GFI Group Inc. Annual Report 2008
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GFI Group Inc. Annual Report 2008 “An investment in knowledge pays the best interest” Benjamin Franklin 2008 was a historic year of rapid change and exceptional challenges. For GFI, progress and resilience came, in large measure, from fi delity to the solid foundation provided by our hybrid brokerage model. 2008 Financial Highlights for year ended December 31 (dollars in millions except for per share and headcount amounts) Revenues in millions (US$) Brokerage Personnel 2008 1,015.5 2008 1,037 2007 970.5 2007 1,037 2006 747.2 2006 932 2005 533.6 2005 777 2004 385.0 2004 560 Net Income in millions (US$) Diluted EPS (US$) 2008 53.1 2008 0.44 2007 94.9 2007 0.80 2006 61.1 2006 0.52 2005 48.1 2005 0.43 2004 23.1 2004 0.24 2008 2007 2006 2005 2004 Revenues $1,015.5 $970.5 $747.2 $533.6 $385.0 Income before provision for income taxes 83.0 150.7 101.8 84.3 43.2 Net income 53.1 94.9 61.1 48.1 23.1 Basic earnings per share* 0.45 0.81 0.54 0.45 0.25 Diluted earnings per share* 0.44 0.80 0.52 0.43 0.24 Brokerage personnel period-end headcount 1,037 1,037 932 777 560 Employee period-end headcount 1,740 1,599 1,438 1,151 868 Total assets $1,085.9 $975.8 $699.6 $ 576.1 $ 640.2 Stockholders’ equity 477.0 452.2 330.5 238.3 53.4 *On March 31, 2008, GFI Group Inc. completed a four-to-one stock split in the form of a stock dividend to shareholders. Earnings per share refl ect the effect of this stock split on historical earnings per share fi gures 01 2008 was a year of unprecedented change and Dear Fellow challenge in world fi nancial markets. Shareholders Substantial market volatility, which benefi ted GFI in the fi rst half of the year, turned to market dislocation following the Lehman Brothers bankruptcy in September. Credit markets deteriorated signifi cantly, world governments attempted to intervene, the health of certain global banks and insurers came under scrutiny, and world economies weakened. Some dealers and hedge funds consolidated and reduced their leverage and risk exposure. Housing, equity and commodity prices plummeted. Because of our past investments to diversify our revenue stream, we were able to benefi t from the volatility in the fi rst half of 2008, while avoiding the full brunt of the market dislocation in the fourth quarter. This is especially noteworthy because the market dislocation most heavily affected many complex derivatives, where we have a leading position. We also had the added challenge of rebuilding our credit team in New York, after a competitor unlawfully hired a large group of our brokers. In the face of all this, we achieved record revenues of $1.02 billion ($1.04 billion on a non-GAAP basis) for the full year 2008, marking the fi rst time our revenues crossed the $1 billion threshold, and net income of $53.1 million or $0.44 per diluted share ($94.7 million or $0.79 per diluted share, on a non-GAAP basis). Michael A. Gooch Chairman of the Board and Chief Executive Offi cer 02 Among our four product segments, equity products, of offi ces in Dublin, Dubai, Tel Aviv and Santiago. EMEA in which we have made a determined investment, (Europe, Middle East and Africa) remained our largest demonstrated the best performance in 2008, growing region in 2008, contributing 51% of total brokerage 22% from full year 2007. At 30% of brokerage revenues, revenues compared to 48% in 2007, while the Americas equity products nearly matched the size of credit contributed 40% versus 43% in 2007 and Asia Pacifi c products, which remained our largest product category, remained steady at 9% of brokerage revenues. at 32% of brokerage revenues. Despite the challenges in credit for us in 2008, our full year revenues from credit Our progress and resilience in 2008 came, in large measure, products were down just 4% compared to 2007, with from the foundation provided by our hybrid brokerage particular strength at the end of the year in corporate model, whereby we combine broker-assisted brokerage and sovereign fi xed income products partially offsetting often referred to as voice brokerage, with its ability to lower revenues from credit derivatives in that period. provide a high level of service and liquidity aggregation, with electronic execution platforms, which offer enhanced trading Our revenues from commodity products in 2008 matched effi ciency and improved broker productivity. Our hybrid the record level achieved in 2007, and represented brokerage services are further supplemented by proprietary, approximately 20% of brokerage revenues in both periods. commercial grade electronic trading platforms, trading data In 2008, commodity revenues were up 10% in Europe but and pricing analytics. As a result, we believe that we are were offset by lower commodity product revenues in the