Bgc Group Inc

NASDAQ:BGC

Earnings Call Transcript 2020-Q2

[Operator]

Welcome to BGC Partners Second Quarter Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded.

I would now like to hand the conference over to your speaker today, Sean Windeatt. Please go ahead.

[Jason McGruder, executive]

It's actually -- sorry, it's Jason McGruder. Good morning. We issued today's second quarter 2020 financial results press release and the presentation summarizing our results earlier this morning. You can find these at bgcpartners.com.

Unless otherwise stated, the results provided on today's call compare only the second quarter of 2020 with a year earlier period. We will be referring to results on this call only on an adjusted earnings basis, unless otherwise stated.

We may also refer to adjusted EBITDA. We may refer to liquidity, which we define as cash and cash equivalents plus marketable securities that have not been financed, reverse repurchase agreements, and securities owned, less securities loan and repurchase agreements. We define total capital as redeemable partnership interest, total stockholders' equity and noncontrolling interest in subsidiaries.

Please see today's press release results under generally accepted accounting principles or GAAP. Please also see the relevant sections in the back of today's press release for the complete and updated definitions of any non-GAAP terms, reconciliation of these items to the corresponding GAAP results and how, when and why management uses such terms.

Additional information with respect to our GAAP and non-GAAP results mentioned on today's call is available on our website at ir.bgcpartners.com and in our investor presentation. We refer to the company's fully electronic businesses as Fenics. These offerings include our fully electronic brokerage products as well as the sale of market data, software solutions and post-trade services.

I also remind you that the information regarding our business on today's call that are not historical facts are forward-looking statements within the meaning of Section 27A of the Securities Exchange Act of 1933, as amended, and the Securities -- Section 21E of the Securities Exchange Act of 1934, as amended. These include statements about the effects of COVID-19 on the company's business results, financial position, liquidity and outlook. Any forward-looking statements involve risks and uncertainties, except as required by law. BGC undertakes no obligation to update any forward-looking statements. Any outlook and targets discussed on this call assume no material acquisitions, buybacks, extraordinary transactions or meaningful changes to the company's stock price.

For a discussion of additional risks uncertainties, which could cause actual results to differ from those contained in the forward-looking statements, see BGC's SEC filings, including, but not limited to, the risk factors and special note on forward-looking information set forth in these filings and any updates to such risk factors and special note on forward-looking information contained on subsequent Form 10-Ks or Form 10-Qs or Form 8-Ks.

I am now happy to turn the call over to Howard Lutnick, Chairman and CEO of BGC Partners.

[Howard W. Lutnick, executive]

Good morning, and thank you for joining us for our second quarter 2020 conference call. Joining me virtually today, for today's call, are BGC's President, Shaun Lynn; our Chief Operating Officer, Sean Windeatt; and our Chief Financial Officer, Steve Bisgay.

We have accomplished quite a bit since the beginning of the year and the outset of COVID-19. We have effectively refinanced our 2021 debt, strengthened our balance sheet, driven our Fenics brokerage revenues to double-digit growth, dramatically expanded the success of our Fenics stand-alone products, positioned our insurance business to generate profits in the fourth quarter and reduced our expenses and improved our efficiency. However, our results were adversely impacted by the continued dislocation faced by BGC and our clients due to COVID-19 and lower industry volumes in rates and foreign exchange, which reflected the massive quantitative easing undertaken by several major central banks and uniformly lower global interest rates, which have resulted in our earnings being $0.02 lower than last year.

Our revenues would have been over $7 million higher, but for the relative strengthening of the U.S. dollar. Over time, we expect a significant increases in global debt issuance to overcome the effects of quantitative easing and to be a long-term tailwind for our rates and credit business.

At the end of our prepared remarks, we will provide our quarterly outlook. In addition, we will discuss our full year expectations, and I will discuss why we believe BGC should be valued significantly higher than it is today, and provide an update on our capital return policy.

So with that, I'll turn the call over to Shaun Lynn.

[Shaun Lynn, executive]

Thank you, Howard, and good day, everyone. Our stand-alone Fenics technology platforms maintained their strong momentum this quarter. For example, Fenics UST generated substantial growth year-over-year, with notional volumes up more than 70% in the second quarter compared to 10% increase in primary dealer treasury volumes.

Fenics UST continued to gain market share and expanded its position as a clear #2 among central limit order book trading platforms. We are rolling out significant technological innovations to our system this quarter, which we expect to result in increased volumes and an expansion of our client base.

