GFI Group Inc. (Nasdaq: GFIG), an inter-dealer brokerage, market data and analytical software provider for global cash and derivative markets, today announced financial results for the first quarter ended March 31, 2007.
- Total revenues increased 29% to $240.3 million compared with $185.6 million in the first quarter of 2006.
- Brokerage revenues rose 31% over the 2006 first quarter, with growth in all product categories - credit, financial, equity and commodity, which increased 19%, 14%, 36% and 81% respectively. All geographic regions demonstrated strong increases in brokerage revenues from the first quarter of 2006.
- Brokerage revenues from credit derivative transactions, which are included in GFI's credit products category, increased 26% for the first quarter of 2007 compared with the same period of 2006.
- There were a total of 990 brokerage personnel at March 31, 2007, representing a net increase of 182 brokerage personnel from the first quarter of 2006 and a gain of 58 from the fourth quarter of 2006.
- Commodity product revenues and personnel totals for the first quarter of 2007 benefited from the acquisition of the North American brokerage operations of Amerex Energy on October 1, 2006.
- Compensation and employee benefits expense, as a percentage of revenues, was 63.0% for the first quarter of 2007 in line with the first and fourth quarters of 2006.
- Non-compensation expense as a percentage of revenues was 19.8% for the first quarter of 2007 compared with 21.3% in first quarter of 2006 and 26.1% for the fourth quarter of 2006. On a non-GAAP basis, non- compensation expense as a percentage of revenues was 19.4% for the first quarter of 2007 compared with 20.1% for the first quarter of 2006 and 24.4% for the 2006 fourth quarter.
- Net income for the first quarter of 2007 increased 45% to $24.7 million, or $0.84 per diluted share, compared with the first quarter of 2006. On a non-GAAP basis, first quarter of 2007 net income rose 32% to $25.3 million, or $0.86 per diluted share, compared with the first quarter of 2006.
Michael Gooch, Chairman and Chief Executive Officer of GFI, commented: "Our record first quarter results reflect the diversityty and balance of our product mix enhanced by strong volatility in specific markets, our recent acquisitions, the continued success of our electronic trading platforms in Europe and the cost containment measures we have taken to improve our operating leverage, which became more evident in the quarter.
"We achieved strong revenue growth in all product categories, led by commodities, which increased 81% year-over-year and included the contribution from our new Amerex subsidiary, strong growth in European energy products, as well as oil and petroleum market volatility stemming from tensions between Iran and Britain in the Persian Gulf later in the quarter.
"Our strong presence in equities enabled us to benefit from volatility spikes in world stock markets in the first quarter of 2007, resulting in a 36% increase in our equity product revenues. This was accompanied by a correlated volatility spike in global credit markets, which contributed to the 26% first quarter increase in revenues from credit derivatives, our largest product category. The 14% increase in financial product revenues resulted, in part, from trading activity driven by economic, inflationary and interest rate uncertainty.
"Our non-compensation expense as a percentage of revenues declined in the first quarter of 2007 compared with both the first and fourth quarters of 2006, demonstrating operating leverage in our business and the progress of our ongoing effort to control costs.
"As a result, our net income growth outpaced our revenue growth in first quarter of 2007, with net income rising 45% on a 29% revenue increase under GAAP and non-GAAP net income increasing 32% on a 29% increase in non-GAAP revenues.
"We expect our strong momentum to continue in the second quarter, with brokerage revenues expected to increase between 20% and 25% compared with the second quarter of 2006."
For the first quarter of 2007, total revenues were $240.3 million, representing an increase of 29% from GAAP revenues of $185.6 million and a 29% increase from non-GAAP revenues of $186.9 million reported in the first quarter of 2006. The non-GAAP revenues for the first quarter of 2006 exclude the effect of foreign exchange collars described below.
Brokerage revenues rose 31% to $232.9 million in the first quarter of 2007 and included a 19% increase in credit products, a 14% increase in financial products, a 36% increase in equity products and an 81% increase in commodity products, in each case, compared with the first quarter of 2006. First quarter 2007 commodity product revenues included the contribution of the North American brokerage operations of Amerex Energy, which GFI acquired on October 1, 2006.
Revenues from analytics and data products rose 3% to $5.3 million in the first quarter of 2007 from $5.2 million in the same period of 2006.
By geographic region, first quarter 2007 brokerage revenue growth was evenly dispersed, with increases of 29% in North America, 33% in Europe and 32% in Asia Pacific over the first quarter of 2006.
For the first quarter of 2007, compensation and employee benefits expense was $151.5 million or 63.0% of total revenues compared with $116.8 million or 63.0% of total revenues in the first quarter of 2006 and $122.5 million or 63.1% of total revenues in the 2006 fourth quarter. On a non-GAAP basis, compensation and employee benefits expense also represented 63.0% of total revenues for the 2007 first quarter versus 62.5% in the first quarter of 2006 and 62.7% in the 2006 fourth quarter.
Non-compensation expense for the first quarter of 2007 was $47.7 million or 19.8% of total revenues compared with $39.5 million or 21.3% of total revenues in the first quarter of 2006 and $50.6 million or 26.1% of total revenues in the fourth quarter of 2006. On a non-GAAP basis, non-compensation expense for the first quarter of 2007 was 19.4% of total revenues compared with 20.1% in the 2006 first quarter and 24.4% in the 2006 fourth quarter.
