Bgc Group Inc (BGC) 2012 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth quarter 2012 BGC Partners earnings conference call. My name is Darcell and I will be your operator for today. At this time, all participants are in listen only mode. Later we will conduct a question and answer section.

(Operator Instructions)

I would now like to turn the conference over to your host for today, Mr. Jason McGruder, Head of Investor Relations. Please proceed, sir.

Thanks, Operator. Good morning, everyone.

Our fourth quarter full and full year 2012 financial results press release was issued this morning. This can be found either at the news center or investor relations section of our Web site at bgcpartners.com. During today's call, we will also be referring to a presentation that summarizes our results and which includes other useful information. This too can be found in the investor relations session of our Web site.

Throughout today's call, we will be referring to results only on the distributable earnings basis. Please see today's press release for GAAP results. Please also see the section of today's press release entitled distributable earnings, distributable earnings compared with GAAP results, reconciliation of revenues under GAAP and distributable earnings, and reconciliation of GAAP income to distributable earnings for a definition of these terms and how, when and why management uses them. Unless otherwise stated, whenever we refer to income statement items such as revenue, expenses, pre-tax earning or post tax earnings, we're doing so on a distributable earnings basis. Unless otherwise stated, all financial comparisons we will be making in today's call will contrast the fourth quarter of 2012 with the fourth quarter of 2011.

I also remind you that the information in today's call contains forward looking statements within the meaning of Section 27A of the Securities Act of 1933 as amended, and Section 21E of the Securities Exchange Act of 1934 as amended. Such forward looking statements include statements about the outlook and prospect for BGC and its industries, as well as statements about our future financial and operating performance. Such statements are based upon current expectations and involve risks and uncertainties. Actual results, performance or achievements can 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 BGC's filings with the US Securities and Exchange Commission.

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 and uncertainties and other factors on anticipated results or outcomes, and that accordingly, you should not place undue reliance upon 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. Please refer to the complete disclaimer with respect to forward looking statements and risk factors set forth in most recent public filings on Forms 8-K, 10-K and 10-Q which we incorporate today by reference.

I am now happy to turn the call over to our host, Howard Lutnick, Chairman and CEO of BGC Partners.

Good morning, everyone. I'd like to wish you all a happy Valentine's Day.

Thank you for joining us for our fourth quarter conference call. With me today are BGC's President Shaun Lynn; our Chief Operating Officer, Sean Windeatt; and our Chief Financial Officer, Graham Sadler. BGC's fourth quarter revenues were up by 19.4%, driven by the continuing success of Newmark Grubb Knight Frank which more than doubled its revenues to $148.7 million and marked NGKF's pre-tax distributable earnings grew by 32.6% to $12.6 million.

Our diversification into real estate services provided us substantial contribution to BGC's overall 2012 results and lessened the impact of challenging industry conditions across the global financial markets. Over the course of the year, industry volumes and volatility were lower, reflecting reduced trading activity by many large global banks. Hurricane Sandy, which was devastating to the New York area, further affected the results of both our real estate and financial service segments in the fourth quarter of 2012. Some commercial real estate transactions were canceled or delayed in areas impacted by the storm, while the financial services industry as a whole faced challenges for much of the quarter due to Sandy.

BGC remained open by relocating our downtown operations uptown. I'd like to take a moment to compliment and thank our hundreds of employees who worked tirelessly to limit the disruption to our Business. The hurricane devastated many families across the East Coast, and we have been front and center helping many of the families with money from our September 11 charity day. I'm happy to report that our lower Manhattan office has now reopened and we expect to be completely back in our regular offices by the end of the first quarter.

The challenge in financial volumes of the last three quarters were well below what anyone would consider ordinary. However, our volumes have rebounded since the beginning of the year. With respect to real estate services firms, they generally have lower revenues and low profitability in the first quarter, and higher revenues and significantly higher profits in the fourth quarter. So we, therefore, expect the addition of NGKF to reduce the seasonality of the BGC's overall quarterly results.

I'm happy to report that our Board declared a $0.12 dividend for the quarter. In addition, 96% of dividends that we paid last year were non-taxable. And we expect a majority of dividends paid this year to also be non-taxable. We are confident in the sustainability of our current dividend and that yesterday's closing stock price, the dividend yield on BGC was 11%.

With that, I'm happy to turn the call over to Shaun.

Thanks, Howard, and good morning, everyone.

In our financial services segment, volatility remained below historical averages across most asset classes during the quarter, resulting in lower volumes industry wide. In rates, activity remained muted, due to conservancy undertaken by major central banks. The US Federal Reserve currently owns approximately $2.4 trillion worth of long dated treasuries and agencies on its balance sheet, which are not being traded or hedged. In addition, the Fed is expected to purchase another $85 billion per month of such assets through to the end of 2013.

