Bgc Group Inc (BGC) 2014 Q2 法說會逐字稿

Good morning and welcome to the Second Quarter 2014 BGC Partners Inc. Financial Results Conference Call. My name is Brendan, and I will be your operator for today. (Operator Instructions) Please note that this conference is being recorded. I will now turn it over to Mr. Jason McGruder, Head of Investor Relations. You may begin, sir.

Good morning. Our second quarter 2014 financial results press release was issued this morning. It can be found at either the News Center or Investor Relations sections of our website at www.bgcpartners.com.

During this call, we will also be referring to our presentation that summarizes our results and which includes other useful information. This too can be found on our website.

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

Unless otherwise stated, whenever we refer to income statement items such as revenues, expenses, pretax earnings or post-tax earnings, we are doing so on a distributable earnings basis. Unless otherwise stated, all results provided in this document compare the second quarter of 2014 with the year-earlier period.

In addition, certain revenue items and nonfinancial metrics have been adjusted for prior periods to conform to current reporting methodology. These adjustments have no impact on overall revenues or earnings for either GAAP or distributable earnings.

On June 28 of 2013, BGC sold its fully-electronic trading platform for benchmark US Treasury notes and bonds to NASDAQ OMX Group, Inc. For the purposes of today's call, these assets sold are referred to as eSpeed and the businesses remaining with BGC that were not part of eSpeed are referred to as retained. Also, Newmark Grubb Knight Frank is synonymous with NGKF or our real estate services segment.

I'll also remind you that information on this 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 prospects for BGC and its industry, as well as statements about our future financial and 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, or 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 disclaimers 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 am now happy to turn the call over to our host, Howard Lutnick, Chairman and CEO of BGC Partners.

Thank you, Jason. Good morning, and thank you all for joining us for a second quarter 2014 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 margins expanded across both of our businesses and for the overall company. You can see this improvement in the face of difficult market conditions in financial services and despite the sale of eSpeed, which last year generated approximately $24 million in revenues and $14.2 million in pretax profits and approximately 60% profit margins. This is the last quarter in which eSpeed results will impact our year-over-year comparisons.

Within a year of the NASDAQ transaction, we have effectively replaced the earnings from eSpeed. We expect our pretax earnings to increase next quarter by between 39% and 60% year over year. Our cash position is over $640 million and we also expect to receive approximately $600 million in NASDAQ OMX stock. This gives us over a billion dollars of fire power to grow our profits. We expect to use these funds to increase shareholder value by making accretive acquisitions across real estate and financial services, repay debt, repurchase common shares and units, and maintain our regular common dividend for the foreseeable future. We expect the acquisition of Cornish & Carey Commercial to close mid-August by adding the leading commercial real estate services company in northern California. Newmark Grubb Knight Frank will expand the scope and depth of services it provides to clients across the United States.

In May, our financial service business acquired Remate, the leading Mexican inter-dealer broker of interest rate derivatives and fixed income. We also continue to hire top producers around the world. We expect these additions to increase our earnings per share going forward.

I am pleased to report that our board declared a $0.12 qualified dividend for the second quarter, which at yesterday's closing stock price translates into a 6% annualized yield.

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

Thanks, Howard, and good morning, everyone. Industry-wide volatility was at or near 20-year lows across virtually all financial products during the quarter. This negatively impacted the trading volumes for most of our customers.

The BGC financial services businesses generated revenues of $271.5 million and $49.9 million of pretax earnings. Last year, we generated $293.4 million in revenues and $42.2 million in pretax profits. Despite these very difficult market conditions, we increased our profits by approximately 18% and our pretax margin by 400 basis points. These comparisons exclude eSpeed.

By the end of the quarter, we lowered our financial services front office headcount by 4% by reducing a number of underperforming brokers. These reductions contributed to our financial services revenues declining by only 7.5% excluding eSpeed but contributed to our improved margin.

Looking at results by asset class, our revenues from rates products, excluding eSpeed, were down by 14.7% in the quarter to $104.7 million. In comparison, interest rate volumes were down by more than 20% at Deutsche Borse and ICE.

The overall credit markets remained difficult due to ongoing regulatory uncertainty and increased capital requirements facing our large bank customers. This was reflected in the combined daily average primary dealer volumes for corporate and mortgage-backed bonds, being down by approximately 20% year over year according to the Federal Reserve. Similarly, gross notional credit derivates outstanding were down by approximately 19% year over year according to SIFMA.

