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GFI Group Inc. F1Q08 (Qtr End 03/31/08) Earnings Call Transcript

April 29, 2008 | about stocks: GFIG

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GFI Group Inc. (GFIG)

Q1 2008 Earnings Call

April 29, 2008 8:30 am ET

Executives

Christopher Giancarlo – Executive VP Corporate Development

Michael Gooch - CEO

James Peers - CFO

Analysts

Dan Fannon - Jefferies & Co.

Chris Allen - Banc of America

Donald Fandetti - Citigroup

Daniel Harris - Goldman Sachs

Justin Hughes - Unidentified Company

Christopher Donat - Sandler O'Neill

Rob Rutschow - Deutsche Bank

Jonathan Casteleyn - Wachovia Capital Markets

Niamh Alexander - Keefe, Bruyette & Woods

Presentation

Operator

Good morning and welcome to the GFI Group earnings conference call Q1 of 2008. (Operator Instructions) I would now like to turn the presentation over to your host for today’s call, Mr. Christopher Giancarlo, Executive Vice President Corporate Development of GFI Group; you may proceed sir.

Christopher Giancarlo

Good morning. Welcome to the GFI Group’s first quarter 2008 earnings conference call. We issued a press release yesterday providing the financial results for our fiscal quarter ended March 31, 2008 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 in prior quarters in conjunction with our earnings release.

To begin this morning’s call, Michael Gooch, our Chairman and Chief Executive Officer will review our business performance in the first quarter, address some recent developments and consider expectations for the current period. Next Jim Peers, our Chief Financial Officer, will review the first quarter 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 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 related 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 risks and uncertainties that include but are not limited to the risks and uncertainties identified in the earnings release and GFI’s filings with the US Securities and Exchange Commission. GFI Group does not undertake to publically 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 Michael Gooch, Chairman and Chief Executive Officer of GFI Group.

Michael Gooch

Good morning, thank you for joining us today. The first quarter of 2008 was a record quarter for GFI. Our brokerage revenues increased 28% and our net income rose 46% on a GAAP basis and 51% on a non-GAAP basis. Our diversification positioned us well as volatility continued to drive all our markets around the globe. We achieved strong growth in every product category and every geographic region in the first quarter, particularly in Europe where our electronic trading platforms are accelerating both our growth and broker productivity.

Our equity products category continued to demonstrate substantial strength in the first quarter of 2008 with revenues rising 40% from the first quarter of 2007 and up 11% sequentially. Growth in cash equities and equity derivatives was particularly strong in Europe and North America. Our quarterly global revenues from credit products crossed the $100 million threshold for the first time in the first quarter of 2008 reaching $111 million for the quarter. That represents an increase of 31% from the first quarter of 2007 and a 52% increase sequentially.

Our CreditMatch electronic trading platform continues to make a substantial contribution to our performance and broker productivity in credit products with nearly 60% of our CDS brokerage trades in Europe electronically traded versus less than 50% in the first quarter last year. During the first quarter of this year trader entered prices for cash bonds on CreditMatch in Europe have increased year-over-year to 44% from 29% and in Asia Pacific 20% from 10%.

Financial product revenues increased 16% from the first quarter of 2007 and 17% sequentially led by continued strong growth in the Asia Pacific region especially in emerging market currency and interest rate derivatives. Emerging market currency derivatives were strong in North America while growth in Europe was led by European and emerging market interest rate derivatives. As we noted in today’s release we have expanded our presence in the Middle East with the opening of our offices in Dubai and Tel Aviv. We recently added more features to GFI’s ForexMatch system by adding analytical tools and additional trading functionality in our ongoing effort to further our position in FX options globally.

Our commodity product revenues rose 22% from the first quarter of 2007 and 13% over the fourth quarter of 2007. We realized significant growth in dry freight derivatives and dry physical freight in both Asia and Europe again this quarter while revenues from our metals desk in Europe more than doubled from the first quarter last year. In North America Amerex saw growth in both power and natural gas and benefited from the addition of our new office in Calgary.

Looking at our performance in the first quarter of 2008 by geography, our year-over-year revenues from Europe increased 39%, Asia Pacific grew 60% and North America grew 11%. Sequentially each region grew approximately 25%.

