GFI Group Inc. Q4 2007 Earnings Conference Call Transcript

Feb.22.08 | About: GFI Group (GFIG)

GFI Group Inc. (NYSE:GFIG)

Q4 2007 Earnings Call

February 22, 2008, 8:30 am ET

Executives

Chris Giancarlo - Executive Vice President for Corporate Development

Michael Gooch - Chairman and Chief Executive Officer

Jim Peers - Chief Financial Officer

Don Fewer - Managing Director in North America

Analysts

Chris Allen – Banc of America Securities

Dan Fannon – Jefferies

Chris Donat – Sandler O’Neill

Don Fandetti – Citigroup

Rob Rutschow – Deutsche Bank

Jonathan Casteleyn – Wachovia Securities

Operator

Good day ladies and gentlemen and welcome to the Fourth Quarter 2007 GFI Group Inc. Earnings Conference Call. [Operator Instructions] I would now like to turn the presentation over to your host for today’s call Mr. Chris Giancarlo, Executive Vice President for Corporate Development.

Chris Giancarlo

Good morning, welcome to the GFI Group Fourth Quarter 2007 Earnings Conference Call. We issued a press release yesterday providing the financial results for our fiscal quarter ended December 31, 2007, which is available on our website 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 have done for prior quarters in conjunction with our earnings release.

To begin this mornings call Michael Gooch our Chairman and Chief Executive Officer will review some of the highlights of our fourth quarter performance and expectations for the current period. Next Jim Peers our Chief Financial Officer will review the fourth quarter and full year 2007 financial results in greater detail. After Jim, Michael Gooch will conclude with a few remarks. Thereafter we will open up the call for your questions.

Before we begin I’d 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 results and events 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 risk and uncertainties that include but are not limited to the risk and uncertainties identified in the earnings release and in GFI’s filings with the US Securities and Exchange Commission. GFI Group does not undertake to publicly update or 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

Good morning and thank you for joining us today. The fourth quarter of 2007 was another strong quarter for GFI with brokerage revenues increasing 28% which was ahead of our forecast of 20% to 25%. Our results for the fourth quarter and for all of 2007 highlight the value of our product diversification strategy which we believe has positioned us to perform well in the high volatility environment the financial and energy markets have been experiencing since last summer.

I will begin my review with our performance of the equity products category which was the largest contributor to our fourth quarter growth achieving a 57% increase in revenues compared with the fourth quarter of 2006. Equity markets remained volatile throughout the quarter due to the write down of sub-prime debt by major financial institutions and rising economic concerns. We saw strong performance in our equity products both in cash equities and equity derivatives.

Performance was also strong in all regions with North America up 36%, Asia up 26% and Europe up 79%. Growth of our equity products was strong each quarter of 2007. In the fourth quarter of 2007 equity products represented 30% of revenues up from 24% in the same period of 2006. Our revenues from credit products increased 19% over the fourth quarter of 2006 with credit derivative products up 23% and cash and bonds and bond options up 15%.

Strong growth in Europe and Asia contributed to our improvement in the quarter. Our CreditMatch electronic trading platform continues to contribute to our performance in credit with nearly 60% of our CDS brokerage in Europe electronically trade for CreditMatch of approximately 90% of all orders entered directly into CreditMatch by our European customers during the fourth quarter. We saw a pick up in CreditMatch in Asia with 16% of orders entered electronically directly by our customers in the fourth quarter of 2007 versus 2% in the same quarter last year. Although fully electronic trading still represents less than 5% of the total trades on CreditMatch in the Asia/Pacific region.

Bond trades on CreditMatch in Europe also showed traction in the fourth quarter with trader entered bids and offers increasing to 40% from 23% in the fourth quarter of 2006. CreditMatch has not seen any improved traction with electronic trading in North America, although we continue to use the system internally and externally for trade data of straight through processing. We experienced typical seasonality in credit products in the fourth quarter of 2007 after a very strong October volumes began to subside as customers wound down trading towards the end of the year.

Overall credit products represented 30% of revenues in the fourth quarter of 2007 versus 33% for the same period of 2006. Financial product revenues rose 14% over the fourth quarter of 2006 led by strong growth in the Asia/Pacific region as supported by emerging market products in Europe and Latin America. GFI ForexMatch continues to make progress with more client log ins and the continued roll out of new features. In total financial products represented 19% of our fourth quarter brokerage revenues as compared with 21% for the same period of 2006.

Our commodity product revenues rose 24% from the fourth of 2006 almost entirely due to organic growth with the one year anniversary of our acquisition of Amerex being October 1, 2007. Our growth in commodities was led by increased business in dry freight derivatives in Europe and Asia. The freight business which is large overall is an area that we feel has considerable growth potential as derivatives are still in their infancy. Growth in the fourth quarter was also attributable to electric power and oil products particularly in Europe and Asia/Pacific.