In comparison, revenues from our fully electronic credit desks increased by 29% and our overall credit revenues declined by 12.5% to $58.9 million. According to Goldman Sachs, the overall FX market experienced its lowest levels of volatility ever measured during the quarter. As a result, FX volumes were down by between 35% and 40% at Reuters, CME, and EBS. In contrast, our high margin fully electronic spot FX revenues increased by 25%. BGC's overall foreign exchange revenues declined by 18.8% to $49.3 million.

Equity derivative volumes were down by between 11% and 22% during the quarter according to the OCC, Eurex and the CME. Total energy and commodities volumes were down by 15% and 25%, respectively, at CME and ICE. In comparison, BGC's revenues energy and commodities desks increased by approximately 72%. Our overall revenues from equities and other asset classes, which include these sesks, increased by 7.2% to $43.6 million.

Excluding eSpeed, financial services electronic trading market data and software revenues increased by approximately 3% to $22.6 million or 8.3% of segment revenues in the quarter. This compares with $21.9 million or 7.5% last year.

These retained fully electronic products generated a pretax distributable earnings margin of approximately 55% in the quarter. Their revenues have grown faster than our overall financial services business for the past several years. Our July to date, fully electronic revenues are up by 18%.

We ended June with 1,519 brokers and sales people in financial services, down 4% from 1,587 a year earlier. Excluding eSpeed, our average revenue per financial services broker sales person decreased by 7% to $172,000.

Moving on to real estate services, according to Costar, net absorption of US office, industrial, and retail properties was up by 1.6% year over year for the 12 months ended June 30th. This signals continued improvement within the overall leasing market. Real estate capital markets overall commercial real estate credit increased by 3% year on year according to Citigroup. Our US sales volumes were up by 23% according to preliminary figures from Real Capital Analytics. The low volatility I mentioned earlier coupled with the steadily growing US economy has created positive market conditions for NGKF. While we benefited from these positive industry trends, we believe that NGKF also continues to gain market share within its businesses.

Our real estate brokerage revenues improved by 5.8% to $110 million. Management services and other revenues were down by 1.9% to $39.1 million and overall revenues improved by 3.6% to $149.1 million.

We had 879 real estate brokers and sales people at quarter end, down 2% compared with 898 a year earlier while average revenue per real estate broker was up 8% to $125,000. NGKF's ongoing improvements in broker productivity along with increased operating efficiencies resulting from successful integration of previous acquisitions, together contributed to pretax earnings increasing by 38.7% to $15.5 million.

With that, now I'll turn the call over to Graham.

Thank you, Shaun, and good morning, everyone. BGC generated revenues of $430.3 million, down 8.7% compared with $471.1 million. The second quarter last year included approximately $24 million in revenues from eSpeed.

Our revenues from the Americas were up approximately 2%, excluding eSpeed. Revenues from Europe, Middle East and Africa were down by 8%. Asia Pacific revenues decreased by 23%.

Turning to consolidated expenses, expenses decreased across all line items, due largely to our ongoing cost reduction program as well as lower revenues and the sale of eSpeed. Compensation and employee benefits were down by 8.6% and represented 61.1% of revenues. Our compensation ratio was flat, despite a larger proportion of revenues coming from real estate and the absence of eSpeed, which had a comp ratio of around 15%.

Over the past 12 months, we reduced the number of employees by approximately 400 companywide or by 6% of overall headcount.

Non-compensation expenses were down by $15.2 million or 11.7% and were 26.6% of revenues compared with 27.5%. Our pretax earnings were $53 million, down only 1.6% when compared with $53.8 million, despite the sale of eSpeed.

Our pretax margin this quarter expanded to 12.3% compared with 11.4% a year ago. BGC's effective tax rate for distributable earnings was 15% versus 14.5%. Our post-tax earnings were down slightly to $43.5 million compared with $44.9 million. Our earnings per share of $0.13 were flat year over year. Our post-tax earnings margin improved to 10.1% compared with 9.5%.

Our pretax earnings were about the same, despite revenues being down around 9%. This clearly demonstrates the success we're having thus far in reducing our expenses.

BGC had a fully diluted weighted average share count for distributable earnings of 366.7 million in the second quarter of 2014 and 326.6 million under GAAP. The GAAP share count was lower because it excluded certain share equivalents to avoid anti-dilution. In the second quarter of last year, our fully diluted weighted average share count was 378.1 million for both distributable earnings and GAAP.

