Executives
Chris Giancarlo - Executive Vice President
Michael Gooch - Chairman and Chief Executive Officer
Jim Peers - Chief Financial Officer
Colin Heffron - President
Analysts
Dan Fannon - Jeffries & Company
Daniel Harris - Goldman Sachs
Don Fandetti - Citigroup
Chris Donat - Sandler O’Neill
Chris Allen - Banc of America Securities
Barry Cohen - Knott Partners
Rob Rutschow - Deutsche Bank
GFI Group, Inc. (GFIG) Q3 2007 Earnings Call November 2, 2007 8:30 AM ET
Operator
Good day ladies and gentlemen and welcome to the GFI Group's third quarter 2007 earnings conference call. My name is Grace Anne and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of today's conference. (Operator Instructions) I would now like to turn the presentation over to your host for today's conference, Mr. Chris Giancarlo, Executive Vice President.
Chris Giancarlo
Good morning. Welcome to the GFI Group third quarter 2007 earnings conference call. We issued a press release yesterday providing the financial results for our fiscal quarter ended September 30, 2007, which is available on our web site at www.gfigroup.com.
Let me remind you that we have also posted monthly revenue information on our website under supplementary financial information' as we did last quarter in conjunction with our earnings release.
To begin this morning's call, Michael Gooch, our Chairman and Chief Executive Officer, will review some of the highlights of our third quarter performance. Next, Jim Peers, our Chief Financial Officer, will review the third quarter financial results in greater detail. After Jim, Michael Gooch will conclude with a few remarks. After that, we'll open up the call to your questions.
Before we begin, I would like to remind everyone that certain statements contained in this discussion are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements include statements about the outlook and prospects for GFI Group and for its industry, as well as statements about GFI's future, financial and operating performance.
These and other statements that relate to future events and results are based on the current expectations of GFI Group. Actual results, performance or achievements could differ materially from those contemplated, expressed or implied because of a number of risks and uncertainties, which include but are not limited to the risks and uncertainties identified in the earnings release and GFI's filing with the U.S. Securities and Exchange Commission. GFI Group does not undertake to publicly update our revise any forward-looking statements whether as a result of new information, future events or otherwise.
I will now turn the call over to Michael Gooch, Chairman and Chief Executive Officer of GFI Group.
Michael Gooch
Thank you, Chris, and good morning and thank you for joining us today. At the time of our last earnings call, we had forecasted strong growth in the third quarter brokerage revenues because of heightened volatility in global credit and financial markets that reemerged late in the second quarter.
In fact, our third quarter was a record quarter for GFI with brokerage revenues increasing 41% over the third quarter of 2006, slightly above the high-end of our forecast. The fallout from the sub-prime debt turmoil drove trading in credit and equity products to record levels in the third quarter, especially in July and August.
After a slow start to September, moves by the Federal Reserve and the European Central Bank to add liquidity to the credit market led to a strong finish for the quarter. Looking more closely at our third quarter performance by product line, credit product revenues increased 45% from the third quarter of 2006 and rose 21% sequentially.
Credit derivative trading activity was impacted by the sub-prime debt market turbulence as it affects spreads to other credit sectors. Our revenues from credit derivatives reached a record level in the third quarter and were strong in all regions. This was accompanied by a 28% increase in cash bond revenues.
The continued success in Europe of our CreditMatch electronic platform made an impressive contribution to our growth in credit derivative and investment-grade bonds. In total, credit product revenues represented 36% of total brokerage revenues for the third quarter of 2007, generally in-line with our year-over-year quarterly results. And up from 33% of brokerage revenues in the second quarter of 2007.
The sub-prime market environment also triggered volatility in the equity markets. This contributed to a 43% rise in our equity product revenues from the third quarter of 2006, and an 11% sequential increase.
Once again, our Paris office, which is now a leader in equity brokerage in continental Europe, was an important contributor to our growth in equity products while equity derivatives also did well in the U.K. and North America.
Cash equities were strong in both North America and Europe. Equity products represented 24% of our total third quarter brokerage revenues, in-line with our year-over-year sequential quarterly percentages. Financial product revenues rose 28% over the third quarter of 2006 and 7% over the second quarter of 2007.
The volatility in the financial markets also led to strength in emerging market products in all regions, especially in Europe and Asia. We continued to roll out ForexMatch in all geographic regions and to add products that we believe we will enhance trading efficiency for clients and increased broker activity.
In total, financial products represented 20% of our third quarter brokerage revenue mix, in line with year-over-year and sequential quarterly results. Our commodity product revenues increased 48% from the third quarter of 2006 mainly due to the addition of Amerex and the strength of several energy products in Europe.
Commodity products represented 20% of our brokerage revenue mix, in-line with our level in the third quarter of 2006 and below the 23% of revenues that they represented in the second quarter of 2007.
Looking at our performance in the third quarter of 2007 by geography, our diverse geographic revenue base enabled us to benefit from global market volatility events in the quarter. Our revenues from Europe rose 48%, year-over-year while we saw a 34% increase in our revenues from the Asia-Pacific region.