The addition of Amerex and StarSupply to GFI has given us the leading position in energy and helps us to earn the title of top commodities broker in energy risk magazines annual rankings. With Amerex Energy listed as the top broker in 14 of 16 North American electricity and natural gas categories. In total, commodity products represented 21% of our brokerage revenue mix for the fourth quarter of 2007 versus 22% in the fourth quarter of 2006.

Looking at our performance in the fourth quarter of 2007 by geography our revenues from Europe rose 49% year over year. Our revenues from the Asia/Pacific region grew 54% while our revenues for North America grew 5%. We continue to focus on improving our operating leverage to bring more revenue dollars to our bottom line. Our progress can be seen in the full year 2007 results where the growth of our pre-tax income substantially exceeded our revenue growth as compared with full year 2006.

We continue to hold the line on compensation costs in the fourth quarter despite competitive market place pressures. Technology plays an essential role in controlling compensation costs through higher employee retention, greater productivity and over time increased internal allocation of technology charges thereby increasing overall margins. Non-compensation costs improved as a percentage of revenues compared with the fourth quarter of 2006 but increased sequentially as a percentage of revenues from the third quarter of 2007.

The increase reflects higher clearing fees due to the strong performance of our equity division. Higher travel and promotional costs due in large part to high entertainments costs around the year end holiday season and a few items that Jim Peers our CFO will cover shortly.

Turning now to the first quarter of 2008 I would like to underscore the importance of our recent acquisition of Trayport. Trayport is a strategic and valuable acquisition not only because of its impressive global vision electronic platform and the equally impressive team that developed it but also because of the impact, I believe, that Trayport will have on GFI’s role in the evolution of electronic trading of both over the counter and listed financial and commodity markets globally.

First of all, Trayport is the recognized market standard trading technology in European OTC Energy supporting multiple commodity and financial instruments from electric power, natural gas and coal to emissions and freight. Trayport software is installed on more than 10,000 trading screens worldwide dealing in over 2,000 trading instruments and supporting over 50 market places across 15 countries. We estimate that Trayport is the supporting technology in over 80% of electronically traded OTC Energy derivatives and other OTC commodities in Europe.

As for exchange traded instruments we are pleased to count as Trayport customers a broad group of commodity, debt and equity exchanges such as APX, CanDeal, the European Energy Exchange, Amerex, the New Zealand Stock Exchange, Power Next and One Chicago. GFI’s acquisition of Trayport is consistent with two key objectives. First to build upon our leading global role in OTC Energy brokerage and second to provide world class electronic platforms which are fully integrated into our customers desktop, middle office and back office to enhance their efficiency and our own.

Currently we plan to continue the roll out of our energy match electronic platform to our energy customers in North America enhanced with appropriate features of Trayport’s global vision technology. In time we will seek to utilize Trayport technology in the development of additional OTC in exchange markets bringing greater efficiency, reliability and connectivity to global markets and market participants.

Turning to our outlook for the first quarter of 2008 we have seen strong growth in our credit business so far this year. The same is true for equity products and we are seeing growth across all product categories. In fact, as a whole year over year brokerage revenue growth for January was 38% over 2007 and so far February is running at about 35% over last year. Nevertheless March 2008 will have two less trading days than March 2007 due to the Easter holiday occurring earlier.

Easter tends to have greater slow down and impact on trading volumes than just the loss of the two trading days. As a result, we currently estimate that first quarter brokerage revenues would increase between 25% and 30% over the first quarter of 2007. Beyond achieving strong operational growth GFI continues to focus on providing superior returns to shareholders. Since our last earning call our shareholders have approved the increase in our authorized share capital for general corporate use including authorization for a stock split.

As we announced yesterday our Board of Directors has declared a four to one stock split in the form of stock dividend effective March 31. As a further step our Board has declared a special cash dividend of $0.125 per share on a post split basis also payable March 31. The Board also has approved a policy of quarterly cash dividends going forward. The amount for such dividends will be determined each quarter by the board currently targeted to be up 15% of net income for the period. We are pleased to have the confidence and ability to take these steps in only our third year as a public company.

I would now like to turn the call over to Jim Peers our CFO before making my concluding remarks.

Jim Peers

Good morning everyone. Our strong revenue growth continued in the fourth quarter of ’07 as revenues grew by $53.3 million to $247.4 million versus $194 million in the fourth quarter of last year resulting in a 27.5% increase. The fourth quarter revenue growth was mainly driven by increased market volatility and strong organic growth in all product groups especially equities. In 2007 revenues increased by $223.4 million a 30% increase compared to last year.