While revenues in our Rates businesses declined by 6.5%, this was less than the 13% to 14% decline in interest rate product volumes for CME, Eurex and Euronext. We believe the central bank positions eventually will be unwound when the economy improves, which will provide us with future tail winds. We also believe rates markets will become more active over time as high levels of government corporate debt issuance around the world drive volumes upward and our Voice and Electronic businesses.

BGC's e-brokered volumes in interest rate swaps and other interest rate derivative products more than doubled, though they are a relatively small percentage of our overall rates revenues. While corporate bond volumes reported to the Federal Reserve for the quarter declined 16% year-over- year, and ICE CDS revenues declined by 14%. Our credit revenues declined by 5.9%. Global FX volumes were subdued in the fourth quarter. Quarterly average daily FX volumes declined by 16% at the CME, 23% at Thomson Reuters, and 30% at EBS.

I'm pleased to say that despite this backdrop, BGC out performed the overall market and total FX revenues were down by just 0.5%, while our fully electronic FX revenues increased by almost 25%. Global equity markets also continued to be difficult as equity derivative volumes were down between 9% and 41%, according to the OCC, Eurex, Deutsche Banks, and the CME. In comparison, BGC's revenues from equities and other asset classes decreased by 18.5%.

Financial services segment revenues from e-brokering, market data and software were $40 million, or 14.6% of segment revenues in the quarter, versus $41.3 million, or 14% of segment revenues. I'm happy to report that our revenues increased by more than 15% year-on-year in January of 2013 for these technology based businesses. BGC now offers e-brokering on over 100 of our 200 plus financial services desks, compared with approximately 90 a year ago. We expect the number of e-brokered desks and the revenue they generate to continue to grow faster than our overall Financial Services business.

Our overall financial services segment generated revenues of $274.9 million, and $35.1 million of pre-tax earnings. A year earlier, this segment generated $296.1 million in revenues and $58.2 million in pre-tax profits. We had 1,721 brokers and sales people in financial services at the end of 2012, generating average revenues of approximately $158,000 per broker in the fourth quarter. A year earlier, these figures were 1,766 brokers and salespeople, and approximately $169,000.

Turning to our real estate services segment, industry metrics continue to move in a positive direction in the fourth quarter. According to Real Capital Analytics, overall US commercial property sales volume grew by 47% year-over-year in the fourth quarter, while the RCA commercial property price index was up by 5% for the same time frame. This strong volume growth was due in part to the relatively high spread between the average capitalization rate or yield on commercial property versus 10 year treasury rates. As of year end, RCA had spread nearly 500 basis points, compared with less than 200 basis points in 2007.

In addition, lower interest rates and the increased availability of credit have made commercial real estate borrowing easier for most buyers. As a result, NGKF's research team expects commercial sale volumes to continue to grow in 2013.

On the leasing side, vacancy rates, asking rents, and net absorption rates also improved. For example, the US office market ended the year with vacancy rates of 15.7%, an improvement versus 16.4% a year earlier, according to CoStar and NGKF research. Our research team believes that the office vacancy rates will fall below 15% by year end and the rental rates will increase by 2% to 3%.

Our real estate services segment generated $107.5 million in brokerage revenues and $41.2 million in management services, and other revenues. Overall, NGKF revenues were $148.7 million, or pre-tax earnings of $12.6 million. These results were substantial improvements compared with a year earlier when real estate services generated $54.4 million in brokerage revenues, and $2.7 million in management services, and other revenues. Overall revenues were $57.1 million, and pre-tax earnings were $9.5 million.

During the fourth quarter, NGKF corporate services was selected by both Nokia Siemens Networks and Cummins, Inc, to be their sole global corporate real estate supply. Between these two companies, this represents hundreds of locations and tens of millions of square feet in over 100 countries around the world. We think that these wins are an excellent affirmation of the strength of NGKF's technology and deep industry knowledge.

NGKF had 807 brokers and salespeople at year end, which is more than double the year earlier figure of 381. Average revenue per real estate broker was approximately $131,000 in the fourth quarter, an increase of almost 21%. These improved metrics demonstrate the success we've had integrating Grubb & Ellis and Newmark, and we expect to further growth NGKF in 2013.

Real estate services drove BGC's overall 17.7% increase in front office headcount to 2,528 brokers and salespeople as of the year end. BGC's total average revenue per front office employee was approximately $149,000. A year earlier, these figures were 2,147 brokers and sales people, at an average of approximately $163,000 each.

