GFI Group Q2 net income falls

Highlights

• Total revenues for the second quarter of 2009 were $224.7 million representing a decline of 14% from $261.5 million in the second quarter of 2008. Total revenues include a $4.2 million mark-to-market unrealized gain on forward hedges of future foreign currency revenues. Excluding this item, non-GAAP revenues were $220.5 million for the second quarter of 2009. In the second quarter of 2008, total revenues were $261.5 million, on both a GAAP and non-GAAP basis.
• Brokerage revenues for the second quarter of 2009 declined 18% to $201.1 million from $245.6 million in the second quarter of 2008. While revenues from financial, equity and commodity products decreased 28%, 30% and 29%, respectively, from the second quarter of 2008, credit product revenues increased 6% from the prior year period. Within credit products, revenues from cash fixed income products increased 140% over the second quarter of 2008 offsetting a 52% decrease in revenues from credit derivative products.
• In the second quarter of 2009, compensation and employee benefits expense was 65.2% of total revenues on a GAAP basis and 66.5% on a non-GAAP basis, compared with 60.7% of total revenues, on both a GAAP and non-GAAP basis, in the second quarter of 2008.
• Non-compensation expenses as a percentage of revenues improved to 23.1% of total revenues on a GAAP basis and 22.9% on a non-GAAP basis in the second quarter of 2009 compared with 25.4% of total revenues on a GAAP basis and 24.0% on a non-GAAP basis in the second quarter of 2008.
• Net income for the second quarter of 2009 was $16.4 million, or $0.13 per diluted share, compared with $23.6 million, or $0.20 per diluted share, in the second quarter of 2008. On a non-GAAP basis, net income for the second quarter of 2009 was $14.6 million, or $0.12 per diluted share, compared with $26.0 million, or $0.22 in the second quarter of 2008.
  

Michael Gooch, Chairman and Chief ExeExecutive Officer of GFI, commented: "In the second quarter of 2009, we achieved sequential improvement in our financial performance, with brokerage revenues up 2% and non-GAAP net income up 13% from the first quarter of 2009. Many of our markets are showing further signs of stabilization and recovery while cost reduction initiatives implemented in the last few quarters are having their intended effect on our pre-tax margin.

"Revenues in our largest product category, credit products, increased 6% from the second quarter of 2008 and rose 9% sequentially, as signs of normalcy continued to emerge in the credit markets in the second quarter, reflected in narrowing credit spreads and strong corporate bond issuance. The main driver of our performance in the quarter was continued growth in revenues from our cash fixed income brokerage operations, which more than doubled from the second quarter of 2008 and increased 20% sequentially. We have invested in those operations since 2007, and cash fixed income brokerage revenues represented 68% of total credit product revenues in the second quarter of 2009. Their growth in the quarter more than offset lower revenues from credit derivative products, which were down 52% year-over-year and 9% from the first quarter of 2009. The year over year decline resulted in part from the defection of a number of New York credit derivative brokers to a competitor in April 2008. Brokerage revenues from credit derivative products now represent 12% of GFI's total non-GAAP revenues.

"While there is increasing stability in the credit derivative markets, many of which are liquid and operating smoothly, legislative, regulatory and structural uncertainty remains a hindrance. In addition, capital commitment to the market by a number of dealers and hedge funds has not yet fully returned, while competition from other brokers remains strong. Despite these challenges, we expect recovery and the market to return to growth in credit derivative transaction volumes next year.

"Equity product revenues were down 30% year over year and 9% sequentially. That was primarily due to continued depressed share values in Europe, where certain commissions for cash equity and equity derivative products are based on notional values, and adverse currency translation. We did see equity revenues increase 10% in the U.S. over the prior year period as our North American cash equities business performed well.

"Our financial product revenues declined 28% from the second quarter of 2008 due to lower revenues from certain emerging market products, currency derivatives and interest rate derivatives. However, financial product revenues increased 7% over the first quarter of 2009, with growth in each region, including Asia, where we are seeing renewed activity.

"Commodity product revenues decreased 29% from the second quarter of 2008 and 3% sequentially. This was mainly caused by continued weakness in the dry freight business in Europe and Asia, as well as the economic recession and other variables that have depressed trading in the longer dated, more complex energy derivatives.

