BGC Partners, Inc. Q1 2008 Earnings Call Transcript

Jun. 9.08 | About: BGC Partners, (BGCP)

BGC Partners, Inc. (NASDAQ:BGCP)

Q1 2008 Earnings Call

May 8, 2008 8:30 am ET

Executives

Analysts

Operator

Good day ladies and gentlemen and welcome to the BGC Partners’ first quarter 2008 financial results conference call. (Operator instructions) I would now like to turn the presentation over to your host for today’s call, Mr. Jason McGruder, Head of Investor Relations. Please proceed sir.

Jason McGruder

Good morning. Before we begin I want to make sure that you know that our first quarter 2008 earnings release was issued last night and that a preliminary S-1 was filed with the SEC on April 18. If you do not have a copy of these documents, you may obtain them by going to the investor relations section of BGCPartners.com.

I also refer you to the disclaimer language titled forward-looking statements contained in our earnings release. I remind you now that the information in the release and on this call contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 as amended in Section 21E of the Securities and Exchange Act of 1934 as amended.

Such statements are based upon current expectations that involve risk and uncertainties. Any statements contained herein that are not statements of historical fact may be deemed to be forward looking statements. For example, such words as may, will, should, estimates, predicts, potential, continue, strategy, believes, anticipates, plans, expects, intends and similar expressions are intended to identify forward-looking statements.

The actual results of BGC Partners, Inc also referred to as we, our, the company or the combined company, and the outcome of timing and certain events may differ significantly from the expectations discussed in the forward-looking statements.

Factors that might cause or contribute to such discrepancy for the combined company include but are not limited to: our relationship with Cantor and its affiliates and any related conflicts of interest, competition for and retention of brokers and other managers and key employees, pricing and commissions and market position with respect to any of our products and that of our competitors, the effect of industry concentration and consolidation and market conditions including trading volume and volatility as well as economic, geopolitical conditions or uncertainties.

Results may also be affected the extensive regulation of our businesses and risks related to compliance matters as well as factors related to specific transactions or a series of transactions, including credit, performance and unmatched principal risk as well as counterparty affiliate.

Factors may also include the cost and expense of developing, maintaining and protecting intellectual property, including judgments or settlements paid or received in connection with intellectual property or employment or other litigation and their related costs.

And certain financial risks including the possibility of future losses and negative cash flow from operations, risks of obtaining financing and risks of resulting leverage as well as interest and currency rate fluctuations. Our ability to meet expectations with respect to payment of dividends if any will depend from period to period on business and financial conditions, our available cash, accounting or other charges and other factors relating to our business and financial conditions and needs at the time.

Discrepancies may also result from such factors as the ability to enter new markets or develop new products, trading desk, marketplaces and services to induce customers to use these products, trading desks, marketplaces or services to secure and maintain market share and to enter marketing and strategic alliances and other transactions including acquisitions, dispositions, reorganizations, partnering opportunities and joint ventures.

And the integration of any completed transactions to hire new personnel to expand the use of technology and to effectively manage any growth that may be achieved. Results are also subject to risks related to the separation of BGC businesses and the merger and the relationship between the various entities.

Financial reporting accounting and control factors, including identification of any material weaknesses in our internal controls, our ability to prepare historical and pro forma financial statements and report in a timely manner.

And other factors including those that are discussed under “risk factors” in eSpeed’s annual report on form 10-K for the year ended December 31, 2007 which was filed with the SEC on March 17, 2008, in eSpeed’s definitive proxy statement which was filed with the SEC on February 11, 2008 and in the combined company’s registration statement on form S-1 which was filed with the SEC on April 18, 2008.

We believe that all forward-looking statements are based upon reasonable assumptions when made. However, we caution that it is impossible to predict actual results or outcomes or the effects of risks, uncertainties or other factors, unanticipated results or outcomes and that accordingly you should not place undue reliance on these statements.

Forward-looking statements speak only as of the date when made and we undertake no obligation to update these statements in light of subsequent events or developments. I would now like to turn the call over to Howard Lutnick, Chairman and Co CEO of BGP Partners Inc.

Howard Lutnick

Good morning and thank you for joining us today on our first quarter 2008 conference call. With me today is Lee Amaitis who is my Co Chief Executive Officer, Shaun Lynn our President and Bob West our Chief Financial Officer.

