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BGC Partners, Inc. (NASDAQ:BGCP)

Q2 2014 Earnings Conference Call

July 31, 2014, 10:00 AM ET


Jason McGruder - Head, Investor Relations

Howard Lutnick - Chairman and Chief Executive Officer

Shaun Lynn - President

Sean Windeatt - Chief Operating Officer

Graham Sadler - Chief Financial Officer


Rich Repetto - Sandler O'Neill

Patrick O'Shaughnessy - Raymond James

Jillian Miller - BMO

Niamh Alexander - KBW

Michael Wong - Morningstar

Justin Hughes - Philadelphia Financial


Good morning, and welcome to the second quarter 2014 BGC Partners Inc. financial results conference call. My name is Brandon, and I will be your operator for today. (Operator Instructions) And I will now turn it over to Mr. Jason McGruder, Head of Investor Relations.

Jason McGruder

Good morning. Our second quarter 2014 financial results press release was issued this morning. It can be found in either the News Center or Investor Relations sections of our website at During this call, we will also be referring to presentation that summarizes our results, and which includes other useful information. This too can be found on our website.

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 also see the section of today's press release entitled distributable earnings, distributable earnings results compared with GAAP results, reconciliation of revenues under GAAP and distributable earnings and reconciliation of GAAP income to distributable earnings for a definition of these terms and how, when and why management uses them.

Unless otherwise stated, whenever we refer to income statement items such as revenues, expenses, pre-tax earnings or post-tax earnings, we are doing so only on a distributable earnings basis. Unless otherwise stated, all results provided in this call compare to second quarter of 2014 with the year-earlier period. In addition certain revenue items and non-financial metrics have been adjusted for prior periods to conform the current reporting methodology. These adjustments had no impact on overall revenues or earnings for either GAAP or distributable earnings.

On June 28, 2013, BGC sold its fully electronic trading platform for U.S. treasury notes and bonds to NASDAQ OMX Group, Inc. For the purposes of today's call, these assets sold are referred to as eSpeed, and the businesses remaining with BGC that are not part of eSpeed are referred to as, retained. Also Newmark Grubb Knight Frank is synonymous with NGKF or our Real Estate Services segment.

I'll also remind you that information on this call contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 as amended and Section 21E of the Securities Exchange Act of 1934 as amended. Such forward-looking statements include statements about the outlook and prospects for BGC and 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 on 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 most recent public filings in Form 8-K, 10-K, and 10-Q, which we incorporate today by reference.

I am now happy 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 all for joining us for our second quarter 2014 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 margins expanded across both of our businesses and for the overall company. We achieved this improvement in the faith of difficult market conditions in Financial Services, and despite the sale of eSpeed, which last year generated approximately $24 million in revenues and $14.2 million in pre-tax profits, and had approximately 60% profit margins. This was the last quarter in which eSpeed results will impact our year-over-year comparisons.

Within a year of the NASDAQ transaction, we have effectively replaced the earnings from eSpeed. We expect our pre-tax earnings to increase next quarter by between 39% and 60% year-over-year.

Our cash position is over $640 million and we also expect to receive approximately $600 million in NASDAQ OMX stock. This gives us over $1 billion of firepower to grow our profits. We expect to use these funds to increase shareholder value by making accretive acquisitions across Real Estate and Financial Services, repay debt, repurchase common shares and units and maintain our regular common dividend for the foreseeable future.

We expect the acquisition of Cornish & Carey Commercial to close mid-August. By adding the leading commercial real estate services company in Northern California, Newmark Grubb Knight Frank will expand the scope and depth of services it provides to clients across the United States.

In May, our Financial Services business acquired Remate, the leading Mexican inter-dealer broker of interest rate derivatives and fixed income. We also continued to hire top producers around the world. We expect these additions to increase our earnings per share going forward.

I am pleased to report that our board declared a $0.12 qualified dividend for the second quarter, which at yesterday's closing stock price translates into 6% percent annualized yield.