With that, I would now like to turn the call over to Graham.

Thank you, Shaun. Good morning, everyone.

BGC generated revenues of $436.3 million, up 19.4% compared with $365.3 million. This excludes a $52.5 million gain from the sale of BGC's investment in the London Metals Exchange. Our revenues from the Americas were up 57% to $232 million, due to the addition of real estate. Europe, Middle East, and Africa decreased by 4%, to $161 million. And Asia-Pacific revenues decreased by 14%, to $43 million. Our European revenues were negatively affected by approximately $2 million due to the impact of the US dollar strengthening versus the Euro year-on-year.

Excluding the real estate services segment, our global October 2012 revenues were down by approximately 4%, to $108 million. November was down by approximately 11%, to $100 million, while December was down by approximately 5%, to $80 million, all when compared with a year earlier.

Turning to expenses, compensation and employee benefits were $268.4 million, or 61.5% of revenues. This compares with $197.9 million, or 54.2% of revenues. Our compensation ratio increased mainly due to the addition of NGKF, since the commercial real estate services industry generally has higher compensation ratios, but lower non-compensation expenses as a percentage of revenue. Non-compensation expenses were $132.8 million, or 30.4% of revenues. This compares with $119.8 million, or 32.8% of revenues. The increase in non-compensation expenses in absolute terms was due largely to the addition of real estate and higher interest expenses as a result of the June 2012 issuance of senior retail notes.

In looking back at 2012, we see that we began the year too optimistic with respect to financial services volumes, and allowed our overall expenses to rise along with those expectations. We also added significant expenses with respect to the integration of Grubb & Ellis with Newmark, and their integration into our infrastructure.

We are now aggressively addressing our expenses and thus incurred a $7.4 million restructuring charge in the fourth quarter, primarily related to the elimination of more than 100 front and back office positions in our financial services and corporate areas. As a result of this restructuring, under our expense reduction program, we expect to reduce overall costs by a total of approximately $50 million on a go forward basis by the end of 2013. This reduction will include comp and non-comp expenses.

BGC's pre-tax earnings were $35.1 million, compared with $47.7 million. Our pre-tax margin was 8% compared with 13.1%. Our effective tax rate for distributable earnings was 14.5% in the fourth quarter 2013, compared with11.7% a year earlier. BGC's post tax distributable earnings were $28.4 million, or $0.10 per fully diluted share, compared with $40.3 million, or $0.16. Our post tax earnings margin was 6.5% compared with 11%.

Our fully diluted weighted average share count was 337.2 million for the farther quarter of 2012. This included a weighted average of 39.6 million shares associated with our convertible senior notes. A year earlier, our fully diluted weighted average share count was 292 million. In both periods, our GAAP fully diluted weighted average share counts were lower than those for distributable earnings, because certain share equivalents were diluted for distributable earnings, but not for GAAP. As of December 31, 2012, our fully diluted share count was 341.7 million, assuming conversion of 39.6 million shares underlying the convertible senior notes.

With that, I'm happy to turn the call back over to Howard.

Thank you, Graham.

Excluding real estate services, our revenues for the first 29 trading days through February 12, 2013, were about even with last year. And so far this year, our fully electronic businesses have continued to out perform our overall financial service results. With respect to the first quarter, we expect to generate distributable earnings revenues of between $440 million and $470 million, which is an increase of approximately 9% to 16% compared with $403.9 million last year. This guidance includes the fact that this year we have two less trading days in the first quarter, and one additional day in the second and third quarters when you compare it to last year.

We expect pre-tax distributable earnings to be between $45 million and $55 million for the first quarter, and this compares to $58.2 million last year. We expect our effective tax rate for distributable earnings to be approximately 14.5% for the full year 2013, as compared with 14.3% in the first quarter of 2012, and 14.4% for the full year of 2012.

I would also like to remind you with respect to real estate, that revenues and profitability tends to be lowest industry wide in the first quarter, and highest in the fourth quarter. We intend to update our first quarter outlook on our before the end of March. Over time, we expect the growth of our technology based businesses to strengthen NGKF and our focus on cost reduction to substantially increase this Company's profitability.

Operator, we would now like to open the call to questions.

(Operator Instructions)

Jillian Miller.

Thanks, guys. Your revenue guidance for the first quarter seemed pretty conservative to me, even at the high end. If I bake in a 20% sequential decline in real estate revenue and assume kind of everything else is flat, then you would be tracking to financial broking revenue down 5%, below 2012 levels, and despite, what is seemingly a very strong January. So, maybe you could just help us understand what is making you a little bit more conservative. It sounds like maybe February is trending lower and signaling that some of the strength in January wasn't sustainable?