We will begin with Lee discussing our partnership structure and business trends, then Bob will cover BGC Partners’ first quarter results and I will conclude with our second quarter outlook. But first, I’m delighted to announce our new dividend policy and the combined company’s strong first quarter results.

The combined company had pro forma revenues of approximately $333 million in the first quarter of this year which is up 22% compared to the $273 million we produced in the first quarter of 2007. With respect to profitability, I would like to describe our simplified earnings measure. Going forward, we will report distributable earnings.

Distributable earnings are the earnings which we expect to distribute for the benefit of our partners and our public shareholders. Distributable earnings will be used to calculate our dividend and determine the size of our stock buyback. Bob will discuss this in further detail later in the call, so let me get back to our results.

BGC Partners pretax distributable earnings increased by more than 100% in the first quarter of 2008 to approximately $51 million compared to $24 million in the first quarter a year ago. We achieved a post tax distributable earnings margin of approximately 12% for the first quarter of 2008, up 4% compared to 8% in last year’s quarter.

The combine company’s post tax distributable earnings grew by over 80% year over year in the first quarter of 2008 to $39 million. Because of this exceptional performance and the combined company’s tremendous cash flow generation, I am pleased to announce that our Board has approved a dividend policy of not less than 75% of distributable earnings, payable semi-annually to all common stockholders.

Based on this policy, we expect to distribute a dividend totaling at least $0.60 over the next four quarters, beginning the first of April, 2008. We plan to use the balance of our post tax distributable earnings after paying the dividend to buy back stock or partnership units.

Our Board has authorized a purchasing in excess of $50 million of stock or units for the purpose of initiating this plan. To summarize, we expect BGC Partners to generate significant amounts of distributable earnings. The company expects to pay a considerable semi-annual dividend to common stockholders and to repurchase stock or units with its remaining post tax distributable earnings.

Our partnership structure allows our public shareholders to stand shoulder to shoulder with our partners which is one of the fundamental principles of our company. So now I’d like to turn the call over to Lee.

Lee Amaitis

Thank you Howard, good morning everyone. As most of you know, a key performance measure in the interdealer broker space is broker compensation. Because of our partnership structure and the way we manage our business, BGC has been successful in this regard and I would like to explain some of the key reasons.

First, our broker compensation ratio was 58% for 2007 and it was 56% the first quarter of 2008. We managed our compensation expense very carefully and expect it to remain in the 55-60% range for the foreseeable future.

In the long term it may in fact decline from this level as we grow the percentage of revenue from fully electronic trading, market data and software solutions. Both our compensation ratio and our broker turnover has been and should remain lower than most of our publicly traded interdealer broker peers.

This is because our partnership structure and stock based compensation have been and will continue to be key factors in the recruiting and retention of employees and because we derive a higher percentage of our revenue from technology based business than most of our peers.

As of the closing of the merger with eSpeed, the employees of BGC Partners owned approximately 34% of the combined company representing over $700 million in restricted equity. Second, over 300 of our best producing brokers and desk managers are partners and held an average of $1.8 million each in equity as of the closing of the merger.

Over 80% of that remains unvested and the balance is restricted. These restricted partnership units not only represent a significant portion of the key employee’s net worth, but that also entitled them to the share of the pretax distributable earnings in the first quarter.

In the first quarter we estimate that our partners would have received distributions exceeding $15 million. Thus, our employee partners earned a healthy dividend on all of their equity, whether vested or not while participating in the upside of our stock appreciation.

This is a tremendous retentive tool since our partners would forfeit most of their equity if they left and competed. I would also like to address a question some of you have asked about the comments made by others regarding pressure on commissions. Over the long term, commissions in the marketplace have historically decreased as volumes have grown.

For those of us who invest in creating and maintaining a robust scalable technology platform, the net result has been a steady increase in revenues and profits over the long term while delivering lower commissions rates to our clients. We expect volumes to grow and as we continue to invest in our industry leading technology, our broker productivity will continue to improve.

We believe our partnership structure and our new dividend policy align the interest of management, employees and our public stock holders towards our common goal of increasing distributable earnings per share. And now I’d like to turn the call over to Bob West our CFO.

Bob West

Thank you Lee and good morning. For the first quarter of 2008 the combined company generated revenues of approximately $333 million, up 22% compared to last year’s first quarter of $273 million. For the first quarter of 2008, the combined company’s brokerage revenues were approximately $301 million, up 24% compared to $243 million in the prior year period.