As of June 30, 2014, our fully diluted share count was 366.9 million, assuming conversion of the convertible senior notes into 40.1 million shares. The 3% year-over-year decrease in fully diluted weighted average share count for distributable earnings was driven in part by the redemption and repurchase of 13.2 million shares and units at a cost to BGC of $82.9 million over the trailing 12 months. This is partially offset by issuances related to employee equity compensation as well as by new hires and acquisitions.

As of June 30, 2014, BGC's cash position, which we define as cash and cash equivalents, marketable securities and unencumbered securities owned and held for liquidity purposes, was $644.2 million. Notes payable and collateralized borrowings and notes payable to related parties were $409.1 million. Book value per common share was $1.90. Total capital, which we've defined as redeemable partnership interest, non-controlling interest in subsidiaries, and total stockholders' equity, was $701.7 million.

In comparison, as of December 31, 2013, our cash position was $795 million. Notes payable and collateralized borrowings and notes payable to related parties were $408.4 million. Book value per common share was $2.15. Total capital was $769.7 million.

BGC's cash position decreased from year end 2013 primarily due to cash used to pay taxes, $56.3 million used to reduce fully diluted share count by 8.1 million over the first half of the year, and cash used for the HEAT and Remate acquisitions. We have now largely paid for all the distributions and taxes related to the NASDAQ OMX transaction, which we had indicated last year would be around $290 million. This means that the majority of our cash balance is available for us to use to invest in our businesses, make accretive acquisitions, pay down debt, and maintain our dividends.

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

Thank you, Graham. Our third quarter 2014 outlook is as follows. We expect revenues to be between approximately $410 million and $435 million and this compares with $414.4 million. We anticipate pretax earnings to be in the range of $52 million to $60 million. This is versus $37.4 million last year. We expect our effective tax rate for distributable earnings to be around 15% as compared with 14.5%. The positive impact of our expense reduction program should become even more evident next quarter. At the low end of our outlook range, we expect pretax income to be up by 39% year over year despite slightly lower revenues. At the high end of our range, we expect pretax earnings to be up by 60% year over year with revenues up 5%. This guidance assumes that Cornish & Carey acquisition closes in the middle of August. We intend to update our third quarter outlook around the end of September.

Now, operator, we'd like to open the call for questions, please.

Thank you and we will now begin the question and answer session. (Operator Instructions) Rich Repetto, Sandler O'Neill.

I guess, Howard, I guess the question is and I'm sure other people were going to ask something to this effect, but with the transaction where the CME bought Trayport and Fenics, I just wanted to see how you viewed the valuation? Then what platforms and I know you put out your fully electronic revenue of $23 million and pretax of $12 million in the quarter. But what platforms you might have that let's just say are of value given the comparable from that, the Trayport transaction and Fenics?

The reason we break out our fully electronic numbers for you is for you to see what would be comparative to other types of businesses. Our volume match businesses, our fully electronic businesses, you know I guess the best thing we should do, is we should pick a name for them so we can call them by some name but they are comparable. You know we view them as comparable. They are highly valuable. They have great margins. I think superior margins and they're very valuable. That's why in numerous times we have done the sum of the parts. You know we are growing them nicely and we expect to continue to grow them, but we do expect eventually that someone will want to buy them and we will get a healthy return for our business and the stock.

So, you know if you just look at how we've grown I think as Shaun said in his remarks, you know our July numbers are up 18%. So you've got tough market conditions. You've got our fully electronic business growing. We are able to drive the voice into the electronic business, but once it's electronic, it's electronic just like Trayport's electronic, just like eSpeed was electronic. Just like all these other kinds of businesses are electronic and exchanges will find them very attractive. So that's why we've done the sum of the parts for you. We think our electronic assets are very, very valuable.

Just to remind us, the specific platforms you're talking about in the electronic assets, the names of the platforms?

Well, I think our weakness has been we haven't put a name on it, so I guess we're going to call our marketing people and say come on. Give me a name. We have our -- look our foreign exchange business which we worked on for many, many years and then finally found a very, very successful business continues to grow nicely, even into the face of the lowest volatility in history and lower volumes across all of foreign exchange. But our business is doing very, very well because it's just a great product. Our volume max products are great products.