Our revenues from North America increased 36%, including the contribution of Amerex. Improving our operating leverage is a major area of focus for the company. I'm pleased to report that we made tangible progress in the third quarter and year-to-date as our earnings growth exceeded our revenue growth in both periods. Of course, our record revenue level helped in this regard.
We were successful in controlling compensation costs, our largest expense in the third quarter despite competitive marketplace pressures. We believe that our strong growth and deep liquidity in our markets helps us retain our talented personnel. Technology plays an increasingly important role in employee retention. We see our investment in the CreditMatch working in Europe where it is benefiting our brokers through higher productivity and overall compensation while at the same time improving margins for the company.
We made headway in controlling our non-compensation costs in the quarter. On a non-GAAP basis, non-compensation costs improved to 19.8% of total revenues in the third quarter of 2007 versus 21.6% in the same quarter of 2006 and 21.9% in the second quarter this year. I point to two areas of focus in the last quarter that were leveraged successfully in the third quarter of 2007.
Travel and promotional expenses were down 2.4% sequentially, while communications expenses remained level with the second quarter of '07 and therefore declined as a percentage of revenues, both sequentially and in comparison to the third quarter of last year. Turning to our outlook for the fourth quarter of 2007, I note that October brokerage activity levels were quite favorable and were approximately 35% ahead at the same month last year, which makes October a record month, albeit with the benefit of two additional trading days over last October.
Please also note that this growth includes the contribution of Amerex for the first time in both periods. With the start of the fourth quarter, we currently estimate that brokerage revenues will increase between 20% and 25% over the fourth quarter of 2006.
GFI strives to provide superior returns to shareholders and we focus on growing our revenues and profitability every quarter towards this end. As reported in yesterday's release, based on our growth update and anticipation of future opportunities, our Board of Directors has authorized management to seek stockholder approval to increase the company's authorized share capital for general corporate use, including authorization for an up to 4 to 1 stock split in the form of a stock dividend.
A special meeting of stockholders will be called specifically to improve an increase in the number of our authorized shares of common stock to 400 million from the current level of 100 million. We will announce the date at the special meeting as soon as it is set.
I would now like to turn the call over to Jim Peers, our CFO, before making my concluding remarks.
Jim Peers
Thanks, Mickey. Good morning, everyone. Our strong revenue growth continued in the third quarter of '07 as revenues grew by $74.7 million to $254.7 million compared to $180 million in the third quarter of last year, a 41.5% increase. Our Q3 revenue growth was mainly driven by increased market volatility, strong organic growth in credit, financial and equity products and the addition of Amerex. On a year-to-date basis, our revenues increased by $170 million or 30.8% on a GAAP basis.
Third quarter net income improved to $25.9 million compared to $16.6 million from the same quarter last year on a GAAP basis. After backing up the non-GAAP items which I will discuss a more detail later, net income grew 53% to $27.6 million compared to $18 million for the same quarter last year.
On a year-to-date basis, our net income grew 36.3% to $74.3 million compared to $54.6 million for the same period in 2006 on a non-GAAP basis. Our diluted earnings per share for the third quarter of '07 was $0.87 compared to $0.57 for the same quarter last year.
However, on a non-GAAP basis, our diluted earnings per share for the third quarter of this year was $0.92 compared to $0.62 in the third quarter of '06, which is an increase of 49.6%. On a year-to-date basis, our diluted earnings per share grew by 33.4% on a non-GAAP basis to $2.50 compared to $1.87 for the same period in 2006.
Brokerage revenues grew by over $71 million, or 41.2% in the third quarter compared to the third quarter of '06. Credit is up approximately 45%, CDS desks only are up over 53%. Financials are up approximately 28%. Equity is up approximately 43% and commodities are up over 48%.
Our brokerage sign-on bonuses paid in the third quarter were $9.1 million versus $3.1 million in the third quarter of '06 and the brokerage sign-on at the bonus expensed was $5.6 million in the third quarter of '07 compared to $5.1 million in the third quarter of '06.
Our brokerage personnel headcount at the end of September stands at 1021, up 194 from third quarter of '06 and a change in our broker headcount from the end of 2006 is 89. Our broker productivity has increased by over 10% to $703,000 for the year-to-date in 2007 from $638,000 for the same period last year.
Pretax margin for the third quarter of '07 was 16.7% versus 15.1% for the third quarter of last year on a GAAP basis. On a non-GAAP basis, our pre-tax margin for the third quarter this year was 17.8% compared to 16.3% for the same quarter last year. On a year-to-date basis, pre-tax margin was 16% versus 14.6% for 2006 on a GAAP basis and on a non-GAAP basis, our pre-tax margin for the year-to-date was 17% compared to 2006 at 16.5%.
In summary, our key performance drivers on a non-GAAP basis are as follows. Revenues from the third quarter are up 40.8% compared to the third quarter of '06, and on a year-to-date basis revenues are up 29.9% from 2006. Our comp costs are at 62.4% for the third quarter of '07 compared to 62.2% for the third quarter of '06 and 62.5% for the second quarter of '07. On a year-to-date basis, comp costs are at 62.6% compared to 61.2% for 2006.
