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BGC Partners, Inc. (NASDAQ:BGCP)

Q4 2013 Earnings Conference Call

February 12, 2014 10:00 AM ET

Executives

Jason McGruder - IR

Howard Lutnick - Chairman and CEO

Shaun Lynn - President

Graham Sadler - CFO

Analyst

Jillian Miller - BMO Capital Markets

Mike Adams - Sandler O’Neill & Partners

Patrick O'Shaughnessy - Raymond James

Kyle Voigt - Keefe, Bruyette & Woods

Michael Wong - Morningstar

Operator

Good day, ladies and gentlemen, and welcome to the BGC Partners’ Fourth Quarter and Full Year 2013 Earnings Conference Call. My name is Crystal and I will be your operator for today. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the conference over to your host for today Mr. Howard Lutnick, Chairman and CEO. Please proceed sir.

Jason McGruder

This is actually Jason McGruder, I will read the disclaimer. Good morning. Our fourth quarter and full year 2013 financial results press release was issued this morning, which can be found in either the News Center or Investor Relations section of our website at www.bgcpartners.com. During this call, we will also be referring to our 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 our results only on a distributable earnings basis. Please see today's press release for GAAP results. Please see the section of today's press release entitled distributable earnings, distributable earnings results compared with GAAP results, reconciliation of revenues under GAAP distributable earnings and reconciliation of GAAP income to distributable earnings, as well as reconciliation of GAAP earnings to EBITDA for a definition of these terms and how, when and why management uses them.

Unless otherwise stated, whenever we refer to the income statement items such as revenues, expenses, pre-tax earnings, post-tax earnings, we are doing so only on a distributable earnings basis. Unless otherwise stated, all results provided on today’s call are compared to fourth quarter 2013 with year earlier period. In addition certain revenue items and non-financial metrics as well as some other items have been adjusted for prior periods to conform the current reporting methodology. These adjustments had no impact on overall revenues or earnings from either GAAP or distributable earnings.

On June 28, 2013, we sold our fully electronic platform for U.S. Treasury Notes and Bonds to NASDAQ OMX Group, Inc. For the purposes of today’s call the assets sold are referred to as eSpeed. Also Newmark Grubb Knight Frank is synonymous with NGKF or Real Estate Services.

I’ll also remind you that information on this call contains forward-looking statements within the meaning of Section 27A of the Securities Exchange 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 and 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.

However, we caution that it’s impossible to predict actual results or outcomes or the effects of risk uncertainties or other factors or anticipated results or outcomes and 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 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.

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

Howard Lutnick

Thank you, Jason. Good morning and thank you for joining us for our fourth quarter 2013 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 post-tax earnings per share increased by 30% in the fourth quarter, driven by the strength of Newmark Grubb Knight Frank, which more than doubled its pre-tax profit. Our real estate revenues grew by approximately 23% which represented over 40% of BGC’s total revenues for the quarter. Our real estate profits grew by 116% and exceeded the revenues not the profits but the revenues of eSpeed’s business a year ago.

Because our two businesses essentially reverse each other’s seasonality, we are unique amongst our real estate and financial service peers and that we expect BGC to have strong fourth and first quarters going forward. Last month we announced our planned acquisition of Cornish & Carey Commercial, the leading full service commercial real estate services company in the Bay area and Silicon Valley. This is a key strategic addition for NGKF in the fundamentally important Northern California marketplace. This transaction is the latest example of the extraordinary value we are creating by deploying our capital across our real estate service business. BGC’s cash position was $795 million at the end of the quarter and we still expect to receive approximately $530 million in NASDAQ OMX stock.

We clearly have the financial capacity to grow our profits by making accretive acquisitions and profitable hires in both of our businesses, which can also repay debt, repurchase common shares and units and maintain our regular common dividend for the foreseeable future. Our Board declared a $0.12 qualified dividend for the fourth quarter, which at today’s stock price represents a 7.3% annualized yield.