Let me now turn to developments in our North American credit products brokerage business. On April 18^th we confirmed the resignation of our head of North American credit brokerage. In addition 18 brokers, three junior brokers and one support personnel of GFI New York credit staff resigned to join a competing inter-dealer broker. GFI is taking appropriate legal action to vigorously defend its right and assert its claims under this matter. As was reported in the press recently GFI is seeking injunctive relief. Among other things GFI is seeking relief to prevent its competitor from continuing to utilize the services of the former GFI employees and to prevent a number of the departing employees from violating various contractual obligations contained in their agreements.

A ruling granting injunctive relief will be invaluable to our efforts to address the harm inflicted by our competitors and former management and employees and avoid potential further harm. It will provide us with relief that monetary damages alone could not. While the injunction hearing will take place in the next few weeks, our claims for monetary damages and permanent injunctive relief will take longer to resolve.

Several years ago when the UK credit derivatives market was a voice-brokered market similar to the North American market today a competing firm raided our staff and took all but one member of our top-rated brokerage team. While the departing team was temporarily out of the market observing restrictive covenants we brought in credit brokers from other offices, talented brokers from related products and otherwise made efforts to serve the customers. With time, the end result was that we retained a leading position in credit brokerage and we’re well positioned for the evolution to hybrid electronic brokerage that has taken place in Europe credit products over the past few years and which GFI is the leading broker with our CreditMatch platform.

The credit derivatives market in New York is still a voice-brokered market. As long as that is the case the better inter-dealer brokers are at risk for these brokerage staff raids from less successful firms. The impact of these raids is compensation inflation and compression of profit margins for all IDBs. I expect that it will also accelerate cuts in brokerage commissions. Before this raid began GFI had about 80 credit brokerage staff in our New York office. Our competitor has recruited 22 of our credit brokerage staff. Even though we believe that our competitor aimed to completely disable us and prevent us from continuing our business in any respect, we never fully stopped doing credit derivative business in New York.

At GFI our intention is to stay disciplined in the face of competitive threats. We remain focused on our long-term objectives for delivering higher value services to markets for complex derivative products. In the global credit derivative markets those value-added services include greater electronic execution and straight-through processing. We are working with the major dealers and banks to develop centralized clearing for credit derivatives through GFI’s membership and ownership in the Clearing Corp which announced last Friday that it will start clearing transactions in credit index products sometime in the third quarter of this year. We are confident that the investment GFI has made in the Clearing Corp and in trading support technologies along with our recognized leadership in the global credit derivative markets provides us with strong institutional advantages to help us regenerate our New York credit team.

We are determined to remain a global leader in credit derivatives brokerage and be well positioned for the next evolution in the global credit market. This recent event proves to us once again the critical importance of technology in the OTC derivatives marketplace and the value proposition of our hybrid brokerage model. The contribution we are already realizing from Trayport which we acquired less than three months ago, suggests that we have only begun to appreciate fully the capability and potential this acquisition has brought to us.

As one example the clear tanker trading platform that we recently launched through our joint venture with ACM Shipping is based on our multi commodity platform EnergyMatch Europe incorporating the technology of Trayport. Other strategic initiatives are ongoing with respect to Trayport and will be reported in due course.

From a financial standpoint Trayport contributed $5.5 million in revenues for a two-month period which was up 44% from the same period in 2007. Growth was particularly strong in the trading gateway and exchange trading system areas. In a few minutes Jim Peers will give you additional detail on the effect we expect Trayport to have on our financial results in future quarters.

In addition to helping us drive revenue growth technology will play an increasingly important role in fostering greater broker productivity as we continue to focus on our major objective of improving our operating leverage. We were able to improve our pre-tax margin both year-over-year and sequentially in the first quarter.

Turning to our outlook for the second quarter of 2008 we currently estimate that brokerage revenues will increase between 18% and 23% over the second quarter of 2007. Since our last earnings call we have completed a four-to-one stock split in the form of stock dividend and our shareholders have received a special cash dividend for $0.12.5 per share on a post-split basis. We are pleased to report that our Board of Directors has declared another cash dividend totaling $0.03 per share payable May 15, 2008 to our shareholders of record on May 1, 2008.

