Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

BGCP Partners (NASDAQ:BGCP)

Q3 2010 Earnings Call

November 3, 2010 08:30 am ET

Executives

Jason McGruder - Head, IR

Howard Lutnick - Chairman & CEO

Shaun Lynn - President

Graham Sadler - CFO

Sean Windeatt - COO

Analysts

Richard Repetto - Sandler O’Neill

Daniel Harris - Goldman Sachs

Rob Rutschow – CLSA

Justin Hughes - Philadelphia Financial

Niamh Alexander - KBW

Operator

Good day, ladies and gentlemen and welcome to the Third Quarter 2010 BGC Partners, Inc. Earnings Conference Call. My name is Lumide and I will be your operator for today. At this time all participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of this conference. (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’s call, Mr. Jason McGruder Head of Investor Relations. Please proceed, sir.

Jason McGruder

Good morning. Before we begin I want to make sure that you know that our third quarter 2010 financial results press release was issued earlier today. It can be found at either the news center or investor relations section of our website at www.bgcpartners.com.

During this call, we will also be referring to a PowerPoint presentation that summarize our results and which includes other useful information. These can also be found in our Investor Relations website.

Throughout today's call, we will be referring to our results only on a distributable earnings basis. Please see the sections of yesterday’s financial results release entitled Distributable Earnings and Reconciliation of GAAP Income to Distributable Earnings for a definition of these terms and how, when and why management uses it.

Unless otherwise stated whenever we refer to income statement items such as revenues, expenses, pretax earnings or posttax earnings, we are doing so only on a distributable earnings basis. I’ll also refer to the statement entitled Discussion of Forward-Looking Statements contained in our press release.

I remind you that the information in the release and on this call contain forward-looking statements within the meaning of section 27A of 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 opportunities as well as statements about our future financial and operating performance.

Those statements are based on 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 are included, but limited to risks and uncertainties identified in the earnings release in BGC Partners’ filings with the US Securities and Exchange Commission.

We believe that our forward-looking statements are based upon reasonable assumptions when made. However, precaution it is impossible to take actual results or outcomes or the effect of risks and uncertainties of other factors on expected results or outcomes that accordingly you should not place undue reliance on these statements.

The 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 set forth in today’s earnings release and the risk factors set forth in our public filings which we incorporate by reference.

I'm now happy to turn the call over to our host, Howard Lutnick, Chairman and CEO of BGC.

Howard Lutnick

Good morning and thank you for joining us for our third quarter conference call. With me today are BGC’s President, Shaun Lynn, our Chief Operating Officer, Sean Windeatt, and our Chief Financial Officer, Graham Sadler.

BGC once again outperformed our industry in terms of top- and bottom-line growth. Our revenues were up 12.3% to $327 million from the third quarter of 2010. Pretax distributable earnings were up 57.5% to $47.3 million or $0.20 per fully diluted share. Our post-tax distributable earnings were up by 87.3 % to $39.5 million or $0.17 per fully diluted share.

BGC had strong performance across most of our products and geographies during the quarter. We again generated substantial top-line growth in the Americas and the Asian Pacific region as well as in fully electronic trading, rates, foreign exchange, equities and other asset

classes.

The combination of our continued top-line growth increasing proportion of our revenues related to fully electronic trading as well as our partnership enhancement program contributed to the expansion of our post tax profit margin by 483 basis points. Our pretax distributable earnings per share increased by 42.9 %, while our post-tax distributable earnings per share increased by 70%.

We are therefore pleased to announce that BGC board of directors has declared a quarterly dividend of $0.14 an increase of 75% compared to last year and remained consistent for the first two quarters of the year. It is our intention to maintain this dividend for the fourth quarter.

With respect to the dot frank bill recently enacted in the US and similar laws pending in the EU while the specific aspects of the rules are still being ironed out on both sides of the Atlantic, we believe that the net impact of the legislation will be positive for BGC.

I would now like to turn the call over to Shaun Lynn.

Shaun Lynn

Thanks, Howard and hello to everyone. I would like to highlight the key drivers of the continued growth of our brokerage revenues and they are BGC’s growing strength in fully electronic trading, our continued growth with front office headcount expansion, our market share growing and overall positive market dynamics in many of BGC’s product categories.