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

Shaun Lynn

Thanks, Howard, and good morning, everyone. Industry-wide volatility was at or near 20-year lows across virtually all financial products during the quarter. This negatively impacted the trading volumes from most of our customers.

BGC's Financial Services businesses generated revenues of $271.5 million and $49.9 million of pre-tax earning. Last year, we generated $293.4 million in revenues and $42.2 million in pre-tax profits. Despite these very difficult market conditions, we increased our profit by approximately 18% and our pre-tax margin by 400 basis points.

These comparisons exclude these things. By the end of the quarter, we lowered our Financial Services front office headcount by 4%, by reducing a number of underperforming brokers. These reductions contributed to our Financial Services revenues declining by only 7.5%, excluding eSpeed, but contributed to our improved margin.

Looking to results by asset class. Our revenues from rates products, excluding eSpeed, were down by 14.7% in the quarter to $104.7 million. In comparison, interest rate volumes were down by more than 20% at Deutsche Börse and ICE. The overall credit markets remained difficult, due to ongoing regulatory uncertainty and increased capital requirement facing our large bank customers.

This is reflected in the combined daily average primary dealer volumes for corporate and mortgage-type bonds, being down by approximately 20% year-over-year according to the Federal Reserve. Similarly, gross notional credit derivative outstanding were down by approximately 19% year-over-year according to SIFMA.

In comparison, revenues by fully electronic credit desks increased by 29%, and our overall credit revenues declined by 12.5% to $58.9 million. According to Goldman Sachs, the overall FX market experienced its lowest levels of volatility ever measured during the quarter. As a result, FX volumes are down by between 35% and 40% according to CME and EBS.

In contrast, our high margin fully electronic spot FX revenues increased by 25%. BGC's overall foreign exchange revenues declined by 18.8% to $49.3 million. Equity derivative volumes were down by between 11% and 22% during the quarter according to the OCC, Eurex and CME.

Total energy and commodities volumes were down by 15% and 25%, respectively at CME and ICE. In comparison, BGC's revenues from energy and commodities desks increased by approximately 72%. Our overall revenues from equities and other asset classes, which include these desks, increased by 7.2% to $43.6 million.

Excluding eSpeed, Financial Services electronic trading market data and software revenues increased by approximately 3% to $22.6 million or 8.3% of segment revenues in the quarter. This compares with $21.9 million or 7.5% last year.

These retained fully electronic products generated a pre-tax distributable earnings margin of approximately 55% in the quarter, and their revenues have grown faster than our overall Financial Services business for the past several years. At July to date, fully electronic revenues are up by 18%.

We ended June with 1,519 brokers and sales people in Financial Services, down 4% from 1,587 a year earlier. Excluding eSpeed, our average revenue per financial services broker sales person increased by 7% to $172,000.

Moving on to Real Estate Services, according to CoStar, net absorption of U.S. office, industrial and resale property was up by 1.6% year-over-year for the 12 months ended June 30. This signals continued improvements within the overall leasing market.

In real estate capital markets overall commercial real estate credit increased by 3% year-on-year according to Citigroup. Our U.S. sales volumes were up by 23% according to preliminary figures from Real Capital Analytics.

The low volatility, I mentioned earlier, coupled with this steadily growing U.S. economy has created positive market conditions for NGKF. While we've benefited from these positive industry trends, we believe that NGKF also continues to gain market share within these businesses.

Our real estate brokerage revenues improved by 5.8% to $110 million. Management services and other revenues were down by 1.9% to $39.1 million, and overall revenues improved by 3.6% to $149.1 million.

We had 879 real estate brokers and sales people at quarter-end, down 2% compared with 898 a year earlier. Our average revenue per real estate broker was up 8% to $125,000.

NGKF's ongoing improvements in broker productivity along with increased operating efficiencies, resulting from successful integration of pre-lease acquisitions, together contributed to pre-tax earnings increasing by 38.7% to $15.5 million.

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 $430.3 million, down 8.7% compared with $471.1 million. The second quarter last year included approximately $24 million in revenues from eSpeed.