Non-compensation expenses in the third quarter as a percentage of revenue were 19.8% compared to 21.6% for the same quarter in the prior year and 21.9% for the second quarter of '07. Our non-comp ratio on a year-to-date basis was 20.3% compared to 22.3% for the same period in 2006. Our effective tax rate for the third quarter of '07 was 39% compared to 40% in the fiscal year 2006.
Now I would like to highlight some other areas that will be of interest to you. The number of diluted shares for the quarter ended in September were 29.9 million shares. In June as I mentioned on the last call, GFI signed a lease to relocate or New York offices to 55 Water Street.
The move is scheduled to commence in the first half of 2008. Accordingly, the Company excluded $2 million before tax as nonrecurring costs in the third quarter made up of $900,000 for duplicate rent and $1.1 million on accelerated depreciation. There will be additional adjustments to GAAP earnings for the next three quarters as the move progresses.
Other income increased by $2 million for the third quarter of this year compared to the third quarter of last year because of transactional unrealized foreign exchange gains mainly in the UK.
That concludes my comments, now I will turn the presentation back to Mickey for some closing remarks.
Michael Gooch
Thank you, Jim. In conclusion, we had a record the quarter as we benefited from high market volatility and our product and geographic diversity, our investment in electronic trading platforms and expert brokerage personnel and our ongoing focus on controlling costs.
We will continue to execute on our strategic plan for growth, while making investments to support and accelerate it as we seek to build shareholder value. We look forward to reporting on our progress on our next call. Thank you for your time and attention today and we're now ready to take your questions.
Question-and-Answer Session
Operator
(Operator Instructions) Your first question comes from the line Dan Fannon of Jeffries & Company.
Dan Fannon - Jeffries & Company
Good morning. And thanks for taking question. Your guys' pretax margin has bounced around a bit in recent periods. You've done a nice job on the non-comp side this quarter. As you look going forward, do you think the pre-tax margin you saw in the third quarter, is that sustainable, or do you think you will see some expansion from here as you look out over the next couple of periods?
Jim Peers
That's a good question. I think we're getting a better handle on the non-comp costs. I think as you saw from the third quarter and the second quarter, even though it's down as a percentage in absolute dollars, it's flat. And with the higher revenue base, that has improved our leverage. We hope that that's sustainable.
However, I think one of the things that people forget sometimes is our business is seasonal, and a good example in the fourth quarter, we would hope that we can continue to stay at that absolute dollars for non-comp. But obviously, I would think that we're going to see a slight increase in T&E, which is normal for the fourth quarter because of the holiday period. And so you will see some other slight increase there.
And typically, sometimes we get some one-off costs, which we just cannot predict. But I think we are focused on trying to maintain that absolute dollar level with the higher revenues that we have, so therefore we continue to see the leverage.
Dan Fannon - Jeffries & Company
Okay, that’s helpful. And in terms of broker retention and the market for hiring new brokers, what do the heightened levels of volatility do to that market and your ability to grow, or as I said, retain employees?
Michael Gooch
I'm going to give this question to Colin Heffron, our President.
Colin Heffron
The heightened loads of volatility are actually very good for us, in terms of the retention gain because it's a bit like playing with the number one team. When things are going really well and markets are trading very actively, you think a lot more about staying where you are and enjoying the market position and the dominance that we have in a lot of our product.
So in terms of volatility or it just being busy, it's very, very good for our business on both levels. Obviously, it just drives volume, but it also concentrates the mind and keeps people right where they should be.
Dan Fannon - Jeffries & Company
Okay. And then lastly on your capital position, obviously you have a fair amount of cash now and low average. Can you give us a sense of your appetite for an acquisition in terms of both the size as well as what product or geographic areas you think would be most additive to your business currently?
Michael Gooch
Dan, we are pretty open-minded about the opportunities in the marketplace. Some of them are really things that we could potentially do without really looking to any great extent beyond the cash in the bank, so to speak, and some of the opportunities are bigger.
I am probably not going to be very helpful here, but frankly it's across all product categories that we are interested, but we also have a focus on improving our technology positions. There are opportunities right now in the marketplace in one or two small boutique type businesses that fit well with us.
We're talking to some other companies about one or two technology strategies that we might enter into. So we have an appetite, we're just looking to make sure that we invest in the right places to basically create the shareholder value.
Dan Fannon - Jeffries & Co
Okay. Well is it safe to assume that your appetite has been increasing at this point or you're anniversary in the Amerex deal? I mean are you looking -- just for a sense of time period. Is it something that you with envision you guys deploying capital in the next several quarters closer or beyond that?
Michael Gooch
I think that we're in a good position to look to expand our business beyond organic growth. One or two of the assets in the marketplace that we could be looking at are in my opinion priced a little richly. But if the economics make sense, I think we're all positioned that we have an appetite to do something in the relative near future.
Dan Fannon - Jeffries & Co
Okay. Great. Thank you.
Operator
Your next question comes from the line of Daniel Harris of Goldman Sachs.