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

James Peers

Thank you Mickey, good morning everyone. Our strong revenue growth continued in the first quarter of ’08 as revenues grew by over $74 million to $314.6 million compared to $240.3 million in the first quarter of last year resulting in a 31% increase. Our Q1 revenue growth was mainly driven by increased market volatility and strong organic growth in all product groups especially equities and credit.

Our first quarter net income improved to $36 million compared to $24.7 million in the same quarter last year on a GAAP basis. After backing out the non-GAAP items which I will discuss in more detail later, net income grew 50.6% to $38.1 million versus $25.3 million for the same quarter last year.

Our diluted earnings per share for the first quarter of 2008 was $0.30 on a post stock split basis compared to $0.21 in the first quarter of ’07. On a non-GAAP basis diluted earnings per share for the first quarter of ’08 was $0.32 compared to $0.21 for the same quarter last year; an increase of 47.6%.

Brokerage revenues grew by over $65 million or 28% in the first quarter of this year compared to the same quarter last year. Credit is up 30.5%, financials are up 15.6%, equity is up 39.6% and commodities are up 21.5%. Brokerage sign-on bonuses paid in the first quarter were $7.6 million compared to $3 million in the first quarter of ’07. Our brokerage sign-on bonuses expensed in the first quarter were $7.2 million compared to $6.5 million in the first quarter of last year.

Our brokerage personnel headcount at the end of the first quarter stands at 1,048, up 58 from the first quarter of last year. Also our broker productivity has increased over 19% to $283,000 for the first quarter of this year compared with $237,000 for the same quarter last year.

Our pre-tax margin for the first quarter of ’08 was 18.3% compared to 17.1% in the first quarter of last year on a GAAP basis. On a non-GAAP basis our pre-tax margin for the first quarter of this year was 19.4% compared to 17.5% for the same quarter last year.

In summary our key performance drivers on a non-GAAP basis are as follows: revenues for the first quarter are up 30.9% from the first quarter of last year. Our Trayport revenues for February and March were $5.5 million and are included in the software licensing revenue line. Our comp costs are at 61.4% for the first quarter of this year compared to 63% for the first quarter of ’07. Non-compensation expenses in the first quarter of this year as a percentage of revenue were 19.2% compared to 19.4% for the same quarter in the prior year. GFI’s effective tax rate improved to 37.5% in the first quarter of this year compared to 38% for 2007.

Now we’d like to highlight some other areas that will be of interest to you. The number of diluted shares for the quarter ended in March after the split were 120 million shares. As discussed in previous calls GFI signed a lease to relocate our New York offices to 55 Water Street. The move is scheduled to take place in the third quarter of this year. Accordingly GFI has excluded $2.2 million or approximately $1.5 million after tax as non-reoccurring costs. There will be additional adjustments to GAAP earnings for the next two quarters as the move progresses.

The purchase price for Trayport was approximately $170 million with intangibles of $38 million and goodwill of $106 million. Trayport’s intangible amortization expense in the first quarter was $0.50 million. Also Trayport’s income before taxes, intangibles and interest cost is approximately $1 million per month.

That concludes my remarks, now I will turn the presentation back to Mickey for some closing comments.

Michael Gooch

Thank you Jim. In conclusion our record first quarter results were driven by growth in every product category and every geographic region. Our diversification efforts coupled with our investment in technology to support our brokerage personnel were central to our success in the first quarter and they will continue to drive our future growth. Despite outrageous actions by a competing firm and a former officer and other former employees, many of whom were subject to restrictions in written agreements with GFI, we’re determined to regenerate the personnel losses we have experienced in our New York credit department. We aim to emerge better positioned for the market structure changes that are underway in global credit markets.

We believe that the future of global credit derivative trading with involve a combination of hybrid electronic execution, straight-through processing and potentially centralized clearing, all of which we believe will increase broker productivity. We believe no inter-dealer broker is better able than GFI to support these facilities while providing access to deep pools of liquidity in global markets. We look forward to the challenges and the opportunities ahead.

I hope my remarks on this matter are helpful. Because of the litigation involved, we will be limited in our ability to answer certain questions you may have on the specific matter during the remainder of this call but I am happy to discuss the credit derivative markets in general. As ever we are committed to delivering value to investors. In furtherance of this goal we are pleased to again declare a quarterly dividend.