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

Shaun Lynn

Thanks Howard and good morning to everyone. BGC’s financial services business generated revenues of $246.3 million and $32.5 million of pre-tax earnings. Despite challenging market conditions this is a decline of just 2.6% excluding eSpeed. We believe we continue to gain market share in the financial services segment. Last year this business included $22.2 million in revenues from eSpeed and overall generated $274.9 million in revenues and $35.1 million in pre-tax profit.

Looking at results by asset class, our revenues from electronics rates products, excluding eSpeed, grew by 8.1% in the quarter, driven mainly by our interest rate derivative desks. Excluding eSpeed, our overall rates business declined by 5.9% to $99.3 million while our fully electronic credit revenues increased by nearly 13%, our overall credit revenues declined by 13.8% to $53.7 million. This reflected overall weaknesses in the interbank credit sector due to regulatory uncertainty and increased bank capital requirements.

Our higher margin fully electronics spot FX revenues were up by over 50% whereas BGC’s overall foreign exchange revenues declined by 5.2% to $44.7 million. This performance was better than the comparable FX volume declines reported by CME, EBS and Reuters. Global equity and energy market were mixed-to-down in the quarter. For example, equity derivative volumes were down by 12% and 28% respectively. According to Eurex and Euronext while the Eurex U.S. cash equity turnover declined by 9%.

Energy volumes were up by 5% to 6% at CME and ICE. In comparison BGC’s energy and commodity desk increased by over 17% in the quarter. Our overall revenues from equity and other asset classes which includes these desks decreased by about 2% to $35.2 million, and virtually all of our fully electronic asset classes showing strong growth despite challenging overall market conditions the bump in the industry’s electronic road this quarter within the E FX options business. Its market volumes are down significantly due to the personnel and for the number of our customers.

Excluding eSpeed, financial services electronic trading market data and software revenues increased by 1.7% to $18.2 million or 7.4% of segment revenues in the quarter compared with $17.9 million or 7.1%. The technology products we’ve retained after the NASDAQ OMX transaction generated a pre-tax profit margin of approximately 47%, and we believe that fully electronic business will continue to growth faster than our overall financial services segment.

We began operating our Swap Execution Facility, or SEF, October 2, 2013. Mandatory Dodd-Frank compliant execution by swap dealers and major swap participants is scheduled to commence later this month for a small number of products and in May of this year to substantially more. We’ve heard from any of our customers that they are currently trading less while they prepare for the new rules to take effect. Those SEF activity has greatly increased in January compared with December, volumes today are not indicative of what we expected it to look like a year from now.

We anticipate improved derivative volumes once the breakthrough landscape becomes clearer for our clients. In addition to our SEF platform, we maintain an ownership stake in ELX markets a CFTC approved designated contract market or DCM which includes several of the world’s largest banks as equityholders. A number of major banks have begun building ELX into their processes and work flows. It is ELX’s understanding, that these banks intend to use its platform as one of their primary means of Dodd-Frank compliant swap trading going forward.

We ended December with 1,501 brokers and sales people in financial services, down 13% from 1,721 a year earlier. Excluding eSpeed our average revenue per broker sales person increased by 4% to $153,000. With respect to our Real Estate Services business, industry metrics continued to move in a positive direction in the fourth quarter. The combination of modern economic growth and low interest rates in the U.S. has continued to be a strong tailwind for commercial real estate. The relatively wide spread between U.S. treasury and commercial cap rates also create strong investor demand for the yields available through direct ownership of real estate and funds.

Activity continues to be strong in gateway cities like New York and San Francisco and it also picked up in some suburban and regional market. Our NGKF research team believes that positive U.S. sales and the leasing trends will continue through 2014. We believe that NGKF will once again outpace the industry and grow its market share.

With respect to our results, management services and other revenues increased by 7.5% to $44.3 million. Excluding the non-core purchase assets that we discussed in our earnings release, NGKF’s brokerage revenues improved by 28.6% while overall revenues improved by 22.5%. Including these purchased assets, our brokerage revenues were up by 23.2% and overall revenues improved by 18.9% in this segment.

We had 884 real estate brokers and sales people at quarter end, up 7% compared with 830 last year. Excluding the non-core purchased assets, average revenue per real estate broker was up 22% to $150,000, including the non-core revenues production per head was up 17%. BGC’s overall front office headcount increased by 7% to 2,385 brokers and sales people. Our average revenue for both businesses was up 9% to $152,000 excluding the non-core purchased assets and eSpeed.