For the first quarter of 2008, rates revenue increase by 11% to $155 million. Credit revenues increased by 60% to $83 million, foreign exchange revenues increased by 12% to $37 million and other asset classes increased by 39% to $26 million all compared to the first quarter of 2007.

For the first quarter of 2008, our rates business represented 47% of BGC Partners’ revenues, credit 25%, foreign exchange 11% and other asset classes 8%. As a result of the separation from Cantor which was effective as of March 31, 2008, the combined companied incurred GAAP non-cash compensation charges of $87 million in the first quarter of 2008.

These non-cash charges related to redemptions of partnership units issues prior to the merger in order to settle outstanding loan obligations of certain senior managers and executives, additional pre-merger grants of founding partner interest to a certain executive, the activation of exchangeability of founding partner interest granted to certain executives pre-merger and compensation expense for restricted stock units and restricted equity units granted pre-merger.

The original issuance of all this equity was pre-merger and dilutive to Cantor. Due to these non-cash charges, the combined company recorded a GAAP loss for fully diluted shares of approximately $30 million in the first quarter of 2008 compared to income of $21 million in the first quarter 2007.

The combined company experienced no decline in net assets associated with these results and as the non-cash compensation charges were offset by an $87 million increase in additional paid in capital from Cantor within stockholder’s equity.

Now I’d like to discuss distributable earnings. We defined pretax distributable earnings as GAAP income from continuing operations before minority interests and income taxes, adjusted to exclude the following: non-cash stock based equity compensation charges for equity granted or issued prior to the merger, post-merger non-cash non-dilutive equity based compensation stemming from restricted equity unit conversions, non-cash undistributed income or non-cash loss from BGC’s equity investments for example Aqua and ELX, lastly non-cash impairment charges and the net income allocated to founding partner units.

BGC Partners defines post tax distributable earnings as pretax distributable earnings taxed at the applicable effective tax rate. Turning to expenses, compensation employee benefits represented 56% of the combined company’s revenues in the first quarter of 2008, excluding the previously discussed non-cash compensation charges which was an improvement over the 58% in the year earlier period.

Our non-compensation related expenses were 29% of revenues in the first quarter of 2008, an improvement from the 33% in the first quarter of 2007. Our pretax distributable earnings represented approximately 15% of revenues in the first quarter of 2008 versus the 9% a year ago quarter.

Our near term goal is to achieve 20% pretax distributable earnings margins, thereafter we believe we can achieve higher pretax margins as we increase the percentage of revenues we generate from fully electronic trading, market data and software. I also want to update you on a positive change to our effective tax rate for distributable earnings.

BGC Partners now anticipates that this effective tax rate will be approximately 22% in 2008 and 27% for 2009 and thereafter, compared to our previously expected tax rates of 28% and 32.5% respectively.

Our favorable distribution earnings tax rate is driven by lower tax rates in various jurisdictions. In addition we have the benefit of NOL carry forwards of approximately $195 million as of December 31, 2007. Finally we have a permanent tax benefit associated with a portion of our non-cash compensation charges.

The combined company currently has a fully diluted share count of approximately188 million shares and at the end of the first quarter of 2008, we had 1,237 brokers. Now I’ll turn the call back over to Howard.

Howard Lutnick

Thank you Bob. To remind you, we guided $315 million in revenues for the first quarter and we were able to achieve $333 million. And now for the second quarter we again are guiding $315 million which is 15% above the $273 million we produced last year. We expect combined company second quarter 2008 pretax distributable earnings of $46 to $49 million which is the same as our guidance last quarter, which is an increase of over 150% when compared to the $17 million we generated in the year ago quarter.

We expect combined company second quarter 2008 post tax distributable earnings to be in the range of $36 to $38 million which is better than last quarter because of our lower effective tax rate which is over 2.5 times last year’s second quarter of $13 million.

Historically, our businesses have typically generated approximately 52% of their revenues and 54% of their distributable earnings in the first half of the year and approximately 48% of their revenues and 46% of their distributable earnings in the seasonally slower second half of the year.

Our outlook does not include the potential impact of any accretive acquisitions or significant increases in brokerage headcount. It simply covers that which we have today. While we have benefitted from strong industry fundamentals, BGC has continued to outpace the other public interdealer brokers.