All of the comparisons I will discuss after the third quarter of 2010 as compared with the year earlier. BGC’s rights revenues increased by 7.7% .We continue to benefit from the sizable levels of debt issuance by governments around the world. The earnings presentation and press release tables on our website show some of the key factors in greater detail, such as the 13.8 % increase in quarterly Federal Reserve US Treasury volumes.

We outpaced this growth in Fed volumes during the quarter with 24.4 % increase in fully electronic rates national volumes, driven by BGC’s fully electronic Treasury business.

BGC’s foreign exchange revenues increased by 24.1% due to the ongoing rebounding global volumes and a continuing market share gains.

Volumes and revenues for BGC’s fully electronic FX business which includes both OTC spot and derivatives accrued on more than double the growth rate for quarterly FX volumes recently reported by some of our competitors and by CLX which settles most bank to spot, bank to bank spot and forward FX transactions.

BCG’s revenues from equities and other assets classes increased by 51.8% driven by strong growth globally from an increased investment in this category. Our growth as shown in our early presentation is particular noteworthy because we achieved it despite lower global equity related volumes and volatility in the quarter.

BCG’s credit revenues decreased by 6.3% reflecting industry wide lower corporate bond anchored at derivative trading activity. For example, to raise our bond volumes which reflect most US corporate bond trades were down 6.7% in the quarter. However, based on the credit results reporting so far, we once again asked (inaudible) industry. This was due in parts to revenues from our sovereign CDS desks and our overall fully electronic credit business both of which more than doubled year-over-year.

We continue to invest in hybrid of fully electronic technology broadly across our quarter (inaudible). Now, approximately 60 of our 200 desks of e-broking and we expect this number to continue to rise. We are especially pleased with our strong initial results from BCG’s growing sweep of fully electronic interest rate derivative products.

In the late august, we launched Euro interest rate swaps on BGC Trader, following October by US dollar interest rates option and Singapore dollar interest rate swaps. Just yesterday, we had our first fully electronic options of US dollar interest rate swaps on volume match. From the end of August through yesterday, BGC has traded approximately $70 billion in national volume of fully electronic interest rate derivatives and we expect this to grow substantially over time.

BGC’s overall fully electronic volumes were up 22.9%, revenues related to fully electronic trading increased by 17.2% to $30.3 million and representing 9.3 % of total revenue in the third quarter of 2010. In comparison, e-broking revenues were $25.9 million or 8.9% of total revenues last year. Fully electronic credit revenues more than doubled year-over-year while fully electronic FX brokerage revenues were up on mid-double digits.

Our overall growth from e-broking (inaudible) multiple desks in Europe, the Americas and Asia. We are driven primarily by sovereign credit default swaps, foreign exchange options, US treasury, Canadian Sovereigns and a couple of (inaudible). As we continue to benefit from the tailwind of massive global government debt issuance and as we roll out fully electronic trading to more of our desks, we expect a strong e-broking performance to continue.

As we have said, e-broking growth makes the higher margin and greater profits over time even if overall company revenues remained consistent. We once again delivered these margin improvements this quarter, and we expect to see margin expansion as we continue to grow fully electronic trading.

From office headcounts and productivity are the other key drivers of our revenue growth. As of September 30, 2010 our front office headcount was up by 18% to 1,721 brokers and salespeople. Average quarterly revenue per broker/salesperson was approximately $183,000, down slightly from a year ago when it was $194,000.

As we have said previously, BGC’s revenue producers generally achieve higher productivity levels in their second year with the company. We therefore expect the productivity of our newer brokers throughout the company to improve, especially those from Mint and in our newest offices in Brazil, Russia, and China. Coming forward, we expect Mint to be a creative division of learning.

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

Graham Sadler

Thank you Shaun and good morning everyone. Unless otherwise stated, all the comparisons I am making compared to the third quarter 2010 to the third quarter 2009, BGC generated revenues of $327 million, up 12.3% compared with $291.2 million. Brokerage revenues were $292.3 million, up 10% versus $265.8 million. BGC’s third quarter 2010 financial result included 3 offsetting items that were not part of our ordinary operating business and have not been included in our guidance for revenues, expenses or earnings.

