GFI Group Inc. Q2 2008 Earnings Conference Call Transcript

GFI Group Inc. (GFIG)

Q2 2008 Earnings Call Transcript

August 01, 2008 8:30 am ET

Executives

Chris Giancarlo – EVP Corporate Development

Michael Gooch – Chairman and CEO

James Peers – CFO

Analysts

Chris Allen – Banc of America Securities

Dan Fannon – Jefferies & Company

Niamh Alexander – Keefe, Bruyette & Woods

Rob Rutschow – Deutsche Bank

Don Fandetti – Citigroup

Daniel Harris – Goldman Sachs

Presentation

Operator

Good day ladies and gentlemen, and welcome to the second quarter 2008 GFI Group Inc. earnings conference call. My name is George and I will be your coordinator for today. (Operator instructions) As a reminder, this conference is being recorded for reply purposes. I would now like to turn the presentation over to your host for today’s call, Mr. Chris Giancarlo, Executive Vice President Corporate Development. Please proceed.

Chris Giancarlo

Good morning. Welcome to the GFI Group’s second quarter of 2008 earnings conference call. We issued a press release yesterday providing the financial results for our fiscal quarter ended June 30, 2008 which is available on our website at www.gfigroup.com. Let me remind you that we have also posted monthly revenue information for the quarter on our website under Supplementary Financial Information.

We issued a further press release last night correcting the record date and payment date for our second quarter cash dividend of $0.05 per share. The correct record date is August 15, 2008 and the correct payment date is August 29, 2008. We apologize for any confusion this may have caused.

To begin this morning’s call, Michael Gooch, our Chairman and Chief Executive Officer will review our business performance in the second quarter, address some recent developments and consider expectations for the current period. Next Jim Peers, our Chief Financial Officer, will review in greater detail the financial results for the recent quarter. 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 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 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

Thank you very much, Chris. Good morning .Thank you for joining us today. As we reported yesterday, our total revenues were $261.5 million in the second quarter of 2008, an increase of 15% from the same period last year.

We achieved increases in all product categories over the second quarter of ’07 and saw very strong contribution from Trayport which helped partially offset the lower than expected increase in our brokerage revenues.

Nonetheless, with the successful in increasing brokerage revenues 11%, while dealing with the disruption in our North American credit business. We were able to achieve a double digit brokerage revenue increase and strong earnings growth because of the durable and sustainable business model which is based on advanced and diverse revenue streams, our conservative cost structure with well managed indirect cost that give us the flexibility to scale as needed, and effective and well-timed acquisitions.

We’re opportunistic that the markets we operate in and our customers are surmounting the challenges of the current credit environment. The OTC derivative markets are functioning well and we anticipate strong growth in returns of our markets in 2009.

Emerging markets, equities, energy and our Asian businesses are general performing very well. The low level of trading activity in certain structured credit markets that we have seen in the last few months since the drying up of the CDO new issuance market has been somewhat offset by stronger trading activity in lower margin cash and single name banking finance products and growing interest in the loan CDS business.

Longer term, we fully expect a resurgence in credit derivative trading in all sectors. That prospect combined with the robust trading activity in other markets that we are currently experiencing, by way of example, we had near record revenues in July in Asian interest rate options and certain emerging market products in North America, and a very promising early adoption of our EnergyMatch, electronic trading of US power markets along with new initiatives in the OTC credit markets, makes me feel very confident that we are well positioned to see the return to significant double digit percentage revenue growth at improving margins in the not so distant future.

Before I discuss our outlook in more bit, let me offer my normal review about second quarter performance to add perspective on the quarter and our future outlook. Our revenues from credit products increased 5% from the second quarter of ’08 and represented 31% of our total brokerage revenues versus 33% in the same quarter last year. The increase was due to the strong growth in creditor derivatives and bonds in Europe, where a number of our desks saw near record performance such as in European government bonds and floating rate notes and a more than doubling of our credit derivative revenues from Asia Pacific. This strong European and Asian growth offset lower revenues in North America.

We have new trading solutions and initiatives planned for release through the end of the year for our CreditMatch platform that adds to our optimism about the electronic development of the market. I am also pleased to report that we have substantially re-staffed our credit team in New York under the very able leadership of Jim Higgins, a former co-head of global credit trading at Citigroup in New York. Scott Wilson is supporting him as head of structured credit products. Scott had been at GFI for five years and has been responsible for new business development in structured credit.