Daniel Harris - Goldman Sachs
Hi, good morning, guys.
Michael Gooch
Good morning.
Daniel Harris - Goldman Sachs
Mickey, thanks again for the commentary on brokerage revenue growth and what your revenues are going forward. I appreciate that every quarter. I just wanted to touch, dig a little bit down into that a bit further. With volumes up 35% through October and your guidance of 20 to 25%, which in the past has been last quarter, it was actually pretty spot on.
What areas do you think would actually decelerate a little bit from the growth that we've seen so far to get to that range?
Michael Gooch
Well, we are trying to be as accurate as we can with predicting the future, but I frankly these last four or five months, it has been difficult to really say what's going to happen. And I think that we've had a lot of discussion about it internally and externally, and our crystal ball is not necessarily any more accurate than anybody else's.
So one of the things I'm trying to do for you guys is give you to really put you in the same position that I am in as we sit looking at the business. We just finished October, so let you know how October was. But bear in mind that October had 23 business days this year compared to 21 the year before, and that's not an exact science.
You cannot just take the number, divide it by 23 and multiply it by 21 to estimate your revenue growth for the rest of the year because there are other factors involved in coming up with that estimation. But if you do that, you come up with 24-point something percent, which would be the high end of the 20 to 25% estimate.
And then, given the fact that going into the end of the year, we're not really sure whether the banks certainly if there are situations in the marketplace surrounding further volatility in the credit markets, if there is some more issues involving concerns about write-downs in the market and potential credit events, or just year end activity, these are all things that it's very difficult sitting here today to say which way it's going to go, whether we're going to end up in the middle of December with everybody throwing the towel in and saying, okay, it was a very, very busy year.
We did well but we're basically going to shut the books for the year. Or, whether we're going to have one of those Decembers where we are really active right up until literally 6 o'clock in the evening on, I don't have a calendar in front of me, whatever the last day of December is.
So, I don't really have an ability to say what the outcome would be, but I would still say that the driving and I think this is your question driving element that is going to probably have the influence over where we end the year is going to be whether or not there continues to be volatility coming from the credit sector. There is still concerns about SIVs.
Six months ago, who knew what an SIV was? But conduits, commercial paper, all these things that are now in everybody's mind, the commercial paper auctions, there's still issues. There might be some more bad news from some of the brokerage companies. I'm not saying I know or anything, but I'm just estimating that it's possible.
And that type of literally like in the last couple of days, it has been -- and yesterday is a fine example, right, with a big down day in the Dow. The fact of the matter is that, that kind of activity ends up being very good for our revenues. So, if it continues through the rest of the year and we have things like that, we're going to end the year in most likely at the high end of my estimate, if not above it.
Daniel Harris - Goldman Sachs
Yeah, no, I appreciate that, Mickey, and the point about the number of days in October is also interesting. So thank you for that. Just to stay on the credit side, because we've talked about it a little bit. Over the past few months, obviously there has been just whipsaws and volatility.
We've put a lot of things about the CDS markets. And even within people I have talked to here at the firm and on the street, you get different opinions on the levels of volumes being traded, and some desks seem like they're extremely active and some desks seem like they've taken a little bit of a step down relative to where they were this past summer. Can you put any color around the CDS market rather than the entire credit market?
Michael Gooch
I would say that we are seeing activity across the board, even some of the more complex structures surrounding the tranches in exotic credit. We're still seeing activity. It's bleeding out into emerging markets. I have to say that, when you're in the position of being the most liquid brokerage shop that I think that even if market conditions become choppy I think it actually means that the business tends to go into the hands of the two or three that have the best liquidity.
So, we probably benefit to some extent in that respect, whereas some of our competitors that maybe have much weaker sort of fourth and fifth place positions probably find it difficult to find any liquidity and get business done. So, did that answer your question? Sorry.
Daniel Harris - Goldman Sachs
Yes, it basically did. I was just looking for a little it's just, I've heard some varying discussion of the absolute level of volumes, and obviously you guys should benefit because you are such a big participant in that market, but the direction and I think I got a little bit…
Michael Gooch
What I want to add to it, Dan, is there is always this concern I think when you are very busy after some financial events. For example, Enron and then the energy markets where we were very busy in 2002 but then saw a tail off in 2003 before the markets grew again simply because what we were seeing in 2002 was a lot of unwinding of positions.
And so, there's always that concern that, is the activity we are seeing, is it a lot of people just unwinding positions and getting out of business which would not bode well for the future, or is it real business?
And I would like to say that from where we are sitting right now, I and, frankly, just from candid conversations that I have had with people in the trenches at some of the big brokerage when retile (ph) brokerage, I mean the Goldman Sachs', the Deutsche Banks of the world -- that they are still very positive that the credit derivative business is here to stay and that if anything, the recent market activity is actually only going to reconfirm the place of credit derivatives in the marketplace and that we’re - I am being led to expect that 2008 is actually going to be a very good year for business in the credit sector.
And I think, that's going to bleed through into our other businesses. Obviously, energy isn't directly affected by credit and there's all sorts of other market things going on that affect the energy market and also going to be -- having a primary in February for the general election next year.
