HOWARD LUTNICK: Good morning and thank you for joining our third 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 post-tax earnings increased by more than 80 percent year-over-year to 56 million dollars, which was a record for the Company. These record results reflect pre-tax earnings growing by 54 percent for our Real Estate Services business and by 74 percent for our fully electronic businesses. Newmark Grubb Knight Frank continued to benefit from positive real estate industry trends and the successful addition of Cornish & Carey. Financial market volatility improved in 1
September and picked up nicely in October. Within Financial Services, we continued to convert our voice and hybrid desks to more profitable fully electronic trading. We expect the combination of positive industry dynamics and our operational outperformance across both of our businesses to lead to strong growth in the fourth quarter. We anticipate BGC s fourth quarter pre-tax earnings to increase by between 50 and 72 percent year-over-year, generating between 69 and 79 million dollars, and we expect our tax rate to remain about the same. This means that we not only expect to increase our revenues and earnings sequentially over the second half of the year, which is virtually unheard of among our financial services peers, but we also expect to have two quarters in a row of record post-tax earnings. 2
Our liquidity is approximately 625 million dollars, and we still expect to receive approximately 550 million dollars in NASDAQ OMX stock, which provides us with more than one billion one hundred million dollars to fuel BGC s growth. We anticipate using some of these funds to continue making accretive acquisitions across both Real Estate and Financial Services. An excellent example of such an acquisition is our tender offer for the shares of GFI Group. We have commenced our fully-financed, all-cash tender offer, which provides GFI shareholders the opportunity to receive 15 percent more than the 4 dollar and 55 cent per share all-stock transaction announced by the CME and GFI on July 30, 2014. In addition, we believe the CME transaction would deprive GFI shareholders of the value of their investment because it allows GFI management to purchase their brokerage 3
business from CME at a discount. We already own approximately 13.5 percent of the outstanding common shares of GFI, we ve secured committed financing from Morgan Stanley Senior Funding Inc., and our offer has no financing condition. In addition, BGC received early termination of the waiting period under the Hart-Scott- Rodino Antitrust Act. Our proposed transaction would provide substantial benefits to GFI s brokers and other employees, as they would become part of a larger, faster growing, better capitalized, and more diversified company. We expect to deliver increased productivity per front-office employee, meaningful synergies, considerable earnings accretion, stronger cash flow, shareholder value for the investors of both companies, and superior service to our customers. 4
I am happy to report that our board declared a 12 cent qualified dividend for the second quarter, which at yesterday s closing stock price translates into a six percent annualized yield. With that, I will now turn the call over to Shaun. SHAUN LYNN Thanks Howard and good morning everyone. Our Financial Services business increased its pre-tax earnings by 85.4 percent to 55 million dollars, while revenues were up 1.8 percent to 261.2 million dollars. We were able to achieve this more than 950 basis point expansion in pre-tax margins due in large part to the significant growth of our highermargin fully electronic businesses. Revenues for our e-businesses rose by 40 percent to 25 million dollars, while their pre-tax earnings increased by 74 5
percent to 14 million dollars. As we continued to convert our voice and hybrid desks to fully electronic, and substantially increased revenues from market data and software solutions, we have already succeeded in creating e-businesses with quarterly revenues and profits similar to those of espeed before it was sold. We have a pipeline of over 900 million dollars of annual voice and hybrid Financial Services brokerage revenue, a large portion of which can be converted to fully electronic brokerage and/or generate valuable market data. Revenues for our e- businesses were up by approximately 75 percent year-on-year over the first 20 trading days of October, and their pre-tax earnings margins averaged 53 percent over the past four quarters. We expect these businesses to be substantially larger than espeed going forward. 6
Looking at our overall Financial Services results by asset class: While revenues from our fully electronic rates products were up by approximately 15 percent, our overall rates revenues were down by 14.3 percent in the quarter to 93.5 million dollars. In comparison, interest rate volumes were down by 32 percent at ICE and 5 percent at Eurex, while Federal Reserve US Treasury volumes were down by 7 percent. BGC s fully electronic foreign exchange revenues, including both spot and derivatives, were up by approximately 40 percent, while our overall FX business increased by 18.7 percent to 56.2 million dollars. The overall market benefited from better FX volatility in the quarter and our results outpaced the industry. For instance, FX volumes were up by between 1 percent and 10 percent at CLS, the CME, and EBS. 7