Our revenues from the Americas were up approximately 2%, excluding eSpeed. Revenues from Europe, Middle East and Africa were down by 8%, and Asia-Pacific revenues decreased by 23%.

Turning to consolidated expenses. Expenses decreased across all line items, due largely to our ongoing cost reduction program as well as lower revenues and the sale of eSpeed.

Compensation and employee benefits were down by 8.6% and represented 61.1% of revenues. Our compensation ratio was flat, despite a larger proportion of revenues coming from real estate and absence of the eSpeed, which had a comp ratio of around 15%.

Over the past 12 months, we reduced a number of employees by approximately 400 company-wide or by 6% of overall headcount. Non-compensation expenses were down by $15.2 million or 11.7% and were 26.6% of revenues compared with 27.5%.

Our pre-tax earnings were $53 million, down nearly 1.6% when compared with $53.8 million, despite the sale of eSpeed. Our pre-tax margin this quarter expanded to 12.3% compared with 11.4% a year ago. BGC's effective tax rate for distributable earnings was 15% versus 14.5%.

Our post-tax earnings were down slightly to $43.5 million compared with $44.9. Our earnings per share of $0.13 were flat year-over-year. Our post-tax earnings margin improved to 10.1% compared with 9.5%. Our pre-tax earnings were about the same, despite revenues being down around 9%. This clearly demonstrates the success we are having thus far in reducing our expenses.

BGC had a fully diluted weighted average share count for distributable earnings of $366.7 million in the second quarter of 2014 and $326.6 million under GAAP. The GAAP share count was lower, because it excluded certain share equivalents to avoid anti-dilution.

In the second quarter of last year, our fully diluted weighted average share count was 378.1 million for both distributable earnings and GAAP. As of June 30, 2014, our fully diluted share count was 366.9 million, assuming conversion of the convertible senior notes into 40.1 million shares.

The 3% year-over-year decrease in fully diluted weighted average share count for distributable earnings was driven in part by the redemption and repurchase of 13.2 million shares and units at a cost to BGC of $82.9 million over the trailing 12 months. This is partially offset by issuances related to employee equity compensation as well as by new hires and acquisitions.

As of June 30, 2014, BGC's cash position, which we define as cash and cash equivalents, marketable securities and unencumbered securities owned held for liquidity purposes, was $644.2 million. Notes payable and collateralized borrowings and notes payable to related parties were $409.1 million. Book value per common share was $1.90. And total capital, which we define as redeemable partnership interest, non-controlling interest in subsidiaries and total stockholders' equity, was $701.7 million.

In comparison, as of December 31, 2013, our cash position was $795 million. Notes payable and collateralized borrowings and notes payable to related parties were $408.4 million. Book value per common share was $2.15. And total capital was $769.7 million.

BGC's cash position decreased from yearend 2013, primarily due to cash used to pay taxes, $56.3 million used to reduce fully diluted share count by 8.1 million over the first half of the year, and cash used for the HEAT and Remate acquisitions.

We have now largely paid for all the distributions and taxes related to the NASDAQ OMX transaction, which we had indicated last year would be around $290 million. This means that the majority of our cash balance is available for us to use to invest in our businesses, make accretive acquisitions, pay down debt and maintain our dividend.

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

Howard Lutnick

Thank you, Graham. Our third quarter 2014 outlook is as follows. We expect revenues to be between approximately $410 million and $435 million, and this compares with $414.4 million. We anticipate pre-tax earnings to be in a range of $52 million to $60 million, and this is versus $37.4 million last year. We expect our effective tax rate for distributable earnings to be around 15% as compared with 14.5%.

The positive impact of our expense reduction program should become even more evident next quarter. At the low-end of our outlook range, we expect pre-tax income to be up by 39% year-over-year, despite slightly low revenues. And at the high-end of our range, we expect pre-tax earnings to be up by 60% year-over-year and revenues up 5%.

This guidance assumes that Cornish & Carey acquisition closes in the middle of August. We intend to update our third quarter outlook at the end of September.

And now operator, we would like to open the call for questions please.

Question-and-Answer Session


(Operator Instructions) From Sandler O'Neill, we have Rich Repetto on line.