We just have fully electronic businesses and we have numerous fully electronic businesses in European government bonds and otherwise that are comparable to eSpeed. They're just in different other products. Then against all of those we have market data. Our market data continues to grow at a healthy pace, just under 30% growth rate in market data. So we've really got nice things and I guess should put a -- we should put a brand on it so it becomes more famous out there in the market. But the products themselves are doing very, very well and growing nicely with super margins. So, while we haven't put a name on it, the business is sensation.

Great, that helps. Just one last one on expenses, Shaun, I guess the -- we're looking at doing this comparison again against the second half of 2012. Roughly the run rate was $400 million in expenses per quarter. So, if you're going to reduce 100, you know 20 -- you'd take 25. So the run rate, the target would be 375, which you're just about at right now. But the second half of 2012 included eSpeed, which is about another 10, so are we using 365 as sort of the target or 375 as a target?

Well, I think, you know obviously you have to think about acquisitions and other such things in there. It's hard to just you know take a target from -- based on last year. What I want -- I can tell you though that we are a substantial way along the track to getting to our target. Howard talked about we will be by the end of Q3. Howard sort of referenced Q3 this year relative to Q3 last year and the margin expansion since that time.

One other interesting statistic actually is in Q4 2012, we made 436 in revenues and 35 in DE, which compares to 60 or 435 and 60 in the forecast. So there's significant margin expansion since the end of 2012. Of course those numbers in 2012 included eSpeed.

Got it. Okay, so whether it's 365 or 375, we're pretty close to both of them, I guess is the thing to say

We should be -- we're substantially complete on it by the end of the third quarter and won't, of course, mean that we're done. It just means we're done that with target and we'll be examining what is available for the next target. We do have acquisitions to integrate and businesses to grow, so we will examine that in the new light and if we have interesting things to say about our goals and objectives going forward, we'll be happy to say them. But for our past goals we are, we expect to be substantially complete by the end of the third quarter.

Right and that's actually -- I don't want to ask another but your volumes don't seem as impacted as you said in the prepared remarks but it's still not as impacted but still, you know if the volume environment stayed down, I guess what you're saying -- there could be more expense adjustments both from -- the integration savings going forward is what you're saying.

Absolutely. Absolutely.

Okay.

You set a goal. You achieve the goal. You set a goal. You achieve your goal. Is there -- I don't know, it's called running the company.

Congrats, Howard. That's all I have. Thank you.

Patrick O'Shaughnessy, Raymond James.

Hey, so you guys announced that you have resolved the FINRA arbitration case with Tullett Prebon, but there's the ongoing RICO case. Can you maybe provide any update on the status of that RICO case? When you think it might be resolved? Also, kind of talk about any similarities or differences between that case and the arbitration issue?

Let's see what I can say starting with I'm not a lawyer so it's -- you know that would be the exact kind of comment I'd say, why don't you call our general counsel and ask him. He'd be better served to answer it.

But, you know look we had a FINRA arbitration on the matters. And that was decided and now there's a case that seems to me to be the same exact case trying to get another bite at the apple. Last I checked, that's not how the world and the laws work in America. So, I think it's just duplicative and that's our view of things.

So while it'd have to whirl its way through the courts and how that is decided and when it's decided, if you know when that is, you can let me know. My experience has been these things just take time and they work their way through. But we think it was completely resolved. You know they're trying to come up with other ways of saying things and I just don't buy it. But, it'll be what it'll be. We'll resolve it when we resolve it. So I can't give you more than that.

All right, got you. On your share count, a lot of moving parts going on in the third quarter. Cornish & Carey acquisition, I would imagine is going to lead to some equity issuance. You had the filings the other day about some share repurchase efforts. Can you guys give us a ballpark, where do you think the fully average diluted share count should be for the third quarter?

Yes, we're trying to manage things to in and around five million share growth or less. So, since we'll have the Cornish acquisition, we thought offsetting some of that issuance was a good idea and obviously we think it's prudent since we're very optimistic about the outcome of the company. So probably in and around five million share growth or less.

Okay, that's helpful. Thanks. Graham, on the expense side of things, there was a big quarter-over-quarter drop in your occupancy and equipment line. Was there some real estate consolidation that took place during the quarter?

Yes, I mean the (inaudible) during the call today, you know from one quarter to another, yes indeed there was. Part of our cost reduction process.