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 $432.9 million, down 0.8% compared with $436.3 million. Our revenues from the Americas were up approximately 14% excluding eSpeed. Revenues from Europe, Middle East and Africa were down by 7.3% and Asia-Pacific revenues decreased by 13.3%.

Turning to consolidated expenses, compensation and employee benefits was 62.1% of revenues compared with 61.5%. Our compensation ratio increased mainly due to a larger proportion of revenues coming from real estate services. Non-compensation expenses, was down on an absolute basis and as a percentage of revenues to 27.3% compared with 30.4%. The decrease in expenses was across nearly all of our GAAP line items due largely to our ongoing cost reduction program, as well as to lower financial services revenues and the sale of eSpeed.

By the end of the quarter, we succeeded in lowering our non-compensation expenses on an annualized basis by approximately $60 million as compared to the second half of 2012 run rate. This puts us at more than half way towards our goal of reducing annualized costs by $100 million by the end of 2014.

Our pre-tax earnings were $46 million, up 31% when compared with 35.1 million. Our pre-tax margin this quarter expanded to 10.6% compared with 8%. BGC’s effective tax rate for distributable earnings was unchanged at 14.5%. Our post-tax distributable earnings increased to $40.2 million or $0.13 per fully diluted share compared with $28.4 million or $0.10. Our post tax earnings margin improved to 9.3% compared with 6.5%. BGC had a fully diluted weighted average share count of 358 million in the fourth quarter of 2013 for distributable earnings and 318.1 million under GAAP.

This compares with 337.2 million for distributable earnings and 297.6 million for GAAP a year earlier. The GAAP share count was lower in both periods because of the excluded certain share equivalents in order to avoid anti-dilution. The year-over-year increase in share count for distributable earnings was due in parts to issuances related to the Frederick Ross, Ginalfi, Smith Mack, Newmark, and Grubb & Ellis acquisitions as well as to new hires and other equity-related employee compensation. This increase was partially offset by the net approximately 32 million fully diluted share count reduction that occurred in the second quarter of 2013, as a result of the large unit redemption and restricted share issuance.

The share count was also impacted by the repurchase or net redemption of another 6 million shares and units in 2013. As of December 31, 2013 our fully diluted share count was 357.9 million, assuming conversion of the convertible senior notes into 40 million shares. Absent acquisitions, significant hiring or changes in the stock price, we expect our fully diluted share count to grow by just under 5 million shares this quarter.

As of December 31, 2013 the Company’s cash position, which we define as cash and cash equivalents, marketable securities and unencumbered securities owned was $795 million. Notes payable and collateralized borrowings and notes payable to related policies were $408.4 million. Book value per common share was $2.15, while total capital which we define as redeemable partnership interest, non-controlling interest and subsidiaries and total stockholders’ equity was $769.7 million.

In comparison, as of December 31, 2012 our cash position was $420.4 million. Notes payable and collateralized borrowings and notes payables to related policies were $451.4 million. Book value per common share was $2.11, while total capital is $506.3 million.

BGC’s cash position increased from year-end 2012 primarily because of the net proceeds from the NASDAQ OMX transaction. The year-end 2013 cash position also increased due to the receipt of approximately 1 million shares of NASDAQ OMX stock. This increase was partially offset by the following items; firstly, withholding taxes and distributions paid by BGC on behalf of partners or unit redemptions related to the net approximately 32 million fully diluted share count reduction in the second quarter of 2013; secondly, cash used to reduce the Company’s debt by $48.2 million; and thirdly, cash used to redeem or repurchase a net total of another 6 million shares and units during full year 2013 at an average cost of $5.08 per share.

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

Howard Lutnick

Thank you, Graham. For the first quarter 2014, we expect to generate revenues of between $410 million and $440 million as compared with $449 million last year which included eSpeed. We expect pre-tax distributable earnings to be between $41 million and $52 million compared with $45.1 million last year which also included eSpeed. We anticipate our effective tax rate for distributable earnings to remain around 15% and this outlook reflects the following items. Excluding real estate services and eSpeed, our revenues for January were down 8.5% compared with last year. On that same basis, revenues were down 6.4% during the first seven trading days of February.