"Compensation and employee benefits expense, which is the largest component of our costs, decreased 8% from the second quarter of 2008, but increased as a percentage of total revenues year-over-year on both a GAAP and non-GAAP basis. We are continuing to focus on managing this cost category and expect to make progress over time. The increase in compensation expense as a percentage of revenues in the second quarter of 2009 is a function of our active restructuring of our business and product focus as we adjust to rapidly changing market dynamics, lower revenues in some historically higher margin derivative markets, and amortization of previously paid sign-on and retention bonuses related to the rebuilding of our credit team in 2008.

"Non-compensation expenses decreased 20% from the second quarter of 2008 on a non-GAAP basis and improved as a percentage of revenues year over year, due to substantial reductions in travel and promotion and professional fees, as well as lower clearing fees due to the revenue shift away from cash equities in the quarter. Non-compensation expenses held level with the first quarter of 2009 despite higher revenues.

"Looking at the third quarter of 2009 and with our preliminary July brokerage revenues indicating a return to a more traditional summer seasonal pattern, we currently expect our non-GAAP total revenues to decline by approximately 20% to 23%, compared to the third quarter of 2008, which was a strong quarter marked by extreme volatility due to the credit crisis."

Mr. Gooch concluded: "The credit crisis precipitated a stream of proposals to regulate and restructure the OTC derivative markets that continue today. We have been very active in monitoring them and, more importantly, participating in direct dialogue with regulators, legislators and industry trade groups in the U.S. and Europe as decisions are being shaped. Ultimately, we are optimistic that the solutions that are likely to emerge will be generally beneficial to the long-term health of the broader financial markets and that our deep management experience, proven agility and technology advantage will enable us to capture newly created opportunities."

Revenues

For the second quarter of 2009, total revenues were $224.7 million on a GAAP basis and $220.5 million on a non-GAAP basis. This compares with total revenues of $261.5 million in the second quarter of 2008, on a GAAP and non-GAAP basis.

Brokerage revenues in the second quarter of 2009 were $201.1 million, which was 18% below the second quarter of 2008. By geographic region, second quarter 2009 brokerage revenues decreased 3% in the Americas, 26% in EMEA and 31% in Asia-Pacific compared with the second quarter of 2008.

Revenues from trading software, analytics and market data products for the second quarter of 2009 were $13.0 million, approximately level with the same period of 2008. This included a $7.3 million contribution from Trayport Limited. Trayport's software revenues decreased 6% on a reported basis but increased 23% in its functional currency, the British Pound Sterling, compared with second quarter of 2008.

Expenses

For the second quarter of 2009, compensation and employee benefits expense was $146.6 million, a decrease of 8% from the second quarter of 2008. Compensation and employee benefit expense increased as a percentage of total revenues to 65.2% on a GAAP basis and 66.5% on a non-GAAP basis in the second quarter of 2009 compared with 60.7% in the second quarter of 2008, on a GAAP and non-GAAP basis.

Non-compensation expenses for the second quarter of 2009 declined 22% to $51.8 million or 23.1% of total revenues compared with $66.5 million or 25.4% of total revenues in the second quarter of 2008. On a non-GAAP basis, non-compensation expenses for the second quarter of 2009 declined 20% to $50.5 million or 22.9% of total revenues compared with $62.9 million or 24.0% of total revenues in the second quarter of 2008.

The effective tax rate for the first half of the year was 37.0%, compared to 36.5% for the same period of 2008.

Earnings

Net income for the second quarter of 2009 was $16.4 million, or $0.13 per diluted share, compared with net income of $23.6 million, or $0.20 per diluted share, in the second quarter of 2008. On a non-GAAP basis, net income for the second quarter of 2009 was $14.6 million, or $0.12 per diluted share, compared with $26.0 million or $0.22 per diluted share for the second quarter of 2008.

Six-Month Results

For the six months ended June 30, 2009, GFI's revenues were $440.9 million and net income was $28.0 million or $0.23 per diluted share, compared with revenues of $576.1 million and net income of $59.6 million or $0.50 per diluted share for the first six months of 2008. On a non-GAAP basis, revenues for the first half of 2009 were $432.8 million and net income was $27.5 million or $0.23 per diluted share, compared with non-GAAP revenues of $576.1 million and net income of $64.1 million or $0.54 per diluted share for the first six months of 2008.

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