Right, so January was up about 10% and February has run lower, so down about 8%. Although, for example, yesterday, was up between 4% and 5% higher than the prior year. So we're basically -- if you take it as a whole, and that's why we sort of highlighted it, the business is running approximately even to last year. When you guide from where we are, I've given you exactly where we are now, saying we're going to be plus or minus 5% is in the ballpark.

So that's just -- that's our example, and it is also important to realize that the Real Estate business is the slowest in the first quarter, and profitability is the lowest. And it's even -- it's low and slow even taking off the EST at the end, but that just comes back in the fourth quarter. So you can see our numbers in real estate that we made last year, we expect to make more money this year. And I think what you'll see is it's more heavily weighted toward the fourth quarter than earlier.

Okay. Thanks. And then the SSA review you ended, I was expecting more of that to flow through the non-comp expense line this quarter, but that cost actually moved higher sequentially, maybe you can walk me through what contributed to that, and what your expectations are for the first quarter.

Well, there was all sorts of issues with respect to Sandy in the fourth quarter. We haven't tried to take them out and highlight them. It was what it was, and it required us to move our New York office uptown. That, on top of a continuing integration of Newmark, and Newmark did -- because this is the second year, we had to satisfy everything for Sarbanes Oxley for Newmark at the end of this year. There's just a substantial amount of work that had to go on to bed these things down and take care them, plus Sandy.

But we do expect as we've said, we have two cost reduction programs going. We have what Graham pointed out was $50 million in cost reduction that should end up with a first quarter 2014 cost reduction of $12.5 million run rate, so that would be $50 million a year, and that you'll start seeing in the second quarter. Obviously it will be done by the end of the year, so that our run rate in '14 will be lower, but you'll see it start kicking in, in the second quarter for sure.

And then, we do have what Graham discussed last quarter, which was our reduction of non-compensation expenses, a part of that, of course, is in the $50 million, and part will continue thereafter, but some of those things are just structural. We have leases expiring and other structural issues that as they come up, we will reduce our non-compensation expense.

Thanks. Maybe one regulatory question then. It sounds like kind of a sticking point in this regulation that's being finalized is a disagreement at the CFTC with respect to the five quote minimum requirement. I wanted to get your thoughts on how you think this is all going to play out, what impact that might have on your business. If we see that five quote requirement scaled back to three, is that a good thing for BGC? Is it a bad thing because it's less of a push towards electronic trading? I'm not sure how to interpret it.

We are a multiple buyer, multiple seller marketplace, so we display quotes to broad ranges of people. I don't think we have a strong opinion between whether it's three or five. As long as the regulations are consistent with the law that was passed by Dodd-Frank, I think we are well positioned. The law is fine. We await reading the regulations, but I don't know of anything with respect to three or five that would have a considerable impact on us.

Okay. Thank you.

(Operator Instructions)

Rich Repetto.

Yes, good morning. My question is, has a little to do with the cost reduction and you helped clarify it, Howard, by explaining the two programs, but looking at real estate margins and I know it is a people intensive business, but the low margin, can you talk about whether the cost reductions are -- what's pointed to real estate, and what you could potentially do with technology to improve the margins there?

Well, the cost reductions that we can drive most clearly across our businesses are in back office technology efficiency. Systems work and integration of all of these offices and all of these different brokers onto data collection systems and processes that are much more efficient, both economically, less expensive, people less expensive, and more efficient and more accurate. I think that is part of what we are spending money on, part of the integration that we have invested heavily in, and part of which we need to aggressively end the continuing expense and get the benefits of that which we've in invested and harvest that which we've invested into our bottom line.

I think we spent, as Graham said, we spent more than given what the market volumes gave us than we should have. And we see that and we are going to move aggressively to harvest the benefits of what we've invested in, and make sure those costs are rooted out of the Company, and that we drive our bottom line.

Okay. Thanks, Howard. And then on -- I know everybody is interested in the dividend, can you update us on what the policy is here now? It's $0.12, I believe and your guidance looks somewhere around there, it was -- well, it was $0.12 last quarter and you didn't quite earn it on a distributable earnings basis. What can we expect going forward as the policy?

Our policy has not changed and we are confident that our earnings, given our real estate business and our view of volumes in the financial services, will be well in excess of that and we will settle into a place where we are very comfortable with our dividend and it will feel very consistent to our policy. Real estate is low profitability in the first quarter. You are not seeing a Financial Service business, and strangely since we bought Grubb & Ellis and integrated it, the financial service volumes fell and the Real Estate business was there.