First, we received $11.6 million in other revenues from a favorable FINRA arbitration ruling pertaining to Refco Securities’ fixed fee US Treasury contract. Refco Securities is appealing the ruling. Second, we acquired various assets and businesses of Mint Partners and Mint Equities which contributed approximately $3.4 million in brokerage revenues in the quarter. Third, we incurred other expenses that are not being part of our guidance, were not part of our ordinary operating business and are not expected to recur in the fourth quarter. Taken together, these three offsetting items have virtually no impact on either distributable earnings or GAAP net income. Had none of these items occurred, our ordinary operating business would have generated approximately $312 million in revenues and earned $0.17 per share which would have resulted in revenues of the high end of our range and earnings exceeding our guidance.

When considering the underlined performance of our overall business, it makes sense or either include or exclude all three of these items. To only include or exclude any one of these items without the consideration of the others would create an inaccurate and misleading impression of our business. When analyzing our own business and judging our performance as compared to other periods, we expect to use $0.17 per share the appropriate comparative figure.

Turning to our geographic revenues, the Americas were up about 41.8% in the third quarter2010, Asia Pacific revenues increased by 17.6% and Europe, Middle East and Africa decreased by 2.8%. Europe represented 50.7% of revenues, the Americas 34.3% and Asia 15%. A year earlier Europe represented 58.6% of revenues, the Americas 27.1% and Asia 14.3%. These changes highlight the success we have had on our ongoing effort to diversify BGC’s global revenues.

Turning to the year-over-year comparison of our monthly revenues, July 2010, was down approximately 1% to $97 million. All this was up by approximately 31% to $107 million and September was up by approximately 10% to $122 million. The Refco payment occurred in August.

BGC’s rates revenues increased to $135.6 million compared to $125.9 million. Foreign exchange revenues rose to $44.4 million compared with $35.8 million. Revenues from equities and other assets classes increased to $38.3 million versus $25.3 million. And credit revenues were $73.9 million versus $78.9 million. Rate represented 41.5% of revenues compared to 43.2%. Credit represented 22.6% versus 27.1%. Foreign exchange represented 13.6% increasing from 12.3%. And equities and others represented 11.7% increasing from 8.7%.

Moving on to expenses, total expenses were $279.6 million versus $261.1 million last year but lower by 415 basis point as a percentage of revenue. Total expenses includes items of this quarter that are not part of our ordinary operating business as I detailed earlier. Compensation and employee benefits were $177.3 million representing 54.2% of revenues. This compares with $176.5 million or 60.6% of revenues in the year earlier period, an improvement of 638 basis points.

This improvement was driven by our on-going partnership enhancing program and the positive compensation related in pair to our growing fully electronic revenues. We expect that our compensation ratio may increase somewhat in the fourth quarter due in part to seemingly lower November and December revenues.

For the third quarter of 2010, long compensation expenses were $102.3 million or 31.3% of revenues. This compares with $84.6 million or 29.1% of revenues. Long compensation expenses include items in this quarter that are not part of our ordinary operating business as I detailed earlier. BGC’s pre-tax distributable earnings were $47.3 million or $0.20 per fully diluted share compared with $30 million or $0.14 per fully diluted share. The company’s pre-tax distributable earnings margin is 14.5% in the third quarter 2010 versus 10.3% or 416 basis point improvement.

BGC produced post tax distributable earnings of $39.5 million or $0.17 per fully diluted share compared with $21.1 million or $0.10 per fully diluted share. Our post tax distributable earnings margin is 12.1% compared with 7.2% or 483 basis point improvement.

We believe that our structure of business model will enable us to further spend our margins as we grow our revenues going forward. Our effective tax rate for distributable earnings was 15% in the third quarter of 2010 compared with 27.4% in the prior year period. We expect our tax rate to remain around 15% for full year of 2010.

Because GAAP does not allow for the inclusion of anti-diluted instruments when calculating earnings per share, our GAAP fully diluted weighted average share count is 228.3 million for the third quarter 2010. However, for calculating earnings per share for distributable earnings, we include the 21.6 million shares underlying the convertible senior notes because their inclusion will be diluted and we exclude the interest charge of $3.3 million less the tax associated with the notes; therefore, our fully diluted weighted average share count for distributable earnings was 249.9 million for the third quarter of 2010 compared to 215.6 million in the third quarter of 2009 for both GAAP and distributable earnings.