Our equity products category continued the strong year over the year growth in the second quarter with revenues up 31% from the second quarter of ’07. Volatility in equity markets around the world remains the major driver of equity volumes. We saw major growth in cash equities and equity derivatives in Europe which increased 46% and strong growth in North America which increased 16%.

Our Paris office continues to perform well and we also saw strong performances from our new offices in Dublin and Tel Aviv, and from our structured equities product group in London. Equity products represented 28% of total brokerage revenues compared to 24% in the second quarter of 2007.

Financial product revenues were only up slightly from the second quarter of 2007 and contributed 19% of our total brokerage revenues versus 21% in the year ago quarter. Emerging market products including NDF [ph], emerging market FX options and emerging interest derivatives which achieved record or near record quarter was strong in the second quarter, offset by the disposition of our global US dollar interest rate swaps business at the end of the first quarter of 2008.

Our commodity product revenues rose 7% from the second quarter of 2007 mainly due to year over year growth in nearly every energy and product category in Europe, especially electric power, wet freight, metals and emissions, each of which achieved near record performance. Commodity products were 22% of total brokerage revenues in the second quarter of 2008 compared with 23% in the same quarter of ’07.

Looking at our performance in the second quarter of 2008 by geography, our year-over-year revenues increased 27% in Europe, 16% in Asia Pacific while North America was down 7%. I've emphasized in past calls of the importance of technology and electronic trading in our growth strategy. We believe our success in internally creating trading platforms including CreditMatch and ForexMatch and the central role we expect Trayport which we acquired in January to play in our future will create a number of opportunities for us.

In the second quarter, we announced a major strategic agreement with NYMEX whereby NYMEX products be distributed on Trayport’s trading gateway system which has broad distribution in Europe. This partnership provides the European energy and commodity market participants who'll use Trayport technology with access to NYMEX's European and US oil markets while providing NYMEX with the natural extension of its distribution in Europe. This represents a potentially significant expansion of Trayport’s position the European and US commodity markets trading in new asset classes and regions. Also, it represents a new revenue model for Trayport based on transactions fees rather than software license fees.

I would also like to tell about two other technology based innovations that we recently introduced. Last week, we launched a new version of our CreditMatch platform called CreditMatch Webview, which provide access to our CreditMatch trading platform via Web browsers and Internet enabled handheld mobile devices such as Blackberry and Windows Mobile. This development allows GFI’s clients to view the credit markets from anywhere in the world whether they’re on the move or on the trading floor.

Earlier this week, we went live with our North American EnergyMatch electronic trading platform for contracts on (inaudible) which is the Texas electricity grid. While we are at an earlier stage, I am pleased to note that the response from key energy market participants has been extraordinary, far greater than anything we expected so quickly. We are very encouraged by the immediate customer demand and will soon be launching other North American energy products on EnergyMatch. If the early traction on GFI EnergyMatch persists, then we will enjoy a significant competitive advantage over our OTC competitors. I look forward to reporting further on the progress of EnergyMatch later this year.

While I’m on the subject of EnergyMatch, let me also note that we have announced the appointment of Michael Cosgrove as head of energy products for the Americas. As you may know, Michael is the President of GFI’s Amerex energy subsidiary which he joined as a trainee in 1981 and become CEO in 2003. Michael is widely recognized as a true visionary in global energy products and a strong proponent of technology and market innovation such as EnergyMatch. I'm delighted that Michael has agreed to take on this larger role based here in New York. I’m certain under Michael’s leadership, GFI will achieve even greater success as one of the world’s most technologically enabled brokers of OTC energy products.

Another area of significant strategic focus is improving our operating leverage. Clearly, there were cross currents in the second quarter that affected our operating costs, namely the second quarter shift in our product mix towards equity products, which carry higher clearing costs as well as items related to the departure and re-staffing of the group in our New York credit operation. With most of these disruptions behind us, our future results should be more be indicative of our focus and progress.

Turning to our outlook for the third quarter 2008, in spite of the fact that last July our performance was extraordinary due to explosion of the credit crisis and this August has two less trading days than last August, we still expect to beat last year’s third quarter revenues for a number of reasons.