Fourth quarter net income improved to $25.2 million compared to $13.4 million for the same quarter last year on a GAAP basis. After backing out the non-GAAP items which I’ll discuss in more detail later net income grew 59.8% to $25.6 million compared to $16 million for the fourth quarter last year. For the year 2007 net income grew 41.6% to $99.9 million compared to $70.6 million in the same period in ’06 on a non-GAAP basis.

Our diluted earnings per share for the fourth quarter of this year was $0.84 compared to $0.46 in the fourth quarter of ’06. On a non-GAAP basis diluted earnings per share for the fourth quarter of ’07 was $0.85 compared to $0.55 for the fourth quarter of last year, an increase of 56.4%. In 2007 diluted earnings per share grew by 38.7% on a non-GAAP basis to $3.35 compared to $2.42 for 2006. In the fourth quarter brokerage revenues grew by $52 million or 28%. Credit was up 19%, CDS desks only were up almost 23%, financials were up 13.5%, equities were up over 57% and commodities were up 24%.

In 2007 the brokerage revenues grew by $228 million or 32% with credit coming in at 25.7%, financials over 18%, equity almost 38% and commodities at 55%. Brokerage sign on bonuses paid in the fourth quarter of this year were $8.4 million compared to $2.4 million in the fourth quarter of ’06. For 2007 the sign on bonus paid were $28.6 million compared to $15.9 million in 2006. The brokerage sign on bonuses expense in the fourth quarter of this year were $6.3 million compared to $5.1 million in the fourth quarter of last year. In 2007 $23.1 compared to $22.4 million was expensed in sign on bonuses.

Our brokerage personnel head count at the end of the year stands at 1,037 up 105 from 2006. Also, our broker productivity has increased 11.7% to $934,000 in 2007 compared to $836,000 for 2006. Pre-tax margin for the fourth quarter of ’07 was 14.3% compared to 10.8% for the fourth quarter of last year on a GAAP basis. On a non-GAAP basis pre-tax margin for the fourth quarter of this year was 15.5% versus 12.9% for the same quarter last year. On a year to date basis the 2007 pre-tax margin was 15.5% compared to 13.6% for 2006 on a GAAP basis. On a non-GAAP basis pre-tax margin for 2007 increased to 16.6% compared to 15.6% in 2006.

In summary, our key performance drivers on a GAAP basis are as follows; revenues for the fourth quarter are up 26.7% compared to the same quarter last year and on a year to date basis revenues are up 29% from 2006. Our comp costs are at 61.1% for the fourth quarter of ’07 compared to 62.7% for the fourth quarter last year and on a year to date basis our comp costs are at 62.2% compared to 61.6% for 2006. The improved comp ratio in the fourth quarter reflects a decrease of approximately $3.1 million in previously accrued bonuses. Without this benefit the ratio would have been 62.3% for the fourth quarter.

Non-compensation expenses in the fourth quarter as a percentage of revenues were 23.5% compared to 24.4% for the same quarter in the prior year. Non-comp ratio on the year to date basis was 21.1% compared to 22.9% for the same period in 2006. The non-comp expenses in the fourth quarter include approximately $2.6 million in litigation settlement and legal costs related to a decrease in the accrued compensation previously mentioned above. Without this charge, the non-comp ratio would have been 22.4% for the quarter. GFI’s effective tax rate improved to 38% in 2007 compared to 40% in 2006 resulting in 6% benefit to earnings in the fourth quarter which was a catch up related to the prior nine months.

Now I’d like to highlight some other areas that will be of interest to you. The number of diluted shares for the quarter ended in December were 30 million. In June, as discussed on previous calls, GFI signed a lease to relocate our New York offices. The move is scheduled to take place in the first half of 2008 accordingly the company in the fourth quarter excluded $2.2 million, $1.5 million after tax as non-recurring costs for duplicate rent and accelerated depreciation. There will be additional adjustments to GAAP earnings for the next three quarters in 2008 as the move progresses.

Our GAAP earnings in the fourth quarter were further improved by $0.05 from the recognition of a specific tax benefit for which a reserve was previously established. This benefit was not recognized in the non-GAAP earnings. That concludes my remarks, now I’ll turn the presentation back to Michael for some closing comments.

Michael Gooch

In conclusion, our strong fourth quarter contributed to another record year for GFI and enabled us to achieve non-GAAP net income for the full year of approximately $100 million on revenues of nearly $1 billion. Contributing to our progress is our diversification effort, the contributions of our talented management and brokerage teams and the success of the acquisitions and investments in technology that we have made to support our strategy. We intend to remain on course for achieving strong growth and we believe our acquisition of Trayport will help us accelerate our progress and build additional value for our shareholders.