While we generated an over 80 percent increase in revenues from our fully electronic credit desks, overall credit revenues declined by 1.6 percent to 53.5 million dollars. These results compare favorably to industry statistics. For example, the daily average Primary Dealer volumes for corporate bonds were down by approximately 10 percent year-over-year according to the Federal Reserve, while dealer gross notional credit derivatives outstanding were down by approximately 27 percent according to SIFMA. BGC s revenues from our energy and commodities desks increased by over 78 percent, while our overall revenues from Equities and Other Asset Classes, which include these desks, increased by 24.6 percent to 43.4 million dollars. This improvement surpassed relevant industry volumes. Equity derivative volumes were flat to up by 14 percent 8
according to Eurex, ICE, and the OCC. Energy volumes at ICE and the CME were flat to down by 5 percent and their combined commodity volumes were up by only 3 percent. Moving on to Real Estate Services - The combination of low interest rates and a steadily growing U.S. economy continues to create positive market conditions for NGKF. According to CoStar, combined net absorption for U.S. office, industrial and retail properties was up by 12 percent yearover year for the twelve months ended September 30 th. This signals continued improvement within the overall leasing market. In real estate capital markets, U.S. CMBS issuance increased by over 6 percent year-on-year for the trailing twelve months according to Commercial Mortgage Alert, while 9
quarterly U.S sales volumes were up by 11 percent according to Real Capital Analytics. While we benefited from these positive industry trends, we believe that NGKF continues to gain market share. Our Real Estate brokerage revenues improved by 28.8 percent to 138.5 million dollars; management services and other revenues were up slightly at 40.6 million dollars; and overall revenues improved by 21 percent to 179.1 million dollars. NGKF s pre-tax earnings increased by 53.9 percent to 23.9 million dollars. Our outperformance in Real Estate Services was driven by a combination of double-digit organic growth from Investment Sales and Capital Markets brokerage, the addition of Cornish & Carey, improved organic revenues from Leasing Advisory and 10
Global Corporate Services, and better operating efficiencies resulting from the successful integration of previous acquisitions. Looking to headcount - We had 1,135 Real Estate brokers and salespeople as of quarter-end, up 28 percent compared with 887 a year earlier, while average revenue per real estate broker increased by 19 percent to 143 thousand dollars. We finished September with 1,620 Financial Services brokers and sales people, up 5 percent from 1,545 a year earlier. Our average revenue per Financial Services broker/salesperson increased by 1 percent to 160 thousand dollars. Company-wide, our front office headcount was up by 13 percent to 2,755, and productivity increased by 6 percent to 153 thousand dollars per broker/salesperson. 11
The increase in the Company s revenues and dramatic growth of its pre-tax earnings during the quarter was due largely to the rise in front office headcount and solid improvements in front office productivity. The productivity increase was driven by the substantial growth of BGC s fully electronic businesses, the addition of higher-performing brokers across both segments, strong commercial real estate industry dynamics, and higher global volumes in equity derivatives and FX. With that, I would now like to turn the call over to Graham. GRAHAM SADLER Thank you Shaun and good morning everyone. BGC generated revenues of 449.8 million dollars, up 8.5 percent compared with 414.4 million dollars. Our revenues from the Americas were up approximately 16 12
percent. Revenues from Europe, Middle East, and Africa were down by 1 percent; and Asia-Pacific revenues decreased by 9 percent. Turning to consolidated expenses: Compensation and employee benefits were up by 5.8 percent but represented only 60.4 percent of revenues, which was an improvement of 160 basis points despite a larger proportion of revenues coming from Real Estate. Non-compensation expenses were down by 7.8 million dollars or 6.5 percent, and were 24.9 percent of revenues compared with 29 percent. This significant improvement was driven by lower costs across most line items as we completed our previously stated goal of reducing overall expenses by 100 million dollars annualized by the end of 2014 compared to the second half 2012 run-rate. This goal excluded the impact of any 13
acquisitions closed in 2014. I am happy to report that we have achieved this target ahead of schedule. In the third quarter of 2014, our compensation ratio improved by approximately 300 basis points compared with the second half of 2012, which lowered our annualized compensation expenses by 45 million dollars. In addition, our annualized non-compensation expenses were reduced by more than 55 million dollars in the third quarter of 2014 compared with the second half of 2012. Taken together, our full year expense run-rate was reduced by more than 100 million dollars. Our improved compensation ratio along with a lower non-compensation cost base significantly improves our earnings leverage. This enables us to be much more profitable, particularly as Financial Services 14
industry volumes return. Our pre-tax earnings before noncontrolling interest in subsidiaries and taxes were 65.8 million dollars, up by 75.8 percent when compared with 37.4 million dollars. Our pre-tax margin this quarter expanded by around 560 basis points to 14.6 percent compared with 9 percent a year ago. BGC s effective tax rate for distributable earnings was 15 percent versus 14.5 percent. Our post-tax earnings were up by 80.5 percent to 56 million dollars compared with 31 million dollars, which is the highest in BGC s history. Our post-tax earnings margin improved by nearly 500 basis points to 12.4 percent compared with 7.5 percent, while our post-tax earnings per share were up by 70 percent to 17 cents. 15
