GFI Group Management Discusses Q1 2014 Results - Earnings Call Transcript

|
 |  About: GFI Group Inc. (GFIG)
by: SA Transcripts

GFI Group (NYSE:GFIG)

Q1 2014 Earnings Call

April 30, 2014 8:30 am ET

Executives

Mark Brazier

Colin Heffron - Chief Executive Officer, Director and Member of Risk Policy Committee

James A. Peers - Chief Financial Officer and Principal Accounting Officer

Analysts

Jillian Miller - BMO Capital Markets U.S.

Christopher R. Donat - Sandler O'Neill + Partners, L.P., Research Division

Daniel Thomas Fannon - Jefferies LLC, Research Division

Niamh Alexander - Keefe, Bruyette, & Woods, Inc., Research Division

Michael Wong - Morningstar Inc., Research Division

Operator

Good morning, and welcome to the GFI Group's First Quarter 2014 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Mark Brazier. Please go ahead, sir.

Mark Brazier

Thank you, Denise. Good morning, everyone, and welcome to the GFI Group First Quarter 2014 Earnings Conference Call. We issued a press release yesterday providing the financial results for our fiscal quarter ended March 31, 2014, which is available on our website at www.gfigroup.com. We have also posted monthly revenue and trading day count information for the quarter on our website under Supplementary Financial Information.

To begin this morning's call, Colin Heffron, GFI's Chief Executive Officer, will review our business performance for the first quarter, highlight some current developments and discuss our trading activity in April thus far. Then Jim Peers, GFI's CFO, will review the first quarter financial results in greater detail. After Jim, Colin will conclude with a few remarks. Thereafter, we will open up the call for your questions.

Our discussions during this conference call will include certain forward-looking statements. These statements are not guarantees of future performance. Actual results may differ materially from those expressed or implied in such forward-looking statements. More detailed information about the risks, uncertainties and other factors that may cause actual results to differ from such forward-looking statements are discussed in our filings with the SEC, including our most recent annual report on Form 10-K.

Also, the discussions under this conference call may include certain financial measures that were not prepared in accordance with U.S. Generally Accepted Accounting Principles. Reconciliations of non-U.S. GAAP financial measures to the most directly comparable U.S. GAAP financial measures were included in the company's earnings press release, which was furnished on the current report on Form 8-K dated April 29, 2014. These reports are available on our website under the Investor Relations section.

I would now like to turn the call over to Colin Heffron, Chief Executive Officer of GFI Group.

Colin Heffron

Thank you, Mark. Good morning, everyone. Thank you for joining us today. I'm pleased to report GFI's first quarter non-GAAP results. GFI's net revenues increased 1% on strong revenue growth from Trayport and FENICS, as well as increased fixed income brokerage revenues. Our brokerage operations continue to face challenges of market disruption and historically low volatility in interest rate environments. However, we have made considerable progress in transforming and strengthening our core execution business to operate as an end-to-end trading solutions provider versus a traditional interdealer broker. We are proud of our electronic trading platforms, their comprehensive service networks and deep liquidity. We believe that we're gaining market share in key fixed income and foreign exchange markets. Customers demand proven electronic execution technology, connectivity to clearinghouses, data repositories and post-trade service providers. They are also looking for pre-trade data and analytics and straight-through processing services. Our proprietary trading platforms address this demand. These include CreditMatch, ForexMatch, RatesMatch and EnergyMatch.

GFI's electronic trading matching sessions continue to provide sustained revenue growth in the first quarter. In the Americas and EMEA, matching sessions revenue represented approximately 52% and 18% of fixed income revenues as compared to 29% and 8% in the first quarter of 2013. In Fixed Income products globally, matching session revenues approximately tripled in derivative products and more than doubled in cash products year-over-year. We believe that GFI's matching session revenues will continue to grow in fixed income and financial products globally.

GFI's Trayport, FENICS software, analytics and market data business continue to outperform as they leverage their customer base and expand their products and services. Trayport's revenues increased 19% on a U.S. dollar basis compared to a year ago. Software analytics and market data revenues increased 16% in the first quarter to $25.8 million.

On the cost side, we continued migrating our front office cost structure from one with a significant fixed component to one that is more performance based and variable. This is reflected in a 50-basis-point improvement in GFI's compensation ratio for the first quarter, despite increased technology and regulatory compliance related cost. It's worth noting that our compensation ratio for the quarter was the lowest since the third quarter of 2011 when net revenues were $33 million higher.