As of September 30, 2010, the company’s fully diluted share count for distributable earnings was 250.8 million, including the shares underlying the notes. Regarding the balance sheet, as of September 30, 2010, the company’s cash position, which we define as cash and cash equivalents, cash segregated under regulatory requirements, and reverse repurchase agreements, was $316.9 million; notes payable and collateralized borrowings were $177.1 million; book value per common share was $2.36 and total capital, which we defined as redeemable partnership interest, non-controlling interest in subsidiaries, and total stockholders' equity, was $419.6 million.

The increase in total stockholder’s equity, the increase is redone in both partnership interest, a lot of such changes in BGC’s total capital are explained in greater detail on our third quarter 2010 earnings presentation located on our webpage.

With respect to our dividend, we expect that at least 10% of our common dividend aided in 2010 will be treated as a non-transferable return in capital for common stockholders. Another remainder will be treated as a qualified dividend for tax purposes. We expect to increase the percentage of our dividend for this non-taxable return in capital in 2011. We go into much more detail in the section of yesterday’s financial results press release called Non-Taxable Return of Capital.

The Earning presentation on my website also includes the taxable equivalent yield analysis of our dividend for your convenient. With that I am happy turn the call back over to Howard.

Howard Lutnick

Thank you Graham our October 2010 revenues were up approximately 5% year over year to $115 million compared to $110 million last year. We expect to generate revenues of between $295 and $315 million in the fourth quarter of 2010 as compared with $299.8 million in last year’s fourth quarter. We anticipate free tax distributable earnings to increase by 65% to 91% to be in the range $38 to $44 million compared with $23 million dollars last year. We expect cost tax distributable earning to be between $32 and $37 million an increase of approximately 117 to 150 percent as compared to the $14.8 million dollars we earned in last year’s fourth quarter. Operator we will now like to open the call for questions please.

Operator

(Operator instructions) And your first question comes from the line of Rich Repetto from Sandler O’Neill. Please proceed sir.

Richard Repetto - Sandler O’Neill

Good morning, Howard.

Howard Lutnick

Good Morning.

Richard Repetto - Sandler O’Neill

I guess the first question is again a little bit on nonrecurring expense and non-operating expense, can you quantify in sort of what the driver was? I guess we are still trying to figure that out.

Howard Lutnick

Well we felt the best way to discuss this was the way we sort of discussed on our call which was to discuss with you the fact that as Graham pointed out that these are distributable earnings figures for all of them. They do not fall into – when we have consistently called outside of our distributable earnings numbers, so the revenue and the expenses where in and we think the appropriate way to look at them all is altogether and so they are 327 million in revenues and we had additional expenses associated with them that are part of our distributable earnings. So to take one piece out would not be right, but they are all in it together and they all make up our business. I think it is – in fact the particular line items as Graham said we do not expect this level of other expense to be with us next quarter and we guide it such.

Richard Repetto - Sandler O’Neill

Okay, but you might still might given a driver or what the reason for the higher nonrecurring expenses?

Howard Lutnick

It has not been our practice to go into other expenses in that level of detail, that is the best way I can say it. It is just that from our perspective these 3 items were not in our guidance and they were not expected when we guided at the end of last quarter and that notionally they all effectively equal to similar numbers and cancel each other out and offset each other. However they just where not part of our guidance and we don’t expect them to occur again this quarter. So I think from a net perspective the company performed much better than we had anticipated, the revenue from sort of ordinary businesses as Graham were saying were at the higher end of the range, but our earnings at $0.17 were superior and these other 3 items were sort of offsetting and not part of our guidance. So that is sort of the easiest way to look at it. We used to include them all or to exclude them all but not to pick and choose because you give out of 2 positive or 2 negative, a view which is not how we look at it and not actually how it work out.

Richard Repetto - Sandler O’Neill

Okay, I guess to move on. So you recently launched dollar denominated interest rate option. You have launched euro denominated. Can you tell us what type of customer – what do you think the catalyst cause you just early on you try to get a platform up and running but what would be the catalyst other than just the regulation – the regulatory or maybe that’s it the regulatory rules being written to really get some buying growth here?

Shaun D. Lynn

Hi this is Shaun. The customers that are picked a bit have been getting with us so far, “no more mentioning customer base”. Obviously regulation would be the catalyst essentially to expand that, but as we said in our earnings we do not know when that is going to happen and we do not know what form that is going to take, but so far the pick has been very good. Everybody embraced it. They are natural inquisitive and they all sit in the same position as we are the moment we just all watching and waking but it is been very good so far.