These include the progress of several new initiatives, the take-up of electronic trading in North America on EnergyMatch, the positive impact of Jim Higgins, our new head of North American credit products and of Michael Cosgrove as head of North American energy products, and the benefits from our current move to a new North American headquarters here in Manhattan. For these reasons, I expect year over year brokerage revenues to increase by 5% to 7% in the third quarter and total revenues to increase 7% to 10%.

One of GFI’s major strengths is reflected in our balance sheet. We currently have debt of $215 million versus shareholder equity of $493 million and we can raise over $300 million in additional funding under our existing credit facilities.

We are fully committed to improving shareholder value and we are pleased to increase our dividend this quarter to $0.05 per share. As you know, we announced yesterday that we are engaged in non-exclusive discussions with Tullett Prebon regarding a possible business combination involving the two companies. As we also noted, there can be no assurances that an agreement will be reached or that a transaction will be consummated. I’m sure you’ll understand that we will not comment further on this matter until an agreement is reached or discussions are terminated.

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

Jim Peers

Thank you, Mickey. Good morning everyone. Our revenues continue to grow in the second quarter of 2008 compared to the second quarter of ’07 with an increase of $33.4 million to $261.5 million versus $228 million for the prior year, an increase of approximately 15%.

Our second quarter revenue growth was mainly driven by increased market volatility and strong organic growth within our equities division along with revenues of $8.5 million from Trayport.

In the first half of the year, revenues increased by $107.7 million or 23% compared to the first half of 2007. On a GAAP basis, our second quarter net income improved to $23.6 million versus $19.1 million in the second quarter of ’07.

After backing out the non-GAAP items which I will discuss in more detail later, net income grew 21% to $26 million compared to $21.5 million for the second quarter of ’07.

For the first half of the year, net income grew 37% to $64.1 million versus $46.8 million for the same period in 2007 on a non-GAAP basis.

Our diluted earnings per share for the second quarter of ’08 was $0.20 compared to $0.16 in the second quarter of ’07. On a non-GAAP basis, diluted earnings per share for the second quarter of this year was $0.22 compared to $0.18, I should say, for the second quarter of ’07, an increase of 20.7%. For the first half of 2008, diluted earnings per share grew by 35.8% on a non-GAAP basis, $0.54 compared to $0.39 with same period in 2007.

Our brokerage revenues grew by $24 million or approximately 11% in the second quarter of ’08 compared to the second quarter of ’07. Credit is up over 5%, financials are up 1%, commodities are up 7% and equities are up approximately 31%. Brokerage sign-on bonuses paid in the second quarter of ’08 were $31 million compared to $5.7 million in the second quarter of ’07. Brokerage sign-on bonuses expense were $9.2 million in the second quarter of ’08 compared to $5.8 million in the second quarter of ’07.

Our brokerage personnel headcount at the end of the second quarter stands at 1,065, up 57 from the second quarter of ’07. The change in the broker headcount from the end of 2007 is 28. Our broker productivity has increased by 11.6% to 515,000 for the first half of ’08 compared to 461,000 in the first half of ’07.

Our pre-tax margin for the second quarter of ’08 was 13.9%, the same as the second quarter of last year on a GAAP basis. On a non-GAAP basis though, our pre-tax margin for the second quarter of ’08 was 15.3% compared to 15.5% for the same quarter last year. For the first half of the year, pre-tax margin was 16.3% versus 15.5% for 2007 on a GAAP basis. And on a non-GAAP basis, our pre-tax margin for the first half of the year was 17.5% compared to 16.6% for 2007.

In summary, our key performance drivers on a non-GAAP basis are as follows. Revenues for the second quarter are up approximately 15% from the second quarter of ’07. Trayport revenues for the second quarter were $8.5 million and are included in the software licensing revenue line.

Our comp costs are at 60.7% for the second quarter compared to 62.5% for the second quarter of ’07. The first half compensation costs were 61.1% compared to 62.8% for the first half of ’07. We currently estimate that our compensation ratio will increase to approximately 62.5% in future quarters mainly due to the increased compensation costs of re-staffing our credit team in New York.

