Bgc Group Inc (BGC) 2007 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third quarter 2007 eSpeed Incorporated earnings conference call. My name is Lauren and I'll be your coordinator for today. At this time, all participants are in a listen only mode. (OPERATOR INSTRUCTIONS).

I'd now like to turn the presentation over to your host for today's call, Mr. Jason McGruder, Director of Investor Relations.

Good morning. Before we begin, I want to make sure you know that our preliminary third quarter earnings release was issued last night and that our special merger proxy was filed with the SEC on November 6th. If you do not have a copy of these documents, you may obtain them by going to the investor information section of eSpeed.com. I also refer you to the disclaimer language, titled Discussion of Forward-Looking Statements contained in our earnings release. I remind you that information in the release and on the call contains forward-looking statements within the meaning of section 27 A of the Securities Act of 1933 as amended and section 21 E of the Securities Exchange Act of 1934 as amended.

Such amendments are based upon current expectations that involve risks and uncertainties. Any statements contained here that are not statements of historical fact may be deemed to be forward-looking statements. The actual results of eSpeed, BGC, or the combined Company in the merger, also known as we are, for the combined Company and the outcome timing of certain events may differ significantly from expectations discussed in the forward-looking statements based on a number of factors set forth in the release. We believe all forward-looking statements are based upon reasonable assumptions when made, however we caution that it's impossible to predict actual results or outcomes or effect of risk, uncertainties, or other factors on anticipated results and outcomes and accordingly you should not place undue reliance on these statements. Forward-looking statements may speak as only as of the date when made and we undertake no obligation to update these statements in light of subsequent events and developments. Please refer to the complete disclaimer with respect to forward-looking statements set forth in yesterday's earnings release and risk factors set fourth in our public filings. I'd now like to turn the call over to our host, Howard Lutnick, Chairman, President and CEO of eSpeed.

Good morning everyone and thank you for joining us for our third quarter 2007 conference call. With me today is eSpeed's Chief Accounting Officer, Frank Saracino, who will review our financial performance and also joining me is Bob West, who is BGC's CFO and he will be the CFO for the combined Company after our proposed merger with BGC is complete. Bob is here to discuss BGC's results and to update its full year outlook for both 2007 and 2008. After that we will be glad to answer your questions.

With respect to eSpeed's proposed merger with BGC, we filed our proxy on Tuesday, November 6 and we still hope for the deal to close by the end of the fourth quarter this year or in the first quarter of next year. BGC had a strong third quarter and is on track to generate full year 2007 revenues and profits well ahead of what we estimated at the time of the merger announced in May. These strong results further demonstrate the compelling logic of the combination of BGC and eSpeed and the substantially accretive nature of the merger for eSpeed shareholders, so with that I'd like to turn the call over to Frank.

Thanks, Howard and good morning. eSpeed reported a GAAP net loss of $6 million or $0.12 per diluted share in the third quarter. Our non-GAAP net operating income was approximately $600,000 or $0.01 per diluted share for the quarter. The after-tax difference between non-GAAP net operating income and GAAP net income for the quarter reflected $4.9 million of patent litigation costs, including a $3.5 million reserve related to the recent patent decision, $1 million in expenses associated with the proposed combination with BGC, $300,000 in charitable contributions related to eSpeed's September 11 charity day and $400,000 in losses from Aqua into which eSpeed contributed equity direct access business and holds an equity stake.

By comparison, the third quarter 2006 we reported a GAAP net loss of approximately $500,000 or $0.01 per diluted share. That same period we reported non-GAAP net operating income of $1.2 million or $0.02 per diluted share. We reported GAAP revenues of $40.4 million and non-GAAP operating revenues of $40.2 million for the third quarter of 2007. The difference between GAAP and non-GAAP revenues for the quarter was $200,000 in revenues from eSpeed equity's direct access business. We reported $38.1 million in both GAAP and non-GAAP revenue for the year ago quarter.

Fully electronic revenues were $16.3 million in the third quarter of 2007 versus $16.8 million for the third quarter of 2006. Excluding revenues from the Wagner patent, which expired in February of 2007, revenues in our fully electronic business were up 10% from $14.9 million in the third quarter of 2006. Revenues from Software Solutions were $11.8 million in the quarter compared with $11.4 million in the year ago period. Excluding Wagner came into $2.5 million for the third quarter of 2006, Software Solutions revenue increased 33%.

eSpeed's hybrid voice assisted and screen assisted revenues totaled $9.6 million in the third quarter of 2007, up 27% compared with $7.5 million in the third quarter of 2006. The year-over-year growth in quarterly GAAP revenues was due primarily to increases in hybrid revenues from BGC, partially offset by the loss of revenue related to the Wagner patent. We anticipate non-GAAP quarterly expenses in the fourth quarter to be approximately the same as the third quarter as we continue to invest in our hybrid voice assisted and fully electronic businesses. Our GAAP expenses for the remainder of the year will also likely include additional merger related costs.