Non-compensation expenses were slightly up from the prior year due to higher rent and occupancy and other expenses in the quarter. We are pleased that GFI's front office productivity has stabilized and started to increase and is the highest it has been since the first quarter of 2012. We continue to believe that our cost-cutting efforts and improved flexibility within our composition arrangements will provide considerable operating leverage when volumes improve.

I will now discuss our performance per product category for the first quarter. GFI's fixed income products, which consists of cash and derivatives, represented 30% of total brokerage revenues. Cash revenues were up 8% as compared to first quarter of 2013 and represented 62% of GFI's overall fixed income businesses in the quarter. Revenues from fixed income derivatives increased 15% in the first quarter of 2014 from the prior year.

Financial products consist largely of foreign exchange and interest rate products. This product represented 30% of total brokerage revenues for the period, and along with fixed income, was our largest product category. Financial product revenues declined 1% from the prior year.

Equity products, which consists of cash and derivatives, represent 17% of GFI's total brokerage revenues in the quarter. Equity product revenues declined 10% from the prior year.

The Commodities category consists of energy and other commodity products. This product category represented 23% of GFI's total brokerage revenues in the quarter. Commodity product revenues decreased 11% due to lower trading volumes in North America.

From a geographical perspective, GFI's brokerage revenues were up 4% in EMEA and Asia-Pacific, but were down 11% in the Americas from the prior year.

Our SEF platform, GFI's Swaps Exchange, is accessed by hundreds of traders. We are on-boarding more participants and executing more trades on our SEF each month. We are pleased with the initial volume trading and are optimistic that mandated SEF trading will have a positive impact on volumes going forward. GFI's Swaps Exchange utilizes our market-tested trading systems, together with established connectivity to customers, clearinghouses, data repositories and post-trade service providers.

Now let me review GFI's non-GAAP expenses for the quarter. GFI's compensation ratio decreased to 68.1% of net revenues as compared to 68.6% in the first quarter of 2013. The lower compensation rate is the direct result of cost initiatives implemented over the past 2 years to add flexibility to our compensation structure despite increased technology and regulatory compliance-related costs.

Non-compensation expenses were higher than the prior year. Higher rent, occupancy and other costs were partially offset with lower market data and travel and promotion expenses. We generated non-GAAP cash earnings of approximately $26.3 million or $0.20 per diluted share in the first quarter.

GFI's balance sheet remains strong, and the company is in full compliance of all its debt covenants. April total revenues are tracking approximately 8% lower when compared to the same period in 2013. We believe that mandated SEF trading will have a positive impact on our market share and revenues. However, we do expect it will take time for customers to become comfortable with the new market structure, and we do not anticipate a sudden increase in volumes as a result.

Before offering my concluding remarks, I will now turn the call over to Jim Peers, our CFO, for his comments.

James A. Peers

Thank you, Colin, and good morning, everyone. GFI's GAAP first quarter 2014 net revenues of $202.4 million increased by $900,000 compared to $201.5 million in the prior year's first quarter. Our non-GAAP first quarter 2014 net revenues were $202.1 million versus $199.8 million in the prior year's first quarter, an increase of $2.3 million or 1.1%.

Our brokerage revenues in the first quarter of this year were $173.1 million compared to $176.6 million in the first quarter of 2013, a $3.5 million decrease, or 2%.

Total revenues for software, analytics and market data were $25.8 million compared to $3.6 million or 16% up -- 16.3% from the prior year's first quarter. On a sterling basis, Trayport revenues increased 13.1% to GBP 11.1 million in the first quarter of 2014 compared to the same quarter last year.

On a GAAP basis, GFI's first quarter 2014 net income was $4 million versus $4.7 million in the first quarter of 2013. And on a non-GAAP basis, GFI's first quarter 2014 net income was $6.2 million compared to $7.2 million in the prior year's first quarter. Our diluted GAAP earnings per share for the first quarter of 2014 was $0.03 compared to $0.04 in the first quarter of 2013. And on a diluted non-GAAP basis, our earnings per share for the first quarter of 2014 was $0.05 compared to $0.06 in the prior year's first quarter.