Non-compensation expenses in the second quarter of ’08 as a percentage of revenues were 24% compared to 21.9% for the same quarter in the prior year. The non-comp ratio for the first half of the year was 21.4% compared to 20.6% for the first half of ’07. The increase was mainly attributed to increased legal fees and T&E expenses. GFI’s effective tax rate improved to 36.5% for the first half of ’08 compared to 38% for the full year of 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 the second quarter were 119.4 million shares. As discussed in previous calls, GFI signed a lease to relocate our New York offices to 55, Water Street. The move will be completed in August.

Accordingly, the company excluded $2.2 million, $1.5 million after tax as non-reoccurring costs. Trayport’s income before taxes intangibles and interest costs out of [ph] run rate of approximately $1 million per month.

On our balance sheet, both receivables from and payables to brokers, dealers and clearing organizations grew from this first quarter. By the middle of July, substantially all fails to deliver and fails to receive transactions as of June 30, 2008 have subsequently settled at the contracted amounts. These balances relate to our matched principal business for cash products. And as you know, we do not trade on our own account period [ph] product inventory will provide financing to our customers.

That completes my remarks and I will turn the presentation back to Mickey for some closing comments.

Michael Gooch

Thank you, Jim. In conclusion, GFI was able to achieve respectable growth in the second quarter of 2008 despite the substantial challenges we faced in credit. We believe the worst is behind us and are fully focused on moving forward with our strategy. We are confident in the many strengths that differentiate GFI from our competitors and we will build upon them to improve our valuation and deliver additional value to shareholders.

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

Question-and-Answer Session

Operator

(Operator instructions) And now our first question comes from the line of Chris Allen of Banc of America Securities. Please proceed.

Chris Allen – Banc of America Securities

Hey, guys. How are you doing?

Michael Gooch

Good morning, Chris.

Chris Allen – Banc of America Securities

I realized you guys can't really address probably directly, but maybe Mickey you would give us some thoughts on the need for scale and product diversity in all the major asset classes including say rates over the long term for a successful IDB franchise.

Michael Gooch

I mentioned in my prepared remarks that we had actually disposed of our US interest rate swaps business globally in a transaction that we closed at the end of the first quarter which gives us a minority interest in an organization called Blackbird which operates an electronic – or that were in the process of operating an electronic marketplace for interest rate swaps.

I think for GFI, if we were to beyond that initiative look at the G3 interest rates swap business, our best approach to entering that business in a significant manner would be through a merger with one of the existing IDBs that has a significant position in that space. I think our action of disposing of our interest rate swap business is twofold. One, clear indication that from our sort of less price position, it was not really achieving what we wanted to. We were not going to try to grow that business through flashy hiring of relationship brokers. And instead we merged it into or sold into, I'm not sure what the technical term is, into this stake in Blackbird which we clearly hope will be very successful. But beyond that, we wouldn’t have really a strategy for expanding our position in G3 interest rate options, I mean swaps. We should do very well in emerging market interest swaps globally.

Chris Allen – Banc of America Securities

If we just turn a little bit to the third quarter outlook, I'm you are already about a month in. I’m just wondering, how is July tracking so far?

Michael Gooch

We have basically come even with last July, it’s like dead even, we performed for the same revenue this July as last July, which I think is actually a result all things considered, because last July was actually extraordinary in light of the credit crisis exposing and that’s why looking at August with two less business days, but my strong confidence for – September is kind different this year around, I think. September last year actually was quite a bit slower than August and July, and I’m still expecting kind of the opposite this year. So, with the various initiatives we have in place, that’s where we come up with our guidance for 5% to 7% growth in the brokerage and then 7% to 10% in total revenues because obviously we are doing quite well with our technology sales.

Chris Allen – Banc of America Securities

Okay, great guys. Let me get back in queue. Thank you.

Michael Gooch

Okay.

Operator

Our next question comes from the line of Dan Fannon from Jefferies & Company. Please proceed.

Dan Fannon – Jefferies & Company

Good morning, guys. Just building on the last question in terms of guidance, is the mix here thus far in July similar what we saw in the Q2 results where equity is still leading the way?

James Peers

Equities is still growing at a significant pace probably similar to what we said in the second quarter, but we’re also seeing in July a pickup in commodities.