We're going to know who our candidates are for President, and then an election later in the year. So I think that that and some of the other developments on the international scene are going to keep generally the financial markets active in 2008.
Daniel Harris - Goldman Sachs
Yeah. Thanks for that, Mickey. And then just lastly here, and I will sign off. On the commodity side with Amerex now and the full year's results, can you give a little color about how we should think about growth?
And I guess what I'm trying to get that is, if you break out over the past year what the organic growth in the business has been versus what it has really been related to the Amerex business, that would be very helpful. Thanks a lot, guys. Great quarter.
Michael Gooch
Thank you. Did you want me to say something about that?
Daniel Harris - Goldman Sachs
I was just wondering if you could help me understand the organic versus the Amerex growth.
Michael Gooch
I have said that, in our business, I think, and maybe it's just a number I'm chucking out there, but I think 9% growth organic is, if that is what we should do -- I don't have to come to work to do 9% growth basically.
I can stay home. And so I think 9% is organic, and then everything that else that we do is a function of our investment, whether it's in people or technology or just strategically thinking about our business.
And so I think that we can do the 9% with our eyes shut. I think that our long-term target that we've talked about, which is sort of 20% plus on the top line and working to improve the bottom line by one or two percentage points each calendar year is something that we are extremely well positioned to achieve.
Daniel Harris - Goldman Sachs
That's great, Mickey. Thank you very much.
Operator
Your next question comes from the line of Don Fandetti of Citigroup.
Don Fandetti - Citigroup
Hi good morning, Mickey, I have a quick question. Do you see any opportunities in European derivatives around MiFID, whether it's partnering with others or looking at new areas?
Michael Gooch
I think that MiFID really is something that actually works to the benefit of dealer, brokers. I think that the OTC derivatives space is growing. And in terms of the transparency, I think it means that the dealer community is going to continue to look to automate processes.
So, companies like GFI that have very good, solid investments in good technology that can support electronic trading, straight-through processing, all of that process, we're going to benefit from anything that comes in the marketplace that might sort of push or nudge the trading community towards greater transparency and greater automation. I'm not sure about what you mean by any kind of acquisition opportunity, if that was part of the question.
Don Fandetti - Citigroup
I think you answered my question, that's fine. I did have a follow-up. I was wondering if you could just give us an idea of what you're hearing from the dealers in credit, in terms of, is there ever any pricing pressure or is everyone making a lot of money or everyone is happy? Just trying to get a sense of what you're hearing from the dealers?
Michael Gooch
I think that right now, it's not the focus. I think that if we get into a period maybe one-third through 2008 if there's sort of a breather period, I think the marketplace might then take a look at their cost of doing business relative to their trading activity.
Right now, it isn't the focus at all. Nobody is talking about the commission rates. If anything, spreads are probably a little wider and I think the commission rates are at the end of the day a function of both spread and total volume.
So, right now, we're not really under any pressure on the transaction cost side of the business.
Don Fandetti - Citigroup
Okay. And if I could ask one last question. This has been a topic over time in terms of the threat to your business from the exchanges. You have done a great job, it has not become an issue. Any thoughts on where you are today on that potential threat?
Michael Gooch
No, I think we still continue to be in a good position. I saw some recent research that showed that the volume of OTC derivatives relative to exchange traded derivatives, it had actually widened. It had gone from five times the volume to 5.9 times the volume.
I think that IDB space, we are a lot like exchanges in that we are the place where people come to offset risk with each other, and it works very well. We're so far ahead of the curve in things like credit products that there's and we have been doing this now, it's actually more than ten years.
And we're so far down the road in new product generation and that just beginning now to try to look at maybe some single name stuff, maybe some index stuff. So, even if the exchanges enter into that marketplace, it's likely actually initially to boost volumes across the board.
And I wouldn't be surprised to see OTC credit derivatives grow if the exchanges enter the business. But in terms of losing OTC business to the exchange space, it's only going to most likely happen in the shorter end of the market in the most highly liquid end of the market where the commissions are the thinnest and where the traders don't care about the margin on a trade.
So, I think we are going to grow with the exchange space. I think there's a lot of things about the way that the OTC market works that is very favorable to the participants and I don't see that that is going to change.
Don Fandetti - Citigroup
Okay. Great. Thanks for the detail.
Michael Gooch
Sure.
Operator]
Your next question comes from the line of Chris Donat of Sandler O'Neill.
Chris Donat - Sandler O’Neill
Hi, good morning gentlemen.
Michael Gooch
Good morning, Chris,
Chris Donat - Sandler O’Neill
First question for Jim here. In terms of the other income from the unrealized foreign exchange gains, is that something that's a function of currency rates, or is that like a onetime issue that we shouldn't expect to see again?
Jim Peers
It's more of a function of currency rates. As you can see, we typically, our major currencies in the English market, believe it or not, are dollars and euros. We don't have much in the way of revenues on a sterling point of view.
And so therefore, as a result of the euro continuing to improve against the dollar, that's one of the major drivers of the increase that quarter. So, I would assume, don't assume that we're going to have that extra $2 million dollars every quarter.