Next, commercial real estate services firms are generally seasonally slow at the first calendar quarter and they are strongest in the fourth calendar quarter. And lastly, our guidance also assumes that the acquisitions we’ve recently announced do not close during the quarter, we intend to update our first quarter outlook around the end of March. And operator, we’d now like to open the call for questions please.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question will come from the line of Jillian Miller with BMO Capital Markets. Please proceed.

Jillian Miller - BMO Capital Markets

Thanks guys. I just was wondering what impact the cash flows are having kind of a fragmentation in the global OTC markets overall. Like are you seeing non-U.S. clients operating their business that they avoid the mandates and did you develop from these kind of regional filers for trading and does that means your volume in the OTC markets longer term it seems like that section could be a headwind?

Shaun Lynn

Yes, we are seeing the fragmentation of some of that how are these splitting their entities. I think it is a headwind in the sense that there is a lot of confusion as you know a little bit they keep being pushed back and pushed back. There is the growth potential of new client base coming into the market as we’ve been talking about over the last 18 months. But throughout all of this the challenge for everybody is just trying to keep ahead of the regulation and how things are changing and keeping telling ourselves there are lot of people and there has been a lot of talking instead of trading.

And they’re trying to see in that crystal ball as to where they are going to be trading and how they’re going to be trading in the next two or three months. As I’ve said in my piece we have only been coming out last week where we were there to talk about how we’re -- some of the trades that are going to be hedge trades but now they are not included within the central until May and that now frees up the market we’re pretty much 65% to 70% of the business that happens in the interest rate swap market will now be offset.

So these things are happening real time, where these things are changing. And so I think this is a headwind for the marketplace which I’ve said in my piece and I think it will continue for the next few months until things become a bit clearer well getting towards March there to maybe seven figures.

Howard Lutnick

I guess one can look at it what Shaun said is exactly right, I think though that the marketplace already has the reduced volumes in it and the headwinds makes you think that things are going to get tougher. In fact, the market numbers that you’ve seen aren’t the ones without regulatory uncertainty sort of baked into them. And so I think what you see is actually strange is that as that is relieved you’ll see substantial benefits coming at that regulatory oversight and uncertainty gets lifted. So I think it’s strange because it is constraining the business today. So to suggest it’s got a headwind would be inaccurate, but the strange point is that because that’s already in our numbers, right the clearing of that uncertainty will create a positive movement in swaps generally and will be an improvement in our numbers in financial services. So as it clears up over the course of the year I think it will become a benefit we maybe only going back to where we were right, but still and these numbers going back to where we were would be a great benefit to our earnings and our profits.

Jillian Miller - BMO Capital Markets

Okay, so even though there is still kind of a lot of uncertainty with what’s going on in Europe and there behind the U.S. you can get at least for the U.S. portion of the business when we get to May it will be a positive for volumes?

Howard Lutnick

Right, it will start, the volumes will start to improve as -- if May is the date where it’s all settled and final then that is the first day of the beginning of improved numbers going forward for the Company.

Jillian Miller - BMO Capital Markets

Okay. And then just on this GCS business it drove all the jump you saw in real estate, it was certainly real estate profitability in the quarter. And I think last quarter you mentioned that it was really not so much a sustainable run rate because in the fourth quarter there were unusual amount of these consulting pay days. But maybe just help us understand, what we should be expecting going forward from GCS is this is a seasonal thing or a fourth quarter is typically stronger like some of the rest of the real estate business?

And I guess kind of separate but related to it, it just seems like this is an attractive business because you don’t have to pay the commissions on it and profitability is higher. So, is there anything you guys can do to try to kind of actively build that out more and expand it?

