GFI's second quarter profit falls

Highlights:

• Total revenues for the second quarter of 2006 increased 34% to $187.6 million compared with the 2005 second quarter and included $5.9 million in revenues related to the substantial completion of Fenics dealFX, an e-commerce foreign exchange execution platform, for a major money center bank. Non-GAAP total revenues, including the Fenics dealFX revenues, increased 42% to $188.6 million compared with the second quarter of 2005
• Brokerage revenues for the second quarter of 2006 rose 34% over the second quarter of 2005, with strong growth in financial, equity and commodity product categories. Revenues from credit products were slightly below the second quarter of 2005 when certain sectors of the U.S. corporate bond markets experienced particularly high volatility. All geographic regions demonstrated strong increases from the 2005 second quarter. There were a total of 828 brokerage personnel at June 30, 2006 representing a net increase of 199 brokerage personnel from the end of the 2005 second quarter and 51 from the end of 2005
• Compensation and employee benefits expense as a percentage of revenues was 60.6% for the second quarter of 2006 compared with 57.6% in the second quarter of 2005 on a GAAP basis. On a non-GAAP basis, compensation and employee benefits expense as a percentage of revenues was 58.9% in the second quarter of 2006 versus 60.9% in the second quarter of 2005. Non-compensation expenses as a percentage of revenues were 26.4% for the second quarter of 2006 compared with 21.3% in the second quarter of 2005 on a GAAP basis. On a non-GAAP basis, non-compensation expenses as a percentage of revenues were 25.9% in the 2006 second quarter compared with 20.8% in the second quarter of 2005. Non-compensation expenses for the 2006 second quarter included $5.2 million of costs related to the Fenics dealFX project
• Net income for the second quarter of 2006 was $14.1 million, or $0.48 per diluted share compared with $16.7 million or $0.60 per diluted share in the 2005 second quarter. On a non-GAAP basis, net income for the second quarter of 2006 was $16.7 million, or $0.57 per diluted share compared with $13.4 million or $0.48 per share the second quarter of 2005

Michael Gooch, Chairman and Chief Executive Officer of GFI, commented: "We achieved 34% year-over-year revenue growth in the second quarter as we continued to benefit from our strategic diversity across product classes. That growth exceeded our earlier expectations as a result of increased market volatility stemming from uncertainties in global equity, energy and currency markets. The growth also reflected our continued investment in the equities sector to take advantage of Credit-to-Equity correlation.

"Credit spreads remained tight in the second quarter despite the negative direction of many global stock indices. Nonetheless, we saw strong growth in revenues from credit derivative products in Europe, where we continued to make further inroads with CreditMatch, our electronic trading platform for credit products. However, revenues from corporate fixed income products in North America and Europe were down from the prior year quarter when certain sectors of the corporate bond markets experienced particularly high volatility. As a result, our overall credit revenue remained essentially level with the 2005 second quarter.

"We introduced CreditMatch v5.5 in Europe at the end of 2005 and we believe that we have continued to gain market share since then. The latest version of CreditMatch now facilitates electronic trading in both credit derivatives and corporate fixed income. I am pleased to report that we have also launched a version of CreditMatch v5.5 in North America in the bank and finance sector and are pleased with the early results. We will soon launch that version for the U.S. auto sector. We also received permission this week from the Singapore authorities to operate electronic trading platforms in certain Asian credit markets. This success reinforces our position as a leader in operating electronic trading systems in the global credit markets. Our leadership will enable us to take fuller advantage of the continued growth in credit markets and future volatility events affecting that market. Our longer term goal is to adapt similar technology to the energy and financial markets as we further expand our hybrid inter-dealer brokerage model.

"We also reached another major technology milestone with the completion of our first Fenics dealFX project, which is based on our experience in building online trading platforms and our Fenics FX analytical tool capability. We created a customized solution for one of the world's largest dealers of foreign exchange derivatives that is integrated with their own internal option analytics and existing processing systems, and enables them to offer proprietary online pricing and trading services to their institutional customers.

"As we look to the third quarter of 2006, we expect our brokerage revenues to meet our baseline growth target of 20% compared with the third quarter of 2005, absent any volatility events that could increase growth. We also believe that our continuing control of compensation costs combined with our current cost reduction efforts should improve our margin and bring more of our revenue dollars to our bottom line in the second half of the year."

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