The declaration of our first dividend and stock split underlies GFI’s commitment to delivering value for investors while continuing to generate strong revenue growth and returns on stockholders equity. Thank you for your time and attention today. We are now ready to take your questions.

Question & Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Chris Allen representing Banc of America Securities.

Chris Allen – Banc of America Securities

A couple of different questions, first on the $2.6 million charge for litigation on the accrued comp reversal. What was driving that, to have legal fees, is it something to do with the broker payouts where there was some legal aspect to it?

Michael Gooch

It’s tied up with what might be considered potentially ongoing litigation that might come forward in the future as we sit here. This was a very specifically related situation that is unusual even in our business where we had this significant group of credit brokers in London who had quite extensive long term contracts still that didn’t expire until end of 2009 going into 2010 that we fired in September for breach of contract.

Then became involved in certain litigation and certain disputes and the result of which is effectively the numbers you see here today which in large part sort of offset each other, we feel we won that battle since, in spite of losing significantly what was considered at one point the number one team in credit derivatives in London. Our team, the people we actually put in the seats to use CreditMatch behind them then moved on to have record revenues and as you can see we had 23% growth in the fourth quarter and we went from strength to strength.

We certainly handled the situation very well and did all the right things and this was economically how the dust settled. This is not something that will occur in every quarter, it’s highly unusual, a little bit of a test case. In this particular instance it’s extremely expensive to litigate in London but this is one of those things where the legal fees were very high. We actually had to pay some legal fees of our contender but it was one of those arguments where I’d say we lost the battle to win the war, if you understand my meaning.

Chris Allen – Banc of America Securities

You talked about, a little bit earlier in your comments the increased allocation around technology putting some of the cost technology back to the brokers. Where do you guys stand with that, is it starting to show up in the numbers, what’s the potential for that to impact numbers over the next year or two?

Michael Gooch

It’s only creeping against the numbers. It’s a balancing act and the fact of the matter is that we only apply technology costs where in fact the technology is really helping the brokers to achieve their productivity goals. Therefore, it is something of a joint effort and only reasonable if they want to use a Bloomberg terminal they’ve got to pay for it. If we install technology that is world class and puts them in a position that enables them to do significantly greater volumes than they could without the technology it seems only reasonable to effectively charge that cost back to the brokerage desk.

It is a process that takes some delicate balancing as you move forward because to some of the brokers it would appear to be an effort on our part to just simply lower their payout which of course it isn’t. Net result is improving margins to GFI at the same time that the individual brokers can actually end up earning more money. I have to say that the situation in London where we lost this significant team of credit derivative brokers was driven by the fact that we actually introduced to them technology charges which caused them to look elsewhere for employment.

As we can see they’ve ended up in a situation where they are doing one tenth of the volume they were doing at GFI because they don’t have the technology and the individuals that are sitting in their seats they are basically landed or parachuted into incredibly productive positions using the technology are only two happy to pay for that technology. As that slowly permeates through the company as we continue to get this advantage though technology, Trayport being without a doubt one of those strategic moves in that direction, we will slowly but surely get that improvement in the margin.

As you know, we’ve not promised that that improvement is going to suddenly reduce our compensation costs by 15%, 20%. I think we’ve told you that we expected over time to improve our margins by a percentage point or so per year. You can see it in the numbers; you can see it beginning to move through. You will occasionally find that it’s a little more difficult to put your finger on because if we get particularly busy in certain markets versus other markets, equities being a prime example.

That can tend to move the needle back the other way simply because of the mathematical accounting that surrounds the way we account for revenues and clearing costs in equities and the broker payouts. Overall, you can see that it is actually going in our direction in spite of the fact that some of these other brokers who have tried to hire in some cases successfully our credit brokers in particular but also other brokers that have offered ridiculously high signing bonuses and payouts relative to the broker performance.

In spite of that we are actually still managing to move the needle in our direction. I think you’ll continue to see that and I have a strong suspicion that as the rest of 2008 shakes out and we go into 2009 there’s going to be a real amount of separating the men from the boys in that respect and our position in technology is just so far ahead of tradition and to some lesser degree eSpeed and ICAP that we will certainly see further improvements in this margin.

Operator

Your next question comes from the line of Dan Fannon representing Jefferies.

Dan Fannon – Jefferies

Building on the last question, pre-tax margins continue to be volatile. How do you envision them tracking throughout 2008? What type of improvements if at all? Specifically in the fourth quarter the travel and promotion released out is higher, any color around that and how we should be thinking about that going forward?