Fenics Global Options or Fenics GO, doubled its volumes in the second quarter. As a highlight, yesterday, the system executed 12% of total volume of NIKKEI 225 options on the OSE and 20% of all block trades in that product. Our data, software and post-trade business grew by over 7%, driven by predictable and recurring revenue stream. We are focused on investing in these businesses, and expect them to double their growth next year.

During the second quarter, we introduced Fenics Integrated, which seamlessly integrates hybrid liquidity with customer electronic orders by graphical user interface and/or application programming interface. We believe that Fenics Integrated will enhance profit margins by further incentivizing the company's brokers and clients to automate execution. We expect businesses, that are part of Fenics Integrated, to generate pretax margins of at least 25% in the near-term and 30% to 35% over time.

While BGC's overall brokerage revenues declined this quarter, Fenics' brokerage revenues increased by 10%, and Fenics' net revenues were up by 9%. We expect Fenics to continue to grow faster than the overall business and improve the overall profitability of the company over time.

Our investment of nearly $180 million per year in technology has put us in a position to drive increased electronic trading and higher margins, while increasing the overall value of the company.

Additionally, we believe that Fenics Integrated will create superior real-time data, improving the robustness and value of Fenics market data, which will accelerate our growth rate. We believe it's only a matter of time before the marketplace realizes the value of our Fenics businesses.

We continue to expect our Fenics stand-alone businesses, such as Fenics GO, Fenics UST, Fenics FX and Lucera, to collectively break even next year. We also expect our insurance brokerage business to become profitable in 2021. If we achieve these goals, for both Fenics stand-alone and insurance brokerage, BGC's pretax earnings and adjusted EBITDA should improve by at least $50 million in 2021 from 2020 levels, all else equal.

With that, I'm now happy to turn the call over to Steve Bisgay.

[Steven Bisgay, executive]

Thank you, Shaun, and hello, everyone. You could find additional details on our quarterly results in today's press release and investor presentation.

Starting with our revenues by geography. Europe, Middle East and Africa revenues declined by 0.9%. The Americas were down 7.2%, while Asia Pacific revenues declined by 19.2%. Our Asia Pacific revenues reflected a sharp decline in money market flows from Mainland China this quarter, which we believe is mostly behind us. Our non-U.S. revenues were over $7 million lower due to the relative strengthening of U.S. dollar.

In terms of expenses, we continue to reduce our compensation-related cost base and streamlining our operations, which resulted in $6.8 million and $22.7 million of GAAP charges recorded in the second and first quarters of 2020, respectively. We expect our cost savings plan to reduce total GAAP expenses in 2020 by at least $35 million, all else equal.

Over time, we anticipate our expenses to decline as a percentage of revenues, as Fenics and the insurance brokerage business improve their top lines and we maintain our expense discipline.

BGC's quarterly GAAP pretax earnings would have been approximately $17 million and $16 million higher in the second quarters of 2020 and 2019, respectively, but for the impact of our continued investment in these businesses.

Moving on to our adjusted earnings. Our pretax income was $92.1 million compared with $102.3 million. Our post-tax earnings were $80.1 million or $0.15 per share compared with $89.8 million or $0.17 per share.

Turning to share count. Our fully diluted weighted average share count increased by 4.4% to 546.1 million under both GAAP and adjusted earnings in the second quarter of 2020. As of June 30, 2020, our spot share count was 546.2 million. We expect to use relatively more cash with respect to compensation over time to minimize dilution. Largely because of this, we still expect our 2020 year-end fully diluted share count to increase by approximately 4% to around 550 million.

With respect to our balance sheet, as of June 30, 2020, our liquidity was $522.5 million compared with $473.2 million as of year-end 2019. Notes payable and other borrowings were $1.291 billion compared with $1,142.7 million, and total capital was $786 million compared with $767.4 million. The quarter-end balance sheet figures reflect paying down $75 million of our revolving credit facility, ordinary movements of working capital, cash paid with respect to annual employee bonuses, taxes and our continued investment in stand-alone Fenics products and our insurance brokerage businesses. We continue to manage our business, with a focus on its investment-grade ratings.

On July 10, 2020, BGC closed an offering of $300 million of 4 3/8 senior notes due December 2025. With this financing, the company has effectively prefunded our May 2021 debt maturity. We continue to expect to strengthen our balance sheet and reduce our overall debt by year-end.

