Bgc Group Inc (BGC) 2013 Q3 法說會逐字稿

Good day, ladies and gentlemen. Welcome to your Q3 2013 BGC Partners, Inc. conference call. My name is Dalou and I will be your operator today. At this time, all participants are in listen-only mode. We will conduct a question-and-answer session towards the end of this conference. (Operator Instructions) As a reminder, this call is being recorded for replay purposes.

I would now like to turn the call over to Mr. Howard Lutnick, Chairman and CEO. Please proceed, sir.

Actually, it's Jason; I'm going to read the disclaimer. Good morning. Our third-quarter 2013 financial results press release was issued this morning. This can be found at either the news center or Investor Relations sections of our website, BGCPartners.com.

During today's call, we will also be referring to a presentation that summarizes our results, which includes other useful information. This too can be found in the Investor Relations section of our site.

Throughout today's call, we will be referring to our results only on a distributable earnings basis. Please see today's press release for GAAP results. Please also see sections of today's press release entitled distributable earnings, distributable earnings results 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, why and when management uses them.

Unless otherwise stated, whenever we refer to income statement items such as revenues, expenses, pretax earnings or post-tax earnings (technical difficulty) on a distributable earnings basis. Unless otherwise stated, all the financial comparisons we will be making on today's call will contrast the third quarter of 2013 with the third quarter of 2012.

On June 28, 2013, BGC sold its fully electronic trading platform for US Treasury notes and bonds, benchmark notes and bonds to NASDAQ OMX Group, Inc. For the purpose of today's call, the assets sold are referred to as eSpeed.

Also, Newmark Grubb Knight Frank is synonymous with NGKF or real estate services -- our real estate services segment. I also remind you that the information on this call contains forward-looking statements within the meaning of Section 27A of the Securities Exchange 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 prospects for BGC and for its industry, as well as statements about our future financial operating performance. Such statements are based upon current expectations that involve risks and uncertainties. Actual results, performance or achievements could differ materially from those contemplated, expressed or implied because of the 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, uncertainties and other factors on anticipated results or outcomes, and that accordingly you should not place undue reliance on these statements. Forward-looking statements speak only as of the date when made, and we undertake no obligation to update these statements in light of subsequent events or developments.

Please refer to the complete disclaimer with respect to forward-looking statements and risk factors set forth in our most recent public filings on Form 8-K, 10-K, and 10-Q which we incorporate today by reference.

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

Good morning, and thank you for joining us on our third-quarter 2013 conference call. With me today are BGC's President, Shaun Lynn; our Chief Operating Officer, Sean Windeatt; and our Chief Financial Officer, Graham Sadler. Newmark Grubb Knight Frank continued to show strong growth, generating almost 36% of BGC's revenues in the quarter.

Over the course the year, NGKF has continued to build its brand by accretively acquiring great businesses, hiring top talent here in New York and around the country, and adding large global corporate service clients.

We expect continuing growth in real estate revenues in the fourth quarter and expect NGKF to produce pretax earnings nearly double those of its fourth quarter last year.

With our $827 million cash position and expected $500 million in NASDAQ OMX stock, we are a cash and asset rich company. There are numerous ways we can deploy our capital to grow our business through accretive acquisitions and profitable hiring. And we remain confident in our ability to generate growth in 2014.

Overall, BGC generated revenues of $414.4 million and post-tax income of $31 million in the third quarter. And Graham will discuss that a little more later in the call. As a result of our recent NASDAQ OMX transaction, this is the first quarter in which we do not have eSpeed which generated $23.1 million in revenues in the third quarter last year.

I am happy to report that our Board declared a $0.12 dividend for the quarter. We are confident in the sustainability of our current dividend for the foreseeable future. And at yesterday's closing stock price, the dividend yield on BGC was approximately 9%.

So with that, I will turn the call over to Shaun.

Thanks Howard, and good morning, everyone. As you know, our financial services business faced challenging market conditions during the quarter. Most of our large customers reported double-digit declines in their revenues from fixed income, currency and commodity trading.

They attributed their results to a number of factors, including the Federal Reserve maintaining its quantitative easing policy, the recent budget impasse in Washington, and the higher bank capital requirements under Basil III.