Michael Gooch

I think that you will see there will be this fluctuation from period to period in pre-tax profit margin. One of the reasons we diversified our business is because these markets ebb and flow. Depending on which business are having a flowing the margin can be impacted slightly. Overall I think you will see we will continue to overall from a year over year perspective continue to improve our pre-tax margin. You might see a step back to take two steps forward from one quarter to another because of seasonality or ebbs and flows in market places.

Overall I believe you will continue to see an improvement each year, year over year in pre-tax margin. Short of something that’s completely out of my control that’s occurring that I cannot foresee. In terms of T&E in the fourth quarter it was high. It was particularly high in New York, when these T&E’s come in high it is one of those things where it’s a little bit like shutting the barn door after the horse has bolted. There’s not much we can do about it in real time.

Overall we stay very much on top of overall T&E expense and we have a number of initiatives in place to improve our position should certain brokers exceed their limits. There are tax consequences, so a number of reasons it is something that we focus very heavily on as do regulators. As you can see for the year as a whole even though we had that spike up in the fourth quarter we in fact still came in at 4.3% for the year and when we first started this public company process we were up in the fives and we’ve been targeting to get eventually down to 3.5% which we think we will achieve on a year over year basis eventually.

We are going the right direction albeit with a spike in this particular fourth quarter. The other thing is that the competitive environment, the situations where you see that we have a big change over in staff due to a poaching situation, that tends to inevitably cause a short term spike in entertainment expenses. We have to introduce a whole load of new brokers to a whole bunch of customers that they previously didn’t know very well.

There’s certainly the degree of getting out in front of those customers and when you are in the trenches so to speak where you are fighting that battle for market share if the competitor doesn’t get traction day one he’s basically dead on arrival. It becomes extremely important to get those individuals in front of those customers in spite of the fact that they are putting 90% of their orders into CreditMatch electronically. It’s still important to make sure that your sales people are familiar with the individual traders.

There was a lot of turnover in staff in the fourth quarter, not our staff but our customers. Individuals moved from shop to shop or lost their jobs or whatever. I think that all of these are factors that contributed to the circumstances in the fourth quarter of 2007 that would not be, in my opinion, a trend going forward but just a blip on the radar screen somewhat associated with some of those events surrounding the circumstances in the credit market that came off the summer and our circumstances with the particular higher away of some of the staff in London.

I know if was a long answer but I hope it was clarifying.

Dan Fannon – Jefferies

Building on that, in terms of your customer base and the dealer community, can you talk about what their appetite is for trading, the use of capital or willingness to commit capital in this market we obviously know that a lot of investment banks are starving for some capital. How does that impact you guys and what are you guys seeing in terms of communication with them as they look out?

Michael Gooch

It’s quite interesting; naturally this is the $64 million question that we get asked a lot by investors that are trying to get a hand on what is the future. One of the analogies I use is that we are in the business of selling shovels, we are selling shovels to our customers, are they digging graves or building foundations? We are actually, as a company, very optimistic about the outlook of the future of our business as an IDB in the derivative markets and I especially today invited along Don Fewer our Managing Director in North America to address this point specifically.

He has direct involvement with day to day business at a trading level, is in touch with customers, has seen a lot of the activity, he is responsible for a lot of our activity in investment and position in credit derivatives. I’m going to put him on now to give you a bit of color about what he is seeing relative to the question you just asked.

Don Fewer

I think what we are seeing generally is certainly there has been a concern by the dealer community in its allocation of capital. Frankly, we’ve seen many of the cash books, the more capital intensive cash books volume in those areas have generally come off. However, we’ve seen the use of the credit derivative link products being used very well by customers and we think that as areas like loans and municipal areas we have focused very strongly on those areas in particular.

We are seeing the use of derivative products in areas where, frankly from a cash market which are much more capital intensive aren’t able to leverage the capital now but we are seeing greater use of a derivative link products in areas that as loans and municipal bonds.

Dan Fannon – Jefferies

When you guys talk to your customers that’s a couple areas of your business. You see people are losing their jobs. Is it something where specifically single name CDS is still seeing significant volume in the indexes, is there anything else where people are rotating into or out of the products that necessarily aren’t being traded at all any more?

Don Fewer

No, generally that would be single name business continues to do very, very well. Again, many of the cash markets, then you have the sectors banks and finance, insurance. Insurance has been one area that has done extremely well in the derivative area. When you look at a lot of what’s going on in the mono-line area the cash markets are simply difficult to trade. I think that what we are seeing is the increased flow in the derivative link areas particularly in areas of banks, finance, insurance, retail, many industrial areas have gotten very, very active.

It’s a function of dealers focusing less on capital allocation to their cash books and focusing much more on the derivative side of the business.