And with that, I'm happy to turn the call back over to Shaun Lynn.

[Shaun Lynn, executive]

Thank you, Steve. Turning to our outlook for the third quarter of 2020. Compared with the year earlier, BGC's revenues decreased by approximately 10% year-on-year for the first 18 trading days of this quarter, which reflects lower global industry volumes thus far in the quarter across rates, FX, commodities and credit derivatives. However, Fenics' revenues for the same period have increased by over 10%. Looking forward, we expect to generate total revenues between $440 million and $490 million compared with $521.1 million. We anticipate pretax adjusted earnings to be in the range of $63 million to $83 million versus $87.7 million. We anticipate our full year 2020 adjusted earnings tax rate to be in the range of 10% to 12% versus 11.4% for the full year 2019. We expect to update our outlook towards the end of September.

And I would now like to turn the call back over to Howard.

[Howard W. Lutnick, executive]

Thank you, Shaun. As the largest shareholder, I am as disappointed as all of you in our stock price. I understand that some might be skeptical of our strategy and plan, so I'd like to spend some time to go through it now.

First, let's talk about Fenics. Our stand-alone new businesses have been significant investments for the company. These businesses are expected to reduce our pretax earnings by $40 million this year. This is on top of the investments we are making across the balance of our Fenics business.

We have done this before. We have built and grown electronic platforms that have created enormous value for this company. We are confident that we have made and continued to make the right investments now. We are in building mode across these platforms, maximizing our market share and showing growth across these businesses. Fenics' revenues grew 10% in the second quarter, and we expect Fenics to deliver both revenues and earnings growth next year.

Fenics, overall, together with our newer stand-alone electronic businesses of Fenics U.S. Treasury, Fenics GO, Fenics FX, Lucera, plus others, we believe will deliver enormous value to our shareholders. We are adding clients and growing our market share. We are very confident that, in 2021, as Shaun said, we will improve our bottom line to $40 million from these businesses, and their value will become much more clear.

Second, let's turn to our voice business. It is a strong and stable business that we expect to generate consistent cash flow for the long term. We have spent this year reducing costs and building efficiencies, including reducing underperforming brokers. This reduced our revenues in the short term, but we expect these moves to increase our profits through this efficiency.

Yes, we have been challenged by the pandemic, but the massive issuance in the world will eventually be a tailwind driving our voice business for the long term. We expect issuance to produce growth, and that is only a matter of time.

Third, we've been building our insurance brokerage business, which created more than a $10 million drag on earnings in the first half of this year. We expect this business to turn profitable, starting in the fourth quarter of this year. We rebuilt BGC after 9/11. We grew Newmark before spinning it off to significant value for our shareholders. We do know how to build brokerage businesses.

So we believe the success of our growth strategy across these initiatives will become apparent towards the end of this year and the beginning of next, but it is clearly yet to be appreciated by the marketplace.

To illustrate this, let me walk through our 2020 actual and expected results by quarter. We earned $0.01 more than last year in the first quarter. We earned $0.02 less in the second quarter. At the midpoint of our third quarter guidance, our earnings would be $0.03 lower than last year. And we expect the midpoint of the range of our fourth quarter earnings to be flat to maybe down $0.01 as compared with last year.

So if I compare the $0.61 we made in 2019, to the midpoint of $0.55 to $0.56 we expect to make this year, our earnings would be down 10%. We expect our earnings to rebound and to be virtually flat in the fourth quarter. Further, we expect to generate EPS growth in 2021, driven by the improvements Shaun and I just outlined from Fenics and insurance, our solid voice franchise and the efficiencies that Steve Bisgay outlined.

There was clearly a disconnect between our stock price and our earnings. While our 2020 earnings are only expected to be down 10%, BGC's share price is down 50% year-on-year, and we are trading at half the multiple of our peers. This deeply disturbs us given our anticipated growth next year and the embedded value we are building in the Fenics business as well as insurance. These are both businesses, Fenics and insurance, that our peers just do not have.

Lastly, let's turn to our capital return. With the outbreak of COVID-19, we reduced our dividend and focused on strengthening our balance sheet. Early next year, we expect to announce our capital return policy, focused on increasing our dividend and detailing our share repurchase plan. Previously, we were deeply dividend centric. Going forward, we plan to deeply consider both potential outcomes, share buybacks as well as dividend.

With that, operator, I'd now like to turn the call -- open to questions.