Chris Donat - Sandler O’Neill
Okay, but if I see a similar movement in the euro and dollar.
Jim Peers
It could have something similar, yes.
Chris Donat - Sandler O’Neill
Okay. Alright, that helps me understand that one. And then also probably one more for you, Jim, with the volatility and additional brokers revenues you had here, communication doesn't really vary with that, right? You don't see data charges that scale with volumes, right? That's pretty much a fixed cost issue, is that correct?
Jim Peers
Almost, that's fairly true. Sometimes it can vary depending on where some of the revenues are, because some of them for example in Asia, some of it is driven by volume. It tends to be more driven by headcount where you would see more variable, whereas, for example, clearing fees are driven more by volume in equities.
Chris Donat - Sandler O’Neill
Okay. Okay. And then, T&E, I think historically you see an uptick in the fourth quarter, holiday parties or something. Is that something we should expect again this year?
Jim Peers
I would anticipate that we would have a bit of an uptick from the third quarter.
Chris Donat - Sandler O’Neill
Okay. And then, to follow-up on a couple of questions that have been asked before, Mickey, as you and you mentioned talking your customers. Does their behavior start to change when they start feeling pressure? And I am thinking more the stories of brokers trimming headcount on their CDO desks and places like that.
Do they start, say, keeping less inventory, and does that benefit you? Or how do spreads benefit you? Can you give a little more color on that?
Michael Gooch
I think it comes back to my earlier statement about whether or not the trimming is trimming to get out of the business, or simply training down and eventually looking to retool into the marketplace. I think that once some of the participants in the marketplace become concerned about committing capital, if it was a long-term situation where participants were not committing capital, that wouldn't be positive for our business.
But in the shorter term, when our customers become anxious about committing capital, initially it actually makes our services more valuable because they want to lay things off much more quickly and spreads have widened and it's more difficult for them to find the other side of the trade.
So, I think that the market environment we're in right now is good for our business. I don't think that participants are looking to scale out of the business. There's obviously going to be some musical chairs over the next month or so with traders getting downsized and moving around. It tends to, in my personal opinion, to ultimately be something of a zero-sum game.
A trader loses a job at one place, goes somewhere else. It might dampen some of the enthusiasm for celebration at the end of the year. If you've got a lot of customers that are concerned about their year-end bonuses, I don't think it's actually good business for an IDB to go out and throw a big splashy year-end Christmas party.
So, what Jim said about year-end entertainment, maybe actually the year-end entertainment might be a little more music this year frankly.
So we might not get the pop in entertainment expense that Jim suggested. But I think generally speaking, as I said before, we are in the sweet spot right now of a marketplace where there is good demand for the business services that we offer.
Colin Heffron
Its Colin I want to add today. When we get these big volatility spikes likely we saw in July and August, what generally happens is some of our more structured products do take a step down, but we more than make up in volume with the more liquid area of whatever particular business we're talking about.
So say, for credit, some of the CDO stuff might be a little quieter or the tranche stuff, but the single-name stuff and the index stuff really takes off. And then, as things subside as they did in September, we saw sort of a general return of health to both sectors, and then obviously as we made public today, significant growth in October.
So I think that if you were still in the game at the end of August, you're starting to make a lot more money than you were previously.
Chris Donat - Sandler O’Neill
Okay. Just to make sure I understand what you're saying there, Colin, basically the more structure, the more exotic products, the liquidity dries up in volatile markets?
Colin Heffron
Yes, for the initial period, spreads get wide and you will see people actually trade on those spreads anyway because they have to. And then they are cutting something out or taking away something, putting a position away. The liquid stuff becomes very active during those times.
Chris Donat - Sandler O’Neill
Okay that’s That's all helpful. I guess last question, looking at October and it being a record month. Are you seeing any product shift from what you saw before, and I'm thinking particularly with energy within oil being up over $90 a barrel. Does that help what had been sort of slower sequential growth quarter for energy we saw in the third quarter?
Jim Peers
Generally, it has been across the board, all products growing nicely. So we haven't seen any real shift.
Chris Donat - Sandler O’Neill
Thanks very much.
Operator
Your next question comes from the line of Chris Allen, of Banc of America Securities.
Chris Allen - Banc of America Securities
Hi guys how are you doing.
Chris Giancarlo
Hey, Chris. How are you?
Chris Allen - Banc of America Securities
I apologize if I missed this earlier. Can we talk a little bit about the comp to revenue ratio and the potential impact from the electronic trading over the long-term?
Michael Gooch
I think that, over the long-term, the increased productivity that should come from technology initiatives will help us improve our margin in the comp ratio to revenues.
One of the things that I warned about a couple of quarters back was some of the pressure in the marketplace for brokerage staff that it's just part of that whole situation that we face where we're doing well and some of our competitors would like to emulate that and they imagine that they maybe can achieve it through the hiring of one or two of our staff.
What it's really doing for us is it's not causing us to really have to go out and necessarily improve the pay packages that we have with people, but certainly it just makes it a little bit more difficult to shift the needle to the Company's favor from a margin perspective.