Rich Repetto - Sandler O'Neill

Howard, I guess the question is, I'm sure other people are going to ask something to this effect, but with the transaction where the CME bought Trayport and FedEx. I just wanted to see how you view the valuation, and then what platforms? And I know you put out your fully electronic revenue of $23 million and pre-tax of $12 million in the quarter, but what platforms you might have that, let's just say, our value given the comparable from that the Trayport transaction in FedEx?

Howard Lutnick

Well, the reason we breakout our fully electronic numbers for you is for you to see what would be comparative to other types of businesses, our Volume Match businesses, our fully electronic businesses. I guess, the best thing we should do is we should pick a name for them, so we can call them by some name, but they are comparable.

We view them as comparable. They are highly valuable. They have great margins. I think superior margins and they are very valuable. And that's why at numerous times we have done some of the parts. We are growing them nicely and we expect to continue to grow them. But we do expect eventually that someone will want to buy them and we will get a healthy return for our business and the stock.

So if you just look at how we've grown, and I think as Shaun said in his remarks, our July numbers are up 18%. So you've got tough market conditions, got our fully electronic business growing. We are able to drive the voice into the electronic business, but what's electronics is electronic, just like Trayport is electronic, jus like eSpeed was electronic, just like all these other kinds of businesses are electronic. And exchanges will find them very attractive. So that's why we've done some of the parts for you. We think our electronic assets are very, very valuable.

Rich Repetto - Sandler O'Neill

And just to remind us, the specific platforms you're talking about in the electronic assets, the names of the platforms?

Howard Lutnick

Well, I think our weakness has been, we haven't put a name, right. So I guess we're going to call our marketing people, and say, come on, give me a name or we have, look o foreign exchange business, which we worked on for many, many years and then finally found a very, very successful business. It continues to grow nicely, even into the phase of lowest volatility in history and lower volumes across all of foreign exchange, but our business is doing very, very well, because it's just a great product. Our Volume Match product is a great product.

We just have fully electronic businesses, and we have a numerous fully electronic businesses in European Government Bonds and otherwise that are comparable to eSpeed. There has been different other products. And then against all of those, we have Market Data and our Market Data continues to grow on a healthy pace just under 30% growth rate in market data.

So we've really got nice things. And I guess we should put a brand on it, so it becomes more famous out there in the market. But the product themselves are doing very, very well and grow nicely with superb margins. So while we haven't put a name on it, the business is sensation.

Rich Repetto - Sandler O'Neill

And just one last one on expenses, Sean. I guess we're looking at doing this comparison again against the second half of 2012. Roughly the run rate was $400 million in expenses per quarter. So if you're going to reduce the $100 million, you take $25 million, so the run rate, the target would be $375 million, which you're just about at right now. But the second half of 2012, included eSpeed, which is about another $10 million, so are we using $365 million as sort of a target or $375 million as a target?

Sean Windeatt

Well, I think obviously, you have to think about acquisitions and all of those things in that. It's hard to just take a target based on last year. What I can tell you though that we are in a substantial way along the track to getting to our target. Howard, talked about, we will be by the end of Q3. Howard's had a reference Q3 this year relative to Q3 last year, and the margin expansion since that time.

And one other interesting statistics actually is in Q4 '12, we made $436 million in revenues and $35 million in DE, which compares to $60 million, the $435 million and $60 million in the full costs. So a significant margin expansion, since the end of 2012, and recall, those numbers in 2012 included eSpeed

Rich Repetto - Sandler O'Neill

So whether 365 or 375, we're pretty close to both of them I guess, is that fair to say?

Howard Lutnick

We're substantially complete on it by the end of the third quarter. It won't, of course mean that we're done, it just means we're done with that target and we'll be examining what is available for the next target. We do have acquisitions to integrate and businesses to grow. So we will examine that in the new light. And if we have interesting things to say about our goals and objectives going forward, we'll be happy to say them. But for our past goals, we expect to be substantially complete by the end of the third quarter.