The combined company has strong and improving financials, world class technology, a strong management team and a unique partnership structure that is both retentive and tax efficient for our stockholders and our partners alike. Operator, we are now ready to answer questions.

Question-and-Answer Session

Operator

(Operator instructions) Your first question comes from Daniel Harris – Goldman Sachs.

Daniel Harris – Goldman Sachs

I was wondering if you can help me recall, you mentioned that a big chunk of the equity is held by the employees there. How do you guys think about the vesting schedule and the restricted schedule or is it just that the stock will remain restricted and they will just receive dividends as they occur?

Howard Lutnick

Approximately 20% is vested but restricted. And the balance is as you said, is unvested and they continue to earn the pretax distributable earnings from that throughout the year. So they get the cash flow directly from how our business does and it is unvested. When and if they can sell any of that stock which is totally up to the company, then that will be vested at that time. But now there is no particular vesting schedule. It is simply a matter of, they earn the earnings as we go along.

Daniel Harris – Goldman Sachs

As I understand it, each quarter they will receive a cash dividend, the owners, the employee owners will receive a cash dividend based on the earnings?

Howard Lutnick

Right, so the distributable earnings is the number that will be distributed both to the partners and effectively to our stockholders. And then the choice will be, the stockholders will receive 75% of the distribution in a cash dividend and the balance, so it’s at least 75% as a cash dividend and then the balance will buy back stock or units.

Daniel Harris – Goldman Sachs

Obviously we’ve seen a lot of changes in the brokerage community over the last month or so and there’s been a lot of headlines. What have you seen from your employees in terms of their either request for retention bonuses or their decisions as it relates to staying on there given some of the numbers that are being thrown around in terms of what bonuses are being offered at other places.

Howard Lutnick

I think the difference is we addressed this issue prior to the merger. The difference between having our staff own 34% of our company and having our staff own virtually none of our company is the difference I think that you’re pointing out.

We consider our employees to be a key and fundamental foundation of the company. They are the best asset of our company and that’s why they own 34% of the company and that’s why we focus on distributable earnings and distribute those earnings to them and now to our public shareholders as well.

So the concept for us is to focus as Lee said on our distributable earnings, to do acquisitions and hires that are accretive to drive those earnings up and then to put those earnings back in the hands of our owners which includes our employees and include our public shareholders.

So that’s our focus and if you just look at the first quarter and that’s why Lee pointed that out, on top of their compensation of 56%, they own shares that produce for them that would have produced for them $15 million in cash to be paid for them on top of that and that’s their ownership benefit.

Now the public shareholders will also be getting substantial dividends because that’s why we’ve structured it this way, so that no one would say that our partners are treated any differently than a public shareholder. They can stand shoulder to shoulder and act and understand our company and how we think.

So we think if you don’t deliver cash returns to your stakeholders, you’re just not as strong a company as you could be. We think that the best way to retain our brokers is to let them own the company, not a little of it, a lot of it and not just make that stock that the only way you get the money is to sell it. But how about driving a significant yield into their hands and they get the one benefit that the public shareholders can’t have which is they don’t have to pay corporate tax.

So they get the pretax amount whereas the public shareholders of course would get the post tax amount and this structure of course has a tremendously effective tax structure, so our tax rate, this year only 22% and we expect it to remain 27% in 2009 and for the foreseeable future.

Daniel Harris – Goldman Sachs

Shifting down to the brokerage revenues, great job and credit seems like you’re certainly growing the business pretty rapidly there. My questions are twofold, one, on the rates business, the second quarter in a row where we’ve got just about a 10% growth rate.

Is there anything going on, you know there’s obviously a lot of talk about leveraging, my guess is rates would be one of the areas that that would be impacting that may be hitting that. And then in terms of credit, can you just remind us, is that largely cash or is that largely CDS?

Howard Lutnick

On rates, I think we had this conversation last quarter as well, the basis starting point in rates was higher because it has been one of the core businesses that we’ve had all along. So growing it 10-11% is consistent to what we think the market has grown at and we still continue to hold our competitive market share in the rates area. In the credit area, virtually all of the 60% growth was due to CDS.

Operator

Your next question comes from Rich Repetto – Sandler O’Neill.