[Operator]

[Operator Instructions] Our first question is from Rich Repetto from Piper Sandler.

[Richard Repetto, analyst]

Hi, Howard, Shaun and Steve. I guess the first question is, on Fenics Integrated and the guidance on the 25% margin, and I think it was 35% over time, could you talk about the 30% to 35% over time? What desks you brought into this Fenics Integrated? And I know there's a footnote in the earnings. But traditionally, we've thought about electronic businesses margins being pretty close to 50% of overall. And I know -- so it appears that you're still carrying a lot of human, what do you call, comp expense in this Fenics Integrated, I guess, is my question.

[Howard W. Lutnick, executive]

So let's sort of break it down, which is our stand-alone electronic businesses will get to, we think, over time, to those fully electronic 50% margins, market data as well, and Lucera as well. So those businesses would be at the 50% margins.

Our integrated business will, as you correctly point out, continue to have significant leadership from our human capital and our product expertise. Our key brokers will remain the key salespeople in that business. And that means our long-term expectation for those businesses will continue to have that capacity in those leaders to be part of that, and therefore, we expect that margin to be 30% to 35%.

So yes, will those people mean that, that business has not reached those other margins? Yes. But their knowledge, their strength and their capacity to be deeply, deeply product-centric, and they add enormous value and knowledge to those businesses, we think is part of our secret sauce. And so we're not just going to have generalist salespeople for lower price, we will have the best knowledgeable people in the world driving our marketplaces. And so we think Fenics Integrated the ability to do business across the board electronically or by voice, and have those deeply integrated together, granted that margin is 30%, 35%. But we are tremendously proud that we think that is our business model for these businesses, and we embrace that model, and that is where we are going.

[Richard Repetto, analyst]

Okay. That's helpful, Howard. I guess my follow-up would be, you issued new debt, but to retire the, I think, it's March 2021 debt. And you only reduced the revolver by another $75 million. And I guess the question is, if -- we thought, at least I thought, that debt refinancing was one obstacle, but now it's complete -- next year is completely gone now. I guess I'm trying to still understand, when we've had reasonable revenue and earnings in the first half, that you're still carrying $150 million of revolving debt. Was that due to the rating agencies increased requirement? Or I'm just trying to see why we're still carrying that increased revolving debt?

[Howard W. Lutnick, executive]

Sorry, so we've not been clear. So the $75 million was what we paid off previously. Upon issuing these notes, we did pay off currently the entire revolver. So currently, there is no revolver outstanding.

We will, when we figure out how to pay off the May 21s, that will shift that back in the earnings, and the company will go back to just reducing our revolver, as we had previously stated. But as of this second, we took the cash from that note and paid down the revolver.

[Richard Repetto, analyst]

Understood. That clarifies it. And I guess the last question is, if -- let's just say market conditions are flat, you're seeing an incremental $50 million in revenue and earnings. That would -- if you hit the growth rates for some of the Fenics nonprofitable businesses, to me, that's $0.10 to $0.12 increase in EPS. So should we expect -- if the market environment stayed the same, that the guidance would be -- would include next year, another $0.12 in EPS.

[Howard W. Lutnick, executive]

Yes, $50 million to the bottom line, right. So depending on our share count and our share buyback and dividend policy? Yes. But $50 million is $50 million. We expect that the combination of our newer stand-alone electronic platforms, plus insurance, will increase the bottom line, $50 million, next year, all else equal, exactly right. Okay.

[Operator]

Our next question is from Patrick O'Shaughnessy from Raymond James.

[Patrick O'Shaughnessy, analyst]

So there were some stories this past quarter that you guys had hired a third-party bank to conduct a strategic review of your insurance brokerage business. What can you say about that process? And kind of how you are viewing that business currently?

[Howard W. Lutnick, executive]

Okay. So how we're viewing the business is the business is growing, as you've seen this quarter, and we expect it to be profitable in the fourth quarter.

As to a strategic review, as I've said on prior calls, we are deeply examining the right answers for this company. We, like the insurance business, and it is growing and it is turning profitable and we've discussed that. But we did say that we would leave nothing on the table, and we are examining everything. So that's the furthest I'm going to go on that topic, other than to say, to agree that we are examining it, and we be open-minded about it.

[Patrick O'Shaughnessy, analyst]

In your prepared comments, Howard, you did note that you expect early next year to announce your new capital return plan. In the meantime, and I guess, until that is announced, what are the factors and inputs that the Board is looking at that will help inform that decision?