Consequently, volatility and rate, foreign exchange and equities all declined from their recent highs in June, and were at or below historical averages. This contributed to lower over-the-counter trading volumes across most asset classes.

BGC's financial services segment generated revenues of $256.7 million and $29.7 million of pretax earnings, excluding the assets sold to NASDAQ OMX. This was a decline of 4.7%. A year earlier this segment, which included the eSpeed $23.1 million in revenues and $13 million in profits, generated $292.6 million in revenues and $44.2 million in pretax profits.

Looking at results by asset class, our revenues from electronic rates products, excluding eSpeed, grew by 16.4% in the quarter, driven mainly by our interest rate derivative desks.

Revenues from our overall rates business, excluding the assets sold to NASDAQ OMX, declined by 6.3%. Our credit revenues declined by 19.9% to $54.4 million. Although our fully electronic FX notional volumes were up by 36.3%, BGC's overall voice, hybrid and electronic foreign exchange revenues declined by 3.1% to $47.4 million. That performance is better than the comparable FX volume declines reported by CME, EBS, and Reuters.

Global equity markets were also challenging. For example, equity derivative volumes were down by 20% and 30% respectively, according to Eurex and Euronext. In comparison, BGC's revenue from equities and other asset classes increased by about 1% to $34.9 million.

Excluding eSpeed, financial services electronic trading, market data and software revenues declined by 7.7% to $17.8 million or 6.9% of segment revenues in the quarter, compared with $19.7 million or 7.2%.

The strong growth generated by our retained ebroker rates desk was offset mainly by lower credit revenues. Our retained technology products generated a pretax profit margin of 45%. And we believe that this fully electronic business will grow faster over time than our overall financial services segment.

On October 2, we began operating our Swap Execution Facility or SEF. Mandatory Dodd-Frank compliant execution by swap dealers and major swap participants is not scheduled to commence until the first quarter of 2014.

The new model of swap trading will not take effect until then, and the SEF volumes today are not indicative of the overall interim results or outlook.

BGC also maintains its ownership stake in ELX, a CFTC-approved designated contract market, or DCM, which also includes several of the world's largest banks as equity holders. ELX has been actively planning for the launch of Dodd-Frank compliant swaps and swaps future trading.

Turning to front office headcount, we ended September with 1,545 brokers and salespeople in financial services, down 11% from 1,735 a year earlier. Excluding eSpeed, average revenue per broker salesperson in the segment increased by 1%.

With respect to our real estate services segment, industry metrics continued to move in a positive direction in the third quarter. The combination of moderate economic growth and low interest rates in the US has been a path for stimulus for the commercial real estate, delivering steady absorption of excess space and strong investing demand for the yields available through direct ownership of assets and funds.

These macroeconomic factors combined with low level of new construction over the past few years also helped push vacancy rates down for the office, retail and industrial markets. A Newmark Grubb Knight Frank research team believes that these positive US sales and leasing trends will continue through the end of 2014.

With respect to NGKF's results, management services and other revenues increased by 2% to $40.5 million. NGKF's brokerage revenues improved by 10.5%, excluding the non-core purchased assets we discussed in our earnings release, while overall revenues improved by 8%.

We have broken out these non-core NGKF revenue figures for you in our earnings presentation going back to the second quarter of last year. Commercial real estate service firms tend to generate the lowest revenues and profits in the first calendar quarter, and their highest in the fourth quarter.

As Howard mentioned earlier, we expect our real estate services segment to benefit from this seasonal pattern. Our real estate services segment had 887 brokers and salespeople at quarter end, up 5.6% compared with 840 last year. Average revenue per real estate broker was up 4.4% to approximately $119,000, excluding the non-core purchased assets.

A year ago, this figure was approximately $114,000. BGC's overall front office headcount decreased by 5.6% to 2042 brokers and salespeople. Our total average revenue per front office employee was down approximately 4% to $144,000, excluding the non-core purchased assets and eSpeed.

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

Thank you, Shaun, and good morning, everyone. BGC generated revenue of $414.4 million, down 7% compared with $445.7 million. Our revenues from the Americas were down approximately 4%, excluding eSpeed.