GFI's GAAP brokerage revenues were down $3.5 million, or 2%, when comparing the first quarter of this year to the prior year's first quarter. Fixed income was up 10.7%, with derivatives up 15.3%, and cash up 8%. Equities were down 9.6%, commodities were down 11.1%, and financials were down 0.7%. Our first quarter of this year brokerage revenues increased by approximately $30 million, or 20.6%, compared to the fourth quarter of 2013.

GFI's sign-on and retention bonuses paid in cash and RSUs in the first quarter of this year was $3.6 million compared to $2.3 million in the first quarter of last year, and $2 million in the fourth quarter of 2013. And our non-GAAP amortization of previously paid sign-on bonuses, in both cash and RSUs, was $9 million in the first quarter of this year compared to $9.5 million in the first quarter of last year, and $8.7 million in the fourth quarter of 2013.

Our brokerage personnel headcount at the end of the first quarter of this year was 1,084, down 81 from the first quarter of 2013 and down 37 from the fourth quarter of 2013 after reclassifying certain broker support staff from front office to back office employees. Our broker productivity of $160,000 in the first quarter of 2014 was up $9,000 from the same quarter in 2013. And our broker productivity is at its highest level since the first quarter of 2012.

On a GAAP basis, our pretax margin as a percentage of net revenue for the first quarter of this year was 2.7% compared to 0 in the same quarter of last year. And on a non-GAAP basis, our pretax margin for the first quarter of 2014 was 4.1% compared to 4.7% in the first quarter of '13.

In summary, our key performance drivers on a non-GAAP basis for the first quarter of 2014 are as follows: our non-GAAP net revenues were up $2.3 million, or 1.1%, compared to the first quarter of 2013; our compensation costs, which includes all employees, not just brokers, were 68.1% of net revenues in the first quarter of this year compared to 68.6% for the first quarter of 2013, and 71.9% for the fourth quarter of 2013. This is the lowest compensation ratio achieved since the third quarter of 2011, even with lower revenues of $33.3 million.

Our non-compensation costs were 27.8% of net revenues compared to 26.8% for the first quarter of 2013, and 31.1% for the fourth quarter of 2013. And GFI's effective non-GAAP tax rate for the first quarter of this year was 20% compared to 36% for the full year of 2013. The 2013 tax rate was impacted by higher valuation reserves recorded against certain prior year deferred tax assets.

Our first quarter non-GAAP items are as follows: on the revenue side, our results exclude a net gain of $400,000 related to the sale of available for sale investments; and as I've highlighted on our previous calls, we are long euros on the revenue side and short sterling on the cost side in Europe.

Accordingly, GFI continues to enter into a number of FX forward contracts which serve as an economic hedge for our exposure to certain euro and sterling cash flows. Our euro revenue hedges were mark-to-market at the end of the first quarter, resulting in an unrealized noncash pretax loss of approximately $100,000. These losses were excluded from our non-GAAP results.

And on the expense side, our non-GAAP results exclude $2.5 million of expense related to the amortization of acquired intangibles and $600,000 on the impairment of a nonconsolidated affiliate. Our SEF cost related to the startup and regulatory compliance in the first quarter of this year was approximately $2.5 million compared to $300,000 in the first quarter of last year. Our cost earnings per share for the first quarter of this year is $0.20 compared to $0.22 in the same period last year. This non-GAAP performance metric is reconciled on our Investor Relations website.

On a trailing 12-month basis, we generated adjusted EBITDA of $120.2 million compared to $113 million in the same period in 2013. The reconciliation of GFI's adjusted EBITDA is included in our Investor Relations website and adjusts GAAP net income for interest, taxes, depreciation, amortization, non-GAAP items and the noncash amortization of our RSUs and sign-up bonuses.

Our balance sheet continues to be strong, and our cash position, which includes cash and cash equivalents, clearing cash and which excludes client's money, was $221.3 million at the end of March of this year compared to $227 million at the end of December 2013.

GFI's total balance sheet cash per share was $1.76 at the end of March of this year compared to $1.84 at the end of the December of last year. The number of weighted average diluted shares for the quarter ended March 31, 2014, were 131.4 million shares for both GAAP and non-GAAP basis, compared to 125.6 million shares for the quarter ended March 31, 2013.