Rich Repetto – Sandler O’Neill

I’m just going to use your historical break out of revenues and earnings between the first half and the second half, so you pretty much told us, well we know what you did in the first quarter, you guided us pretty reasonably in the second quarter and we can back into the back half I guess. So anyway, I’m coming up with $0.75 for the year.

Is that reasonable guidance because I’m using your historical 52% of revenues in the first half and 54% of earnings? And is there anything that would tell you this year would be dramatically different then that or why you wouldn’t think that’s the best way to look at it? And is anything going to happen to the share count of 188 for the rest of the year?

Howard Lutnick

Number one, I don’t have a calculator out but probably the number that you quoted doesn’t include our significantly lower effective tax rate. So if you plug back in your tax rate I think you’ll end up with a number higher just doing that math than the $0.75.

With respect to how we guide and what that means, we tend to sit here today and look at the business we have today, the people that we’ve hired as of today, meaning that we’ve signed contracts with that we know are committed to joining the company and we look at our business and say here’s what we have. Right but obviously we are trying to hire people every day.

We consider acquiring companies all the time. And we are working on that nonstop. Any of those things will improve us in the future. But I can’t, I just don’t feel comfortable guiding the concept of I think we’re possibly going to hire some people and therefore we’re going to do better. Some other people do that and I guess they’re comfortable with that.

We say here is what we have, this is the business that we see right today and this is our expectation and we are going to work our darnedest to hire to more people and acquire companies accretively that will improve that. So that’s sort of where we think about it. And with respect to share count, it would be basically if we sell stock, if the company sells primary shares which would be the only thing that would change the share count, it would be to raise money and we will use that money to then accretively acquire.

That is our goal and objective. So while we could have a share count increase, that would be within the company’s, you know sort of the foreseeable future for the company to acquire companies accretively with that money. And so therefore our expectation for distributable earnings would continue to rise.

So we are out there trying as we said, focused on increasing our distributable earnings per share and so if there was an increase in share count, it would be because the company expects to deploy that money accretively and therefore increase our earnings per share in the not so distant future.

Rich Repetto – Sandler O’Neill

I get what you’re saying, but just the numbers, here’s the numbers that I’m using, if you use $39 million in post tax distributable earnings in the first quarter, you’re guiding to, the midpoint of your guidance I believe is $37.5 million for the second quarter, that would give you $76.5 and if that’s 54% of yearend that gets you to $142 million divided by the 188 gets you to $0.75. But we can talk about it after I guess.

Anyway, the next question is on the employee retention, from what I understand are partners in any way, are they locked up in certain contracts or was any agreements with the partners renewed as a part of the transaction or the closing etc and what was the term of that if it was.

Howard Lutnick

The vast majority of our brokers have a significant long term contract. But like all contracts, time goes by and they roll forward. We often extend our contracts well before they come due. So we’re not of the kind of people who wait until they end to start negotiating its extension.

We tend to talk about extending people’s contracts when they still have one year left. That is always happening. Our employees extended, the lion’s share of our employees extended their contracts when they received the equity or invested in the company prior to this transaction.

So we have just had a very strong reason for people to want to extend their contracts so they could have equity and participate in this transaction which has just happened and so we have both lots of people who have recently re-upped, recommitted and extended and lots of people who are very, very happy because the deal closed April 1 and they made a lot of money just like we had suggested that if they joined us that this would happen.

I mean we’ve been talking about this for a long time and if you walk around our hallways, April 1 was a great day for them, this is the day when we executed all of the things that we had said and discussed for all of this time. And that’s why they joined. I mean these people joined for a number of reasons, that they could own equity in the company themselves and have that be wide spread, not just in the handful at the top.

But as we said, 300 of our best producing brokers and then on top of that, this is a company which owns its own technology by merging with eSpeed it took in house all of that technology and that technology is going to be a driving force that will enable these brokers to exceed what other brokers can do who just don’t have that same kind of technology.

The idea of using technology to make brokers more productive has been around quite some time. But really using electronic trading where your customers literally type and transact with each other is something that we do very well and everyone knows that we are industry leading at doing.

Right and most of the others just don’t have those kind of tools and it’s effective for our brokers. So it’s the reason why our brokers want to stay. So we have not seen any of the issues that have made the headlines within our company. It does not mean that other people don’t try to hire our staff.