Revenues from Europe, Middle East and Africa were up by approximate 5% to $170 million. And Asia-Pacific revenues decreased by approximately 16% to $43 million. Excluding both the real estate services segment and eSpeed, our global July 2013 revenues were down by approximately 1% to $90 million.

August declined by approximately 11% to $76 million, while September was down by approximately 4% to $100 million, all when compared with a year earlier.

Turning to consolidated expenses, compensation and employee benefits were 62% of revenues compared with 59.8%. Our compensation ratio increased, mainly due to a larger proportion of revenues coming from real estate services and because eSpeed had a relatively low compensation ratio.

Non-compensation expenses were down on an absolute basis and as a percentage of revenues to 29%, compared with 29.7%. The decrease in non-compensation expenses were across all of our GAAP line items, due largely to our ongoing cost-reduction program as well as to lower revenues and the sale of eSpeed.

We remain on target to reduce overall costs by $50 million on a go-forward basis by the end of 2013, as compared with the second half of 2012 run rate. We also expect to reduce costs over the course of 2014 by another $50 million, bringing our total projected cost reduction to an annual run rate of $100 million.

Our pretax earnings were $37.4 million compared with $46.7 million. Our pretax margin this quarter was 9% compared with 10.5%. However, because we sold our eSpeed business, these comparisons aren't apples to apples.

BGC's effective tax rate for distributable earnings was unchanged at 14.5%. Our post-tax distributable earnings were $31 million or $0.10 per fully diluted share, compared with $38.6 million or $0.13. Our post-tax earnings margin was 7.5% compared with 8.7%.

BGC had a fully diluted weighted average share count of 355.2 million in the third quarter of 2013, for both GAAP and distributable earnings. This compares with $325.7 million for distributable earnings and $146.7 million for GAAP a year earlier.

The GAAP share count was lower a year ago because it excluded share equivalents, including partnership units and the convertible senior notes in order to avoid anti-dilution. The year-over-year increase in share count for distributable earnings was due in part to issuances related to acquisitions, as well as equity-related employee compensation.

This was partially offset by the net $33.2 million fully diluted share count reduction over the previous two quarters. As of September 30, 2013, our fully diluted share count was 356.4 million, assuming conversion of the convertible senior notes.

We expect to decrease the absolute level of share issuance per quarter. Absent acquisitions or significant hiring, we expect our fully diluted share count growth to be significantly less than the first half of the year.

With respect to our receipt of NASDAQ OMX shares, the $31.9 million of revenue associated with BGC's expected receipt of approximately 992,000 shares was recorded in GAAP revenue as other revenues in the financial services segment during the quarter.

It was based on the September 30 closing price of $32.11. BGC expects to receive the same amount of shares in each of the next 14 years. Should certain acceleration events occur, including NASDAQ OMX undergoing a change of control, whatever remains of the share earnout will be paid immediately at that time.

As of the most recent closing price, the value of these expected 14.9 million shares is approximately $532 million. The value of 25% of these earnout shares was included in distributable earnings for this quarter, or will be recorded in each of the next three quarters.

The dollar amount included in both GAAP and distributable earnings in future periods may be adjusted to reflect any potential hedging and/or mark-to-market movement.

As of September 30, 2013, the Company's cash position which we define as cash and cash equivalents, marketable securities and unencumbered securities owned was $827 million. Notes payable and collateralize borrowings and notes payable through related parties were $423 million.

Book value per common share was $2.25, while total capital which we define as redeemable partnership interest, noncontrolling interest in subsidiaries, and total stockholders' equity was $808.5 million.

In comparison, as of December 31, 2012, our cash position was $420.4 million. Notes payable in collateralized borrowings and notes payable to related parties were $451.4 million, and book value per common share was $2.11, while total capital was $506.3 million.

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

Thank you, Graham. Excluding real estate services and eSpeed, our preliminary revenues for the first 22 trading days of October were down by around 3% compared with a year earlier. For the fourth quarter 2013, we expect to generate distributable earnings revenues of between $400 million and $425 million. This compares with $436.3 million last year.