Dan Fannon – Jefferies & Company

Okay. Can you help us quantify what the contribution you guys have seen, or actually first off in Q2 what do you think you lost in revenue in terms of the departures from your North American Group and then kind of where you think you are now in terms of re-staffing and kind of rebuilding back from a run rate basis going forward in terms of the new hires, their contribution and what you are looking at going forward?

Michael Gooch

We cannot really going to comment about dollar figures on what we think we lost or what we might gain or whatever et cetera, et cetera, partly because of I think comments that we had to make to you guys have conference calls worked against us in our litigation when we were looking for an injunction. But in terms of our position in credit derivatives, we’re still number one. We are doing fine. And as I mentioned when everybody was getting all excited about some brokers leaving back in April, we’ve been through this a number of times and we got a very strong franchise and we’re very good at this, and we have an excellent New York credit derivative group.

Dan Fannon – Jefferies & Company

Okay. And then lastly, in terms of the credit business as being your highest margin statement, as you kind of look out, you talked about volumes potentially coming back in ’09 or resurgence in overall trading, when you see that or when you think about that event happening, do you think it’s going to be lower margin with a lot tighter fee compression?

Michael Gooch

We think that we are going to be about 5% worse off in the contribution margin just due of the increased compensation level in the credit derivatives space. Certainly that’s going to wash through over the next two, two and a half years. Just in the North America which is where we are able to calculate that effect, we had about 1% impact on the total compensation line. But certainly things like the structured credit markets where the deal is going to be quite lucrative, that ends up tending to be good margin business. So, when that slows down for a period of time, that can have a negative impact on the margin for that period of time.

But longer term, I was in that 5% decline in the margin for the next two and a half years in just the North American business. I think we’re still gaining margin in our European and Asian credit derivative businesses. I think that the activity in the structured credit derivative market will return. I think that we’re seeing business growing in areas that we were doing a year ago like some of the loan CDS areas, we are very active in bank and finance, naturally and there will be something else down the road that we will get very active. And so, I think generally speaking, we will have very good credit derivative performance going forward in the future.

Dan Fannon – Jefferies & Co.

Okay, thank you.

Operator

Our next question comes from the line of Niamh Alexander from KBW. Please proceed.

Niamh Alexander – Keefe, Bruyette & Woods

Hi, thanks for taking my questions. Apologies, sorry, I missed it earlier, but I just wanted to revisit credit derivatives from an industry perspective, and because we seem to be getting closer to the central clearing initiative and simultaneously I guess an exchange has bought credit derivatives broker kind of potential looking to get into that part of the world too, help me understand GFI’s position. I know you’re part of the Clearing Corporation. Can you give me a sense of when you think that might roll out and what an opportunity that might be for GFI?

Michael Gooch

I think somewhere in the third quarter, maybe September, I think that the main deal is that the members of the Clearing Corporation will begin to offset transactions with each other through the Clearing Corp in certain limited index markets and then over a period of time, they will expand that process to all of the credit derivative markets. And I think that is going to be very, very good for the credit derivative business overall. I think it’s going to cause the banks to be able to trade quite actively in credit derivatives without tying up significant areas of their balance sheet. So that’s a very fixed positive sign.

Also, Jim Higgins, who we hired, who was co head of global credit of Citibank, he’s being named to the Clearing Corp to the board. So, he’s representing us on the Board of Directors at the Clearing Corp. So ourselves and (inaudible) on that Board of Directors and have an ownership stake in the Clearing Corp. And in terms of an exchange entering the market, I think what you’re referring to there is I.T.’s [ph] acquisition of CreditX. And significantly that doesn’t really change anything because I don't think the dealer community is looking to utilize a different clearing mechanism. I think they are probably focused on the Clearing Corp. And in terms of an IDB competitor, CreditX’s business is identical to ours other than we do twice as much business as them.

So, other than that, it’s identical in terms of what percentage of it is electronic, what percentage of it is guys on phones, it's identical, we just do double the business. We are members of the Clearing Corp, I think the business will grow, we’ve got initiative, no one is putting credit derivatives on BlackBerry except GFI. Our competitors don’t even have that technology capability. I know that might not sound like much, but it’s just one more example of our leadership position and I don’t think you’re going to see the exchanges doing anything particularly exciting in credit derivatives.

I think there might be possibly some index contracts lost in Europe. If they are, we will and overall really just like we do in the energy markets put them on our trading screen and trade them. So, if there is any kind of clearing mechanism beyond the Clearing Corp., we welcome it. The more the merrier, the more clearing mechanisms, the better for our business.