Okay and then I guess lastly for me so your third quarter guidance, it seemed, you know would seem to include maybe a month and a half of revenues from Cornish & Carey. And you know because it's included in that, you know your overall DE revenue guidance of 410 to 435, I guess I would have thought that would be a little bit higher. Is there maybe some seasonality to the Cornish & Carey revenues where 3Q just isn't going to be very significant for them?

When you buy a company, often the day before you buy it they try to jam in as many deals as they possibly can. So, my guess is we're going to be reasonably conservative in our view of things because our experience is that's just the way it goes.

Got you. Understood, thank you.

Jillian Miller, BMO Capital Markets.

I know that you said you'd be substantially complete with the cost saving program by the end of the third quarter, but I might have missed it. Did you tell us how much you've done to date? So essentially how much more we have before the end of third quarter to go?

No, we didn't give you a number. Basically just saying that by the end of Q3, we're going to be substantially complete.

Okay, I mean given your third quarter guidance for the revenue and then the pretax earnings, it seems like you're projecting pretty meaningful improvement I guess in the expense ratio sequentially, despite the fact that more of your business is going to be coming from real estate, which I think typically has a lower margin. So, I mean could you give us a little bit more detail on where some of that improvement is coming? Is it mostly comp? Is it non-comp?

Well I think it's across a whole variety -- it's really across our business and we've been working on it for so long, you know sometimes you know for instance if we move some software and we're finally off the maintenance and you have to give them notice under the contract. And the contract rolls when it rolls. That's when you get the benefit. So, it's really -- you know we said we'd get it done by the end of the year. Obviously, internally we wanted it substantially done by the end of the third quarter. We've been talking about it for almost a year or nine months. So the fact is we're -- you would expect us to be around here then and it's coming across. You know I would have preferred more of it came in the second quarter.

You know but it comes when it comes and you know we've done all sorts of things here to make the company more efficient. We think we have more to go. But, I guess before I start talking about how much more we have to go, I sort of want to figure out again how long we think it'll take and what we think the scale and scope of that is and whether it's worth talking about or it's just our job. You know it is our job to do that. Talking about it is nice, but it doesn't mean we don't talk about it internally all the time anyway. So I don't think there's anything particular about the third quarter other than we needed it all to come to roost by then. So not surprisingly, it's all coming to roost by then.

Okay and then just to clarify in Cornish & Carey, is all of that revenue associated with the business coming through the real estate broking or do they have any of the real estate management stuff going on?

They have both.

Okay. Got it. Then finally, you know going back to the GFI transaction, clearly a lot of value was placed on Trayport, but you know on the flipside I was kind of surprise at how little value was placed on the voice broking business. I mean it's being bought for $165 million, which is 0.25 times their annual revenue. So, I would just be interested in your thoughts on that valuation. You know longer term, I guess, how you see GFI surviving as a standalone voice broking only business.

Well, we find the transaction interesting and certainly will garner lots of reading and thinking from us. What was the second part of your question?

I just -- you know do you think GFI essentially can survive alone without Trayport earnings to boost it, I'm saying?

The world out there requires, in my opinion, two things, money and technology, to be capable of being successful. We have both of those things. If one were to not have enough money and one were to not have technology, you know there's other niches for people to be successful. Of course there are. Are they relevant in scale? Of course they're not. So one could always make a choice to be a niche and not relevant but maybe make a little bit of money.

So I, you know I don't know. That is not a hand that I have played. I have played a hand of enormous capital, enormous sums of money and spectacular technology to become fundamentally relevant in the world. That's what we like. That's what we want to do. So, you know someone else playing a different set of hands is up to them. But I find the transaction interesting and we will think -- you know we're going to think about it and learn and learn from it.

Okay, thanks.

Niamh Alexander, KBW.

Thanks for taking my questions. On the distributable earnings number, you know with the cash you have and the signals you've been clearly sending about kind of buying growth now that you're done with the taxes and kind of maybe buying out some stock. You know help me think about the distributable earnings and the dividends, because historically you've paid out quite a high proportion of your earnings. For awhile there you were paying out higher than that, but you're buying growth here. Should we think about the same ratio going forward? Should we think about maybe the capacity to raise the dividend in the future?

Yes. I mean you know it's hard for me to be short, as you know, but I think the answer is yes.

So I should still think about that target, is it like 70% to 90% is your payout ratio that you target typically?

Well, historically -- look historically the company wanted to have a high percentage of its distributable earnings distributed and that's why we came up with the brilliant name, distributable earnings. So historically that's been the case.