And we expect pretax distributable earnings to be between $36 million and $44 million, and that compares with $35.1 million last year.

We anticipate our effective tax rate for distributable earnings to remain at approximately 14.5%, and we intend to update our fourth-quarter outlook around the third week of December.

So with that, operator, I'd now like to open this call for questions, please.

(Operator Instructions) Jillian Miller.

Thanks. I guess just starting with the SEF rules and what you're seeing there, I know part of this thesis was that once the self-compliance went into force the smaller competitors with lesser resources might be forced out of the market, and that would create some acquisition opportunities for you guys. So, just wanted to get an update on what you're seeing, what kind of opportunity you might have, especially given your cash position. Thanks.

Well, I think that the thesis remains. That the rules that come into effect in the middle of the first quarter -- or that's what people anticipate -- are creating issues for smaller people who don't have the capacity to assess, and they need to find a way to solve that regulatory problem.

They will do that either by dealmaking or by dealmaking. One way or another they have to do it.

So what type of deals and who they do them with, open-minded. But you are correct. We are at the party with a very strong balance sheet and a lot of money, and I think that makes us an attractive partner. Given we have technology and money, we should be able do some very interesting things going forward.

Okay. Have you guys seen any fundamental changes in the market since some of these SEF rules have been, I guess partially in place, not entirely yet? But are you seeing any more electronic trading? Any diversity in the participant base, or shifts in market share or pricing? Or is it basically business as usual for the time being?

It's been business as usual to a large extent. We expect obviously this is going to change leading up to the first quarter of next year.

But it's very early days. We have literally just entered this sector of the market now where the rules are starting to take [in] place. And we expect things potentially will change over the course of the next three to four months.

But as an example, we've seen an increase recently of fully electronic transactions in some of our marketplaces. And that's where you see our rates for the electronic business increase by 16%. So the world is beginning. It is beginning.

Okay, and then just one final question for me. On the extension of your cost cuts, or I guess the new cost-reduction program for next year, is that a reflection of your outlook for trading activity in 2014? Like, are you expecting another difficult year and that's why you see this as necessary?

Or is it just, I guess some excess fat in the organization after integrating the real estate businesses, that you think needs to be cut regardless of your activity outlook?

We had a significant structural surround to our Treasury business. That has a vast R&D associated with it. I think this is really a retooling and re-examination of where the world is going, how we want our technology to invest in it, and how we expect things to back our business going forward.

And I think with that we also have the advantage of really examining our business and being able to skinny ourselves down and be ready for the future. I think this is an opportunity for us to do that with the -- on the back of the eSpeed transaction -- to modify the way we invest in some areas of our technology and then to have our business fit -- our expenses fit out business as we see it going forward.

Okay, thanks guys.

Rich Repetto.

Good morning. I guess just to back into the guidance on the real estate revenue -- excuse me, pretax distributable earnings for 4Q, so at the midpoint we're coming up with about $18 million, if you compare to last year. Is that correct? When you say is going to double --

No, I would've thought substantially higher than that.

Just the real estate portion.

Right. I think our real estate portion, I think we have around $13 million from last year; so we are saying approximately double, could be better.

Okay. So then given that is the case, let's just use a number of $25 million or so, could be better, $25 million to $30 million. If $40 million is the midpoint, that means financial services is going to be significantly, you know $15 million or less. Is that the -- am I backing into right numbers for pretax for the financial services sector?

Well, historically the fourth quarter with Thanksgiving and Christmas is the slowest quarter for financial services. If you just took the third quarter the way it was and take an ordinary fourth quarter, you'd have our revenues decline historically probably around 10%. Right? Give-and-take around there.

So that's just the normal seasonality is there. Obviously, you have seen in the third quarter with the changes in the swap execution rules, the business itself has declined because people are trying to figure out the new order of things and the new way to do their business.

When are you talking to your clients, instead of talking about directional and about rates they are talking about compliance and things like that. That obviously holds back some volumes in the near term.

Then also you have to remember that because we sold eSpeed the comparison, as Graham aptly put it, isn't apples-to-apples.