Niamh Alexander – Keefe, Bruyette & Woods

That’s great. Thanks for the color, Michael. Really appreciate it. And if I can go to the front end of the trade as well, do you think you’re any closer to the dealers in the US moving some of the products electronic? I guess that not all of them can be treated electronically, but with the Clearing Corporation, could that be kind of be a catalyst to shift more of the trading front end, and then if so, how is CreditMatch positioned? Could there be a few different venues? Could it roll on to one?

Michael Gooch

There is not anything yet to specifically make me certain that the electronic trading is going to take off in North America. But when it does, it’s going to be sudden. And I will tell you that just in the last two or three months, we’ve made significant improvement in our use of our technology in North America for credit derivatives and Jim Higgins is very focused on this and there are a number of opportunities to trade credit derivatives electronically in North America and I think this clearing mechanism is going to help.

I mean we have the straight due [ph] process accountabilities to process indexes electronically in North America and if this business starts to take off on the clearing side, I think the volumes are going to explode. And frankly, if you look at the difference between the voice brokered business and the electronic business in Europe, it’s just purely the volume becomes very difficult to be handled without a trading mechanism to back it up and we’ve got that all in place and we’re ready to go, and we’re a member of the Clearing Corp. So we’re right with them working hand in hand in this process.

Niamh Alexander – Keefe, Bruyette & Woods

Okay, that’s great. Thanks for that color. And then just real quick if I could go back to this past quarter, the second quarter, the commodities business. The group slowed a little when I would have thought that the market volatility would have supported stronger growth. Was there anything specific in there? Was it maybe just a risk of urgency on bilateral trades or –?

Michael Gooch

There is no risk of urgency doing bilateral trades and there’s plenty of clearing mechanisms in the energy market and we utilized all of them and what I would tell you though is that in the second quarter, because of the volatility in the marketplace, what did happen is more business transpired in the short end of the market where the commissions are lower and the margins are lower and also, where you tend to get more electronic trading. And so, as that kind of calms down, I think you will see that we will get much more longer term business going through in energy space. And I think – on my sheet, I don’t have these numbers fresh, so I’m going to put it out there with a caveat that we’ll have to double check it, but I believe we had growth in energy trading in July that was north of 20%. Jim is just confirming that. And it was actually closer to the 30%. So, I think that’s because the market’s already calmed down from that short end trading and the longer end trades, we get more commission.

Now, we just launched electronic trading of (inaudible) in North America. We’re going to go live with PJM [ph] next week. And none of our competitors with the exception of ICE doing anything on electronic trading of energy, OTC energy in North America. And if the first week is going to go by, we’re going to be gaining a significant amount of market share in that space and not just market share from our OTC competitors that don’t have any electronic platform, you should all bear in mind they all licensed their electronic trading platform in Europe from us.

So, in North America at this point, really only IDB that’s actually launching this in North America and we also would expect a pick-up a lot of the short-end business now that we have the fully electronic trading of energy in North America.

Niamh Alexander – Keefe, Bruyette & Woods

Okay, that’s helpful. Are you kind of – you’re not competing with the ICE. Is it competing with the ICE OTC venue?

Michael Gooch

Yes, it completes with the ICE OTC venue through execution. ICE clears trades and executes trades.

Niamh Alexander – Keefe, Bruyette & Woods

Yes. So, it’s an (inaudible). Okay, that’s helpful. Thank you. And just lastly if I could, from last quarter or just after the guys had left, you were talking about maybe one of the ancillary impacts of such a large brokerage move. At the time, it’s some pressure on your rate card, maybe customers pushing back on the rate card, but I didn’t (inaudible) to me you were talking about a little bit of margin pressure in the credit derivatives is more coming from the comp. Have you had any of those discussions or you’re seeing any pressure from your customers?

Michael Gooch

Yes, the customers would all like to do business at lower rates and we’re happy to provide them execution at lower rates if they want to trade electronically. I think it’s going to be part of the move towards electronic trading in North America. And generally speaking, certain areas of that business, they are encouraging us to charge them lower rates but it’s always been in my experience that longer term, that tends to lead to greater volumes. And so, once we sort of get past this period of retrenchment, I would fully expect to see quite of bit of growth in the credit derivative business. I’m expecting this clearing mechanism to really bring growth to that business, but it probably will be at lower commission rates. Nevertheless, we would expect to do significantly larger volumes which would offset that lower commission rates.