The combination of the Financial Service business being a reasonable or ordinary or normal or any her kind of word you want to do, our real estate business, which is substantial and successful delivering in the second, third, and much stronger fourth quarter, I think you will -- plus layer on top of that our cost reductions rolling through the Company, you're going to see a very profitable and successful company that can easily maintain, in our view, our $0.12 dividend.

Got it. And last thing, Howard, on Dodd-Frank, two part. The question is the headwinds, I think people see, they see opportunity, they see head winds. The head winds being that maybe your client base could be pulling back a bit, and the other, the products potentially going to futures. So could you comment on -- you talked about opportunity, but maybe the headwinds? How you -- what you think and how you plan to combat them?

Well, Dodd-Frank, and as the regulations come, we will read them and go from there. Our expectation, which we have discussed is that volumes on the world will not dissipate. They just will not. Issuance is gigantic and ever increasing. Bank lending has, and with Basel III may well stay at a lower level, but that means securities issuance will grow because no one expects global economic growth of developed countries to decline precipitously over the course of the rest of our lives. So growth requires borrowing, borrowing will require more security issuance, and those securities will trade.

If the volumes of the large banks decrease, then the volumes of other non-banks will increase. Once upon a time, we used to talk about broker dealers as if somehow they traded. Now, we talk about banks all the time because most of the big banks became -- most of the big broker deals became banks. You should not assume that there won't be new classes of those that buy and sell securities, whether those are big buy side firms that hire all the people from the big banks, or some other form of companies that form themselves, broker dealers, hedge funds or otherwise, there will be significant trading on, in and across our businesses which are in and across the world.

So I think our volumes will be good over time. I think quantitative easing is an oddity. When quantitative easing stops, then issuance so dramatically increases, the effective issuance so dramatically increases, that that will change the cadence of these businesses generally to the good, not least of which is when they start to sell their instruments. Sooner or later, the Fed will sell their instruments, and they will become one of the largest issuers on the universe themselves. It's sort of a second tier to the US Treasury, you have the Fed, you have European Central Bank. These are new issuers coming.

So I think overall, the business will be fine. Overall fundamentals will be fine. And then the question is, who will be trading it? We have pointed out over numerous analyst days and other periods the scale and size of the business that we don't yet participate in, meaning banks to their clients is multiples larger than banks to bank, and any leakage of that business, and any extension, like you said three quotes, five quotes, or any other models like that will just improve the size of the business in which we operate.

So I think the fundamentals that we have is what keeps us optimistic. What day that occurs we don't know, but generally speaking, we are optimistic structurally going forward. With respect to futures, number one, there are lots of brokers of futures, and we are a broker of futures and we make money brokering futures. That's number one. Number two, the reason we invested in ELX and having a futures exchange would be that we can provide our clients with a regulatory structure that is very much in line with the views of Dodd-Frank, right? And, will very much be able to meet their particular needs and their particular desires of how to create products and market those products to their clients.

It is a great asset, it is an asset that is under appreciated. You couldn't go and get one today, you can't just go on the shelf and get one, you can't get one that's integrated to all the banks that has the OCC as a clearer. It is a great asset that is yet to have produced its value nonetheless, but it is an asset that BGC is very, very happy to be an owner of and to owning it together with a number of the bank clients. We think it's an opportunity, maybe that opportunity will emerge more clearly as the Dodd-Frank rules come out, but it is an opportunity nonetheless.

And I think lastly, the vast majority of credit and rates are bespoke, and they are just not the topic of futures, so there are lots of products that can be futures, right? The homogeneous one, the easily traded ones, but all the rest will still require some customization, and I think those businesses will remain OTC. Great opportunity in futures, but I think we are extraordinarily well positioned. If that emerges, which it may well in part to capture a part of that, and I think our market share in those things will dramatically increase because of our substantial investment in these kinds of thoughts, this kind of structure, in ELX, in the technology. These are investments that you've seen us make over many years that we think are very, very valuable.

Excellent point, Howard. Thank you.

Niamh Alexander.

Hi, thanks for taking my questions. I see you're picking up deals in the brokerage business -- well it's not broker, the financial services as well the retail. Are you seeing a bit more capitulation by the smaller firms? And we've been talking about it for awhile now as the rules approach. These smaller firms just don't have the capital or the money needed to invest in the technology. Are you finally seeing some more capitulation there?

Yes, we are. It's Shaun here. Without a doubt, for some of the smaller companies, it's quite difficult with the challenges of the SEF rules and the capital requirements from a regulation perspective that is impacting on the market as a whole. And we've seen a lot of opportunities in the last 6 to 12 months, and we expect we'll be seeing lots more of that going forward.