Right. Right, but we're still looking at going from, I believe, roughly a $30 million pretax distributable earnings 3Q this year without eSpeed down to something that looks like somewhere around half. Is that -- do I get the right picture there?

It looks to be, by putting them together, if it's around -- your analysis isn't incorrect. So the real estate, right, would be the higher number and financial services in the fourth quarter lower. And then of course financial services does much better in the first quarter as things bounce back; and real estate is not at its best in the first quarter.

No, I understand. I got the extremes, where the real estate does its best and brokerage does not so good seasonally.

Anyway, I guess the next question, this will be my last out, is just on the SEFs. We're hearing not only slow -- how so I put this? That during this period up until it's mandatory that people start trading, that you get the made-available-to-trade mandates, that we're actually seeing activity pull back from normal activity. Because they don't -- well, they're not trading on SEFs hardly at all, because you register -- you would have to fully become a member. And when they don't have to, when they can still trade the way, is that a reasonable picture what's going on out there?

Yes, I agree. The volumes are weaker now; but ultimately our view would be ultimately clients are still going to want to do swap business. And buy-side firms tend not to do business with other buy-side firms. That's why they're called buy-sides firms; they're not called sell-side firms.

And that is the history of those kind of firms. When they all get together and try to do business with each other, there's lots of buying and not much selling, and therefore not much transactions.

So they need the Wall Street firms, banks, to be the middleman, to grease the skids and to help this kind of business flow. And that we expect to continue to happen.

And as those banks find their way to do business with their clients in the new rules, then they will need to mitigate their risk by reducing their risk by trading with each other. And that structure will find its way.

Because you are absolutely right. It is slower today as people are trying to consider how they're going forward.

And the new rules really take effect February 15. So whatever you view the business as between now and February 15, you have to realize that it's going to improve. That will be the first day of the rest of our lives.

And then from there it will begin. I'm not saying on February 15 it starts to rocket. I'm saying that is beginning of the movement going forward.

Just one follow -- I lied, one follow-up. Like the process I believe needs to kick-started by this made-available-to-trade determination, which then requires some of these swaps to be traded on SEFs.

But you didn't request any, I don't believe -- and the only ones I believe have is I think Javelin and maybe Bloomberg, but there's only a couple. Was there a reason why you haven't started the process to get products approved to trade?

No, I don't think there's any particular reason. We take advice, we will -- we expect to be there on the first day. We expect to be there.

Got it. Okay, thank you very much.

Michael Wong.

Good morning. Eventually rising interest rates and the related rates change have been a corner stone of your eventual earnings growth story for years. So in general, what you say are your largest opportunities now?

Through the rates market, in which we're still growing our rates market globally, we are focusing on the growth in energy commodities, real estate, and all of that, current sectors. We haven't changed our attack in any way.

We are doing as much as we can to turn more markets electronic. We feel as bullish on the marketplace as we always have done.

Of course it's gone through a difficult time for everybody with the new rules coming in, with Basel 3 taking effect, and the pullback from some of the major banks. But we think that's amazing opportunities for us going forward regards to acquisitions, with regards to the way the markets are changing, which is going to play out really well for us.

And as Howard has said, with our financial situation being as strong as we are, it's the same business for us as usual. We are still going to grow, build, and expand into this.

Okay. In general, how would you characterize, I guess, the hiring or compensation environment right now? It seems like -- would you characterize that as more rational, as it seems like the brokerages are tightening headcount, (inaudible) even front office much more than hiring?

Yes. Yes, sure. I mean I think it's easier to hire, but you have always got to upgrade where you see potential. You've always got to cut costs, as Graham has been speaking; and just because someone offers you something doesn't mean to say you always want it.

You've got to be looking forward to where the market is going to be, what's the parts of the market you want to be in. There's no point in going into old businesses that effectively are not going to be the flavor next year.

You want to be focusing on the new businesses that are up-and-coming and how the market is evolving, and making sure you are at the forefront of that with the right stuff and with the right compensation packages, which incentivize people to work hard and grow and build the business electronically, not just in the old-fashioned way.

Okay, thank you.

(Operator Instructions) Niamh Alexander.