Howard Lutnick

Well, we completely agree with you and we are doing everything we possibly can to build and expand this and you are right, look it is a conflict free analysis. The common thought in real estate is you go ahead of that particular business and you want more space, he or she wants more space nearer to their house, and that’s basically how it works. And when you get to corporate headquarters they don’t have that particular interest. They want to know what’s most efficient for their company generally and to be able to bring in basically deal conflict-free consultants who are deep, deep experts in work flows and real estate management and be consults not for their business but just for their workflows in the real estate we can save companies tens of millions of dollars by suggesting that they add space here and they get rid of the space there and all that kind of work which is basically paid as a consulting fee, often they then hire us to execute that plan, and now we then go into the brokerage business.

But just that advisory business, it tends to be little more consistent, with the real estate business generally in terms of seasonality but less so, so it’s not entirely sort of bulky in the fourth quarter and it is more spread out. But it does in fact things tend to crescendo in the real estate business by the end of the year. So, they will what their reports did by the end of the year, they will pay the bills by the end of the year, sort of classic stuff that happens more balanced towards the end of the year. But from a billion, from an operating, from a business perspective, it tends to be much more spread out across the business year.

We are using our technology at BGC and our technology expertise to do a huge value input, taking our technological expertise our valuation, determination, our influential pricing models and using them in real estate is really giving us leg up and has created enormous value I think in the GCS business. And I would think we should have substantial growth going through that as we leverage our ability to price and value bonds, which is deeply, deeply complex and then taking those inputs and using it in real estate is really extraordinarily interesting and helpful in the GCS space and we’re very, very excited about its prospect.

Jillian Miller - BMO Capital Markets

Okay, that’s interesting. And final question for me, you made several acquisitions in the period, or you have done several acquisitions in the period, can we kind of refer from that, that you are seeing prices for some of the assets you have been watching for a while rationalize ahead of these SEF mandates and if that’s the case, could you just discuss what areas of the business you are still looking to build out potentially and organically in the next couple of quarters?

Howard Lutnick

Yes it’s -- I think I’ve said in the last call that we were literally looking for these kinds of opportunities as the SEF rule starts to take hold. The cost of being compliant operating a SEF is a heavy burden for a lot of companies. And I think that from our standpoint we feel with the NASDAQ OMX transaction that we are now best placed with the cash that’s inside the Company, our platform the marketplace is to attract many different types of brokerage, be that from energy, commodities, the traditional day-to-day business that we do every day. And then going onto many other products in the market space in brokerage, we are attracting lots of these.

So, yes, we do see it as a great, great opportunity as much as it can be a headwind from a day-to-day business, which we are as Howard said earlier, we’re in that at the moment. We are right in the middle of that, ongoing for the next two, three, four year, this is not going away. You have got Europe coming in with exactly the same agenda. So, if you are a small brokerage outset or medium sized brokerage outset, this cost is not going to go away. You are not just going to spend this money then there is nothing else. It’s going to be relentless with regard to the investment that you are going to have to make from a technology perspective and from regulation and compliance. So, we are out there at the moment we are looking at, as I am sure are others, but we feel with our situation and aspects we are best positioned compared to a lot of others.

Shaun Lynn

And then with respect to real estate the value of joining our platform will mean that we should be able to make, fair and reasonably priced transactions because for example the Cornish & Carey transaction may have, they are and have been the leading company in Silicon Valley and the Bay area for a long, for a decade, for a long-long time and what they’ve been doing is they’ve been, they are the broker who starts off Apple and Google and you name, and Hewlett-Packard even and I mean go back and fudge that and they were ones who did it and what they do would is after those companies expanded and grew out of Silicon Valley and wanted to expand in other marketplaces, they ended up losing that client to other platforms because they weren’t there, and now by joining the NGKF platform they can retain a piece of the business that these companies do across the country, and so that is a very attractive pull and so the benefit of keeping that piece of that business for their employee makes the deal sort of a balanced deal, it’s good for them, extraordinarily good for them and extraordinarily good for us, and that kind of balance makes things work well, so we are seeing very, very attractive candidates talking to us at fair prices.

I’m not saying bargain, that’s the opposite of true, okay, these are not bargains for piece you know when you buy a great company with great people and you do a fair deal for you and for them it works out brilliantly because you can grow and do it well. So I think we are seeing fair, fairly priced deals in the real estate business because of the strength of our platform and Newmark’s fundamental strength in the biggest market in the world, in New York, Newmark is, if not the best, certainly tied for the best company in New York and that is a great magnetic pull for other companies who want to associate with that.