We reported cash flow from operations of $9.9 million in the third quarter of 2007, compared with $20.8 million in the third quarter of 2006. As of September 30, 2007, eSpeed's cash and cash equivalents were approximately $103.5 million. ESpeed short-term assets also included $2.4 million in marketable securities and an $80 million loan receivable secured by $100 million of our stock. This is a demand note callable at any time and as of November 6th paid interest at 90 basis points above the market-rate for Treasury refunds.

As of December 31, 2006, eSpeed's cash and cash equivalents were approximately $187.8 million. Finally, eSpeed's headcount was 432 employees as of quarter end. I would now like to turn the call over to Bob West, who will give you an update on BGC's recent results and outlook, as well as the outlook for the combined Company.

Thank you, Frank.

First, I would like to provide an overview of BGC's preliminary results for the third quarter and year-to-date. For the third quarter of 2007, BGC's revenues were approximately $272 million, up 41% compared to the prior year's quarter, of approximately $193 million. For the nine months ended September 30, 2007, BGC 's revenues grew 35% to approximately $773 million compared to the prior year's first nine months of approximately $573 million. In the third quarter of 2007, compensation expense was 57% of revenue versus 75% last year. BGC's total compensation expense for the first nine months of 2007 was approximately 58% of total revenue versus 68% during the prior year's first nine month period.

For the third quarter, 2007, non-compensation expenses were approximately 31% of revenue, compared to 43% in the third quarter of 2006. Non-compensation expenses for the first nine months of 2007 were approximately 32% of revenue compared to approximately 42% during the same period in 2006. For the third quarter, pre-tax profit came in at approximately $32.4 million or 12% of revenue compared to a loss of approximately $34 million in the prior year period. For the first nine months of 2007, pre-tax profit was approximately $81.5 million, up from a pre-tax loss of approximately $55 million in 2006.

Continued global volume and volatility led to strong organic growth in BGC's three largest revenue categories during the third quarter of 2007 when compared to the third quarter of 2006. Our rates business, which represented 51% of total revenues increased by 38%. Our credit business, which represents 21% of global revenues grew by 50%, and our foreign exchange business which represented 14% of total revenues grew by 59%. The other revenue category grew by 26% in comparison to last year's third quarter. Margin improvements in our third quarter were driven primarily by improved broker productivity and BGC's strong revenue growth, compared with a scalable platform which allows for improving incremental margins.

Turning to our outlook for 2007, BGC's full year revenues are expected to exceed $950 million, an increase of at least 26% over last years $754 million. And our profits are expected to exceed $100 million. The combined Company is expected to generate revenues of more than $1.050 billion, in 2007, an increase of at least 23% over the combined Company's 2006 pro forma revenues of $854 million. For 2008, the combined companies' projected revenues are expected to increase by more than 12% and to be in excess of $1.175 billion. We expect the combined Company to earn more than $160 million in pre-tax income, which is a 60% increase from the combined Company's 2007 expected pre-tax earnings. 2008 combined Company compensation expenses are expected to be between 55 and 60% of total revenue. While non-compensation expense is expected to be in the range of 27 to 31% of total revenue.

We expect the combined Company to have an effective tax rate of approximately 28% in 2008 compared to our previous outlook of 27%. The effective tax rate increase is the result of higher than projected pre-tax income for 2007 and 2008, which will allow for faster utilization of net operating loss carryforwards. For 2008, this means that the combined Company should have after-tax income in excess of $116 million available to fully diluted shares. We expect to have an effective tax rate of 33.5% for 2009 and thereafter. Our combined Company outlook, pardon me, excludes revenue of approximately $57 million in 2007 and $61 million in 2008. The pro forma results and outlook for BGC and for the combined Company reflects the effects of the full formation and final separation from Cantor, and excludes any costs which may be associated with the the formation, separation and merger. With that, I'd like to return the call to Howard.

Thanks, Bob. eSpeed's tremendous growth in revenue and profitability clearly demonstrates the strength of its business model and its highly scalable platform and it also underscores the compelling strategic rationale of combining eSpeed with BGC. We remain confident the combined Company will continue to deliver strong revenue and earnings growth in 20008 and with that, Operator, we would like to open the call for questions, please.

Thank you. (OPERATOR INSTRUCTIONS). Your first question comes from the line of Rich Repetto with Sandler O'Neill.

Good morning, Howard.

Good morning.