As of March 31, 2014, GFI was compliant with all of its bank covenants. Our consolidated capital, which must be greater than $375 million were, at currently at over $408 million. Our leverage ratio cannot exceed 3x, and we are currently at 2.08x. And fixed charge must be greater than 1.4x, and we're currently at 1.8x. That concludes my remarks. Now I'll turn the presentation back to Colin for some closing comments.

Colin Heffron

Thanks, Jim. In summary, we continue to invest in our electronic trading and SEF platforms, providing customers with a comprehensive end-to-end trading solutions. We're executing on our strategy of expanding GFI's hybrid technology. We believe these efforts will add considerable operating leverage to the business in an improved volume environment. As reported in our release, we are pleased to declare a quarterly cash dividend to our shareholders of $0.05 a share. Thanks for your time and attention today, we are now ready to take your questions. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] We have a question from Jillian Miller from BMO Capital Markets.

Jillian Miller - BMO Capital Markets U.S.

So I think the hope was that with the SEF rule, and IDBs in general and yourselves included, would benefit from a broader participant base and we'd see maybe some hedge funds or alternative liquidity providers getting involved. And originally, we were hoping that, that might happen sooner rather than later. And hopefully, soon after the mandates were enforced, but it seems like maybe that expectation has been pushed out. So I just want to get an update on timing, when you think we'll see the first non-dealer participants kind of live on the SEFs and what has been the hold up to date?

Colin Heffron

Okay. So I think back to October when the SEF launched, October 2nd was a key day and the next day was November 2nd, and as time went on, we were able to put, what I would call, traditional customers on them and I think that the number kind of quickly got to about 39. Since then, that's gone to about 50, what I would describe as traditional customers. Now we have those customers accessing our SEF through agency model. And I think that is probably another 15 what I would describe, as nontraditional customers. They're not direct members. And then I think we have 6 or 7 direct members who have signed our rulebook and are testing with another 6 or 7 in the wings. But it's a matter of testing, getting the credit hubs up, working with SCMs. So that's been the drag. But we're prepared, we're ready, and I think you're right. We thought -- a lot of you thought it would happen sooner rather than later. But I think it's ongoing.

Jillian Miller - BMO Capital Markets U.S.

Okay. I mean, do you guys feel confident that, let's just say, by the end of the year, we'll have some of these people through the testing phase? Or do you think that this is something that could stretch into 2015?

Colin Heffron

No, I very much feel comfortable that the people want to and are entitled to join the SEF will be -- as direct members, will be done testing sometime in June, the latest, and then that will be ongoing. Some people are going to quicker at it, some people are going to be sitting back and wanting to see what SEFs they want to join and where the liquidity is. But they'll be ready much sooner than the end of the year, if you will. But it will be appetite-driven.

Jillian Miller - BMO Capital Markets U.S.

Okay, got it. And then on the non-compensation expenses, they're a bit higher than I had anticipated, and I guess, $3 million higher than last quarter. And you mentioned in the remarks, rent and occupancy and other expenses, but I was just wondering if there is anything unusual going on in those items? Or what was driving the increase there and kind of how you're thinking about the non-comp base going forward, just given the fact that volumes continue to be somewhat weak?

Colin Heffron

Jim, do you want to have a go at that?

James A. Peers

Jillian, I think there's really 3 areas. We'll focus on rent and occupancy. It went up with the Trayport move to the new space here in the U.K. But also, our IT licensing fees are up with -- for Ubix [ph] and database, so those are probably more ongoing costs. On the other expense side, though, their increase was because of the duplicate charges as we migrate from SunGard to Equinix through July, so that will disappear. And then we have some higher regulatory fees for Kyte, and then we have a few catch ups on cost method investment for Kyte, which will disappear. And then, I think, the third offsetting item is we had some one-off benefits in Q4 which artificially lowered that cost a little. But also, I think there's been some negative impact in this quarter as a result of the increase and the sterling increase, it's exchange rate compared to the first quarter of last year. So I think some of that will -- I think that roughly half of it will go away and other half is we're going to have to manage it down.

Jillian Miller - BMO Capital Markets U.S.

Okay, that's helpful. And then one final one for me. In the prepared remarks you guys had mentioned that you felt like you were gaining market share in FX and fixed income. And I'm assuming that, that's related to your matching sessions, but I was just wondering if you could give us a sense for, like, what you're looking at that gives you confidence that you're gaining market share and what figures you're examining or any anecdotal evidence that what you're seeing that gives you the confidence?

