Bgc Group Inc (BGC) 2008 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the BGC Partners first quarter 2008 financial results conference call. My name is Shaquana, and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will facilitate a question-and-answer session towards the end of this conference. (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.

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 S1 was filed on with the SEC on April 18th. If you do not have a copy of these documents, you may obtain them by going to the Investor Relations section of www.bgcpartners.com. I will also refer you to the disclaimer language titled "Forward-Looking Statements" contained in our earnings release. I remind you now that the information in this release and on this call contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 as amended and Section 21E of the Securities and Exchange Act of 1934, as amended. Such statements are based upon current expectations that involve risks 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 and timing of 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 commission 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 or geopolitical conditions or uncertainties. Results may also be affected by the extensive regulation of our businesses and risks related to compliance matters, as well as factors relating 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 [inaudible] 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 attaining 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 ability to enter new markets or develop new products, trading disks, marketplaces or services to induce customers to use these products, trading disks, 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 relating to the separation of BGC businesses and the merger, and the relationship between the various entities; financial reporting, accounting and internal control factors, including identification of any material weaknesses in our internal controls, our ability to prepare historical and proforma financial statements and report in a timely manner 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 17th, 2008, and eSpeed's definitive proxy statement which was filed with the SEC on February 11th, 2008 and in the combined Company's registration statement on Form S1, which was filed with the SEC on April 18th, 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 [inaudible], 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 BGC Partners, Inc.

Well done, Jason. 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 proforma revenues of approximately $333 million in the first quarter of this year, which is up 22% compared to the $273 million we earned in the -- we produced in the first quarter 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 buybacks. 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 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 percentage points compared to 8% in last year's quarter. The combined 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 semiannually 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 repurchasing 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. Now I'd like to turn the call over to Lee.

Thank you, Howard. Good morning, everyone. As most of you know, a key performance measure in the inter-dealer 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'd like to explain some of the key reasons. First, our broker compensation ratio was 58% for 2007 and it was 56% for the first quarter of 2008. We manage our compensation expense very carefully and expect it to remain in the 55 to 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 inter-dealer 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 we -- because we derive a higher percentage of our revenue from technology based businesses 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 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 employees' net worth, but that also entitle them to the share of the pretax distributable earnings in the first quarter.

In the -- excuse me, in the first quarter, we estimate that our partners would have received distributions exceeding $15 million. Thus, our employee partners earn 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 like to address the questions 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 commission 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 stockholders 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.

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, 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 increased by 11% to $155 million. Credit revenues increased by 60% to $83 million. Foreign exchange revenues 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 on March 31st, 2008, the combined Company incurred GAAP noncash compensation charges of $87 million in the first quarter 2008. These noncash charges related to: Redemptions of partnership units issued prior to the merger in order to settle outstanding loan obligations of certain senior managers and executives; additional pre-merger brands of founding partner interest to certain executives; 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 noncash 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 noncash compensation charges were offset by an $87 million increase in additional paid in capital from Cantor within stockholders equity.

Now I would like to discuss distributable earnings. We define pretax distributable earnings as GAAP income from continuing operations before minority interest and income taxes adjusted to exclude the following: Noncash stock based equity compensation charges for equity granted or issued prior to the merger; post-merger noncash nondilutive equity based compensation stemming from restricted equity unit conversions; noncash undistributed income or noncash loss from BGC's equity investments -- for example, Aqua and ELX; lastly, noncash 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 and employee benefits represented 56% of the combined Company's revenues in the first quarter of 2008, excluding the previously discussed noncash compensation charges, which was an improvement over the 58% in the year earlier period.

Our noncompensation 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 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 distributions earnings tax rate is driven by lower tax rates in various jurisdictions. In addition, we have the benefit of net operating loss carry forwards of approximately 195 million as of December 31st, 2007.

Finally, we have a permanent tax benefit associated with a portion of our noncash compensation charges. The combined Company currently has a fully diluted share count of approximately 188 million shares, and at the end of first quarter of 2008 we had 1,237 brokers. Now I will turn the call back over to Howard.

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 year's -- quarter, because of our lower effective tax rate, which is over two and a half 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 benefited from strong industry fundamentals, BGC has continued to outpace the other public inter-dealer brokers. The combined Company has strong financials, world-class technology, strong management team, and a unique partnership structure both retentive and tax efficient for our stockholders and our partners alike. Operator, we are now ready to answer questions, please.

Thank you. (OPERATOR INSTRUCTIONS). And your first question comes from the line of Daniel Harris with Goldman Sachs. Please proceed.

Hi, good morning, guys. How are you?

Good morning.

Howard, I was wondering if you can review for me or help me recall, you know, you mentioned that a big chunk of the equities 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?

Right. So approximately -- as we said, 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 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 -- 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.

And so as I understand it, each quarter they will receive a cash dividend -- the owners, the employee owners, receive a cash dividend based on the earnings?

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

Okay. 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, you know, their either request for retention bonuses or their decisions as it relates to staying on there given some of the -- I guess some of the numbers that are being thrown around in terms of what bonuses are being offered at other places?

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 their staff own virtually none of their 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 include 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 between -- of 56%, they received -- 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 our public shareholders. 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 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.

Okay. Thanks a lot for that. Shifting down to the brokerage revenues, great job on credit. Seems like you're certainly growing the business pretty rapidly there. My questions are twofold. One, on the rates business, second quarter in a row where we've got just about a 10% growth rate. Is there anything going on -- there's obviously a lot of talk about de-leveraging. My guess is that rates would be one areas that would be impacting and may be hitting that. And then in terms of credit, can you remind us is that largely cash or is that largely CDS? Thanks a lot.

