yields.

It just doesn't make any sense to us. And so I think our job is to do just what we are doing today. To explain how we view our company first, and then secondly, to drive investments of the proceeds and consideration of this transaction to raise our earnings. And then ultimately to buyback shares and invest in other businesses that we think whenever it's most accretive.

Niamh Alexander - KBW

And then should we expect that partnerships that you mentioned, the kind of the change in the partnerships structure to reduce the pace of your shareholder dilution because your revenue is growing. I mean, your expense is elevated, as you've kind of integrate the business, but we're not seeing it in the EPS. So clearly want to address that. But it's maybe just eliminating the partnership structure, buying out some of these partnership units entirely, is that on the table?

Howard Lutnick

I don't want to say anything that's off the table, because the one thing I'd say, which we do not expect to do is to do a one-time special dividend. But I think everything else, whether we buy public shares or units back, whatever is most efficient, we will chose to do. So I don't want to say that there is something off the table other than the one-time special dividend, but I do think the investment opportunity for the company in acquiring accretive companies, I think is well and front of us and something that we think is a huge drop for us to invest and then the possibility of buying back shares and possibly repaying debt are key things us to consider. We want this company to be strong and to make lots of money.

And your last point is a pretty simple one, it is disappointing that the January industry volumes did not stay to February and March and that April was down, while it's notionally up 9% day-by-day it's down 1%. There is nothing else I can do, as I should here, right today, but to guide based on what we see. And the real estate business is coming on strong and when financial volumes stabilized for growth, they're stable now, but as they go back to more normalized levels I think you're going to see one heck of a company.


Your next question comes from the line of Michael Wong of Morningstar.

Michael Wong - Morningstar

Just a couple of quick questions, does the profit from your electronic treasury platform sale materially affect the return of capital tax status of your dividend payments?

Howard Lutnick

I think for the near-term, once this transaction closes, I think the beneficial tax portion of our dividend meaning, it's still a qualified dividend, but that which is non-taxable will decline. So I would expect to be the amount of our dividend that is considered a return of capital to materially decline. Our dividend will still be, of course, a qualified dividend. But the return of capital portion of it will clearly decline.

Michael Wong - Morningstar

And after the treasury platform sale, how much would you estimate your transaction cost will go up since you'll be having to pay NASDAQ instead of using your own platform?

Howard Lutnick

To the extent we use the platform, we have negotiated with them, that in a very, very favorable terms, we have the rights to the market data, to use it for our business and we have the right to have access to the system going forward. So we do not find either of those things to be consequential. They were part of the terms of the transaction that we would have very, very, very good terms for us to use the platform and use the market data. And so we do not think those costs will be material, if any.


There were no further questions. I'd now like to pass it back to, Howard Lutnick, for closing remarks. Thank you.

Howard Lutnick

Well, thank you all for joining us this morning. Clearly, we think there are tremendous opportunities in front of us at the company, while we have entered into a transaction to sell our benchmark U.S. Treasury market to NASDAQ, we do retain the software. We have the capacity to use our software and our network connectivity to build many, many other businesses. And we expect to.

And so part of our call today was to highlight the value of our real estate business, the value of our remaining electronic businesses and Financial Services, the growth rate of those Financial Services, electronic businesses, which were overwhelmed by both our treasury statistics and the unusual aspects of quantitative easing, which hold down the treasury businesses volumes.

And then lastly, our voice and hybrid business and the ability to both convert that prospectively for electronic high-margin businesses as well as its fundamental profitability and value to the company. So those things taken as a whole, coupled with we think the fundamental sustainability of our $0.12 per quarter dividend makes us believe that our company is dramatically under valued. I think our board recognizes that and we will take action accordingly.

So we are excited about the prospects of the company. And we look forward to updating you on the call towards the end of June. So we look forward to speaking to you then. Have a great day.


Thank you, ladies and gentlemen. Thank you for participating in today's call. You may now disconnect. Thank you for joining and enjoy the rest of your day.

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