Thank you for your time and your attention today. We are now ready to take your questions.

Question-and-Answer Session

Operator

Your first question comes from Dan Fannon - Jefferies & Co.

Dan Fannon - Jefferies & Co.

I know you are limited on what you can say here but was wondering if you could update us on how many of the brokers you were able to retain or if you can update us on any of the hiring process in terms of outside employees that you’ve had, you’ve been successful in bringing in to replace some of the lost employees.

Michael Gooch

We can’t say very much about that. We’ve hired a few. We kept a few but we’re not really giving any detail on that but we’ll update you in due course.

Dan Fannon - Jefferies & Co.

I guess in terms of the expenses and on compensation costs can we talk about the impact potentially going forward, you obviously are losing some high cost employees that you were paying a fair amount to but you now have to then pay up to replace them. How do you think that’s going to play out in terms of your margin structure going forward?

James Peers

Well I think there are a few factors that are going to influence that ratio. First of all in the Q1 did benefit from the high revenues and therefore the cost of [leaverage] of the support staff comp costs so that brought it down. The competition for brokers is still strong and will keep the pressure on broker payouts and also it is too early to see what the impact of the CDS staff that left will have on our comp ratio but we do expect it to increase in the near-term and I would estimate in the region of around 62%.

Michael Gooch

I would like to add something. There is no doubt in my mind that this particular raid will lead to a lowering of profit margins in the North American credit derivative business for all IDBs, not just GFI. There is currently the game of musical chairs taking place as other brokers are scrambling to replace lost brokers and to secure their remaining brokers from rivals. So for example if GFI picks up two or three credit brokers from one or more of our direct competitors as we rebuild, then those competitors will have to look to replace them and at the same time secure brokers who they view that may be vulnerable to approach. Any IDB that were in the middle of a contract renewal negotiation with one or two credit derivative brokers will have to pay up and lift the offer in terms of signing bonuses and guarantees or else risk losing the broker. Frankly the IDBs in this instance led by tradition have in my opinion in their infinite wisdom, set up what I would describe as a circular firing squad. I agree with Jim that in terms of the overall impact on our compensation margin the effect of this going forward will be that our compensation margin will have a 62 handle instead of a 61 handle.

Dan Fannon - Jefferies & Co.

Okay that’s helpful and then just in terms of the business, you gave us your guidance. Can you talk about how April has tracked and what segments within your businesses are performing well?

Michael Gooch

I can tell you that April has performed about 35% revenue growth to date. The reason we’re not guiding that high for the quarter is not because of particularly anything to do with the issue that I’m discussing, but because of Easter. So this April had more trading days and didn’t have Easter in it although it did have Passover, but the effect of that is that 35% doesn’t necessarily generate that kind of level of activity going forward and I don’t have the breakdown of exactly which products performed well versus others. It was generally across the board good business in April.

Dan Fannon - Jefferies & Co.

Okay, thank you.

Operator

Your next question comes from Chris Allen - Banc of America

Chris Allen - Banc of America

Just a quick question on the comps of revenue ratio, was there any reversal of bonus accrual for the brokers who departed in the first quarter?

James Peers

No because that was a second quarter event.

Chris Allen - Banc of America

Would that hit in the second quarter potentially?

James Peers

Too early to tell until we see how things play out. I can’t comment on that at this point in time.

Chris Allen - Banc of America

Okay, Mickey you’ve been talking about a potential, the investment in the Clearing Corporation a potential clearing solution in credit for quite some time now, obviously there seems to be an impetus to move forward the second half of this year, but from talking to some of the banks it seems to be a little bit more limited in focus. Can you provide any details on how you’re seeing the clearing evolving?