Jillian Miller - BMO Capital Markets

Okay, thank you.

Operator

Our next question will come from the line of Mike Adams with Sandler O’Neill. Please proceed.

Mike Adams - Sandler O’Neill & Partners

Good morning, gentlemen. One follow-up question here on the SEF curious if some of the regulatory focus on impartial access has resulted in a diversification of the customer base if you’re talking to some new clients and may be in the past weren’t picking up the phone with you guys that often, has that happened and if not do you expect that to happen in the coming quarters?

Howard Lutnick

I think, look it’s started to happen it’s not material as we hear today, as you know basically our platform is open access and as it must be, but it’s not material at this current time.

Mike Adams - Sandler O’Neill & Partners

Okay, fair enough, and then a follow-up question on expenses, you guys made really great progress on some of the non-comp expenses but looking at compensation as a percentage of distributable revenue, it’s kind of stuck around 62%. I appreciate that the higher payout real estate business was really strong in the fourth quarter but if you drill down by segment, what sort of trends have you seen within financial services, brokerage and I know there’s been some headcount reductions but we’ve also seen the comp ratio coming down there overtime?

Howard Lutnick

Look I think we are -- the challenging market conditions are no secret, okay, they’re not, they’re not our well kept secret they are the employees know it perfectly and they are as you know huge partners and owners of this company. And we have aligned their interests with the shareholder’s interest in a way that I don’t know of any other company in our industry who has done, and so I think you will see our comp ratio and financial services drop a bit in order to make sure that this company continues on its current trajectory high.

We have made a commitment that we would lower our costs and our employees understand that and they are on-board, I’m not suggesting that they’re happy about it, right, anymore than anybody would be happy about challenging market conditions. But when you understand it and you also know the value of investing in technology is fundamentally important they’re going to throw their hat in the ring with us somewhat and I think you should see over the course of this year that our financial service comp ratio should decline a bit, not a huge amount, that’s for sure, but a bit.

Mike Adams - Sandler O’Neill & Partners

Okay, so would it fair to say that in order for the consolidated comp ratio to come down this year it’ll probably take an uptick an improvement in the financial service’s performance.

Howard Lutnick

No, I think if all other things stayed equal, it would, will pick up. Look we’re on our path to $200 million so if we picked up -- it picked up one point, right? You can do the math of one point, one point will add to our totals and in our cap towards cutting our cost to $100 million, so that’s how we look at it. I don’t think it’s going to drop two points, I would say in the point to maximum sort of 1.5 point range and these are one of the objectives of the Company, that sort of a range, but I wouldn’t think, if it grew that would be that, that’s for sure, that would definitely help.

Moving things electronic also helps, and we could see from our numbers, just the E foreign exchange options business coming back will help our numbers. All of those things more electronics reduces our cap ratio and more financial services as a percentage reduces our cap ratio and working with our partners to be committed to having them participate in the investment of technology as we drive forward to achieve better results for the Company will help reduce our cap ratio a bit, but like I said more in the order of a point.

Mike Adams - Sandler O’Neill & Partners

Got it. Thank you for taking my questions.

Operator

Our next question will come from the line of Patrick O'Shaughnessy with Raymond James. Please proceed.

Patrick O'Shaughnessy - Raymond James

Hey. Good morning guys. My first question is with Cornish & Carey. Yes, it’s a pretty sizable deal for you. What sort of implications is bringing that business and the fold is going to have on the margins of your real estate segment?

Howard Lutnick

It’s my understanding there when we combine with them they should be consistent with our margins.

Patrick O'Shaughnessy - Raymond James

Okay, great. So, kid of on the 10% range or so?

Howard Lutnick

Just consistent, as we improve our margins and grow our business by scale, I hope to improve those margins. But we see no structural difference with the combination to business, it fits beautifully with us.