Rich Repetto - Sandler O'Neill

That's actually, I don't want to ask another, but your volumes don't seem has impacted, as you said in the prepared remarks, but is still not as impacted, but still if the volume environment stayed down, I guess what you're saying, that there could be more expense adjustments, integration savings going forward is what you're saying?

Howard Lutnick

Absolutely. And so just to tell you, you set a goal, you achieve your -- you set a goal, you achieve your goal, I don't know, it's called running the company.


From Raymond James we have Patrick O'Shaughnessy see on line.

Patrick O'Shaughnessy - Raymond James

So you guys announced that you have resolved the FINRA arbitration case with Tullett Prebon, but there is still the ongoing RICO case. Can you maybe provide any update on the status of the RICO case? When you think it might be resolved? And also kind of talk about any similarities or differences between that case and the arbitration issue?

Howard Lutnick

Let me see what I can say. Starting with, I'm not a lawyer. That would be the exact kind of comment I would say. Why don't you call our General Counsel and ask him, if he would better serve to answer it. But that we had FINRA arbitration on the matters, and that was decided.

And now there is a case that seems to me to be the same exact case, trying to get another bite at the apple. And last I checked that's not how the world and the laws work in America. So I think it's just duplicative. And that's our view of things. So while they have to whirl its way through the courts and how that has decided and when it's decided.

If you know when that is, you can let me know, because my experience has been these things just take time and they worked their way through. But we think it was completely resolved. They're trying to come up with other ways of saying things, and I just don't buy it. But it will be, when it will be. We'll resolve it when we'll resolve it. So I can't give you more than that.

Patrick O'Shaughnessy - Raymond James

On your share count, a lot of moving parts going on in the third quarter. Cornish & Carey acquisition, I would imagine is going to lead some equity issuance. You had the filings the other day about some share repurchase average. Can you guys give us a ballpark on where do you think the fully average diluted share count should be for the third quarter?

Howard Lutnick

We are trying to manage things to in and around 5 million share growth or less. And so since we'll have the Cornish acquisition, we saw it offsetting, some of that issuance was a good idea. And obviously, we think it's prudent since we're very optimistic about the outcome of the company. So probably in and around 5 million share growth or less.

Patrick O'Shaughnessy - Raymond James

Graham, on the expense side of things, there was a big quarter-over-quarter drop in your occupancy and equipment line. Was there some real estate consolidation that took place during the quarter?

Graham Sadler

Yes. During the course from one quarter to another, yes, indeed there was, part of our cost reduction process.

Patrick O'Shaughnessy - Raymond James

And then I guess lastly from me. So your third quarter guidance would seem to include maybe a-month-and-a-half of revenues from Cornish & Carey. And because it's including that, your overall DE revenue guidance of $410 million to $435 million, I guess I would have thought that would be a little bit higher. Is there maybe some seasonality to the Cornish & Carey revenues, where 3Q just isn't going to be very significant for them?

Howard Lutnick

Well, when you buy a company, often the day before you buy it, you try to jam in as many deals as they possible can. So my guess is we're going to be reasonably conservative in our view of things, because our experience is that's just the way it goes.


From BMO we have Jillian Miller on line.

Jillian Miller - BMO

I know that you said you'd be substantially complete with the cost saving program by the end of the third quarter, but I might have missed it. Did you tell us how much you've done to date, so essentially how much more we have before the end of third quarter to go?

Graham Sadler

No, we didn't you give a number, right. We basically just say it by the end of Q3 we're going to be substantially complete.

Jillian Miller - BMO

I mean given your third quarter guidance for the revenue and then the pre-tax earnings, it seems like you're projecting pretty meaningful improvement I guess on the expense ratio sequentially, despite the fact that more of your business is going to be coming from real estate, which I think typically has a lower margin. So I mean could you give us a little bit more detail on where some of that improvement is coming, is it mostly comp, is it non-comp?

Howard Lutnick

Well, I think it's across a whole variety. It's really across our business. And we've been working on it for so long. Some times, for instance, if we move from software and we're finally off to maintenance, and you have to give them notice under the contract, and the contract rolls. When it rolls, that's when you get the benefit.