Michael Gooch

Yes I think as I’ve mentioned previously about where the dealer community is on this right now, the main dealers, the larger banks, are looking to set this off initially in indexes just as a starting spot using the settlement process with markets and the index corporation to margin and centrally guarantee trades between each other. So that what they’re looking at right now is just offsetting the credit risk amongst those member banks. So its not a full fledged clearing for credit derivatives, it’s a lot more like what we see with swaps clear right now which is sort of a netting and margining system so that the well capitalized member banks are able to affectively take a lot of bilateral risk off with each other. What effect does that have on us frankly is that it just means that some of the fears in the marketplace about credit exposure to counter parties, the whole domino effect discussion that took place when Bear Stearns was bought out by JP Morgan, if this is successful and they get this off the ground and then it is expanded into other credit products beyond just indexes, then I think that that is going to be good for our OTC business in general. It takes away the question mark hanging over the business where the inter-deal community worries that the – not us frankly – but the banks worry that their prime brokerage model is going to be getting attacked by a move by regulators to force centrally guaranteed settlement onto some central clearing mechanism that the banks don’t control. So that’s what’s going here. It’s the first step in that process. It doesn’t mean the GFI Group or any other IDB is going to be blind-brokering effectively OTC listed type credit contracts with multiple counter parties. This is just the very early step towards offsetting bilateral credit risk among the key core members. And I don’t think that they plan to let others in very easily. I think that they’re going to limit this whole process to initially only the owner members which includes GFI CreditX and ICAP.

Chris Allen - Banc of America

Is this going to be enough to satisfy the regulators and does this help accelerate adoption of electronic trading in North American credit at all?

Michael Gooch

Well I think that it will be enough to satisfy the regulators. I think that in all probability we are probably – here I’m using my crystal ball saying we’re probably through the worst but as we move out, as time goes by I think that some of the knee-jerk reaction of regulators might be satisfied by this. I don’t think that the CME as a clearing solution is necessarily is a viable or useful solution for the OTC market. It would eliminate all of the prime brokerage business that the dealer community do so I just feel that there’s just so much money at stake there that there’s just no way that the American political systems is going to end up allowing that to be taken away from this dealer community. They’ve just got way too much at stake and way too much influence. From our perspective will this potentially move things further towards electronic trading? Well I can certainly tell you that it will enhance the value of straight-through processing. To be able to match two member banks and put the trade directly into the Clearing Corp on their behalf through STP, I think those are the kind of initiatives where the regulators are going to say we want to see more streamlined confirmation process. I know there was something that was put out by SIFMA not that long ago that said that by 2009 they’re looking to have significantly more of the OTC credit derivative markets streamlined electronically. So I would say optimistically that yes, we are for a number of reasons including an emerging highly probable lowering in actual commission rates charged per credit derivatives, we are going to be probably moving towards the catalyst that will encourage electronic trading in the North America. That’s my prediction.

Chris Allen - Banc of America

Thanks.

Operator

Your next question comes from Donald Fandetti – Citigroup

Donald Fandetti - Citigroup

Mickey, I just wanted to get your thoughts in the business, obviously we’ve come off some pretty strong growth periods here, are there any particular parts of your business that might be more susceptible to more modest growth rates, whether its credit, energy, do you feel better about others?

Michael Gooch

No I think that’s – if you look at these OTC derivative markets and you can see the driving forces behind them, that any kind of deleveraging effect of tighter credit environment for the hedge fund community is going to permeate itself out through all the markets, not any one particular market. And my feeling about this is that we might have a period of a quarter or two where we’re kind of going through a regrouping but I wouldn’t be surprised if we got a really big credit rally towards the end of the year and I think that you’ll see that a number of the hedge funds already in the process of renegotiating deals with banks, there’s -- I think I just read the other day $41 billion raised in 2007 alone over $16 billion the prior year for distressed debt markets. So this is quite encouraging and so my overall estimation of where this business is going for the longer term is going to be a couple of quarters where my guidance will probably be similar to the one we’re discussing this quarter while there’s a relative level of regrouping across most of the hedge fund community and the leverage at which they’re going to put into the derivative markets. Then I think ’09 we’re going to be back off to the races.

I actually had a very interesting analogy given to me by a Chairman of an insurance company who said that even though you hear that these are always situations that are unprecedented the financial markets go through this all the time and they’re actually like a washing machine and they have cycles like a washing machine. There’s the soak, wash, rinse and spin and we’re in the rinse cycle.

Donald Fandetti - Citigroup

I like that. Obviously there’s been some talk in the press about consortium-like entities, how concerned are you about that or is this sort of old news?