Patrick O'Shaughnessy - Raymond James

Okay, got you. And then I guess staying on the real estate theme, you guys are seeing some really nice growth out of your real estate management services. And Shaun I think you probably alluded to it before. But is that an area where you expect to see it continue to grow or and to get some market share gains in 2013 that you think might level off a little bit?

Shaun Lynn

No, we like that business a lot. And we think a combination of our GCS business and our management services business should continue to grow. We should have opportunities to build, hire tremendously talented people and acquire firms in that area to strengthen up the key acquisition in that space is the Grubb & Ellis transaction gave us scale, gave us scope, and we added some tremendous management. And so we’re willing to invest in them and it feels good. So I would say there is a long road ahead for us in that space and I think we should see continued growth going forward.

Patrick O'Shaughnessy - Raymond James

Okay, great. And then last one from me, just kind of more of focus on the credit segment. And your comments were I think pretty interesting before about how the dealers continue to shrink their balance sheets, and that’s pressured. And I think as a function of that your credit revenue I think was down 14% year-over-year of kind of overall trade’s corporate bond volume from I am looking at was actually up 5% year-over-year. So it seems like a lot of the corporate bond trading activity is kind of moving away from your clients. And A; is that kind of a correct assumption; and B, do you expect that trend to continue or do you kind of think things have more or less stabilized now?

Shaun Lynn

Not using stabilized I think that from that standpoint we, as you know the traditional client base they’ve been stresses on their balance sheets constraining them with regards to position taking that they have which is working true with more clients moving away from the traditional clients and moving to hedge funds and moving to other different counterparties where they’ve probably books up and the client base is changing I think we’ll come out of that but today I think we are where we are and I don’t think we expect them to slip anymore.

Howard Lutnick

So in short has been great.

Shaun Lynn

Yes.

Howard Lutnick

Right, issuance has been great and the banks are trading less than they have in the past. And so you see the difference between the issuance market and the traditional entity of broker market. When friction wide that occurs when one side is big and the other side is small and you see it in the press by the largest accounts complaining is, there is just not enough liquidity out there for them to do there -- for them to transact their business in the way they’re comfortable with and so they’re going to try to figure out alternatives.

The alternatives are going to be met with exactly the way Shaun said it, which is additional capital is going to come into the market through non-bank means whether that’s hedge funds, money managers, electronic trading firms.

However, the structural work eventually capital will come into the business because that I don’t remember anyone saying that trading corporate bonds from a bank’s perspective was not a profitable business until they put such high capital charges on it and maybe less difficult, and made it more difficult. So, eventually, those don’t have those kind of high capital charges and we will find a way into the business, and this will sort its way out. So, I think the pressure that you’re seeing in pointing out will eventually meet itself to a modification of the business.

Remember in U.S. Treasuries once upon a time all the top-10 names or the top-10 bank names, or investment banks that you could remember. And at some point that all changed and then the top 10-was filled with names that most people in America have never heard of because there were again they brought capital and technology to the marketplace to provide market making liquidity and expertise as the banks reduced their liquidity and capital in that space. And I think that this is the kind of thing that will happen. And what you’re pointing out is the pressure that is creating, that is going to make it happen and provide that opportunity. And we’ll be there to pick up some of the pieces.

Patrick O'Shaughnessy - Raymond James

Okay, got you. That’s helpful. And actually one last one from me and maybe this is for Graham, with your diluted share count guidance for the first quarter of 2014. What are your share repurchase assumptions within that guidance?

Graham Sadler

Yes and that’s just a small part of it right and what we’re predicting is that -- so we’re looking at just under 5 million for Q1 and then sort of going forward from that we’re striving to reduce that issuance, with our compensation unit. And then but of course we may issue units in respect to no accretive acquisitions and new hires. So that may cause it to bump up.

Patrick O'Shaughnessy - Raymond James

Okay. But kind of taking acquisitions aside, just kind of on the organic basis would you foresee -- like some companies say we’re going to use our repurchases to offset dilution from share based compensation. Is that a philosophy that you would subscribe too or do you still kind of think that the share base is going to grow or maybe you will be opportunistic with repurchases but you are not specifically going to try to offset that dilution?

Howard Lutnick

We are considering that, we certainly have the financial resources to do that and we are not announcing that on this call, but I would not take that off the table.