Michael Gooch

I think I will say something that Don and I were talking about this morning which is the dynamic of our business. If you consider the big brokerage houses like Goldman Sachs and Credit Suisse and J.P. Morgan, etcetera where they try to internally cross as much customer flow business as they can. Goldman Sachs would probably be the 75/25 rule where they try to cross 75% and then maybe go to the street for 25%. Some of the lesser models might be more 60/40.

With some of these buy offs that have happened in the market it’s in the sales desk. I’ve talked to guys who came off their best ever year in sales who lost their jobs for no specific reason. Two dynamics there means that the dealer community is in some instances going more 50/50 or 40/60 as opposed to the 75/25 rule. You actually see less capital committed and more laying off of risk directly between counterparts in the IDB space. The IDB can actually see increased volumes in those kinds of environments.

Secondly, it also plays into this concept of compensation margin because there’s a number of highly skilled bank sales people that are interested in potentially working in the IDB space rather than the bank space. It does give us a good source of potential growth in our business in the sales side and potentially employment opportunities for us with some of these sales people from the banks. This is one of the reasons why we are sitting her today relatively optimistic about the future.

Operator

Your next question comes from the line of Chris Donat representing Sandler O’Neill.

Chris Donat – Sandler O’Neill

I want to follow up on the growth you’ve seen in the equity business. If the trend continues your equity brokerage revenues are going to outpace credit in the quarter. Can you give us a little more color; can we see anything that we can attribute to MiFID or some other change in Europe that drove the growth in the fourth quarter?

Michael Gooch

I don’t think that its anything attributable to MiFID, I could be wrong on that. I think it’s just attributable to higher volatility rates. The increased implied volatility of the derivatives which are trading extremely actively does then tend to cause for there to be self fulfilling prophecy. The higher the implied volatility rates in the option market, the more hedging takes place in the cash markets. As I said before, our business tends to ebb and flow. We are very strong now in equity derivatives and equity execution partly due to our strength in CDS which I think positions us very strongly in that regard.

We might continue to see some strong quarters in equities but I’m pretty confident that we’ll see some ebbing and flowing. I’ll be talking to you in three quarters time and it will be our energy markets that were up 57% or something. I think that we are well diversified.

Chris Donat – Sandler O’Neill

In terms of thinking about the margins at the various segments is it safe to say your pre-tax margins for credit is higher than pre-tax margins on equities?

Michael Gooch

Yes, that’s very safe to say that because we have quite a substantial clearing cost component with equities.

Chris Donat – Sandler O’Neill

That is the major reason for the increase we saw in the quarter in clearing, I guess you said it in the script, was with equities. I was wondering what’s the right way to think about…

Michael Gooch

If you look at our other expenses, I’m doing Jim’s job here, I can have him talk to you in a second.

Jim Peers

Typically what you have seen over the last couple of years is that equities as a percentage of total revenues have been around 24%. In the fourth quarter of ’07 it spiked up to 30%. As a result of that the clearing fees obviously with a higher revenue base moved up to a little over 4%. People would ask, is that going to stay there or not? Once again, it’s going to depend on the level of equity revenue in relation to the total.

Michael Gooch

You look the other expense line, if you take out the clearing expenses and that spike up in T&E and adjust for that anomaly with the situation between comp and legal fees. Aside of that out other expenses declined year over year sequentially. We were going in the right direction.

Chris Donat – Sandler O’Neill

As far as the tax rate goes, it was 38% on a recurring basis for the full year 2007. Do you think that is a good tax rate going forward?

Jim Peers

I think so; assuming the overall mix stays relatively the same. The main driver behind the lower rate is our revenue has grown at a faster pace in Europe and also Asia which have lower tax rates. Also some tax planning ideas that we have initiated around the 38% is still a reasonable objective.

Operator

Your next question comes from the line of Don Fandetti representing Citigroup.

Don Fandetti – Citigroup

Obviously the dealer community pays the IDB’s somewhere between $8 and $10 billion a year in fees. Any pressure on that that you can see? Can you define how you and if you negotiate different commission and fee structures with the dealers?

Michael Gooch

We always look to negotiate fee structures that are volume driven so that we try to encourage our customers effectively to consolidate the business into the hands of the few in exchange for lower per unit charges. Sitting where I am, I’m not actually aware of any particular pressure right now on fee structure. With banks actually reducing their sales desks and becoming more reliant on offsetting risks with each other through the IDB. It’s probably not the area we of focus to them because they need best execution in the IDB.

I’ll ask Don since he’s right in the business mix if he’s having any specific pressure from customers on commission rates right now.