Michael Gooch

I’m not losing any sleep over that because we hear about this all the time. Obviously the consortia was successful with EBS in spot foreign exchange that damaged the inter-dealer broker community a lot back in that particular timeframe but at the time the inter-dealer broker community just wasn’t positioned to compete electronically. Frankly it was a similar story with [Brokertech] and both of those platforms are now in the hands of ICAP. In terms of the two most recent ones we’ve heard, the V10 initiative in London, assume V10 means ten participants, and they’re going to put $5 million in each. Well just look at what tradition is achieving. I don’t think $50 million is going to get them very far. In terms of the guys in the US, it’s another initiative. The interesting thing with these consortium initiatives is we’ve seen them before in credit; CreditX was initially a consortia initiative and until they hired voice brokers that system didn’t get very far. I don’t see the dealer community having the stomach for the type of brokerage wars that us IDBs roll our sleeves up and in our infinite wisdom have. If they want to join the circular firing squad they’re welcome but I feel that you’re going to have a situation where you’re never going to have all the liquidity because your consortia is going to have nine of the 18 players, the other guy is going to have eight of the 18 players. They’re not going to be the same players. Goldman Sachs won’t deal on the platform that he’s not a member of. BMP won’t deal on the platform that he’s not a member of and so on and so forth. So they never get the full liquidity puzzle. The IDB, being independent and being able to offer services and get liquidity from all players will win the liquidity puzzle. That’s my personal opinion. I’m not too worried about it.

Donald Fandetti - Citigroup

Thank you.

Operator

Your next question comes from Daniel Harris - Goldman Sachs

Daniel Harris - Goldman Sachs

Mickey I think you’ve said that in the past and you’re probably going to have an update to this, that you would have expected in normal times 100 basis points in comp cost reductions in each of the next couple of years but given the changes and what your new guidance is at least for this year or as Jim says for about a 62% rate, do you still that that’s likely for 2009 and 2010 at all?

Michael Gooch

It’s a difficult question; I think that we will get ahead of this. It might take – I know it’s kind of like we keep pushing the date back but this circular firing squad, the ultimate result is going to be that it isn’t going to actually pay dividends to IDBs to make these kind of payments. If you think about it, Cantor Fitzgerald via its BGC unit started the most recent trend towards large upfront bonuses to attract brokerage staff when they were ramping up their IDB business in ’05 and ’06. And I seem to recall that BGC reported operating losses of just under $96 million in ’05 and I think about $112 million in ’06 and I believe a lot of that may have been signing bonuses. However assuming BGC entered into say three-year contracts in ’05 and ’06 on average with brokers during that ramp up period, then those contracts may be coming up for renewal in ’08 and ’09. That may trigger a new round of musical chairs as those BGC brokers look to get paid again. So [Tallot] was the next with their aggressive hiring of approximately 11 of our brokerage staff in London last summer for their credit derivatives business and that hasn’t really worked out for them. Once again large signing bonuses played a role and tradition has been aggressively hiring with large upfront and guarantees for some time and this is culminated most recently with this Tradition-led raid on our credit staff and their margins are pathetic; the Tradition. So it’s eventually, it’s just going to occur to these IDBs that this model doesn’t work and when that finally occurs – right now bear in mind that we have about close to three percentage points of our revenue is going into signing bonuses and retention bonuses. So if you take that and look at the entire string, add that number up, that’s a lot of money and eventually whether its through consolidation between the inter-dealers which is possible, some of them much more leveraged than others, just bear in mind we’re leveraged about .5 to one compared to significantly higher leverage elsewhere, I think that you will see that this will calm down and so give it another year to 18 months and we should be back on track for reducing compensation margin again.

Daniel Harris - Goldman Sachs

Okay that’s helpful, and I just want to follow-up on some things you said there about consolidation, obviously it’s a term that we’ve heard a lot in the exchange space over the last year, and its bantered about from time to time in the IDB sector, but there are five major IDBs and if you want to throw CreditX in there as a sixth, do you think that the brokers, the investment banks feel that that’s an optimum number or has and I know that this type of event has been going on for years in this business but has this recent raid on your staff sort of highlighted the fact that maybe six is too many three is the right number, just sort of what you consider an inefficient usage of capital.