You know we're always going to examine the opportunity for us to spend our money and grow our business and balance that with making sure we're producing shareholder value in either growth or cash return to the shareholders. That balance, as you know, is important to us. We have our employees, our sales people, both in financial services and in real estate. They get paid a percentage of their equity. They get paid a percentage of their compensation in equity. The returns on that equity are very helpful to balance it because they don't have liquidity in the same way others do. They, of course, have you know that is also has a portion of it that they would lose if they left and competed. So it's important to them to have a strong dividend that keeps them -- that keeps that value to them current.

So we have that balance and so that's why I answered so simply, yes, which is it is important to the firm that we have a distribution ratio that is relatively high. However, we're always going to examine it. The board is always going to think about it. We're always going to look at options that are in front of us and we feel it is better to have a lower percentage, meaning to keep the dividend where it is and start using the cash to buy other companies or invest in other ways. Of course, we're going to do that. Whatever is best for the company, but I have explained one of the factors that is important to the company is our -- is the current distribution ratio. If our company earns more, that certainly will be a topic that we will talk about very positively about raising our dividend.

Okay, well it seems like this year there's a lot of deals happening, there's a lot of other moving parts and you got some debt repayment due. So, maybe nothing imminent anyway in terms of the dividend change there. I guess on the debt repayment just to clarify, Graham, you know I took away from your investor day that you were talking about repaying the $150 million convert, not necessarily replacing it. Was I correct there?

Yes, yes that's right, yes.

Okay so we'd for a reduction there next year. Then just lastly, just for the modeling, the real estate management services line, sorry if I missed this, but is there some seasonality there? It was higher in the second quarter last year than this year, but it kind of came back down in the first half. Is there some seasonality in that? I would think it's more flow and steady but should we kind of look for that again to pick up in the second half of this year?

It will pick up in the second half simply because we're winning business not necessarily because of seasonality. It's just because we're winning business. It is a slow and steady business. I think you've expressed it correctly except as we grow our business it should be slow and steady until it's quick and fast and then it'll go back to slow and steady as it grows.

But, look we had a business. We've acquired a bunch of businesses. When you acquire businesses, sometimes you see some legacy issues that need to be rationalized. We are going to do that. So sometimes we have unprofitable business lines that are in there that we're going to rationalize out in the same way that there're underperforming brokers. You just rationalize them. So there might be a revenue decline, but if it comes with an increase in profits, that tends to be just prudent management.

Sometimes buildings are sold. Properties are sold and the management goes with them. An example would be you know the Empire State Building goes public. We manage the Empire State Building. Then they put their management in house, right when it went public. So it's not that anything happened, it's just we manage the Empire State Building and then it went public I think in a very high profile transaction and they took the management in house because that's part of being a public company. They wanted to do that.

So those are examples of sort of the ins and outs of things. They're not particularly relevant to the overall scheme of things. They're just part of the business. But I would expect that number to grow both in the second half and over time. We are confident in that business and we like it very much.

That's helpful, thanks, Howard. Then just lastly back to the inter-dealer broker which is you know the hybrid of the voice and the electronic. You know some of your competitors have been out there talking about being too much -- having too much capacity in the industry. You know you're seeing the GFI transaction and I guess you're seeing Tullett talking your reducing headcount again. You know where do you stand with -- and you have also been reducing headcount, I think you've called them unproductive brokers or you know something like that, less profitable brokers. Where are you or where do you stand with respect to that core inter-dealer broker part in the financial services segment? I mean if the volume doesn't recover is there maybe some more tweaks you need to make? Do you agree there's too much capacity? What do you plan to do about it?

Well we're going to -- I mean we're going to continue to streamline our business. We're turning more and more markets electronic. That is the future. Whichever way you cut it, it is always a competitive landscape and we always face new competitors coming into the market, be that Bloomberg, Tradeweb, ICAP or whoever. So from that standpoint, as a matter of fact giving the best cost effective service the fastest way using our technology because that's the way we get better returns for the shareholders and faster returns back to the company.

So, we're going to continue to streamline our business, to ask unproductive brokers to move out, to upgrade them, find better brokers with better relationships and, therefore, turn more market to electronic using relationships. Then moving straight into and focusing on the really, really liquid markets where we know technology is going to be the differentiator. As we've seen in the (inaudible) world is how more and more markets are being driven to technology and we're going to see that all the way through Europe and Asia over the course of the next two or three years. This is going to be an ongoing task for us within the financial industry.