well positioned for changes in market dynamics, such as Americas. Our revenues from fi nancial products were 7% the rapid shift that occurred in certain products during the lower in 2008 compared to the prior year. This was mainly year from electronic trading volumes to increased reliance due to lower trading volume in emerging market interest on voice brokerage as markets became more treacherous, rate and currency derivatives globally, the transfer of our a trend likely to reverse course as markets stabilize. global U.S. dollar interest rate swaps business to a third party in March 2008, and the closing of certain desks We continued to develop and expand our hybrid capabilities in the third quarter of 2008 as part of our restructuring in 2008, beginning with the acquisition in January 2008 initiative. Financial products represented 18% of our of Trayport, Ltd. along with its GlobalVisionSM electronic brokerage revenues in 2008 compared with 20% in 2007. platform, which can accommodate electronic trading, The diversity of our revenue stream is also based on our information sharing and straight-through processing global reach, which we extended in 2008 with the addition in commodity and fi nancial instruments. In acquiring Because of past investments to diversify our revenue stream, we were able to benefi t from the volatility in the fi rst half of 2008, while avoiding the full brunt of the market dislocation in the fourth quarter. 03 Trayport®, we saw the opportunity to build upon its We ended 2008 with highly regarded GlobalVision platform to streamline the introduction of new trading platforms and products. a solid balance sheet, In the second quarter, we announced a major strategic agreement with NYMEX for NYMEX European and U.S. including cash and oil products to be distributed on Trayport’s Trading Gateway System. This represents a signifi cant expansion of Trayport’s position in the European and U.S. cash equivalents of commodity markets in new asset classes and regions. Development of GFI-created platforms also continued $342 million, and in 2008 with the launch of our EnergyMatch® electronic accrued commissions platform for certain North American energy products. Controlling expenses to increase our operating leverage receivable of $112 is a major focus for our management team. To address the dramatic changes in our operating environment, we million representing implemented a cost restructuring initiative in October, which entailed the closure of certain underperforming 32% and 10% of total brokerage desks and a reduction in headcount, to give us the necessary fl exibility to respond to evolving market conditions. The initiative proved timely because as the assets, respectively. fourth quarter proceeded, we saw reduced trading in many derivative and energy products, lower commissions in Europe where certain commissions are based on share, index or asset values, and unfavorable foreign exchange rates, all of which reduced our revenues. Those conditions have generally continued into 2009. We were early movers in advocating the benefi ts of centralized clearing of OTC derivatives. 04 With the disruption of the world fi nancial markets that cash and derivative OTC markets. In fact, a substantial and began in September, transparency and regulation of the growing potion of our brokerage business is conducted OTC credit derivatives market have become a central focus in markets where there is a central counterparty. We of U.S. and European governments, with global systemic expect this business to grow and represent a greater risk regulation being a main topic of discussion at the April percentage of our business as we go forward. 2009 G20 economic summit in London. While it is uncertain at this writing as to what form future regulations will take, We ended 2008 with a solid balance sheet, including we believe GFI will ultimately be a benefi ciary of market cash and cash equivalents of $342 million, and accrued structure changes. We have always championed the benefi ts commissions receivable of $112 million representing 32% of effective market regulation. Our 21 years of experience and 10% of total assets, respectively. Our total debt was and leadership position have provided GFI with a seat at $225 million and shareholders’ equity was $477 million, or the table to help shape the discussions on these matters. $3.98 per diluted share. This strength enabled us to declare a cash dividend each quarter in 2008, resulting in an annualized We were early movers in advocating the benefi ts of dividend yield of 5.0% on the year-end stock price of GFI. centralized clearing of OTC derivatives and were an early investor and board member in The Clearing Corp., a As market changes continue to unfold in 2009, we believe clearing service provider to the OTC derivatives market.