Michael Gooch

Well I think these events and in particular this most recent raid because it was kind of high profile would undoubtedly encourage the trader community to think reductions in brokerage rates particularly as they hear about the large upfront compensation and multi year guarantees and from that perspective I think the timing on this was not good in my opinion since banks have experienced large losses and traders and sales people are having some cases received smaller bonuses than usual and don’t have job security. So the dealer community never likes to hear about brokers getting multimillion dollar signing bonuses and big fat long-term guarantees. I think that in terms of the perfect number of brokers, what happens is that the dealer community then looks to negotiate lower commission rates and invariably the companies that have got the best market share are in the best position to negotiate sort of all-in type of deals and that does tend to lead towards consolidation of the market into the hands of a few. The technology does the same thing. It’s certainly a different game in Europe right now to North America where the business is still a voice-brokered business in particularly in the credit space and also the interest rate derivative space. Initially maybe the banks sort of benefit from the [inaudible] stupidity because now one more mouth to feed but we are all going to scrambling with each other to win their business and gives them leverage in brokerage discussions. But in the longer term I think that the dealer community would prefer to have less fragmentation. I mean at a certain point if there are five pretty good brokers and four weak brokers in a market that’s dominated by nine customers; you start to lose the benefit of having a broker if you’ve got to phone nine of them. You might as well phone the nine guys that are the liquidity providers. So I think the pure economics and the capital markets free system will sort this out for us in due course.

Daniel Harris - Goldman Sachs

Okay great. You guys, obviously the business is very healthy and you generate a lot of cash in addition the balance sheet as you’ve mentioned is healthy, but low leverage and about $270 million or so in cash, how do you think about beyond the dividends that you’ve announced recently a decision maybe with a buyback or a tender offer, given the value or the perceived value of the stock at these levels, how do you look at the value versus all the initiatives you have in place for growth.

Michael Gooch

Well all I want to tell you is that we do look at that. We do look at the value and we are only .5 to one leveraged and we do have a very solid strong business but I can’t obviously tell you what our specific plans or discussions are in that regard.

Daniel Harris - Goldman Sachs

Okay thank you.

Operator

Your next question comes from Justin Hughes – Unidentified Company

Justin Hughes – Unidentified Company

When you start using the Clearing Corp in the second half of this year, will you need to capitalize that any further? Will you need to add additional cash?

Michael Gooch

No we wouldn’t be actually principal on any transaction so we wouldn’t be doing anything more than just sending a trade over there for processing so we wouldn’t be required to provide any capital for that purpose.

Justin Hughes – Unidentified Company

Okay would your customer have to post collateral?

Michael Gooch

Well that would be the major banks or the member owners and its my impression that that is their plan to post collateral in the centralized environment with various offsetting mechanisms so that at least amongst themselves, the 16 or so main players, instead of the environment that we talked about with Bear Stearns where we’re not sure where the final guy is standing, at least bank to bank, that they’ll at least have one central place where they know all their bilateral trades sit together. That’s the plan.

Justin Hughes – Unidentified Company

Okay and have those 16 banks made the same commitment as you have about getting this to move forward in the second half of the year?

Michael Gooch

Yes well actually I’m not sure if 16 is the right number, I don’t have the membership and capital makeup in front of me of the Clearing Corp. It might not be 16 but it’s certainly all the household names that you usually come across like Goldman Sachs and JP Morgan and Morgan Stanley. They are the ones that are really making this commitment right now. I mean this is their initiative and it would certainly seem to me to be their focus. I would say that the Bear Stearns JP Morgan incident and the immediate questions being asked at the regulatory and congressional level have encouraged them to fast forward this solution.

Justin Hughes – Unidentified Company

Okay so you’re just working with them; its not you pushing this?

Michael Gooch

No we are just sitting at the table.

Justin Hughes – Unidentified Company

Okay, thank you very much.

Operator

Your next question comes from Christopher Donat - Sandler O'Neill

Christopher Donat – Sandler O’Neill

A couple of questions for Jim here just looking more specifically at the results here, in terms of the other income can you give us a little more color on that? In the past it’s been some foreign currency gains, is that what happened this past quarter?

James Peers

That’s pretty well what flows through there is the foreign currency and so that can go up and down depending on our exposure. But I think it’s fair to say though that in Europe where on the revenue side we tend to me long on euros and on the expense side we tend to be long on sterling. However keep in mind that all of our brokers’ bonuses are still paid in both.