Patrick O'Shaughnessy - Raymond James

Alright, great thank you guys.

Operator

Our next question will come from the line of Ms. Alexandra with KBW. Please proceed.

Kyle Voigt - Keefe, Bruyette & Woods

Hi this is actually Kyle Voigt I am stepping in for Niamh most of my questions were answered already. But just one more quick one if I could on eSpeed deal. You said you are exploring options to hedge out of the NASDAQ stock. Could you just give us an update on any progress there?

Howard Lutnick

Sure we have, we continuously -- since we know the market is particularly well, we sometimes consult calls, we sometimes buy put spreads we do a variety of things. All we have now is a small amount of put spread protection on our position with no cost to us, since we have done a variety of other transactions which by trading around the marketplace we have put on and taken off. So we have small amounts of put spread protection and literally it has cost us zero because we invested the proceeds of other option trades which have since expired or have been closed out and used those proceeds to put on the put spreads. We have downside protection, no upside costs, unlimited upside and that’s where we stand out but it’s relatively small.

Kyle Voigt - Keefe, Bruyette & Woods

Okay thanks. That’s really all I had. Thank you.

Operator

(Operator Instructions) Our next question will come from the line of Michael Wong with Morningstar. Please proceed.

Michael Wong - Morningstar

Good morning.

Howard Lutnick

Good morning.

Michael Wong - Morningstar

I believe that your SEF volumes are fairly decent compared to your peers. So I am just wondering if you could go more into why you said that you believe the market share now wouldn’t be indicative of what you believe the market share will be a year from now?

Howard Lutnick

Because the volumes that you are seeing on -- and we have said this all the way along the volumes that you are seeing on the various different websites are only indicative of some of the trades that are actually going through the SEFs. It’s a very small amount compared to the tradition that we had been doing although it has ticked up in January when the further guidance came out the CFTC. But we think that that’s going to just increase over the course of this next year as clarity prevails into the marketplace and we get through May subject to actually getting some definitive guidance enrolled in May, that will start to increase.

Michael Wong - Morningstar

Okay. And with the recent announcement of the Cornish & Carey so you've recently added to your real estate brokerage headcount and you have been I guess actively reducing your financial brokerage headcount. Do you have any long-term strategic mix in mind in terms of revenue of your operating income among those businesses or are you just responding to the environment and opportunities that are presented to you?

Howard Lutnick

The way one succeeds in the brokerage business for scale is average revenue per head and so adding high quality brokers and reducing those that are towards the bottom of your productivity has economic enhancing quality to the firm. And that is the math, so we’re going to continuously add quality people at the top and ask those who are less productive at the bottom to go elsewhere, that’s just the math of this business. So you should expect that to continue in financial services and from time-to-time in real estate, it’s just good prudent management and we expect to do that every once in a while we’re going to take a hard sharp look at our business and make sure we -- the people who are here are productive, active and economically viable for our platform.

Michael Wong - Morningstar

Okay thank you.

Howard Lutnick

But the more the better, the more the better, so Cornish & Carey has approximately in the neighborhood of 275 to 300 brokers and so when we close that transaction we will see our brokerage numbers jump.

Shaun Lynn

And you should expect us to continue on the financial side, continue to look into the energy and commodity side which I've been talking for the last 12 to 18 months, so that's exactly there. But we would look at any opportunity that makes sense to the Company and that's going to accretive. And one thing is that as much as having these calls, but we see our shareholders every day, we look up and down the list. We see them and talk to them every day, so they want performances as well as the public.

Michael Wong - Morningstar

Okay, thank you.

Operator

And with no further questions, I would now like to turn the call back over to Mr. Lutnick for closing remarks.

Howard Lutnick

Well, thank you all for joining us today and we look forward to speaking to you again next quarter. We'd also like you to mark your calendars for May the 29th, which is when we have planned out another Analyst & Investor Day in New York City and hopefully the weather will be warmer as it is today. So anyway, thank you all for joining us and have a great day today.

Operator

Ladies and gentlemen, that concludes today's presentation. You may now disconnect. Have a great day.

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