Colin Heffron

Some of it's consensus driven, but we look at the day-to-day volumes in Tray's on the corporate bond market. And -- well, it's not super scientific, we see it as flat to down. And we know we're up 8% so that's what we point to when we think we're gaining market share. And when you triple your derivative sessions and you double your cash volumes in those sessions and you know that there are certain participants that either don't want technology or are not successfully launching it, that's another indication that we feel we're gaining market share.

Operator

Next question is from Chris Donat from Sandler O'Neill.

Christopher R. Donat - Sandler O'Neill + Partners, L.P., Research Division

Colin, I wanted to ask about the comment about April being down 8% year-on-year, and you cited lower volatility and regulatory. I was also wondering, if from your opinion, that the timing of Easter would have an effect? Easter was sort of midmonth this year and last year, it was a sort of split between the first quarter and the second quarter. Anyway, just looking for a little commentary there?

Colin Heffron

Yes, we see that as one less trading day in April. And the full brunt of Easter and Passover are certainly part of it. And then, particularly in the markets last year in April, the listed business performed very well off the back of the quantitative easing in Japan. So that wasn't around this April. But if there's something that doesn't seem to be going away as a negative, I think the commodity and energy trading volumes are down. And I don't expect them to recover very quickly. I think that the people leaving the market and selling their businesses to either marketing or trading organizations or private equity organizations or quasi-hedge funds, that's going to be a gap in commodity volume trading. So I'd expect that to pick up later on in the calendar. But I think between all those things, the one-offs are probably half of the downmarket. And then the -- probably half of the other half, if you will, is the listed market that outperformed last year. And then the other half is staying.

James A. Peers

Chris, one comment I would add on that 8% down is that, that all relates to the brokerage revenues at this point in time. We don't have any color or full color yet on Trayport or FENICS revenues until the month end. [indiscernible] on a daily basis.

Christopher R. Donat - Sandler O'Neill + Partners, L.P., Research Division

Okay. Right. But generally, the Trayport and FENICS are subscription like in...

James A. Peers

They shouldn't be impacted. We should not -- we would not expect them to be down 8%.

Christopher R. Donat - Sandler O'Neill + Partners, L.P., Research Division

Right. Unless it's like an account loss or something, I would think, right?

James A. Peers

Yes.

Christopher R. Donat - Sandler O'Neill + Partners, L.P., Research Division

Okay. And then, just looking at the geographic mix of your revenues. So Americas was down 11% year-on-year. Is that where we're seeing the impact of the regulatory, like I'm looking first quarter '14 versus first quarter of '13? Anyway, the Americas now represents only about 1/3 of your revenues, is that where we're seeing some of the impact from the regulation?

Colin Heffron

Yes, I think so. I think -- and it probably is hitting us in the commodity energy space a little more than other places. And again, I put that down to the fact that we've got this gap and the cyclical change of who's going to trade gas, electricity, coal? So yes, that's definitely the spot.

Christopher R. Donat - Sandler O'Neill + Partners, L.P., Research Division

Okay. And then just last question for me as it relates to that, and I guess more for Jim. Does this mean we might expect to see your tax rate lower over time as the mix of the business shifts more to Europe with a lower tax rate and Trayport continues to grow and U.S. brokerage becomes less? Or is that -- am I getting ahead of the game here?

James A. Peers

Well, in theory, that's what you would expect to happen. So that's why we're sort of still at -- we're at the 20% right now. Because, as you pointed out, more of the revenues coming from Europe with the income. But that could change, depending on a discrete item or an uptick in the mix again, the change of the mix. So it's very hard to predict.

Operator

Our next question is from Dan Fannon from Jefferies.

Daniel Thomas Fannon - Jefferies LLC, Research Division

Just looking at the Trayport business, can you talk about the drivers of growth that you still -- signing up some new customers, was there price increases and kind of the outlook from a demand perspective as you think about this year?