Christopher Donat – Sandler O’Neill

Okay and then looking at the couple of the expense items, it seemed like you had pretty good control on clearing fees. As I modeled it it came down as a percentage of brokerage revenue. Can you give a little color on that and also on communication and quotes that also came down?

James Peers

First of all I’ll deal with communication and quotes, we put in a sort of an inventory system there so we know what our cost is by desk and I think its giving us better color into how we can better manage our costs there so I think that’s working and we’re just going to expand that into Asia next. On the clearing costs, the clearing costs really are still the function of how fast our equity has grown as a percentage of revenues and in the fourth quarter it was up significantly. The growth was over 50% where this quarter is around 40% but also our revenues were down in the fourth quarter so therefore as a percentage it comes down. But the clearing is still an area that we are spending time on to see how we can improve that number going forward.

Christopher Donat – Sandler O’Neill

Okay and then Mickey you had talked about the experience a few years ago in Europe where virtually the whole team of CDS traders left, if we use that as a comparison for today how much did those departures create the opportunity to go electronic or did that just happen to coincide around the same time?

Michael Gooch

The market going electronic in Europe actually was the result of CreditX having their entire team poached and CreditX not being a deep organization like ours didn’t have too many resources at their fingertips and just decided, you know what we might as well launch the platform electronically and introduce a new, much cheaper brokerage rate and it just happened to click. It was just purely fortuitous timing on their part and that was the catalyst for electronic trading in Europe in credit derivatives.

Christopher Donat – Sandler, O’Neill

Okay, is it possible to draw any similarities today with potentially some of the banks putting pressure on for lower fees structures that they would want more electronic trading now? Haven’t they been one of the not the guys to be dragging their feet, but not exactly rushing into electronic trading?

Michael Gooch

Basically it’s going to happen when they demand it and clearly there is the potential for that to occur in the near future. It is going to be when the dealer community decides. What the catalyst is, is going to be is difficult to predict at this point in time but it will happen.

Christopher Donat – Sandler, O’Neill

Okay but you haven’t seen anything in the last, with the events in the last few weeks and months that has changed your view on when the dealer community is likely to move more electronically?

Michael Gooch

Nothing specifically at this point.

Christopher Donat – Sandler, O’Neill

Okay thanks very much.

Operator

Your next question comes from Rob Rutschow - Deutsche Bank

Rob Rutschow - Deutsche Bank

I guess the first question is just related to the US [single-named] desk, are you still seeing activity there at this point?

Michael Gooch

We can’t really discuss in any great depth about that right now because we’re going through this injunction process.

Rob Rutschow - Deutsche Bank

Okay, can you just give us a timetable for the legal proceedings then?

Michael Gooch

There are some hearings on May 7^th and then there’s an injunction hearing on May 19^th. We had a similar situation with a gentleman that left the company in a different product area, emerging markets, where we initially lost the TRO but we won the injunction. So we’re aggressively and vigorously pursuing those injunctions come May 19.

Rob Rutschow - Deutsche Bank

And then that – when that occurred before were they able to take away activity for awhile and then they lose it when the injunction hits?

Michael Gooch

Well in the case of the situation in Europe, they didn’t even start up because they didn’t actually breach their contractual obligations to the company, they honored their contractual obligations and didn’t start right up and then they honored their post restrictive covenants. So the difference here is that these particular candidates didn’t do that so they have actually started up or some large portion of them have. If we win the injunction they’ll simply be interrupted at that point.

Rob Rutschow - Deutsche Bank

Okay, can you tell us how many of the employees that left are still under some contractual obligation to GFI?

Michael Gooch

We can’t talk about that right now.

Rob Rutschow - Deutsche Bank

Okay, and then the principal transactions relative to agency, it looks like those trended down, can you just talk about some of the underlying trends there over the last couple of quarters?

Michael Gooch

When we have principal transactions that just means that we’re matching through our DTCC account equities, cash equities. Its still matched riskless principal – buyer and seller matched. But if that business doesn’t grow one quarter as much as say – give up OTC emerging market derivatives, you’re just going to get a different balance between principal and non-principal. But its just business mix. It doesn’t really mean anything visa vie the overall activity of the company.

Rob Rutschow - Deutsche Bank

Okay, thank you.

Operator

Your next question comes from Jonathan Casteleyn - Wachovia Capital Markets