Don Fewer

No, actually to your point we have found that customers are very focused on execution. I think we have seen commission rates get to a level that dealers find very acceptable. We are not currently engaged in a significant conversation about any dramatic changes. Right now we see the market very much oriented toward best execution, getting sized done. There are other issues that I think are certainly of paramount importance in the credit markets and commission rate certainly are not one of them right now.

Don Fandetti – Citigroup

When you talked about this quite a bit over time. In terms of the IDB’s if you take out Canex it’s by an exchange we’ve generally not viewed that as a highlight. Do you have any events that happened over the last six to nine months that dealers might be open to that odds increased or decreased or are they about the same?

Michael Gooch

The odds of IDB’s and exchanges maybe synergizing?

Don Fandetti – Citigroup

That’s correct.

Michael Gooch

I think that the odds of it are increasing as we go forward. As our margins improve some of it might be driven by regulation. If there was to be any successful effort by regulators to break up the clearing monopolies I think that you could potentially see that causing synergies between exchanges in IDB’s. One example of that is certainly in the energy markets, you have competition between Ice Clear and Nymex Clear and in that situation they do complete with each other to get the trades that we’ve executed OTC to then be put into their clearing functions.

We get paid for that clearing flow and we tend to direct those trades to the most competitive clearing mechanism. There is an example where you’ve actually seen both Ice and Nymex take small stakes or large stakes in small IDB’s in order to try to lock up that clearing flow. I think that you could imagine as time goes by a similar environment occurring where the large exchanges with the clearing mechanism try to lock up the order flow in the OTC derivatives.

A lot of the OTC execution of listed derivatives via electronic trading platforms and it would just be an extension of their execution business. I do think its going to happen, probably sooner now than I might have thought even eight months ago.

Operator

Your next question comes from the line of Rob Rutschow representing Deutsche Bank.

Rob Rutschow – Deutsche Bank

The first question I have relates to the non-comp expenses. I guess you won’t give us any specific numbers but I’m wondering if you can tell us what the factors will be that will drive the growth there and whether or not we should look for similar growth rates in ’08 as we saw in ’07?

Jim Peers

If you go through line by line on the non-comp the percentages that you are seeing now are probably representative of, I think as Mickey said earlier, I said the two that were sort of out of whack in the fourth quarter were the T&E and also the clearing. The clearing obviously will be a function of the revenue for equities as a percentage of the total. That could fluctuate anywhere from the 3.3% to 4% but I can’t really finalize that without knowing what the mix is.

That’s the one that probably the hardest and obviously our goal is to continue to drive the T&E number down, we came at 4.3% and I think our goal right now is to get it to maybe 4% this year and eventually down lower as time goes by. Otherwise I think the only other items that you will continue to have some impact on deprecation and the rent is with regard to the move in New York. Those are pretty well tracking the same for the last two quarters. They haven’t changed dramatically.

Rob Rutschow – Deutsche Bank

On the equity side, can you give us an idea of what percentage was cash versus derivatives during the quarter and whether that changed at all?

Jim Peers

It’s usually roughly 50/50; I don’t think it’s significantly that different.

Rob Rutschow – Deutsche Bank

In terms of the activities this quarter have you seen any shift from single name toward, you touched on it earlier, and secondly, we’ve heard a lot about some of the credit indexes widening substantially versus their underlying components in particular some of the less liquid areas like the LCDX and CMBX. I’m wondering if you can comment on what the market looks like in terms of buyers and sellers and whether that mix is sustainable?

Don Fewer

I think that the growth of the index market has been one of the fastest growing areas over the last couple of years. The index product generally has been accepted more of a macro type product. We are seeing it in LCDX, high yield index, the ABX index obviously was a very significant component in helping dealers deal with the recent crisis growth in the CMBX index. I think that while the single name business continues to grow and do well I think that the index business has evolved to a place where it certainly is being utilized as a macro hedging and trading product and in effect creates a lot of underlying activity because the components of each index need to be hedged, there’s a basis risk.

We are seeing very active players in both the single name business as well as the index businesses.

Rob Rutschow – Deutsche Bank

If I could ask about one specifically, the CMBX we’ve had a lot of discussion here about how that has widened out substantially and primarily people are talking about that being technical. What I’m wondering is what is the mix of buyers and sellers in the market for these index products at this point and have you seen any shift in that over time?

Don Fewer

I think the CMBX index should be held relative to the ABX index. Obviously there has been a lot of focus on the ABX index and while I would say over the last quarter there certainly has been, because of the reshuffling of some of the players in the market on some of the announcements that have hit the headlines. There has been a shift away from the ABX index to a much more of a focus on the CMBX index and there’s actually the dealers are working on an ALTA Index.