So first question on the guidance looking forward. It looks like you increased the revenue guidance for the combined Company for '08 by $75 million from $1.1 billion to $1.175 billion, but you only increased the pre-tax income by $15 million, so a 20% incremental margin. I understand the incremental margin might be lower, but I guess that doesn't make sense, a 20% of that $75 million in incremental revenue dropping to the pre-tax bottom line.

Well, your math is correct and I guess the answer is rather a function of rounding than a change in business at all. When we say before we would do at least $1.1 billion in revenue, we weren't actually calculating when we said we would do $145 million estimate in earnings and we were going to do exactly, it wasn't $1.1 exactly compared to $145 million exactly. It's really we're going to exceed $145 million and we're going to exceed $1.1 billion, and I didn't try to put such a fine pencil to it to try to get the exact numbers. That's my positive look. Our compensation is between 55 and 60% and our costs are going to be, you've seen our costs this year with 32 and we expect them obviously as they get bigger to drop in its percentages so we should be able to drive those kind of 30%, between 25 and up to 30% incremental margins to our bottom line and it's really a matter of we expect to do more than $1.175 billion in revenue and earn more than 160, so I don't want you to put such a fine pencil point to it because we're not doing that. You've got the model correct and we're just saying these are numbers that we expect to exceed.

Okay, I mean just case in point, this quarter, with the increase in revenue at BGC this quarter, 43% of that increased revenue dropped, and it's sort of intuitively, if you're paying between 55 and 60% in comp, I guess it would intuitively tell me too that that incremental margin, why wouldn't it be even higher than 25 to 30?

Well, the math tends to be, as we said which is if we pay our guys 60%, if we assume there's about 10% in additional cost as we grow our business, the net result leaves us about 30% and we are very comfortable with that expectation. I think part of the math may be it comes from, if you think about the business, we have $10 million in synergies going to next year and we did guide just under 50% margin in all of our new business so if you took out the synergies, you really have increasing our guidance, the $125 million in revenues and $60 million in profits take out 10 for synergies from the merger, that's 125 in revenues and $50 million and up, so we kind of have covered all of these things together, but the model is exactly as you discussed it. It's a simple model and nothing has changed. I guess as we go into '08, we've been more aggressive because of the synergies and therefore you have only $125 million of revenue as our minimum guidance and $60 million of increased profit as that which we expect to exceed guidance.

Okay, and we are are beating a dead horse here, but on the revenue side, if I back it, I'm getting first quarter at BGC $248 million, second quarter 253, third quarter 272, and then the fourth quarter would imply 177 if i use that $950 million of revenue guidance, and i understand the fourth quarter is seasonal, but that's 30% below the run rate and that only impacts Q4 but it also impacts your guidance for '08 if you use that 12% up from '07.

I think the two numbers go hand in hand, which is we do still expect to generate in excess of $100 million so for us to make the additional say $20 million, obviously we would have to do revenues in excess of that, but I think our model is pretty simple which is I don't want to become so granular with our guidance levels that I have to say the difference between, I really only want to move our guidance when it's material and consequential, number one. Number two, we are unable to estimate today the difference between what December might have been but for the turmoil and what it may well be because of the turmoil.

There is a reasonable sense that it will do much busier than it normally is but I'm not certain of that, and basically it comes back to what is the formation and format and baseline of our guidance which is, we guide what we have and what is in our place today, so for instance, our '08 guidance is based on our October business, the one that we have, the one that we've seen and the one that is past, plus our broker productivity that we have and we've been experiencing and we can reasonably estimate because of the brokers that we have in place today, and how they're growing and then lastly, the synergies of the merger with eSpeed and what that will bring to the bottom line. That's our guidance. We don't guide about brokers that we would like to hire, that we have yet to hire. Acquisitions that we would like to make that we have yet to make and other goals and objectives that the firm has that it's not at, so I agree that the math is an exceed math. Do I expect to exceed these numbers?

We do expect to exceed them all but I think what our job is in guidance is to give you what we have and what we are highly confident that we will exceed. It is not the goals of this Company. The goals of this Company far exceed those numbers but this is what we can guide with a level of confidence that says that's what we have, and so I don't mean to understate it so severely. It's simply a matter of this is what we have. Do I expect to exceed all of these numbers? We do.

I bet you will. Okay, thanks, Howard.

Your next question comes from the line of Daniel Harris with Goldman Sachs.

Hi, good morning, Howard.

Good morning.

When you think about the pre-tax margins and the BGC business at around 12% in the third quarter and 11% or so year-to-date, what do you need to do to move those towards a sort of the pure level over the next year or two? Is it just really increasing revenues or do you think there's some sort of expense management initiatives that you guys will be looking at?