And it's a positive, because it gives us an opportunity to move into new sectors, new areas, something we've always spoken about, which is energy, commodities, and it gives us an opportunity to look inside our Company to basically stream down some of the areas where we want to upgrade areas, staff, people, and going to new products. So, yes, we see it as an opportunity. And I think we can expect a lot more over the course of the next 12 to 18 months.

Do you have the capital to be buying these businesses? Or, is it mostly a stock deal that you look at?

We have both opportunities open to us. The way we like to acquire companies is they must be accretive, they must invest with us, we make sure they are our partners, and they work with us to build the business and there is an earn out over many years for any company. That's how we look at it.

Okay. Fair enough. On the same subject of the acquisitions, if we look at this quarter versus a year ago, you posted 19% revenue growth, which is quite unusual in the brokerage industry given the volumes industry wide, especially in financial services. But that's still not translating to earnings per share for shareholders. EPS, distributable EPS is down 60%, most revenue growth is diluted in terms of the shareholder dilution. So how do you make sure these deals are more accretive going forward?

I know the cost reduction effort can help a little, but 50 on a 1.5 billion is not going to help a whole lot. It is going to help a little. Maybe help me think about the pace of dilution, the share issuance, is that going to slow going forward? How to think about the metrics for the deals to make sure they are accretive?

So, what's most difficult for us is that we acquired Grubb & Ellis right at the beginning of the second quarter, and went to its integration which went brilliantly for us, and we really felt it would display a tremendous earnings for our shareholders. And right at the same time, the financial service volumes started to decline, and declined relentlessly through the course of the year. And so you have never seen the combination of our Financial Service business acting reasonably and normally, coupled with our real estate business at delivering earnings. Layer on top that, a cost cut, you have just never seen it.

The second quarter, the revenues were, for financial services were lower than they have been in years and years and years. Third quarter, lower, fourth quarter lower again. And you had the oddity of and devastating effects of Sandy, us moving out of our offices, and then you move into the first quarter where we are seeing more normalcy with respect to financial services and you have the first quarter of real estate, which if you go take a look at the industry wide and all of the players in real estate, you will see the first quarter is by far the worst quarter, more seasonal than even our Business would be. And so you've not yet seen it.

And so we are very anxious to show you the second quarter of our Company if financial service volumes remain normal, ordinary, reasonable. Any other word you want to put on it, and you get to see our real estate business on top of that, together with the beginnings of our cost cuts. You're going to see the Company that we run, and one of the problems that people talk about is this quarter on quarter comparisons and things. We invest to make our shareholders money, we are our shareholders, our employees are our shareholders, we expect to drive our Business to maintain our dividends and to grow it.

And I think we are excited for the opportunity of the second quarter, and even more excited about the fourth quarter, because we do not think that there will be seasonality anymore because the Real Estate business will make up for the Financial Service business seasonality. And we think that will become a very strong and steady growing BGC.

And then the other thing is that your competitors, they're getting quite a lot of negative press with regards to the LIBOR investigations and I believe NDF's are a topic too. You are in the same space, your name hasn't come up. What are you doing internally to make sure that there's no issues to be concerned about there? Have you launched some internal inquiries? How should we think about BGC in this space?

It's easy to think about BGC in this space. We did not broker those products, so we did not employ people who did them. And therefore, we were not associated with that business. Good or bad, we didn't have any revenues associated with that business either, so I wouldn't suggest it's such a good thing, but we are not associated with that. I feel very badly for those companies that are involved in this, but we are not.

Okay, that's good. And now that they are moving forward, you don't participate in those either?

Yes we do. We do NDF's but with regards to the investigations, not that I'm the expert, we feel that going back to when the, when we take about the LIBOR situation, or the rate fixing situation, we were not part of -- we didn't broker those instruments at that time.

Fair enough. Just lastly, all the topics are regulation, but this is the world we're in. Especially this year, with everything changing, actually finally changing. The financial transaction tax proposal listing in Europe that 11 member states looking to impose it, not only in those countries, but any products traded anywhere that originated in those countries, or any entity based anywhere, not in the least the headache that this could involve, but help me think about the potential impact on your business if this does go ahead and get implemented.

So far, the financial centers have not -- it has not really gained any traction. The UK has been clear and concise in their disagreement of that as a business. The prime minister of Ireland, as an example, said that would never happen in Ireland, because they consider themselves a business friendly place where they wish financial service firms to go to. The same has been generally said in America. It doesn't mean that a few congressmen and senators can't say it and get nice press out of it, but I don't recall there being a broad ground swell in America for it.