And in one or two cases, one of the things that how we run our business is we do sign our employees to contracts. So there will be two-year, three-year contracts. And if the rolling-off of the contract happens to coincide with the time frame where competitors are being particularly keen to hire staff, it might cause us to pay a signing bonus for the contract.
In Jim's presentation on the numbers, we were actually looking at what I would call them disloyalty bonuses. The bonus that you pay to staff on a retention basis to have them sort of renew a contract. So where you're paying a bonus to existing employees. And that number in the third quarter was up from the prior year, and those signing bonuses, whether they are in cash or RSUs, are then going to bleed into the compensation number as we amortize them over the two- or three-year life of the contract. And that it is going to continue to be a drag on that 62.8% compensation number.
But meanwhile, we are getting benefit at the other end where we are actually getting productivity improvements and getting the ability to move the needle in the Company's favor. And of course, any time we have robust revenues, that always helps the compensation margin. So it's sort of mixed.
Jim Peers
To give you a perspective on those numbers that Mickey referred to which I mentioned was payments in the third quarter last year were $3.1 million, and then this quarter, third quarter this year, they were $9.1 million. So, almost a threefold increase.
Chris Allen - Banc of America Securities
Okay. And I think we chatted about this before a little bit. Have you guys started to impose a levy on some of your brokers for electronic trading as some of the areas have moved increasingly electronic?
Michael Gooch
Yes, that's what we're doing. It's a partnership. You have to remember that our employees are actually on this conference call, so the issue is that it is a partnership. We are working together to improve the margins for the Company and also make their lives better too.
So, when we do establish a strong foothold with technology and we consider it effectively glue that is going to glue our customers to the business so that the franchise business with GFI is valuable relative to the relationship value of the individual broker, then we have an opportunity to improve the margin for the Company, and we do do that.
That is when we do institute technology charges, increased overhead charges, just the small incremental steps for improving the margin. And I believe that over the next couple of years, we are going to see a significant opportunity in that respect.
We are at the moment happening to be going through a period where the same two competitors are out there aggressively trying to hire and sometimes I'm not sure if they're trying to hire our staff or just trying to make our lives miserable by offering them jobs.
But they are out there and it just makes it more difficult to institute a technology charge. We have instituted a technology charge in Europe on credit derivatives where 55% or more of the trades are fully electronic and it might have been the catalyst that enabled Colin to get into two or three brokers and hire a few and get them to take the signing bonus, whatever it was that they were getting for going over there, because maybe the employee thought that, wow, the Company's initiating a technology charge, and in another couple of years are not going to need me or something.
So, it's a very delicate balance. We work very hard at managing this. And frankly, I think we do a good job of it and I think we're winning. For example, in credit derivatives in London where we lost what would have been considered the three highest-producing employees on the desk to a competitor, and frankly the desk that they left, we just had a record month, and the revenues were up 58% year-over-year from prior October, and that is without the three supposed superstars that solid tired.
And without a trading system, they're going to find it very difficult to really get any business done of any substantial significance when they, we're not sure when they're going to get revenue. We told Tollett, they can start anytime they want and they could start tomorrow for all we care because we don't miss them.
And to some reason, Tollett doesn't want to start them. So I'm not even sure what's going on around there. I think they may have bitten off more than they can chew, but we'll see.
Colin Heffron
Can I just jump in for a second? It's Colin.
Michael Gooch
You got me off on my favorite subject.
Colin Heffron
Anytime we've introduced technology or a technology charge, we have seen a jump in market share. And also, all the people, first of all, it leads us to hire more people because the market share jump we grow our business. And also, the people on that desk make more money year-on-year. So it's a win-win if you handle it correctly.
Chris Allen - Banc of America Securities
I guess the point is that, in some areas like with the technology charge, the market is pretty close to tipping over to almost all electronic trading, right? And this is what we've heard from you guys and ICAP is why you're willing to let some of the brokers walk, so to speak, if they choose not to participate in the increased volumes. Is that fair?
Michael Gooch
I don't think the market goes fully electronic. I think that there is always going to be value added from having well-qualified personnel on the phone or on the IM or on the Bloomberg, however they want communicate with their customers assisting them in trades where liquidity or spread is a question.
But you're going to increasingly see the dealer community embracing technology, not just the electronic trading side of it, but the STP. And we now are just at the stage now where we are beginning to have some of our customers actually feed us live electronic feeds of their volatility services, which populates our screen with prices all day long.
When I was a broker on the desk, the hardest job was trying to make sure that your bids and offers were constantly populated. And at this point, we're getting to the stage where customers are actually feeding that to us electronically.
And I have to tell you that one or two of our competitors, they do not have the technology to actually achieve that, and that's a huge competitive for the Company to have invested in that. We began that process back in 1999, and at this point have really got ahead of the curve.
Chris Allen - Banc of America Securities
Great. Thanks a lot, Gooch.
Operator
Your next question comes from the line of Barry Cohen of Knott Partners.
Barry Cohen - Knott Partners
Good morning gentlemen, thanks for taking the call.