So we said we'd get it done by the end of the year. Obviously, internally we wanted it substantially done by the end of the third quarter. And we've been talking about it for almost a year or nine months. And so the fact is you would expect us to be around here then and it's coming in across. I would have preferred more if it came in the second quarter. But it comes when it comes. And we've done all sorts of things here to make the company more efficient, and we think we have more to go.

And just before I start talking about how much more we have to go, I sort of want to figure out again, how long we think it will take and what we think the scale and scope of that is, and whether it's worth talking about or it's just our job. It is our job to do that. Talking about it is nice, but it doesn't mean we don't about it internally all the time anyway. So I don't think there is anything particular about the third quarter other than we needed it all to come to roost by then. And so not surprisingly, it's all coming to roost by then.

Jillian Miller - BMO

And then, just clarifying Cornish & Carey, is all of that revenue associated with business coming through the real estate broking or do they have any of the real estate management stuff going on?

Graham Sadler

They have both.

Jillian Miller - BMO

And then, finally, going back to the GFI transaction, clearly a lot of value is placed on Trayport. But on the flipside, I was kind of surprised that how little value is placed on the voice broking business. I mean it's being bought for $165 million, which is 0.25x the annual revenue. So I'll just be interested on your thoughts on that valuation. And longer-term I guess how you see GFI surviving as a standalone in voice-broking only business?

Howard Lutnick

Well, we find the transaction interesting. And certainly we'll go in a lot of reading and thinking from us. And what was the second part of your question?

Jillian Miller - BMO

Do you think GFI essentially can survive alone without Trayport earnings to do certain thing?

Howard Lutnick

The world out there requires, in my opinion, two things, money and technology and capable of being successful. And we have both of those things. If one were to not have enough money and one were to not have technology, there is other niches for people to be successful, of course there are. Are they relevant in scale? Of course, they are not.

And so one could always make a choice to be a niche and not relevant, but maybe make a little bit of money. So I don't know. That is not a hand that I have played. I have played a hand of enormous capital, enormous sums of money and spectacular technology to become fundamentally relevant in the world. That's what we like and that's what we want to do. So someone else playing a different set of hands is up to them, but I find the transaction interesting and we will think. We're going to think about it and learn from it.


From KBW we have Niamh Alexander on line.

Niamh Alexander - KBW

On the distributor earnings number, with the cash you have and signals you've been clearly sending about kind of buying growth, now that you're done with the taxes and kind of maybe buying out some stock. Help me think about the distributable earnings on the dividend, because historically you've paid out quite high proportion of your earnings, and for a while that you're paying out higher than that, but you're buying growth here. Should we think about the same ratio going forward? Should we think about maybe the capacity to raise a dividend in the future?

Howard Lutnick

Yes. I mean it's hard for me to be short, as you know. But I think the answer is yes.

Niamh Alexander - KBW

So I should still think about that target, is it like 17% to 19% is your payout ratio that you target typically?

Howard Lutnick

Look, historically the company wanted to have a high percentage of its distributable earnings distributed. So that's why we came up with a brilliant name, distributable earnings. So historically that's been the case. We're always going to examine the opportunity for us to spend our money and grow our business and balance that with making sure we're producing shareholder value in either growth or cash return to the shareholders.

And that balance, as you know, is important to us. Our employees, our sales people, both in financial services and in real estate, they get paid a percentage of their compensation in equity. The returns on that equity are very helpful to balance it, because they don't have liquidity, in the same way others do.

And that it is also has in a portion of it that they would lose it if they left and compete it. So it's important to them to have to strong dividend that gives that value to them current. So we have that balance. And so that's why I answered so simply, yes, which it is important to the firm that we have a distribution ratio is that is relatively high.

However, we're always going to examine it. The Board is always going to think about it. And we're always going to look at options that are in front of us. And if we feel it is better to have a lower percentage, meaning to keep the dividend where it is and start using the cash to buy other companies or invest in other ways, of course, we're going to do that, whatever is best for the company.