Thanks for taking my question. On the real estate business, I know you want to spend more time focusing on that, because it's more of a growth story right now. It looks like it's pretty impressive in what you're going to do in terms of the earnings jump in the fourth quarter.

Help me think about what specifically is driving that. Is there -- is part of the cost saves that you put through this year starting to play out in there as well? Or is it all top-line revenue driven with the seasonality, and we should kind of model a [go back]?

Because you are kicking into double-digit margins there for the first time, and I'm just wondering if that is a good run rate to think about as the margin potential, especially as the big financial services segment, the margin's deteriorating.

So, is twofold. It's both a top-line revenue growth model and we continue to see strong top-line revenue growth; but it's also a mix issue. Which is, we have been winning global corporate service clients, and the global corporate service clients have a higher margin to their business because this is more of a consultant brings transaction, rather than just broker brings transaction.

And as you do the analysis on these large global corporate transactions, and you analyze these companies on a global basis you end up being in transactions all over the world on better financial terms, as compared to how much percentage we have to pay out brokers. So the bigger the global corporate services business, the better our margins in that business.

And in the fourth quarter we have had and we are seeing an excellent return from global corporate services, and that will improve our margins. But that is sort of like [your] experience. It's a mix issue; there will be many quarters where that's not the case. But when global corporate services hits we bring big money to the bottom line; and in the fourth quarter of this year we expect that to happen.

Okay. Thanks, Howard, that helps. Then on the cost saves, the additional $50 million, where should we be looking for that? Is it a lower comp ratio? Is it some of these non-comp expenses coming down?

I think there will be some in the (technical difficulty) line but primarily I think you see it in non-comp expense. As I said, I focus on making our technology is focused on the areas we need it to and the processes we need to.

We're not -- we don't need to be in the every-three-months rat race of making our system 2 microseconds faster than it was yesterday. Rather we can look at things from a holistic approach and try to come at things from an entirely different perspective. And that is refreshing and relieving in a way.

And I think I think we will do very, very well with it. So I think be able to refocus our technology expense and refocus the business on the expenses that we need to support our business going forward.

Okay, that's helpful, thank you. Then lastly, on the staff, we've seen some of your competitors come in with -- number one and two are coming in with stronger volume; and I guess that it's very early days and clients are still figuring out what it is that they need to do.

But would you be -- is it an okay spot to be number three? Or don't you want to be number one or two in this space to make sure that you're getting most of the trades routed to your venue going forward?

And that's primarily in rates. In credit I'm just a little concerned with the deterioration in the revenue there relative to some your peers. I know the market has been soft, but I'm just wondering; have you lost some share there? Maybe as it went onscreen and you saw some more of the index business go onscreen.

As you know we are not the biggest and the strongest in every product category. There are certain indexes -- right? Shaun, you want to talk about things we do and what we don't do?

Basically, it's very, very early days. The initial numbers that are out there are specific to the indices -- the CDS market. We have never been strong in the CDS market, but we're very strong in other parts of the market.

So that number isn't captured in those early day graphs. With regards to rates we are still growing and building in that market. We are not fazed by the numbers that are actually out there at the moment.

I would not consider us number three. And certainly inside of this Company we do not see those statistics or those things making a hill of beans at all to us.

We have great technology. We have great position. And we feel that our opportunity is superb right here and right now.

And there's a lot of work to do to make that come to pass. But I would not bet against us. I would not.

Fair enough. Then on the cash, just the use -- the repayment of debt is one of your first, it's still what your priority. Was there something specific you had in mind?

I know there are some restrictions on the big convert you had with Cantor. But is that something you're trying to work through, maybe, to reduce that leverage a bit earlier?

If we can. If we can, we would. But I think when it matures it won't be replaced.

Not till when it matures, okay. That's the [first] time. I'll get back in line, thanks.

Thank you, we had no further question in the queue. With that I will now turn the call back to Mr. Howard Lutnick for closing remarks.

Thank you all for joining us today, and we look forward to updating you at the end of the fourth quarter and speaking to you next quarter. Thanks everyone.

Have a great day and Happy Halloween to you all. Bye-bye.

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