Richard Repetto - Sandler O’Neill

Okay and one last comment, a follow up to early question. You know we found in the Q in the last filing, Howard. Your other expenses and this is the exact line: “the other expense increase by 9.7 million in the quarter compared to the year ago” and it goes on say “the increase was primarily due to additional cost associated with the hiring of new brokers”. Could that be similar in this quarter?

Shaun D. Lynn

Yes, I would say similar.

Richard Repetto - Sandler O’Neill

Okay, alright. Thank you.

Howard Lutnick

I think with respect Shaun’s answer on fully electronic trading. Because we have the capacity and the technology built, our ability to provide the electronic access and create markets and drive. Really the results that the clients want is really the key asset of the company and having that built already, so that now when the clients start to look at it both because volume of interest rates are growing and they like to do fully electronic trading which cuts their cost of transactions as well as the regulatory framework really puts us in a superb position to serve our clients and to satisfy their desire and needs and for those who did business for ourselves. We are really in the right place at the right time with the right technology which comes only one way, it is because of our significant investment over many, many years and you know seeing the pay off of that investment with dramatically increasing margin and operating margin flow into the bottom line. We had many years where you saw our investments were very large and maybe our profit margin wasn’t as high with some others who had underinvested. Now you will see us dramatically improving our margin as we capitalize on that investment and bring it to market and we are very excited about the fact yesterday our electronics were able to be in US interest rates swaps. So this is a huge market right here and I am very excited.

Operator

Our next question comes from the line of Daniel Harris from Goldman Sachs. Please proceed.

Daniel Harris - Goldman Sachs

Hey, good morning guys how you doing?

Howard Lutnick

Good Morning

Daniel Harris - Goldman Sachs

So you noted that 9.2% of your revenues were related to fully electronic trading year to date so far on 2010. Outside of cash treasuries where you seeing the most pick up in that electronic trading?

Shaun D. Lynn

It’s across the board (inaudible) and they fall in most products. We have increased revenues in FX options and we (inaudible) swaps from European governments single name CDS - cost sovereign CDS as well is being broad base across all of our products globally.

Daniel Harris - Goldman Sachs

So is it safe to say though that given the cash governments are highly electronics in many cases that the rest of the products were still very much on the early stages of 10% or maybe some 5% of the revenue from those electronic.

Shaun D. Lynn

I think it’s fair to say that we are on the way it seems. Still very much early days, we have 60 days of it – sorry 60 days (inaudible). Still so much more that can grow out of these, I mean – I think that when you consider that we build our technology over the last 10 years, we implemented into pretty much most major if not all major banks globally across the board, all the product we do have electronic capability, we still very much on the first phases of this growth.

Daniel Harris - Goldman Sachs

Okay, fair enough. So looking at your revenue growth over the course of the year you guys started the year out exceptionally strong. North of 22% and this quarter it is 12 and it seems like at the midpoint in your range, next quarter it seems like you’re around 2%. How do you the market changing, is it just that 2009 was much weaker that what you have done here in the 2010 and the industry you guys made acquisition that has been help, but do you think 10% to 15% growth rate is likely going forward or do you think you have to continue to hire brokers and look for acquisitions to drive that kind of growth?

Howard Lutnick

We are in the business of looking for acquisition that we think are creative and to hiring broker that we think are creative. We would say that the recent hires and recent acquisition of Mint put us in the very attractive position to deliver double digit revenue growth next year. I mean we now have over 1700 brokers and as they productivity as Shaun said, as their productivity reaches its steady state in its second year, we will see that by just doing that math alone drives our top line revenue. So the Mint acquisition for example, was nearly a hundred brokers just add a lot of people as they come on to our technology platform and ramp up to our average revenues. You are going to see a very attractive numbers for us.

We also have a lot of opportunity to grow. You saw that our Radix acquisition in energy was a small beginning but it puts in the nice position to grow in energy, to grow in commodities. There are enormous amounts of places that we can grow. Property derivatives and the whole real estate in property area is a coming business for us and we really think that our position, our technology in the way we think about our business was really attractive. I think our brokers who we have now set us up for strong growth going forward as they increase the productivity and our ability to hire and acquire a credibly will be really strong. We have Brazil, we have China, we have Russia. We have all sorts of places where we have really strong sense of growth, so we do not see internally any constraints to that opportunity in front of us to deliver strong top line revenue growth going forward.