But I have explained one of the factors that is important to the company is the current distribution ratio. And if our company earns more, that certainly will be a topic that we will talk about very positively about raising a dividend.

Niamh Alexander - KBW

Well, it seems like this year there is a lot of deals happening, there is a lot of other moving parts and you've got some debt repayment too. So maybe nothing eminent anyway in terms of the dividend change there. I guess, on the debt repayment just to clarify, Graham, I think away from your Investor Day that you were talking about repaying the $150 million convert, not necessarily replacing it. Was that correct though?

Graham Sadler

Yes. That's correct.

Niamh Alexander - KBW

So we'd look a reduction there next year. And then just lastly, just for the modeling, the real estate management services line, sorry if I missed this, but is there some seasonality that it was higher in the second quarter last year than this year, but it kind of came back down in the first half. Is there some seasonality in that? I would think it's more slow and steady, but should we kind of look for that again to pick up in the second half of this year?

Howard Lutnick

It will pickup in the second half, simply because we're running business not necessarily because of seasonality, just because we're winning business. It is a slow and steady business. I think you've expressed it correctly, except as we grow our business it should be slow and steady until it's quick and fast and then it will go back to slow and steady as it grows.

But look, we had a business. We've acquired a bunch of business. And when you acquire businesses, some times you see some legacy issues that need to be rationalized. And we are going to do that. So some times we have unprofitable business lines that are in there. That we're going to rationalize out, in the same way that there were underperforming brokers, you just rationalize them.

And so there might be a revenue decline, but if it comes with increase in profits that tends to be just prudent management. Some times buildings are sold, properties are sold and the management goes with them. An example would be, the Empire State Building goes public, we manage the Empire State Building and then we took their management in-house, right, when it went public.

So it's not something anything happened, which is we manage the Empire State Building. And then it went public, I think in a very high profile transaction, and they took the management in-house, because that's part of being a public company and they wanted to do that. So those examples are sort of the ins and outs of things. They're not particularly relevant to the overall scheme of things, they are just part of the business, but I would expect that number to grow, both in the second half and over time. And we are confident in that business and we like it very much.

Niamh Alexander - KBW

And then just lastly, back to the inter-dealer broker, which is in the hybrid of the voice and the electronic. Some of your competitors have been out there talking about having too much capacity in the industry. And then you've seen the GFI transaction. And I guess you've talk about you reducing headcount again. Where do you stand with -- you have also been reducing headcount, I think you had call them unproductive brokers or something like that, less profitable brokers.

Where are you or where do you stand with respect to that core inter-dealer broker part in the Financial Services segment? I mean is the volume doesn't recover? Is there maybe some more tweak you need to make? Do you agree there is too much capacity? What do you plan to do about it?

Shaun Lynn

We're going to continue to showing on our business, returning more and more markets to electronics, that is the future and whichever way you cut it, but it is always a competitive landscape and we always face new competitors coming into the market. Be that Bloomberg, TradeWeb, iCaptial, whoever. So my standpoint is, as a matter of fact giving the best cost effective service, the fastest way using our technology, because that's the way we get better returns for the shareholders and positive returns back to the company.

So we're going to continue to shrink on our business, to ask unproductive brokers to move out, to upgrade them, find better brokers with better relationships. And therefore, turn more markets electronic using relationships. I mean moving straight into and focusing on the really, really liquid markets. But we know, technology is going to be the differentiator.

And as we've seen the in the set world is how more and more markets have been driven to technology and we're going to see that all the way through Europe and Asia over the course of the next two to three years. This is going to be an ongoing task for us within the financial industry.

So we'll grow in buildings at commodities and energy as we've said using our technology and the business that we've been in for many, many years. We'll make sure we're a market leader and an industry-leader, but at t he most effective way, for us and the marketplace. So it's an ongoing task.


And from Morningstar, we have Michael Wong on the line.

Michael Wong - Morningstar

Do you see the GFI Group transaction as changing the competitive dynamics of the full service voice kind of hybrid into dealer broker industry?