There will be outliers and there will be some clients of ours who suffer the consequence of that sort of tax, but capital is fungible. These countries will learn that if you make rules about capital, capital can swiftly move to other places, in other areas and other jurisdictions. And it will do. And these things just happen. And so I think that it is a negative. I'm not saying it's not a negative to the business, I'm just saying it will be much more muted than people think. And movement of capital will reduce whatever impact it will have as they work around it over time.

Thanks for taking my questions.

(Operator Instructions)

Patrick O'Shaughnessy.

So, if I can go back to Dodd-Frank. It seems like the biggest potential impact on you guys would be interest rate swaps. And to the extent that interest rate swap trading volumes decreases or moves onto exchange, can you provide what percentage of your rates revenues, interest rates swaps actually represents?

As an overall percentage of our Business?

Of your Rates business, yes.

We don't share that --

We can look at it and consider whether that would be a helpful statistic to put out there. But the issue is we have a broad global interest rate Swaps business across many, many currencies, and so if you are focused on just dollar swaps, US dollar swaps, we can look at that and see if we can put that number out there for you.

I think the thought is that rates are about 33% of your total brokerage revenue, if only 10% is rate swaps, any relation not a big deal. If it's half of that or maybe larger, maybe it's a bigger deal. So any sizing you can could do would be useful.

Second question I have is on your employee headcount growth, we've seen the headcount trickle down a little bit over the last few quarters, both on the financial services side and the real estate side. I imagine that the real estate headcount reduction is a function of integration and some folks saying this isn't the place for me. But on the brokerage side, the financial services brokerage side, if we look back at '07, '08, '09, a lot of your top line growth came from market share gains. You were hiring brokers away from competitors, you were growing your headcount and you were able to leverage that on top of climbing industry volumes. Right now with your broker headcount kind of stabilizing, it seems like you are more reliant on industry volumes to turn around rather than it being a market share story. How do you think about that right now?

Not that way. So we expect a couple of things. Just on your first point, I just want to point out to you that interest rate swaps in Europe as a business is a larger industry than the US, as can comparative number, something to talk about going forward. Okay.

Then with respect to headcount, average revenue per head drives our bottom line. As we have highlighted on this call, we are focused on our bottom line. So average revenue per head matters to us, and we are culling the lower producing brokers and making sure our administrative staff is both properly sized and we are as efficient technologically, so as we implement technology, we should be able to have more efficiency in our back office. Usually, that would not -- in most normal market conditions, the growth of our Company would not require us to drop headcount. We would redeploy those heads doing other things in business and take that opportunity to be more efficient, but we wouldn't need to cut your heads. But your percentages would improve, your bottom line margins would improve.

The volumes that we saw the last three quarters of last year caused us to change our view, and we are going to reduce our headcount and reduce our costs as we have discussed. We did have a bulk up with respect to integration, and we are going to reduce that ongoing and that is true. With respect to once we reduce the lower performing brokers and get our average revenue per head to a number that we think is appropriate, we expect to drive revenues initially through electronics, and then we will continue to hire and acquire accretively.

As I think Shaun said, the opportunities for us to acquire other firms is coming our way, the costs of regulation are growing. The cost of technology is growing, and our ability to acquire other companies or hire first class staff feels better than it's felt in quite some time, so sometimes tough markets bring in opportunity. They do bring a tough period, but they also bring an opportunity and we think our average -- our revenues can come and will come from market share gains driven by quality staff and extraordinary technology.

And we expect to drive those and use those technology growth numbers, which are now was just under 15% of our revenues, and then make sure we're driving our bottom line based on those technology investments and make sure we get the benefits of those electronic modifications to our bottom line, and that we don't keep an overly large brokerage staff as we move things electronic to drive those bottom lines. That's part of what we are focused on.

Great. And then one last one from me. So, with your new expense reduction targets that you talked about today, does that change Graham's target for non-compensation ratio? I believe he said over time you want to get it down to 25%. Does that 25% go lower at this point?

That's the non-comp target is still there. The $50 million that we talked about today is a mixture of comp and non-comp. And non-comp pace will count towards the 50 in our overall non-compensation target.

Okay. That's helpful. Thank you.

Rob Rutschow.

Good morning. We saw, on the residential side, larger clients doing some tax motivated selling. I'm wondering if you guys saw any of that in the commercial side, and how you would kind of juxtapose that against the loss of activity due to Sandy?

The -- yes, generally there were transactions motivated by the end of the year. One is an example of those is we closed two real estate firms, Smith Mack and Frederick Ross right at the end of the year, because they were -- the timing of tax change sort of helped spur it along. They were well underway any way, but we were able to get them done with a hard end date, which was very helpful. And I'm sure that, that occurred generally. I don't know that people actually did transactions that they wouldn't otherwise have done, but I think what happened, it helped push them to a final date.