James A. Peers

I think as you go back to some of the middle of last year's earnings calls, I mentioned that we were redoing the system which was completed and launched successfully. We're continuing to move people on to the SaaS [ph] service and more penetration. So it's a little bit of everything. There's not one big thing happening. It's just that further -- providing further services to core customers, a couple of new deals I mentioned last year, Portugal and Eastern Europe, those are now kicking in. We have another broker on the system that's adding revenue. And then, as contracts end and they get re-upped, we have inflationary clauses that drive revenue a little higher. So I wouldn't point to any one thing, I think it's just the year that we had last year was -- we spent a lot of time and effort rebuilding several software and working on new products and they are starting to yield some benefits now.

Daniel Thomas Fannon - Jefferies LLC, Research Division

Okay. And then, I guess just think about the total business. And I think you guys have mentioned before kind of a breakeven level in terms of revenues. Wondering kind of where that sits today, and just thinking about margin opportunity in a kind of flat to slightly down revenue environment? Just trying to get a sense of how you guys are thinking about cost and margins and without the benefit of, really, revenues improving here?

Colin Heffron

Jim?

James A. Peers

Yes. Well, right now, as you knew, a number of years ago, our breakeven was sort of around the $65 million level for brokerage revenues, and that number today is closer to around $51 million. So we're not seeing revenues below that level at this point in time. But you hit it right on the head. I mean, if we start going back to revenues, brokerage revenues of $60 million, with a 6 handle [ph] on it going forward, the leverage opportunities for us in the bottom line are quite significant. I mean, I think we did an estimate when we did our budgeting. And if we had just a 4% increase of revenues from the 2013 base, our bottom line would more than double.

Colin Heffron

The only thing I would add to that is, the natural -- we're completely determined to not overextend ourselves in the amortization. As time goes on, we'll continue to have a positive effect on margin.

Daniel Thomas Fannon - Jefferies LLC, Research Division

Right. But there's no -- as you guys think about the business in an environment as we go through this year, if revenues aren't growing, do we think about additional cost-cutting or is it just kind of continued focus around certain areas?

Colin Heffron

I think that we would look at additional cost-cutting, pairing back certain investments that would lower that breakeven.

Daniel Thomas Fannon - Jefferies LLC, Research Division

And then just -- you gave some stats around the matching engine and the revenues. Can you talk about the economics of that versus your traditional kind of IDB business for you guys?

Colin Heffron

Sure. The economics are better for investors in the firm. And I'd argue that the economics are better for the brokers. Because they're very much engaged and participating and the marketers are helping them, and it's a team effort. And while the payout might not be as high on a matching trade or an electronically-assisted trade, we're doing a lot more of them, and it allows our front office sales guys to concentrate on the thicker trades, if you will. The more prosperous trades. So it's really a teamwork environment. It continues to grow, and it's very healthy. And we're actually attracting staff off the back of the fact that people want to be in a place where you can both trade electronically and the voice on IM, any kind of trade. And we think that we're nicely positioned to continue to offer that benefit.

Daniel Thomas Fannon - Jefferies LLC, Research Division

And then, I guess, just lastly. I think for Kyte, you guys had mentioned, I think last year, that there was some renegotiation of contracts that was going to occur at some point that if volumes didn't pick up, the economics would be more favorable to you. Just wondering where that sits?

Colin Heffron

That has occurred. We increased certain service prices and services to certain counter-parties. And they are still with us, so we're reaping some of the benefit of that. And we're closely monitoring it to see whether we can maintain that customer and get more profitable.

Operator

Question is from Niamh Alexander from KBW.

Niamh Alexander - Keefe, Bruyette, & Woods, Inc., Research Division

It could go back to SEF, Colin, and how -- you talked about kind of you seeing market share, you're seeing kind of more activity. I guess I'm a little concerned. There's 2 things going on right now. There seems to be a bit of a void with SEF trade happening or -- and the regulators are trying to prevent it. But it seems like, especially in the dealer to dealer space, if you can kind of register something overseas, you can avoid the SEF as it were. So that's happening and maybe impacting volume. But as well as that, there's one very, very big player that's really been quite disruptive with their pricing, and it's just a flat fee, not based on value traded, which will be a little bit concerning if this spreads. So help me think about if this is something that -- how would you respond? Or do you think you're going to -- there's a risk of the pricing might migrate to that? And do you think that there is some depression in the activities just because of this role? Because if that's the case, then until the European rules come into effect, people can continue to do so, which could be like 2016?