Daniel Harris - Goldman Sachs

Okay Howard thanks a lot. Last question for me, the first year and half or so ELX generating open interest was a challenge in treasuries. Over the last couple months in eurodollars open interest – last couple of months ago the ELX in euro dollar you guys have actually generating north 100,000 contracts and open interests and I am just wondering, what you attribute the success to in eurodollars versus the more difficult goings on U.S. treasuries in terms of generating open interest in the futures, contract and how do you think that progresses from here? Thanks a lot.

Howard Lutnick

I think as I said before I generally agreed with the ELX board at that our conference calls would not be the place to announce all sorts of interesting things about ELX. However, I would say that we had and remained very optimistic about the ELX as you point out eurodollars which we opened just recently at ELX has gained really, really nice open interest growth. Buyings have picked back up across the board in ELX in September and then again in October. There really are great opportunities in front of us for ELX. Our partners are superb and some of the large traders in the world and we think that the opportunities in front of ELX are growing. I think the simple answer is more commitment from the partners as well as growth from non partners in ELX. We are seeing more and more players who are not partners in ELX trading more and more and so as we expand the client base using ELX the natural under-pinning volumes and open interest are continue to grow so just positive statistics.

Daniel Harris - Goldman Sachs

Thank you, Howard.

Operator

And your question comes from the line of Rob Rutschow from CLSA. Please proceed sir.

Rob Rutschow - CLSA

Hey, good morning everybody. I guess couple housekeeping items first. It look likes just on the press release (Inaudible) some revenue from rate to FX in terms of their brokerage business so I was just wandering what happened there and what sort of business that was?

Howard Lutnick

I think that was what? 3 quarters ago.

Shaun D.Lynn

That was A while ago, 3 quarters ago, I think.

Rob Rutschow - CLSA

Okay. And then in terms of the other expense, I think you guys identified the 3 items presumably there are all another expense to charitable contribution and the workman’s comp and in the acquisition related cost. So, is this 17 – if I shift that out I came to a number of 17 million for other expense. Is that a good sort of run rate of number going forward?

Graham Sadler

We do not only normally comment on some ongoing levels of (Inaudible) and what’s in there and because it’s everything else.

Rob Rutschow - CLSA

Okay. I was also wandering you guys have growth in the forgivable loan balance. You guys do a provision for that and have a reserve or how does that work?

Howard Lutnick

When we hire and often when we acquire as part our retention goals and objective we give either forgivable loans or loans to our employees and it is a way to give them cash and to keep them connected to the company and so we do expect to either get paid back loan or to forgive the loan. If the loan is expected to be forgiven its amortized over the course of the period by which we expected to be forgiven and it expected to be paid back then we expected to be paid back our – as it turns out our ability to project these things has been rather good so far because they are with our employees and we know that someone just signed a 3 or 4-year contract and they expect to pay back the loan. We know where they getting the money from cause they getting the money from us and so the connected view of long term employment contracts connected with those loans means when that when do give an employee loan we have high degree of confidence that we will get paid back and our experience is that we do and if it is going to be forgiven then we are amortizing it anyway and it s going to our cap expense.

Rob Rutschow - CLSA

But I guess from a distributable earning stand point these loans don’t really hit the income statement?

Howard Lutnick

Sure the amortization would go to our compensation numbers of course they would.

Rob Rutschow - CLSA

But that would be non cash right?

Howard Lutnick

No that would be regular compensation expense. We gave someone a 300,000 dollar forgivable loan over 3 years we would charge our compensation expense 100,000 dollar a year for 3 years, simple math.

Rob Rutschow - CLSA

Okay.

Howard Lutnick

It is just simple math – nothing special.

Rob Rutschow - CLSA

Last question you guys may have gone through this before but I was just hoping you could help me out understanding the allocation to founding partners used to be pretty close to the minority interest charge and the difference is pretty wide this quarter and last. I was just trying to understand why is that had switch, some of it related to the debt?

Graham Sadler

Part of relates to fact in the first quarter we made a loss and that loss didn’t get allocated to the sort of REU holders. They are redeemable partnership interest and so in the next quarter we would cash that up as you actually end up with (inaudible) what looks like in sort excessive allocation to (Kansas) but actually to the non controlling interest but actually it’s just strengthen it out on the year to date basis.

Rob Rutschow - CLSA

And how long will that take sort work through that minority interest number?