We think that each dealer that are generally the liquidity providers, you are talking about the Goldman’s the Lehman’s the Morgan Stanley’s, Bear Stearns, they are very active in supporting the index. The market has proven the effectiveness of the indexes and being able to deal in times of crisis. We are seeing very active participation particularly over the last two to three months in the CMBX index in addition to the ABX index.

Michael Gooch

We don’t ultimately see who the buyers and sellers are on the hedge funds. We don’t see where some of that buying and selling trend might be shifting. We are seeing plenty of two way activity amongst the dealer community.

Rob Rutschow – Deutsche Bank

The dividend, should we read anything into that in terms of an appetite for acquisitions? Does this mean that you are reducing your cash because there’s less likelihood that you’ll do a larger deal? Is your appetite for acquisitions essentially the same?

Michael Gooch

We don’t think that this dividend really has any significant impact. We have a significant capital available to us from a credit perspective. We are extremely on the leverage compared to other IDB’s a 0.54%. One of our competitors might be closer to 3.0% on leverage, debt to equity leverage. We are extremely underleveraged. Our independent Board of Directors studied this very closely; they looked at the dividend policies of our competitors in the public arena, including the exchanges.

This is extremely conservative this dividend relative to what appears to be the norm in the market place. This enables us to potentially attract shareholders who would be interested in our kind of growth stock but need to be vested in the dividend stock. We also think it’s a good return to shareholders ROE. I think in terms of any impact on our growth or our likelihood of doing acquisitions is zero from this dividend.

Jim Peers

To follow up on one of your questions that you raised on comp expense, it sort of ties into this. On thing I did mention is that, it’s obvious, just to make sure everyone understands. The interest expense ratio will go up significantly because we have financed the Trayport acquisition through bank debt. On the last call we explained how that was being financed and you can pretty well back into the cost on that.

Operator

Your final question will come from the line of Jonathan Casteleyn representing Wachovia Securities.

Jonathan Casteleyn – Wachovia Securities

In the past you’ve mentioned a longer term pre-tax margin target of 20%. I’m wondering here now moving into ’08 and beyond where you think you stand with that target?

Michael Gooch

I think the elephant in the room continues to be compensation and as I think I mentioned before we see an opportunity to get about a percentage point improvement over the next few years out of that. The non-comp expense we are making some headway in terms of leverage in the business. I think that we are probably two, two and a half years away from 20%.

Jonathan Casteleyn – Wachovia Securities

The one percent you are saying on the comp side is that this year or a couple of years out? I’m just trying to drill down on that?

Michael Gooch

We are trying to achieve about a percentage point per annum.

Jonathan Casteleyn – Wachovia Securities

Looking at your geographic source revenues, North America up 5% year over year in the fourth quarter, Europe up about 49%, Asia/Pacific up about 54%. Generally how does that affect pre-tax margin just looking at the geographic disbursement of those revenues?

Michael Gooch

Certainly the tax rate is more attractive in Europe and Asia so that growth has probably somewhat assisted us there. We do naturally expect to see stronger growth in North America, we are moving into this new office space in July. The profitability in North America is taxed at a higher rate. Nevertheless I still think we achieved the improvement because our marginal dollars are coming gout of a much better rate than our current pre-tax margin.

Our opportunity to grow the business in North America at reasonable contribution margins in our new office space is pretty strong. I think we still achieved, you won’t be able to see any discernible difference in the tax rate as a result of our getting 15% to 20% growth in North America this year.

Jonathan Casteleyn – Wachovia Securities

Lastly, can you touch on hiring? I know you are up about 105 brokers’ year over year; can you give us a sense of what that absolute number could be in 2008? Broadly, does that mean there is upward pressure on comp before these individuals become “producers”? Is there a little bit of lift on comp as you hire before they are revenue producers.

Michael Gooch

It seems to just blend in. Some of these hires are college graduates who don’t produce anything. Others are brokers that are hired in for a specific reason that slightly and immediately start to produce day one. Overall, it isn’t a negative compensation driver except for the signing bonus component. We are also expecting that the signing bonus component is going to become less and less. Particularly there are great opportunities right now to hire sales people from the banking environment that are not looking for signing bonuses.

I think that the number that we expect to probably add in this calendar year is probably similar. We are talking between 80 and 105 new brokers. You can see, I was quite pleased with broker productivity that we had an 11.7% increase in broker productivity. We had greater revenue growth than actual head count growth.

Operator

This concludes the time that we have for question and answer for today. I want to now turn the call back to Mr. Chris Giancarlo for any closing remarks.

Chris Giancarlo

Thank you everyone for your time today, this concludes our earnings conference call. We’ll speak to everybody again soon. Thank you.

Operator

Ladies and gentlemen thank you for your participation in today’s conference. This concludes your presentation you may now disconnect. Good day.

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