On a GAAP basis, net income for the first quarter of 2007 rose 45% to $24.7 million, or $0.84 per diluted share, compared with $17.0 million, or $0.59 per diluted share, in the first quarter of 2006. On a non-GAAP basis, GFI's first quarter 2007 net income increased 32% to $25.3 million, or $0.86 per diluted share, compared with $19.1 million, or $0.66 per diluted share, in the first quarter of 2006. The non-GAAP amounts exclude non-operating or non- recurring items as summarized under "Non-GAAP Financial Measures."
Non-GAAP Financial Measures
To supplement GFI's unaudited financial statements presented in accordance with GAAP, the Company uses certain non-GAAP measures of financial performance. The presentation of these non-GAAP financial measures is not intended to be considered in isolation from, as a substitute for, or superior to, the financial information prepared and presented in accordance with GAAP, and may be different from non-GAAP financial measures used by other companies. In addition, these non-GAAP measures have limitations in that they do not reflect all of the amounts associated with the Company's results of operations as determined in accordance with GAAP. The non-GAAP financial measures used by GFI include non-GAAP operating income, non-GAAP net income and non-GAAP diluted earnings per share. These non-GAAP financial measures currently exclude amortization of acquired intangibles and certain other items that management views as non-operating or non-recurring from the Company's statement of income as detailed below.
In addition, GFI may consider whether other significant non-operating or non-recurring items that arise in the future should also be excluded in calculating the non-GAAP financial measures it uses. The non-GAAP financial measures also take into account income tax adjustments with respect to the excluded items. It should be noted that, upon review, GFI management now considers interest charges on acquisition funding to be an item that should be included in the calculation of non-GAAP net income. Therefore, interest charges for the Amerex acquisition that were not included in our calculation of non-GAAP net income for the fourth quarter of 2006 are now included as an expense in our calculation of non-GAAP net income for the first quarter of 2007. The acquisition funding interest expense related to the Amerex acquisition was $0.9 million before tax in the first quarter of 2007.
GFI believes that these non-GAAP financial measures, when taken together with the corresponding GAAP financial measures, provide meaningful supplemental information regarding the Company's performance by excluding certain items that may not be indicative of the Company's core business, operating results or future outlook. GFI's management uses, and believes that investors benefit from referring to these non-GAAP financial measures in assessing the Company's operating results, as well as when planning, forecasting and analyzing future periods. These non-GAAP financial measures also facilitate comparisons of the Company's performance to prior periods.
In addition to the reasons stated above, which are generally applicable to each of the items GFI excludes from its non-GAAP financial measures, the Company believes it is appropriate to exclude amortization of acquired intangibles because when analyzing the operating performance of an acquired business, GFI's management focuses on the total return provided by the investment (i.e., operating profit generated from the acquired entity as compared to the purchase price paid) without taking into consideration any charges for allocations made for accounting purposes. Further, because the purchase price for an acquisition necessarily reflects the accounting value assigned to intangible assets, when analyzing the operating performance of an acquisition in subsequent periods, the Company's management excludes the GAAP impact of acquired intangible assets on its financial results. GFI believes that such an approach is useful in understanding the long-term return provided by an acquisition and that investors benefit from a supplemental non-GAAP financial measure that excludes the accounting expense associated with acquired intangible assets.
Set forth below is specific detail regarding items excluded in our non- GAAP financial measures. A reconciliation of the non-GAAP to GAAP figures follows this press release.
In the first quarter of 2007, there was no difference between GAAP and non-GAAP revenues. The difference between GAAP and non-GAAP net income was $0.6 million and reflected for non-GAAP purposes:
- The exclusion of $1.0 million of amortization on all acquired intangible assets.
- The effect of adjusting for this item would increase the Company's income tax expense by $0.4 million.
The difference between GAAP and non-GAAP amounts for the first quarter of 2006 reflected the exclusion for non-GAAP purposes of:
- A $1.3 million loss reclassified from accumulated other comprehensive loss into other income due to foreign exchange collars. In the first quarter of 2005, GFI discontinued hedge accounting for a foreign exchange collar because the rates on the contract were renegotiated, resulting in a termination of the contract and the execution of a new contract. The new contract did not qualify for hedge accounting, resulting in all unrealized gains and losses on the contract being recorded directly to earnings. The new contract was settled on June 30, 2005 for a net realized gain of $1.1 million. Unrealized losses on the original contract remained in accumulated other comprehensive loss on the balance sheet and were reclassified into earnings over the term of the original contract. As of December 31, 2006, there was no remaining unrealized loss to be recognized.
- The exclusion of $0.4 million of amortization on all acquired intangible assets.
- The exclusion of $0.8 million of costs incurred by the Company relating to its first year of compliance with the requirements of Section 404 of the Sarbanes-Oxley Act of 2002 which management believes are in excess of those costs that will be required for continued compliance.
- A $0.8 million accrual for the remaining rent and related charges for the Company's vacated London office.
- The effect of adjusting for these items would increase the Company's income tax expense by $1.1 million.
On April 13, 2007, GFI entered into an agreement to acquire the assets of the retail energy procurement and consulting business of GSE Consulting L.P., an affiliate of Gulf States Energy, a privately-held, energy commodities firm, based in Dallas, Texas. The transaction is expected to close in the second quarter of 2007, subject to standard closing conditions.
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