BGC had a fully diluted weighted-average share count for distributable earnings of 371.4 million in the third quarter of 2014 and 331.2 million under GAAP. The GAAP share count was lower because it excluded certain share equivalents to avoid anti-dilution. A year earlier, our fully diluted weighted average share count was 355.2 million for both distributable earnings and GAAP. As of September 30, 2014, our fully diluted share count was 371.7 million, assuming conversion of the Convertible Senior Notes into 40.2 million shares. The year-over-year increase in fully diluted weightedaverage share count for distributable earnings was due mainly to issuances related to the acquisitions of Cornish & Carey, Remate and Heat, as well as compensation-related issuance. This was partially offset by redemptions and repurchases totaling 19.3 16
million shares and units over the past twelve months at a cost to BGC of 131.9 million dollars. As of September 30, 2014, BGC s liquidity, which we define as cash and cash equivalents, marketable securities, and unencumbered securities owned held for liquidity purposes was 624.7 million dollars; notes payable and collateralized borrowings, and notes payable to related parties were 410.3 million dollars; book value per common share was 1 dollar and 95 cents; and total capital, which we define as redeemable partnership interest, noncontrolling interest in subsidiaries, and total stockholders' equity, was 700.5 million dollars. In comparison, as of December 31, 2013, our liquidity was 795 million dollars; notes payable and collateralized borrowings, and notes payable to related parties were 408.4 million dollars; 17
book value per common share was 2 dollars and 15 cents; and total capital was 769.7 million dollars. The uses of BGC s liquidity since year-end were primarily due to cash used to pay taxes, 111.4 million dollars of cash used to reduce the fully diluted share count by 15.3 million over the first nine months of the year, and cash used for the Cornish & Carey, HEAT and Remate acquisitions. With that, I am happy to turn the call back over to Howard. HOWARD LUTNICK: Thank you, Graham. Our guidance for the fourth quarter 2014 is as follows: We expect revenues to be between 475 and 510 million dollars, an increase of 10 to 18 percent, as compared with 432.9 million dollars last year. 18
We anticipate pre-tax earnings to be between 69 and 79 million dollars, an increase of between 50 and 72 percent, as compared to 46 million dollars last year. We expect our effective tax rate to remain at approximately 15 percent, as compared with 14.5 percent. And we intend to update our fourth quarter outlook toward the end of the third week of December. With respect to GFI, I know there are a lot of questions that you might want to ask, but we have a live tender offer out there, and the only thing I m going to say today is that we are very much interested in buying the company, and our offer is very much for real very. Operator, we would now like to open the call for questions. Q&A 19
After Q&A - Howard Lutnick: Thank you all for joining us today and we look forward to speaking to you again next quarter. 20
JASON MCGRUDER Good morning. Our third quarter 2014 financial results press release was issued this morning. This can be found at either the News Center or Investor Relations sections of our web site at www.bgcpartners.com. During this call we will also be referring to a presentation summarizing our results and 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 the sections of today s press release entitled Distributable Earnings, Distributable 21
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, pre-tax earnings, or post-tax earnings, we are doing so on a distributable earnings basis. Unless otherwise stated, all results provided on this call compare the third quarter of 2014 with the year-earlier period. In addition, certain revenue items and non-financial metrics have been adjusted for prior periods to conform to current reporting methodology. Any such adjustments would have had no impact on overall revenue or earnings for either GAAP or distributable earnings. 22
On June 28, 2013, BGC sold its fully electronic trading platform for benchmark U.S. Treasury Notes and Bonds to NASDAQ OMX Group, Inc. For the purposes of today s call, the assets sold are referred to as espeed and the business 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 also remind you that the information on this call regarding our business that are not historical facts are "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 statements involve risks and uncertainties. Except as required by law, BGC undertakes no obligation to release any revisions to any forward- 23
looking statements. For a discussion of additional risks and uncertainties, which could cause actual results to differ from those contained in the forward-looking statements, see BGC s Securities and Exchange Commission filings, including, but not limited to, the risk factors set forth in our public filings, including our most recent Form 10-K and any updates to such risk factors contained in subsequent Form 10-Q or Form 8-K filings. Please also refer to the section of today s press release titled Important Additional Information for a disclosure regarding our recently launched tender offer for GFI Group, Inc. I am happy turn the call over to our host, Howard Lutnick, Chairman and CEO of BGC Partners. 24