Niamh Alexander – Keefe, Bruyette & Woods

Okay, that’s helpful. Thanks for taking my questions.

Michael Gooch

Sure.

Operator

Our next question comes from the line of Rob Rutschow from Deutsche Bank. Please proceed.

Rob Rutschow – Deutsche Bank

Hey, good morning everybody.

Michael Gooch

Good morning

Rob Rutschow – Deutsche Bank

I was hoping you might be able to give us a little bit more detail on the non-comp expense guidance going forward. Obviously, looks like T&E was up and professional fees. I’m assuming that’s probably both related to the departure. So, I’m wondering if you can tell us what the delta should be going forward?

James Peers

Well on the professional fees, professional fees were up approximately $2 million in the quarter related to the credit and situation in New York. We’re not sure exactly how that will play out in future quarters but I wouldn’t be surprised it will be way down from that $2 million base. So there’d be a significant decrease there. With regards to T&E, I guess there’s two comments I would make there.

The first one is with the customer layoffs and also with the lower revenues our brokers are staying closer to our customers and so therefore, there was increased spending on T&E. But also was impacted by the product mix with the growth in equities which tends to have higher T&E spends but the same for all of that being said though we have started to initiate a specific spending limits on our T&E going forward for the rest of the year (inaudible).

Rob Rutschow – Deutsche Bank

Okay. And then more broadly, I guess, one of the things I think about when I see a potential deal like what you’re talking about is you are maybe concerned about revenue growth and so you do mergers so you could get cost savings. Is that all on your mind or is it more just you need more scale to compete effectively?

Michael Gooch

We are not against cost savings as a concept. I do think that longer term – I’ve said that my vision of the marketplace longer term is going to be probably three major consolidated IDBs that will probably at some point in time consolidate on who deals with certain exchange entities primarily the exchanges that have the presence in the financial future trading and energy trading sector.

So, it was jut a question of how you get there when you get there, what the right timing on these things is. We are doing very well and we’re doing very well with the technology and one or two of our competitors really do need to get a technology system into place and we would be an obvious partner to achieve that. I think that whoever we aligned ourselves with would be immediately catapulted to the preeminent position in technology in the IDB space.

Rob Rutschow – Deutsche Bank

Okay. I guess it kind of ties in, do you think there is – dynamics that have changed that would cause you to think there might be less loss business from a combination like this than there was in the past?

Michael Gooch

It’s the same. It wasn’t that big a deal but we have disposed of our G3 interest rate swap business. So, there’s no overlap there at this point.

Rob Rutschow – Deutsche Bank

Okay, thank you.

Operator

Our next question comes from the line of Don Fandetti from Citi. Please proceed.

Don Fandetti – Citigroup

Good morning. Mickey, I guess following up on the last question, it sounds like you think that the worst is behind you. The exchange is really aren’t a big threat. I’m just a little perplexed why you would consider effectively a strategic sale at this point, so wanted just kind of get your thoughts on that.

Michael Gooch

All the lawyers in the room are telling me not to comment. Sorry.

Don Fandetti – Citigroup

Okay. And then in terms of – historically, you viewed the company as sort of a 20% top one grower and it sounds like you’re pretty bullish for ‘09. How do you think about the growth of the company on a going-forward basis? Have you taken a haircut from the historical pacer, what do you think there?

Michael Gooch

I still think, Don, it’s just these next two or three quarters where you’re going to see this sort of 7% to 10% growth. I mean if we really get traction with this EnergyMatch situation, that could actually spike that for us. And then I think that once we get past that, we’re back to high double digit – when I told high double digit, I mean in the high teens to 20% of revenue growth, and that’s going to translate into better than 20% EPS growth if that occurs.

Don Fandetti – Citigroup

Okay. And then your comments about – you think there could be a very good uptick in credit derivatives activity outside of going to central clearing. I mean what would cause you to be so bullish? I mean there’s been deleveraging. Would you expect them to re-lever or do you just think broadly speaking there’s going to be greater use of the product? Why are you so positive?