It just means with an average of $1.8 million in equity that could well be forfeited if they left, substantial portion of that forfeited if they left, we’ve already given them what other people are trying to offer others now. It’s simply a matter of our structure saw this beforehand, offered it beforehand and it diluted its owner. Cantor took massive dilution to do this, but that’s why we have a strong company today.

Rich Repetto – Sandler O’Neill

I’m just trying to see how you came up with the $0.60 dividend, how that was sort of, what was the assumptions or how you came up with the number and am I understanding it correct that it’s paid out over the next 12 months which on today’s stock price would be about a 6.5% yield or somewhere around there. Could I get the thinking behind it and do I have the right view I guess is the question.

Howard Lutnick

Yes you have the right view. The yield that you articulated is the right view which is we are a company that’s going to distribute our earnings. That’s who we are. We have promised that to our brokers and that’s very much why they’re here and that’s very much why they’re being retained because they know they get their pro rata share of the earnings of the company in cash in their hands.

We want the shareholders of ours to think they are no different than our brokers. So the company gets that cash distributed. Now the Board has decided to distribute no less than 75% of that number as a dividend and we expect that that number will be at least $0.60, it doesn’t mean that we will pay $0.60, it means we think it will be at least $0.60.

Obviously if the company were to hire a lot of brokers, acquire other businesses, have market conditions remain robust as they have been certainly in the first quarter, then we will be able to pay a dividend higher than that. But we have said we will pay no less than 75% of our distributable earnings as a dividend to our shareholders. We will then use the balance of our cash to buy back stock or partnership units, obviously also creating an accretive value.

We know many shareholders appreciate a dividend, we know that many shareholders appreciate stock buybacks, so our Board has decided to split 75% towards the dividend and 25% towards the stock buyback. But that is purely a decision by the Board but it as you know includes the 100% number.

We want the value of our distributable earnings to go out. It will create a very high yield as compared to other companies. That is because this company has already invested in its technology and built and paid for its technology. That’s how you get cash flow generation. It’s possible to earn more money if you’ve not built your technology and capitalized all sorts of things.

But what that does is it hammers your cash flow because you’re really spending on technology but your earnings look better than that. This company does not have that problem. We have spent a huge amount through eSpeed on our technology. It’s built and paid for, it’s installed all over the world and this is a place where we get our leverage from that.

The way you can see it is that we are going to distribute our distributable earnings, that’s why we’re calling it distributable earnings. 75% at least going to the dividend. Now of course it is post tax for the public shareholders, that’s sort of just part of America. But of course our structure has been very tax efficient. So at least 75% going out as a dividend and the balance will be used as a stock buyback.

Operator

Your next question comes from Tripti Prasad – Sidoti & Co.

Tripti Prasad – Sidoti & Co.

Just to touch on the exact number for the year, your guidance is already pretty detailed but I read the release at least 75% of the dividend payout and that would be at least $0.60, I took that as implicit of $0.80. Does that make sense?

Howard Lutnick

If $0.60 is at least 75%, if it was 75% then of course that would be $0.80.

Tripti Prasad – Sidoti & Co.

Right, so it would be higher, I just want to make sure that I’m looking at this right given the commentary from a minute ago.

Howard Lutnick

Correct.

Tripti Prasad – Sidoti & Co.

On the tax rate, I know that you guys kind of touched on this but can you explain why the primary reason that it’s so low?

Bob West

The NOL carry forwards we have are a major contributor as we talked about.

Tripti Prasad – Sidoti & Co.

On that, I mean looking at the loss from eSpeed for the quarter, it’s in line with prior losses, I don’t understand I guess why this wasn’t estimated to be around, the NOLs weren’t estimated to be close to where they [inaudible] coming in.

Bob West

Besides the NOLs, we earn our income in multiple jurisdictions around the world. A number of jurisdictions are taxed at much lower rates than we are in the US. And we also have the benefit of getting a deduction for the non-cash equity compensation for certain of our partners. And that’s a permanent difference that we’re going to have in our, its going to be accrued to us all the time and it’s going to stay with us. So that is, it’s really the combination of those three things is what’s giving us a really favorable tax rate.

Operator

Your next question comes from Rich Repetto – Sandler O’Neill.

Rich Repetto – Sandler O’Neill

I just wanted to follow up on the guidance issue. The way I understood the dividend was it was either $0.60 or 75% of your distributable income. Is that correct?