Howard Lutnick

The deal that's announced, if it happens, would be the change in dynamic for GFI, from being a large technologically capable company to a smaller less financially sound, less technologically-based enterprise, which seeks to find a niche. So I think it's just a change for them to move towards niche as opposed to being effectively a competitor of ours. So having it to step away from the path that we are on, which is servicing our clients in a big way with the fiscal capacity to do it in any regulatory environment, in any way the clients need it, with whatever the technology is or needs to be.

Our clients know that we are capable of delivering and will deliver it if we so promised. And that's a different class and then that's a change. And that's it. I mean I can't speak to how it will come, because we'll see, but it just seems to me that someone else has stepped off the path that we are on and so be it.

Michael Wong - Morningstar

In general, would you say that you and your inter-dealer broker peers are doing a broad-based retrenchment or is it more particular to various sets and products and/or geographies?

Howard Lutnick

Well, I think Shaun used actually a word, which is streamline. We have two objectives. Our return on our brokers, so the average revenue per head and the productivity of those brokers and the profitability of those brokers that has continuously improved over the past year for us. So we're not looking for less brokers, and in fact we're looking for more productive brokers and less unproductive brokers.

So if the market becomes tougher, some particular brokers may become unproductive or less profitable, and then the economics of having them change, but the economics of having productive brokers never changes. And so we will continue to do that. To say, it's a broad-based retrenchment, incorporates what other people are doing, which I don't know.

So our company is converting markets electronics, which have substantial margins, for us, 55% profit margins. So you have profitability increase. That will drive down head count, but for the benefit of the company. And then, the streamlining of the business, making sure you hire and retain the most profitable brokers, and the one that fall below the line over time, they need to leave, because it's just math of the marketplace and that's the way it goes.

And so I don't want to speak to other people. I think we are in the zone. We understand what to do and we are doing it, and that's why our earnings are going to be up between 39% and 60% next quarter. We've replaced eSpeed virtually effectively now in it's entirely in next quarter, really in a good spot for us. And if market conditions improve, we'd be in a great spot. But that's not up to us. We're just going to do the best with the cards we are being dealt, and we think we are playing those cards very, very well.


And finally from Philadelphia Financial we have Justin Hughes on the line.

Justin Hughes - Philadelphia Financial

I was going to ask about the third quarter margin guidance, but I think that's been fairly well covered. And also, I want to say that if we look over the last year, you've really done an amazing job of monetizing technology assets for the benefit of shareholders, and we saw GFI follow, you're leading as usual, Howard you were very early on that one, hopefully more companies follow your suite.

But my question was on the distributable earnings guidance, the lawsuit accruals historically are non-cash and they've not been a part of distributable earnings. When you actually pay the amount to Tullett, is that going to go into your distributable earnings number?

Howard Lutnick

No. The benefits we've had that are not part of our operating business, don't go in and the payments don't. So they will have no effect on distributable earnings.

Justin Hughes - Philadelphia Financial

It will be a cash expense. It's viewed as one-time and you'll leave it out.

Howard Lutnick



Thank you. We will now turn it back to CEO and Chairman, Howard Lutnick, for final remarks.

Howard Lutnick

Well, I appreciate you joining us. Look we're very proud of what we've accomplished in the year. We sold our eSpeed business, in particular, a treasury business, a narrow group of instruments, and we have set out to reinvest that money effectively. I think we have done exactly that having one-year on effectively returned all that money.

We've met much more cash, almost $270 million more cash than we had just before the transaction last year, and about $600 million in NASDAQ Stock. So we've replaced the earnings with $850 million, the firepower on which to grow and build the company. I think we've put the company in an excellent platform, in an excellent footing. And we're proud of where we are.

We're excited about where we're going. And it feels really good. So we appreciate you spending the time. It's probably nice to be on a phone call in tough market environments with people who know where they're going, know to how to get there and who are winning.

So thanks for being with us. And we look forward to speaking to you and updating you later at the end of the quarter, and speaking to you next quarter on our call. Thanks everyone have a good day.


Ladies and gentlemen, this concludes today's conference. Thank you for joining. You may now disconnect.

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