Colin Heffron

Okay. That's about 8 questions, so I'll start with the first one. So the -- I think that there was certainly an avoidance of the SaaS early on. I think that's decreasing. I think that we don't actually have great data because a couple of the services that are trying to provide the data -- we're not exactly sure where -- whether people or how people are attributing a trade, whether you have a trade of $10 million, are you counting both sides, is it $20 million? But we think that as time goes on, the loopholes close and more and more of the volume would be put into the SEF. And you also mentioned one large player that has a different fee structure. Yes, we're well aware of that. We do the math and when we trade with our counter-parties, which are mostly dealer-to-dealer now, but in the future could be a larger audience, the math the we do is through our central order book and the protocols within it, we think that we can compete on the cost of execution very, very well. So while we think that there's a competitive threat, because there always is, we think that we'll be able to address it by allowing people to save money in different ways on the trade.

Niamh Alexander - Keefe, Bruyette, & Woods, Inc., Research Division

I guess the other one is, they have a lot of other sources of revenues, so if they kind of continue to cut their price more, I mean, it's just -- are you nervous about a price war? I mean, you just have -- don't have the luxury that they have of being so big. Are they doing a lot -- do you think that they're not really quick to do the dealer-to-dealer stuff, or do you think that they're still doing some dealer-to-dealer stuff right now?

Colin Heffron

I think that they're mostly doing dealer-to-client stuff. I know that they've opened up essential limit [ph] order book that's anonymous, effectively, is I don't think it trades. I think we're always going to have competitors that are larger, we've lived with this competitor forever, as well as others that are in the same vein as well as dealer on consortia, as well as our own standard competitors. I mean, our competitors are changing for sure, which is why we work so hard on our technology, and we think that we're doing very well in the credits SEF. We think we have a great offering in the interest rate swap SEF. In the foreign exchange SEF, we also -- based on the evidence within the providers of some of the market share figures, we feel very competitive there. So I'm not -- it doesn't keep me up at night per se because I think our clients and the audience outside that wants certain protocols and certain things within trading that we think we can offer that some others can't -- some others can't as easily.

Niamh Alexander - Keefe, Bruyette, & Woods, Inc., Research Division

Okay. On the core -- I guess, the core, that the SEF is kind of part of the core business now, but on the more traditional business, you've done very well historically in emerging markets and commodities end up and you've had the growth there in emerging markets, but as well as that, your big customers have been shrinking and continue to shrink in the commodity space. You talked about that -- those businesses are being sold and somebody else is going to buy them and need to hedge, but Europe, do you see -- how do you kind of break into the new customer group? Do you feel like you're not worried -- you already know some of those buyers and there is an opportunity to capture some of that volume back?

Colin Heffron

Yes. So if -- the commodities businesses is always kind of sort of changing, if you think about it. When it was traditionally oil companies and banks, before Enron collapsed, that was our place. Then Enron collapsed, then clearing came in. And our customer base went from 20 to 150. So we think there's a gap, but the firms that are buying the assets off the banks are going to have to trade and we have 1 of the 2 largest commodity energy businesses globally. So we'll weather the storm, we'll monitor it and price -- and size our business to service the new customers.

I also think that there's a very good chance that the regulators, looking at the market, where it stands today, where our futures -- where they're all effectively futures, but a huge percentage of the futures are traded off exchange, but you could see a return to the swaps markets because I don't think any regulator is designing a feature where the bulk of it trades off exchange. So I think they're going to probably come back and address that, which again, only makes it more important to have liquid SEFs or IDBs in the middle of that space through an intermediate.

Niamh Alexander - Keefe, Bruyette, & Woods, Inc., Research Division

Yes. So the block in the futures right now could kind of just take home the fault going forward. If I could, Jim, on the cash generation. It's -- if the cash generation is so much better than the adjusted earnings and the GAAP earnings, and that's quite comforting, but you've -- basically, the cash earnings, well, they've been declining for several years -- it's the business you are in, the industry that you're in has been shrinking, but that cash on the balance sheet's been decreasing. You're kind of getting closer, much closer to that consolidated capital covenants. Help me think about what kind of flexibility you have or is there some areas -- I think, as you go into the second quarter, typically, you've had [ph] your bonuses, right? So I'm just thinking -- help me think about your comfort level in the cash generation? If this business low doesn't change, like if this is our new reality for the year, we've been talking about new reality for quite some time, but when you talk in your release about when volumes get better, but if they don't for a few more quarters, at least, are you comfortable with the cash generation and what you see coming in and going out that you're not going to start getting close to reaching those -- some of those covenants?