To answer the question on rates, I think we had -- 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 at 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.

Okay. Thank you.

(OPERATOR INSTRUCTIONS). Your next question comes from the line of Rich Repetto with Sandler O'Neill. Please proceed.

Good morning, guys.

Good morning.

Howard, I guess the first -- 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 than, you know, that, or why you wouldn't think that's the best way to sort of look at it, and anything going to happen to the share count of 188 for the rest of the year?

Well, a couple of things. Number one, you know, 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 will 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, look at the business that we have today, the people that we have 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 do better. Some other people do that, and I guess they're comfortable with that. We say, here's what we have. This is the business that we see right today, and this is our expectation, and we are going to work our darndest to hire 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, of course, 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 share count increase, that would be within the Company's -- sort of 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 Lee 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.

Okay. I don't want to get bogged down. I get what you're saying. But just so the numbers that -- here are the numbers that I'm using. If you used 39 million -- excuse me -- 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% at year end, 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, I guess the next question is on the employee retention, what -- from what I understand, our partners are in any way -- are they locked up in certain contracts, or was any agreements with the -- with the partners renewed as a part of the transaction or the closing, et cetera, and what was the term of that, if it was?

Yes, our -- most -- the vast majority of our brokers have significant long-term contracts. 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 1st, 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 1st was a great day for them. This is the day when we executed all of the things that we had said and discussed for many -- for all of this time. And that's why they joined. And these people joined for a number of reasons -- that they could own equity in the company themselves and have that be widespread, not just in the handful at the top. But as Lee 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 a reason why our brokers will 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 beforehand, and it diluted its owner. Cantor took massive dilution to do this. But that's why we have a strong Company today.

Understood. One last question. I'm just trying to see how you came one 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 prices would be about a -- almost a 6.5% yield, or somewhere around there. Could I get sort of the thinking behind it, and then do I have the right view, I guess is the question?

Yes, you have the right view. So 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 get their pro rata share of the Company in cash in their hands. Right? We want the shareholders to think they are no different than our brokers, so the Company gets that cash distributed. Now the board has decided to distribute not 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 lots 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.

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 a stock buyback. But that is purely decision by the board. But as you know, it 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 capitalize all sorts of things.

But what that does is it hammers your cash flow because you're really spending it 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. But at least 75% going to -- going out as a dividend, and the balance will be used as a stock buyback.

Great. Thanks. That's helpful. Thanks, Howard.

Your next question comes from the line of Tripti Prasad with Sidoti. Please proceed.

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

Meaning that if we --

[inaudible] the $0.60

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

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

Correct.

Okay. And then secondly, on the tax rate, I know that you guys kind of touched on this, but can you explain why it's -- the primary reason that it's so low?

Sure, this is Bob speaking. Hi. So the NOL carry-forwards we have are a major contributor, as we talked about, and --

I know, and then just 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 was estimated to be around -- the NOLs weren't estimated to be close to where they ended up coming in.

Yes. 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 U.S. And we also have the benefit of getting the deduction for the noncash equity compensation for certain of our partners. And that's a permanent difference that we're going to have in our -- it's going to be accrued to us all the time and it's going stay with us. So that is -- it's really the combination of those three things is what's giving us the really favorable tax rate.

Okay. That's it. Thank you.

Your final question comes from the line of Richard Repetto with Sandler O'Neill.

Howard, I just wanted to follow up on this, the guidance issue. The way I understood the dividend was it was either $0.60 or 75% of your distributable income. That's correct?

I'll just do it a little slower, which is our board has authorized, and we will distribute 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 a dollar, then the dividend would be $0.75, right? And so it's a variable number, but then to assist everyone, we said we expect, right, that that dividend to be at least $0.60 so that you could have some sort of 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 that you $0.60 could end up being 78%, [inaudible], 79%.

That's my point, is that I don't see how that implies any $0.80 guidance, because suppose -- and I don't think this is the case, but suppose did you $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%.

Well, so both 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 achieve 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 roll out ELX ,which will have I think wonderful upside for the Company. There are a whole host of things which have us seek to do better, and we were able to do so just this last quarter. And 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 give out $0.60. And that's -- what's that 75% of, and the answer is always $0.80. So we are not guiding anything for the full year. We're just trying to help with you historical trends. As an example, last year the second half of the year was very, very busy, because of the credit crisis. The traditional, I guess, historical percentages didn't hold, right? 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 say historically if everything -- all other things were equal and normal, this is what would happen; but as you all know, rarely is everything equal and normal.

Understood. Thanks.

I apologize. We actually have one final question from the line of Daniel Harris with Goldman Sachs. Please proceed.

Hi. Actually just two quick ones here. In terms of the dividend payout, what is that on a cash flow basis?

Well, 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 up the-front 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.

So I just want to make sure I understand. So is it safe to say that you're generating more cash than you're going to be -- significantly more cash in terms of then percentage of the 75% that you're going to be paying out?

Yes.

Okay. Got you.. Then if I could just ask Bob a question a little bit following up on one that was asked earlier a little bit differently, you know, I think a lot of the stuff that you said with regards to the tax rate was in place two months ago on the prior call. Is there anything that's changed that would have caused the multi-hundred basis point change in your tax rate estimate?

Yes, it's really the noncash equity compensation element of it. And we'd seen that originally as going to be capital gains worldwide, and we're seeing that now as effectively 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 hadn't identified on the last call. So that's another contributor that's helping us get this very favorable rate.

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

Not really a change accounting treatment, no. Just a change in the -- 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 noncash equity compensation is going to be treated.

Okay. Thanks very much.

I would now like to turn the call over to Mr. Howard Lutnick for closing remarks.

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 to us 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.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect, and have a great day.