We don't -- NGKF does not have -- when we bought Newmark, it did not have a large Capital Markets business with the sale of buildings. We are investing in and building that business presently. It is much, much larger now, and so I think we will participate much more in the growth of the capital markets, which is the term for selling buildings as opposed to leasing them. We are adding to that mix, something that most of the other firms don't do, which is we will raise capital for people who wish to buy buildings. We will raise them equity and we will help them raise debt, and those two things make us an interesting capital markets company in NGKF, and that comes with our sophistication of the ways of Wall Street and financial.

So BGC has infused in NGKF much more serious capital markets people by hiring the people who run our capital markets business, have come from Nomura's capital markets, real estate capital markets and examples like that, hiring across, hiring from Deutsch Bank, hiring from world class institutions into NGKF to grow that. So that was a key part of the market in the fourth quarter. Our capital markets business relatively small. Also, relatively New York centric, which was impacted the most by Sandy. And since we are so New York centric now, because we are of a certain size in capital markets, it pushed off some transactions for us, more as a percentage than maybe others.

Okay. Also I had a question on the traditional brokerage business, it seems like Dodd-Frank is consolidating some of the swaps activity at the larger dealers. Are you seeing any pricing pressure from those clients?

The swap business has always been consolidated on the larger dealers because that's the way the business worked. The business of swaps was non-democratic. You either had the scale, girth, size, gigantic in nature to be a swap counter-party who could warehouse risk and buy and sell swaps, or you could do a swap for yourself. So those were basically it. There were 10, 12, maybe 14 firms that could actually buy and sell swaps, and everyone else was a client.

And so futures will democratize that business and allow broker dealers who can trade in treasuries and corporate bonds cannot trade in swaps. They cannot. So those firms will be able to. And so the ability just to have central counter-party clearing, non-discriminatory central counter-party clearing will democratize swaps, and you can have central counter-party clearing that is non-discriminatory in over the counter products, and that's what Dodd-Frank says to do.

And it is in corporate bonds, it is in equities, it is in US treasuries, and now it shall be in interest rate swaps, and we think that singular change gets way too little focus because the futures exchanges get an enormous amount of press, but the democratization of central counter-party clearing in interest rate swaps will make the interest rate swap business a bigger business for firms like ours.

And that leads me to the second part of the question, how are you guys progressing in terms of getting more dealer to client activity or participating in that part of the market?

Well, timing is everything. We need to read the regulations to see what they say, but the democratization I just spoke of is really what it brings in all of our current clients. So, of all of our clients around the world, only as I said roughly a dozen of them are really swap market makers. Right? That's about it.

You could add regionally some banks are regional, but they are not global in nature, but the rest of our global client base cannot make markets in interest rate swaps. Just the democratization of the business by having central counter-party clearing in swaps will allow any of our clients to transact in that business because they can buy them in the morning and sell them in the afternoon, or hold them overnight and post margin. And that difference will -- does not even require us to do a single transaction with a buy side firm. It just allows us to do much, much more business with the clients we already have.

Then we will see what the rules are for regulation, and how the market will play itself out for what role banks can have with their clients, with their current clients, and we will read it with great interest because in the world of multilateral buying and selling we are experts. Banks are not. And they are not good at doing things very, very efficiently across broad spectrums of clients for agency fees. That is just not what banks are good at because they bring much, much, too much capital to the party. Right?

We are an efficiency low cost multi-buyer, multi-seller marketplace Company. That's how we think. Big giant banks with $100 billion in capital should never have those thoughts, because they will never get an adequate return on their capital if they have those thoughts. They have market makers, right? They make spread. Those are the kind of thoughts that they have.

And when driven to be an agent, that will fundamentally change who does what to whom and why and what everybody forgets about is why. We're good at low cost multilateral transactions. Banks are great at market making, using their capital to earn a spread. Those are different things.

Okay. Last question. I think your non-cash comp for 2012 was maybe around $125 million, ballpark. Can you give us any guidance on what we should think about for non-cash camp for 2013?

We don't usually give --

I don't think we've given that guidance before. We'll take a look at it and see if we can't -- we'll examine it for you, and if we think it's a good number to put out there, we will put it out for everybody. But we'll take a look at the question and see if it's helpful, both A that we can guide it, and B, it's helpful to put it out there. We'll consider that.

Okay. Thank you.

There are no further questions at this time.

Thank you all for joining us today. And each of you, I hope has a very happy Valentine's Day. So thank you all, and we'll see you again next quarter.

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.