I think that it's simply scale. As our revenues grow, if you just look at all of the statistics comparing '06 to '07, you see them dramatically changing. It's pretty simple which is as you add voice revenues, adding 30% margin or electronic revenues at a gross margin of 75%, the math just does it to you. You can calculate in exactly what that will be so we expect it just on this revenue growth to walk up to the 13, 14% range. If our revenues are higher we'll walk up to the 14, 15% range. It's simply math. It's not expenses or we have a scalable platform that's primarily fixed cost based so as our revenues grow we drive the the bottom line, very simply pay our comp ratio just under 60% and our expenses are kind of fixed, we add 10% to our expenses just so that we can continue to grow and support our business and then the rest just falls to the bottom line.

Okay so then just looking at the expenses that they're seeing in the proxy and what you guys have provided that's a good run rate to use going forward? We shouldn't expect any major differences?

Correct. What you should expect is that we continue to add about 10%, maybe 10 to 12% of our increased revenue to our expensing.

And just going back to that comp rate that I think you mentioned, I seem to recall that you guys had talked about a 56 to 58% comp rate in the past and it seems like the guidance today was 55 to 60 and I think you've noted 60 in a couple of your comments. Have you seen more industry pressure on compensation or what has sort of moved you closer to that 60% range than 56?

Really, for us, we have about 300 of our employees own just under $600 million of our stock, and much of that stock is unvested, and they would forfeit if they left us and competed with us, so we have a very strong economic tie, golden type handcuff, if you will, with our employees. They have just tremendous economic value to stay at the Company and to help, which means that our comp ratio generally, when it comes up for their contract renewal, tends to be less expensive for us to retain our key staff than it would be for our competitors so I think our comp ratio will remain below 60% and for simplicity I just use the number 60% but as you saw, our numbers bounced between 57 and 58% and it's simply a matter of that some of our desks have a slightly higher compensation ratio, some have slightly lower, depends on the size of the desk and the size of the cost of building that desk and what amortization schedule we have from hiring those people and it's really a mix related rather than structure related, so I think our compensation ratio will remain.

I don't think it will be below 55, and I don't think it will be above 60, but we do not worry about the difference between 57, 58 and 59 because it is not that we're paying anymore money to any one broker to do it. There's no structural difference to our 1200 brokers. It's simply a matter of where did the revenue come in? Did the revenue come in this area of credit that has one point higher or this area of rates that has one point lower? It really is a macrogrowth story of under 60% and I was just for ease of math, for everybody not saying the number 58, I just sort of said it but wasn't giving away those two points, we'll earn them and we'll drive them to the bottom line.

Okay, great. That's actually very helpful, and then just lastly, can you help me think about profitability mix in the IGB? Obviously in rates you guys are putting up very solid and very high numbers, but is that driving most of the profitability of the BGC business at this point, and frankly, are all of the products profitable or are you still building some of them up and trying to get them into the black?

Clearly, our three biggest businesses, rates 51% of the Company, has more than adequate the scale to make substantial profits to us. Our credit business 21% of our Company, way more enough scale for us to be substantially profitable and get to its end game and of course, our foreign exchange business had 14% more business with plenty of scale, so our three big businesses are big businesses with big scale and they have plenty of profitability to them and it's really just that fixed cost model which is we built this Company to be the world class player. We built our platform to be able to grow to be number one, so that we don't have big additional expenses coming our way. We built that platform.

That was the investment that we made, and then when you look at the comparison to '06, it's because we made that investment in '06 and we were able to just simply drive the profitability through '07, it's going to drive profit to the bottom line going forward in '08 so all of our big businesses, all of our big businesses are substantially profitable and at the percentages that you would expect. It's simply a matter of scale as we had other businesses, they go on our scale platform so really for us, the whole driver of our business is we have figured out a business model that can handle very diverse businesses, 127 different desks, right? And treat them in a scalable model so we can do scale across interest rate swaps and currencies and products and categories and drive that profit to the bottom line as if it was a single product and that model of technology and scale allows us to continue to grow our revenues virtually across-the-board at different kinds of products, as, as long as the comp ratio stays where it is which we expect it to, every dollar we drive from any business will cover our expenses, drive the marginal money to the bottom line.

Great.

Thank you very much. (OPERATOR INSTRUCTIONS). There are no further questions in the queue. I'll now turn the call back over to Management for closing remarks.

Thanks, everybody. We appreciate your attention and spending time today together and BGC obviously is a tremendous driver of growth and opportunity for us. I think the merger is obvious how and why we did it and why it makes tremendous sense and we appreciate you spending the time with us this morning and we look forward to speaking to you and updating you as we move forward. Everybody have a great day today, thanks.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.