James A. Peers

Yes, I -- that's a good question. I think there's a couple of things. First of all, the first quarter always has the highest use of cash because we pay out the bonuses for the last half of the year for the front office and then also the back office bonuses, plus the interest. Then you get an increase in the second quarter, and it goes down again in the third quarter because you payout the bonuses and the interest in the third quarter, and then it significantly grows in the fourth quarter. Even at the end of the first quarter compared to the end of the year, even though we have the outflow of cash, it's not down that much. The other thing though that I think we've also been able to manage is the increase in regulatory capital that we needed. A good example is because of the CFTC, the NFA now requires us now to have same amount of capital or follow the same capital rules with all our jurisdictions, whether it's in New York or Asia. So we've had to adjust to that, and that's not a significant cost, but those rules are still being adjusted. So that's there, but I think we're comfortable. I mean, when I look at our adjusted EBITDA, we're up at a $120 million, and that's been relatively flat for the last 3 quarters. Yet we're up from $113 million compared to a year ago. So I think we're hanging in there. There's no question about that. But I'm not concerned about hitting -- being below a covenant at this point in time because our leverage ratio has been pretty -- around that 2.084 for almost 3 or 4 quarters now. It hasn't changed much. But I would like to get a little more cash in so that we give ourselves a little more breathing room, there's no question about it. But I don't see it going down significantly either.

Niamh Alexander - Keefe, Bruyette, & Woods, Inc., Research Division

And how could you get that? I mean, I guess, you're just talking about if -- you like to see kind of better revenue quarter or something like that...

James A. Peers

Obviously, you'll get a significant pop with better revenue, and I mean very small revenue increase makes a big difference. But the other thing, too, is that, I think, we're going to start looking at -- you start looking at assets that -- could we monetized them where we believe that the returns that we're getting on them don't justify holding them anymore.

Niamh Alexander - Keefe, Bruyette, & Woods, Inc., Research Division

Do you mean businesses?

James A. Peers

No, not necessarily businesses. They just could be little assets. Little asset we have here or there, I'm not necessarily saying selling off a business. No, that's not what I'm saying.

Operator

[Operator Instructions] We have a question from Michael Wong for Morningstar.

Michael Wong - Morningstar Inc., Research Division

Just one question for me. Can you remind us if Trayport revenue and Contigo acquisition are primarily captured in the European segment revenue breakout? And if that's what led to the fairly good European revenue increase from the prior 3 quarters and slight increase from the previous year?

Colin Heffron

So they are included, but that's not what led to the increase -- the significant increase.

Michael Wong - Morningstar Inc., Research Division

So can you add some more details around the fairly good performance from your European business, then?

Colin Heffron

The Trayport European business or the...?

Michael Wong - Morningstar Inc., Research Division

EMEA, in general.

Colin Heffron

Okay. Just to clarify, Contigo is included in Trayport's revenue, but it wasn't significant. So that's why I would say that's not the reason that you're seeing higher growth rates in Trayport. And in EMEA, we're just seeing sort of across-the-board growth, the Commodities business performed well. The acquisition of Phoenix Partners, now called Latinum Group, also contributed to European results. And the Fixed Income business also did well. We had similar success in the index business and the credit markets in Europe. So it's been pretty much across the board, if that helps.

James A. Peers

The only comment -- 2 comments I would add there. One is that the Trayport revenues per se, they are showing up in -- on our P&L under software analytics and market data, so they're totally separate from the brokerage revenues. And I think the other thing I would add is that even though we've seen a decrease in our revenues in the U.S., mainly impacted by on the commodity side, unlike in the U.K., they have actually increased. So -- and also, we've seen the Ukraine volatility, which is, I think, also had some potential benefit in that as well.

Operator

This concludes our question-and-answer session. I would like to turn the conference back over to Mark Brazier for any closing remarks.

Mark Brazier

Thank you, Denise. This concludes the GFI Group First Quarter 2014 Earnings Conference Call. Thank you for joining us this morning.

Operator

The conference is now concluded. Thank you for attending today's presentation. Please disconnect your lines.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!