Howard Lutnick

Our Board has authorized and we will distributed at least 75% of our distributable earnings. So it’s a no less than number. So a simple way to say it is if we earned $1.00 then the dividend would be $0.75, so it’s a variable number but then to assist everyone, we said we expect that dividend to be at least $0.60 so that you could have some range on that.

Now of course when you’re trying to figure out, does that mean ever more specific guidance, I just want to help you that it could, $0.60 could end up being 78%, it could be 79%.

Rich Repetto – Sandler O’Neill

That’s my point is that I don’t see how that implies any $0.80 guidance because suppose, I don’t think this is the case, but suppose you did $0.70 and you still paid out the $0.60, you would still pay out $0.60 and you would still pay out more than 75%?

Howard Lutnick

That’s, Tripti’s math is correct and your math is correct. Which is that if we were only able to achieve exactly the mathematical minimum of our guidance then that would be correct. But obviously my management team and my staff and our brokers come in every day raring to achieving ever higher and better terms.

We are out hiring all the time and adding people to our platform, trying to do more electronic trading which as you know comes at better numbers. We are working to rollout ELX which will have I think wonderful upside for the company. There are a whole host of things which have us seeking to do better and we were able to do so just this last quarter. Remember we only guide what we have, not what we intend to do.

And so both math may well be correct, one may be conservative in what we have and does not assume that we get everything else, or one may be more simple saying, if they’re going to get out $0.60 and that’s what’s 75% of and the answer is $0.80. So I think we are not guiding anything for the full year, we’re just trying to help you with historical trends.

As an example, last year, the second half of the year was very, very busy because of the credit crisis. The traditional historical percentages didn’t hold. So I’m just suggesting that having been in this business a very long time with our management team who knows our business absolutely cold, they historically, if everything, if all other things were equal and normal, this is what would happen. But as you all know, rarely is everything equal and normal.

Operator

Your final question comes from the line of Daniel Harris – Goldman Sachs.

Daniel Harris – Goldman Sachs

In terms of the dividend payout, what is that on a cash flow basis?

Howard Lutnick

Our distributable earnings are intended to effectively try to cover cash earnings, the earnings of the company. So our cash flow, because we have built and paid for our technology and we have all of our, for example, all of the upfront payments we gave to our brokers are all being amortized over the life of their contract, straight on.

So that means that every quarter we have enormous cash flow generation because we’re amortizing payments that we made last year. So our cash flow is very strong but our distributable earnings tries to capture the concept of our earnings, what’s the money that we earn that would be available to be distributed to our partners, both our partners who are employees and our partners who are public stockholders.

Daniel Harris – Goldman Sachs

So is it safe to say that you’re generating more cash than you’re going to be, significantly more cash in terms of the percentage of the 75% than you’re going to be paying out?

Howard Lutnick

Yes.

Daniel Harris – Goldman Sachs

I think a lot of the stuff you said Bob with regards to the tax rate was in place two months ago on the prior call. Is there anything that you changed that would have caused the multi-100 basis point change in your tax rate estimate?

Bob West

It’s really the non-cash equity compensation element of it. And we’ve seen that originally as going to be capital gains worldwide and we’re seeing that now as [respectively] ordinary income to certain partner groups. And because of that we’re going to get a deduction for it which is really a deduction that we happened to identify on the last call. So that’s another contributor that’s helping us get this very favorable rate.

Daniel Harris – Goldman Sachs

So then it’s just a change in accounting treatment?

Bob West

Not really a change in accounting treatment, just a change in our understanding of how the taxes were going to flow through to the effective tax rate. So not a change in law or rules, just a change in our understanding of the way that the non-cash equity compensation is going to be treated.

Operator

There are no further questions.

Howard Lutnick

Thank you all very much. We at BGC Partners are very happy to have concluded our merger to be able to from now on report as one company to discuss and show you the strength of our structure and our cash, distributable earnings. I think the feeling that we have here is that the concept of shoulder to shoulder.

That if we think of our partners who work here, who generate our earnings, together with our partners who are public shareholders and we work to raise our distributable earnings per share and that is our focus, that will lead us to higher earnings and better returns. It will be a very high yielding stock and should remain so because this is how we look at things.

We very much appreciate your time, we are very excited about being together and being one company and we look forward to many mornings like today where we show just tremendous earnings growth as compared to last year. So thank you all and have a great day today.

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