So, we'll grow in building said commodities and energy, as we've said using that technology and the business that we've been in for many, many years, we'll make sure we're a market leader and industry leader but in the most cost effective way for us and the marketplace. So, it's an ongoing task.

Okay, fair enough. Thanks so much.

(Operator Instructions) Michael Wong, Morningstar.

Do you see the GFI group transaction as changing the competitive dynamics of the full service, voice, kind of hybrid inter-dealer broker industry?

I think it'll change -- the deal as of now if it happens would be the change in dynamic for GFI from being a large technologically capable company to a smaller, less financially sound, less technologically based enterprise, which seeks to find a niche. So I think it's just a change for them to move towards niche as opposed to being effectively a competitor of ours. So I think it's a step away from the path that we are on, which is servicing our clients in a big way with the fiscal capacity to do it in any regulatory environment, in any way the clients need it with whatever the technology is or needs to be. Our clients know that we will be -- we are capable of delivering it and will deliver it if we so promise. That's just a different class and that's a change. That's it. I mean I can't speak to how it'll come because we'll see. But it just seems to me that someone else has stepped off the path that we're on and so be it.

Okay, in general would you say that you and your inter-dealer broker peers are doing a broad-based retrenchment or that more particular to very certain products and/or geographies?

Well, we are -- I think Shaun used an excellent word, which is streamline. We have two objectives. You know our return on our brokers, so the average revenue per head and the productivity of those brokers and the profitability of those brokers. That has continuously improved over the past year for us. So, we're not looking for less brokers. In fact, we're looking for more productive brokers and less unproductive brokers. So if the market becomes tougher, some particular brokers may become unproductive or less profitable and then the economics of having them change but the economics of having productive brokers never changes. So we will continue to do that.

To say it's a broad-based retrenchment incorporates what other people are doing, which I don't know. So our company is converting markets electronic, which has substantial margins. For us, 55% profit margin. So you have profitability increase. That will drive down headcount, but for the benefit of the company. Then the streamlining of the business, making sure you hire and retain the most profitable brokers and the ones that fall below the line, over time they need to leave because it's just math of the marketplace and that's the way it goes.

So I don't want to speak to other people. I think we are in the zone. We understand what to do and we are doing it and that's why our earnings are going to be up between 39% and 60% next quarter. We've replaced eSpeed, virtually effectively now in its entirety next quarter. We're really in a good spot for us and if market conditions improved, we'd be in a great spot but that's not up to us. We're just going to do the best with the cards we're being dealt and we think we are playing those cards very, very well.

Okay, thank you.

Justin Hughes, Philadelphia Financial.

I was going to ask about the third quarter margin guidance, but I think that's been fairly well covered. Also, you know I want to say we look over the last year, you've really done an amazing job of monetizing technology assets to the benefit of shareholders and we saw GFI follow your lead and, as usual, Howard, you were very early on that one. Hopefully, more companies follow your suit. But my question was on the distributable earnings guidance, you know the lawsuit accruals historically are noncash and they've not been part of distributable earnings. When you actually pay the amount to Tullet, is that going to go into your distributable earnings number?

No, the benefits we've had that are non -- that are not part of our operating business don't go in and the payments don't. So they will have no effect on distributable earnings.

Okay, so even though it'll be a cash expense, it's viewed as one-time and you'll leave it out?

Correct.

Okay, thank you.

Thank you. We will now turn it back to CEO and Chairman, Howard Lutnick, for final remarks.

Well, I appreciate you joining us. You know look we're very proud of what we've accomplished in the year. We sold our eSpeed business in particular, treasury business and now a group of instruments and we have set out to reinvest that money effectively. I think we have done exactly that, having one year on effectively returned all that money with much more cash, almost $270 million more cash than we had just before the transaction last year and about $600 million in NASDAQ stock so we've replaced the earnings with $800.5 million of power which to grow and build the company. I think we've put the company in an excellent platform and an excellent footing. We're proud of where we are. We're excited about where we're going. It feels really good. So, we appreciate you spending the time. It's probably nice to be on a phone call in tough market environments with people who know where they're going, know how to get there, and are winning.

So thanks for being with us and we look forward to speaking to you and updating you later at the end of the quarter and speaking to you next quarter on our call. Thanks, everyone. Have a good day.

Ladies and gentlemen, this concludes today's conference. Thank you for joining. You may now disconnect.