Graham Sadler

I think it (next quarter)

Rob Rutschow - CLSA

So next quarter?

Graham Sadler

I would expect so, yeah.

Rob Rutschow - CLSA

The allocation should look more similar to minority interest.

Graham Sadler

Yes that is what I would expect.

Rob Rutschow - CLSA

Okay great thank you very much.

Operator

And the next question will come from the line of Justin Hughes from Philadelphia Financial. Please proceed.

Justin Hughes - Philadelphia Financial

Good morning. I had to come back to this but just a follow on the non comp expenses. If I look at the midpoint for guidance for revenue and pretax for 4Q and assume the comp ratio is flat kind of back into a non comp number for 4Q about 100 million and if you are saying there is 11.6 million of nonrecurring, non comp in the third quarter, why isn’t dropped down to get closer like a 90 million run rate – 100 million that you are kind of suggesting for 4Q?

Howard Lutnick

I think as Graham said, because of the seasonal revenues being slower in November and December, Graham said he expected our comp ratio to increase somewhat simply that we do have a back off instead of fixed expense. So if you have a slower Christmas on holiday season the last weeks of December are always slower, Thanksgiving in Americas is always slower. That just takes down your revenue numbers and by map will increase our compensation ratio with respect to our non variable based compensations. So that is why Graham sort of expressed that in his remarks. That should help you just put the comp ratio up a bit, just scramble those numbers together.

Justin Hughes - Philadelphia Financial

Okay so we should get back in a comp ratio that would kind of have non comp closer to 90 million. That makes sense? By talking 90 million I think that comp ratio to get to the midpoint of your pretax right now?

Howard Lutnick

I don’t know if we would look at it that way with such a fine point but the idea is you are doing two things correctly which is if you pick the comp ratio up it will pick the non-comp expense down and those two things will work out. So what level you chose for compensation will create an offset in lowering of non-comp expense. So the two variables are right and what numbers you put into. It really is your choice we haven’t really guided in such a fine point as of yet.

Justin Hughes - Philadelphia Financial

Did you say that Mint added a hundred brokerage and sales people?

Howard Lutnick

Just under yes.

Justin Hughes - Philadelphia Financial

Okay so your total quarter to quarter grow 109 so excluding so excluding Mint you have roughly 9 people. Why did you have so much expense from hiring brokers? It only looks like you hired 9 during the quarter?

Howard Lutnick

It is not just 9; it is 109 plus lots of coming and going, and lots of cost associated with brokers that we previously hired. These are just other expenses that have to do with – if you look at the overall growth of the company’s headcount over time.

Justin Hughes - Philadelphia Financial

Okay thanks.

Operator

There are no more questions at this time I would like to turn the call over to the management for closing remarks.

Howard Lutnick

Just one more, just one more.

Operator

Would you like to take that question sir?

Howard Lutnick

Absolutely.

Operator

Okay. Our next question is from Niamh Alexander from KBW please proceed.

Niamh Alexander - KBW

Thanks for taking my questions. Can I go back to the interest rate swap opportunity? Because you rolled out options, you have rolled out some swaps, I am just trying to understand the competitive landscape as ICAP -- I guess it started in October with some of the big banks they cleared several billion dollars. I just want to understand, is it still up for grabs as multiple potential venues to become electronic procuring, does it matter where they are forced, or are they in swaps and euro in options. How should I think about that, as you think about the competitive landscape shaping out?

Howard Lutnick

I think from a operational perspective BGC and ICAP have the technological to provide full electronic trading in the swap derivative landscape to the large class of the world and we would expect us both to be reasonably successful and reasonably competitive in one of the great electronic opportunities out there. So we are in a great position it is definitely an opportunity for us since we have a big boy’s business and we have the technological capacity to move it electronically if the client want to do that and obviously that is our point is they are open minded now and are considering using it, trying it. It is already installed there so that is one of our great benefit and ICAP is trying to do the same thing, so I think we are both – whether they are one step ahead of us or one step behind us would be a very fine point that I am not aware of but I would suggest we are both relatively speaking in locked step going forward.