Michael Gooch

Well, it seems that the credit derivative business performed very well through this credit crisis and the demand for the product, the money interest apparently that’s floating around the index space and the loan space and the single name space, it’s very real. And once you sort of eliminate some of the balance sheet issues, it becomes very lucrative for the banks to tighten their markets and trade that very actively. So, of all the major credit derivative heads I've talked to, and bear in mind that we would talk to them with this Clearing Corp process, but they generally tend to expect increased volumes in credit derivatives.

Don Fandetti – Citigroup

Okay, thank you.

Operator

Our next question comes from the line of Daniel Harris from Goldman Sachs. Please proceed.

Daniel Harris – Goldman Sachs

Good morning, guys and I apologize if I ask a question that was asked previously and that you addressed earlier. But if I look at the equities line and that’s obviously been a real source of success for you guys over the last couple of quarters including this one, what’s really been driving that? Is that just a lot more block trading activity? Is that derivative swaps? What’s really helping you deliver the kind of growth that we’re seeing there?

Michael Gooch

Well, both the cash and the derivatives are both being very active in the last quarter. On top of other things, first of all Bear Stearns going out of business, that has an impact, because that was significant execution shop for the Street. And on top of that, I think that a lot of the dealer community has pulled away from committing capital. And what I understand is that the – particularly the hedge fund community is quite keen to have reasonably low-cost execution only services from organizations like GFI. So, it’s just being – it’s just been all around good. I think it speaks to our diversification because needless to say, in another two or three quarter's time, it’s going to be something else at GFI that’s knocking the ball out of the park. I just think that we are extremely well diversified company.

Daniel Harris – Goldman Sachs

And I know that you guys really kick started that with the hire of the 30 folks from Paris, but how has that really build out since then in terms of US and Asian presence?

Michael Gooch

Well, we have significantly built out our European business not just in Paris but also in London and North America. We’ve been expanding that business globally.

Daniel Harris – Goldman Sachs

Okay. Mickey, I just want to follow up with something that you have said in the last quarter with regards to pricing compression and I think you touched on that a couple of questions ago, but we’ve heard that pricing and credit has actually gotten a lot more challenging over the last few months and I was wondering if you can comment on that at all?

Michael Gooch

What do you mean by pricing has become a lot more challenging?

Daniel Harris – Goldman Sachs

Well, that in pricing, I guess on a fees per million, has actually come down similar to what you had said in the past would likely happen.

Michael Gooch

Yes, I think in some segments it has, broadly in the more active stuff like the single-name stuff. I don’t think it’s really been impacted too much in the structured market because to some degree, the lack of liquidity actually makes the broker more valuable because you are – you got a lot of wider spreads in this liquidity so the (inaudible) is actually searching the market for what is more valuable. But yes, definitely there’s been a lowering of the commission rate generally in credit derivatives.

Daniel Harris – Goldman Sachs

Okay. That’s helpful. I appreciate that. And then, just lastly, Jim, if you can touch on the clearing fees as a percent of equity revenues, I think they’re tied pretty closely to that. Look like they’ve moved up here in the quarter. Was there anything in there that was more one time or the 15%-ish rate of equity revenues something that is a good run rate going forward?

Jim Peers

It’s impacted by the level of equities as of percentage of the total revenues since equities was higher percentage of the revenues for this quarter than other quarters. It picked up to 4%. So, it goes anywhere between 3.5% to 4%.

Michael Gooch

Daniel, you want to know if 15% of equity revenues the right number for clearing costs?

Daniel Harris – Goldman Sachs

That’s what I was aiming at Mickey, yes. Is that, Jim, I hear you as equities increases but as a percent of equities, I would have thought with the more volume you do, that percentage would actually come down as a percent of equities commissions.

Jim Peers

No, it’s been certainly constant actually but we are continually looking at how we get that fee down. And so we – that’s one of our major projects in the next six months.

Daniel Harris – Goldman Sachs

Thanks very much.

Michael Gooch

Are we done? George?

Operator

I would now like to turn the call over to Chris Giancarlo for closing remarks.

Chris Giancarlo

I have no closing remarks. I just want to say thank you very much for participating in our call today. This concludes our second quarter 2008 earnings conference call. Thank you for joining in.

Operator

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

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: [e-mail]. Thank you!