Michael Gooch
Good morning.
Barry Cohen - Knott Partners
Earlier in the call, you were talking about the credit, having spoken to some of your larger bank customers, and they were discussing the credit derivative markets, could you parse for us maybe a little bit finer, when you say the credit derivatives markets, what you're referring to versus let's say CDO issuance or things along those nature?
Michael Gooch
So, CDO issuance, obviously, that is dried up now. But at the same time, there is a ton of the stuff out there that still needs to change hands. And interestingly, once it reaches that point, our services become quite valuable because the participants in the marketplace need price discovery.
There was never a CDO issued again that eventually I guess you would have a sort of drying up of all the derivatives that surround that marketplace. But we don't think that is going to be the case. I think that what will happen is the street will just become much more educated on how to value these things and the mechanisms will go into place to make that far more efficient and you will end up with actually a very liquid and well established CDO market eventually.
Barry Cohen - Knott Partners
Okay. And what are you seeing now in terms of, can you give us a better sense of the mechanisms for price discovery in the marketplace now for those that are trading?
Michael Gooch
In the liquid instruments that we're involved in, I don't know if you're just focusing on CDOs, but in the marketplaces that we're involved in which goes across many categories -- energy, currencies -- it's highly liquid.
There are bids and offers all day long for all of the instruments. It's the edges where things get to be a little more exotic, that maybe it takes a little more time end effort to dig up the prizes. But we are seeing no slowdown in terms of the number of bids and offers that we're getting across the board in our products.
Barry Cohen - Knott Partners
Okay. Thank you very much for your help.
Michael Gooch
The next question will have to be our last question.
Operator
Okay and your final question comes from the line of Robert Rutschow, of Deutsche Bank.
Rob Rutschow - Deutsche Bank
I apologize if addressed some of these already, but the first question was just related to M&A activity. You've been somewhat quite recently, and so I'm wondering what the outlook is there?
Michael Gooch
I think that we have an appetite to do a transaction. I haven't got anything right now that I can go on the record to tell you that we have in eminently teed up, but we are actively in conversations. Internally, that is, with ourselves.
Rob Rutschow - Deutsche Bank
Okay great.
Michael Gooch
Internally that is with our source.
Rob Rutschow - Deutsche Bank
Okay and I am wondering about the North American revenues. It seems a little flatter then they seemed a little bit flatter than what you saw in Europe and Asia on a linked-quarter basis. So I'm wondering what the underlying trends were there?
Michael Gooch
I think that the North American business, it still has not adopted electronic trading, in credit as an example. And I think that as a result of that, when the markets become more difficult, spreads get wider, prices become more difficult to attain.
I think that the technology-driven market has benefited much more. The other thing is, we are quite crowded in our office space here. It's one of the reasons we're moving down the street to a space where it's going to be state-of-the-art.
And we're going to be able to increase our headcount by 50% and our productivity hopefully by another 20%. And I think that maybe some of the opportunity to expand the North American revenues is partly a function of the fact that we really need to move into new office space.
So I think once we do move to that new office space, I think that you're going to see that the North American revenues from our perspective will start to get into line growth wise with Europe and possibly Asia.
Asia, we're coming from a smaller start, so obviously the actual percentages look much bigger in Asia but we are like I say coming from a smaller start. It's easier to double $40 million of revenue than it is $400 million. But I think that we are going to see improvement in the North American growth rate.
Rob Rutschow - Deutsche Bank
Okay. You talked about a couple of key competitors that are causing some of the pressure on personnel expenses. I'm wondering if there has been any other smaller competitors that are building out that have caused pressure and whether you see them still building or leaving the market or staying steady-state?
Michael Gooch
There's no pressure coming from any small competitors.
Rob Rutschow - Deutsche Bank
Okay the other question I had was related to the pricing. You talked about slower markets allows you to add expertise to get transactions done. Is there interplay there between the expertise that you had and the pricing that you're able to charge?
Michael Gooch
We could put the prices up. Some people have suggested to me that in some of the more esoteric end of credit market since the spreads are so wide, we should actually be increasing our commission rate. We are not doing that. I don't think that the commission rate is a function of the level of expertise.
I think the commission rate is a function of volumes and spreads. And so to simply answer your question, I don't think there's a correlation.
Rob Rutschow - Deutsche Bank
Okay that’s helpful, I guess if I could ask one more question. Could you just talk about and you may have already addressed this but just the underlying trends in terms of the types of derivatives index versus single name in Europe and U.S. this quarter and what you have seen recently?
Michael Gooch
We haven't seen any real change. I think it has become a little less liquid in some of the more exotic charge into the market, but the single name business has always been something of a function of whatever is hot that day or whatever particular sector, whether it's the builders or whether it's the financial sector. It has been pretty broad, the general activity in the last quarter.
Rob Rutschow - Deutsche Bank
Okay, thank you.
Chris Giancarlo
Grace Ann, this concludes our third quarter 2007 earnings conference call. Thank you, everyone, for joining in.
Operator
Thank you for your participation in today's conference. This concludes the presentation and you may now disconnect.
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!