Niamh Alexander – KBW

Okay. That is helpful, thanks. And then help me understand your willingness to work with the dealers going forward, if for example, there is much less of a democracy with the business in the U.S. versus in Europe. So would you feel that maybe there is an opportunity to sign off and share some economics with the dealers in order to insure that they kind of using your venue and maybe one other, what nots. Do you think that we should look for opportunities like that and them secondly, you primarily focus in the dealer is the dealer’s pace? Should we think about what the new legislation you look into kind of expanded the dealer client space providing some SCF role there?

Howard Lutnick

We are definitely open minded and we have a superb relationship with the largest trading firms in the world, all around the world. And they know our technology and that is how sort of we got the ELX as an example. So it think that we are open minded to working together to solve for the business objective of all parties; our selves, the dealers, the trading community at large and the regulators. As those rules get written, I think having that technology built and installed and ready and being a trusted counterparty for all these bank around the world, I think puts us in a very good position to work together to solve those new regulations and do so in a way that they feel comfortable that they want to support and we feel comfortable that will be great for our shareholders over the long term. And getting through that and how we do that we will play our over time but we want to make one thing very, very clear. Central clearing from our perspective, central kind of party clearing from our perspective is excellent for our volume and excellent for our business and since non discriminatory central clearing is part of the U.S. rule then we expect it to be part of the E.U. rule. This is just a baseline positive for our company.

Niamh Alexander – KBW

Okay. That is helpful, thank you Howard. And lastly if I could just on eSpeed, can you help me understand the competitive barriers there? If someone else decided that they want to participate in an all-electronic venue for that particular treasury product, are there pretty high competitive to barriers to entry there for a new entrant?

Howard Lutnick

I think what happened over the many years, we haven’t talked about it for a while, but the majority of our largest clients have fixed the long term business arrangements with us, which means they pay a contractive fixed fee for unlimited volume. That commission structure means that they can marginally trade the next trade to zero and so if they want to bring a new participant in whatever they pay the new participant would be just an economic increase. So I think the structure of the market has created high barriers to economic entrance and it had been that way, because it is an economic reality that the largest players use huge amounts of volumes and by having a fixed fee contract they can rely on us and we can rely on them and that as volumes grow, it is not them who is paying the – our revenue growth we have new players who come into the market and they pay variable but our largest kind of fixed fee.

Niamh Alexander – KBW

Okay that is helpful, thanks Harold. And I guess just lastly on the expenses, maybe it is just an observation, but you have such a great revenue quarter and clearly are opposite pacing competitors share and the acquisitions are delivering but when you are kind of so vague about – that is also maybe driving the expenses up it is hard to kind of fit any benefit in the multiple from it. It doesn’t seem like what you are saying was maybe driving the other expenses or kind of outside of the course of ordinary business. So you are kind of saying, “take my word for it, it is non-recurring” but it sound like it is part of the regular recourse of business of hiring and moving people around and things like that that is driving that line. Am I misunderstanding that?

Howard Lutnick

How we view our business as we said, if you include all items from our business then it is clearly 327 per $0.17, you wish to parse some of them out and say, “gee, those were not part of your guidance and they were not part of your expectations when you last spoke to us” you would still end up with 312 million and $0.17. Either way you come to it, you come to us delivering $0.17cents per share to the bottom line and paying a $0.14 dividend and we are very proud of how this company is operating.

The benefit of having Refco actually finally pay us for the year and years back when – there was a time when we have to take Refco out of our earnings and out of our revenues. I am sure we have suffered the consequences of that, underperformance at that time. It is all part of our redistributable earning. We are not saying it is not part of it, we are just trying to make sure that we expressed to you that which is sort of ordinary in our operating business and that which is extraordinary by putting Refco in other revenues. We are sort of highlighting is for you to make sure that you understand where things are coming from, to be more transparent and to help you understand what is ordinary for us. But we can’t really go into each and every point all the time in our other category but as Graham said, we don’t expect this to be next quarter and we didn’t expect it last quarter. I mean – I think we are just going through it. I hope we answered it for you reasonably.

Niamh Alexander – KBW

Okay fair enough, thanks Howard.

Operator

There are no questions at this time. I will now like to turn the call over to the management for closing remarks.

Howard Lutnick

Thank you very much for joining us this morning the company is in an excellent position and it continues to grow its distributable earnings and we are very excited about our opportunities and prospects going forward and we look forward to speaking to you next quarter. Thank you very much everyone.

Operator

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

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!

Source: BGCP Partners CEO Discusses Q3 2010 Results - Earnings Call Transcript
This Transcript
All Transcripts