[Howard W. Lutnick, executive]

Well, so we have a number of things, right? Number one, we are constrained as to share buyback, because of the Newmark spin-off, and that will expire in December of this year. So come December of this year, that 2-year constraint is behind us.

Going forward, we will have our earnings, which we -- as we just discussed, the investment in both our new Fenics platforms and insurance should dissipate, so that should improve our earnings $50 million. And then I think we're going to look at where our dividend policy should be. And as I said in my remarks, we were very dividend-centric. And now I think we really need to examine how -- what is the right balance between increasing our dividend and having a capital return policy through share buybacks. And I think the Board is just going to be free to balance those 2, and to examine what is the maximizing move for the company.

But with our investments fading behind us, because these investments will be turning profitable or breakeven, I think the Board and the management will feel very strong about our position going forward, and we're very excited about 2021. We did reduce our dividend because we felt, going into the pandemic, we didn't know what the outcomes would be. If you were certain to tell us these were going to be the outcomes, we'd have felt much better, right? But that was deeply uncertain. I think we have made the move to strengthen ourselves so that as we enter 2021, we will be in the best position to both increase our dividend and to buy back stock.

[Patrick O'Shaughnessy, analyst]

Something else that you guys touched on in the press release, you kind of talked about the corporate structure. And I think you noted that, depending on the outcome of the U.S. election in November, that could influence your decision for your corporate structure. So is it fair to conclude that if the Democrats won the election and indicated that the corporate income tax rate would be moving higher, you guys would likely stay with your current partnership structure?

[Howard W. Lutnick, executive]

I think the answer is, we are studying it carefully. I think we are coming up, watching what everybody is saying, studying it carefully. The U.S. is only a certain percentage of our earnings. We will take that into the mix. So I think our point we were trying to make is we will be ready at the end of the year. We will be ready.

And if something changes, we will study it and move accordingly. But as of now, we are moving a pace to be ready by the end of the year. And we're just being plain that if the election is -- if the outcomes, or the taxes, or some other things that are said, make us rethink things, I guess, we'll rethink them. As of right now, we're moving apace.

[Patrick O'Shaughnessy, analyst]

Can you speak to the similarities or differences between the global financial crisis and the current COVID-driven recession on your rate franchise? And I guess I'm thinking both in terms of the near-term impact or headwind to rates trading activity as well as the potential long-term tailwind of kind of more raw product to be traded?

[Howard W. Lutnick, executive]

Well, I mean, you've seen it in the CME numbers, right? The extraordinary concept of vast issuance, beyond what any of us could have imagined, which must eventually create vast trading volumes. Issuance must come with vast trading volumes, it is only a matter of time.

But also the significant scale of the quantitative easing, that is going on by the central banks, was also unprecedented. So you have those 2 things sort of fighting desperately with each other, but this is only the first inning. So I think we've seen a decrease in volumes in the rate space. You're going to see that, but eventually, that must break.

Now when that is, I don't know. And -- but it must break. And it may not break across the curve, meaning they may decide you might see that they stop learning about the 30 year, or they stop learning about the 10-year and the quantitative easing does not go out that far, and all of a sudden, those volumes just explode in a way that people had not ever contemplated.

And then at some point, just the scale of this issuance will mean they won't be able to defend the 5-year any longer, and that will explode. So they may be -- you may see the central governments defending the 2 and the 3-year, the short term, but when they lose the capacity to control and to be continuous buyers of the very long term, you're going to see those things break over, and the scale and volume of growth and that tailwind will be just incredible. So this is a time to invest and build because that is coming.

What day it is coming, I don't know? But it is coming for sure.

[Patrick O'Shaughnessy, analyst]

And then looking at your equity and other revenue line, it was down, I think, 6% year-over-year in the second quarter. That was a bit surprising to me, just given some of the exchange-traded volumes in equities and equity options and other index products. Can you talk about what you guys are seeing in the equities business right now? And maybe why some of those exchange-traded volumes that I was looking at didn't translate to your results?

[Howard W. Lutnick, executive]

Sean?

[Sean Windeatt, executive]

Yes, sure. So you're absolutely right. Within our equity business, we have a significant amount of equity options business, and you'll notice that the volumes on the options platform where -- across the board, were actually lower. We saw that same decline. I think the start of the third quarter, those declines have started to sort of come back a little bit. So what we saw in the second quarter, we're now starting to see levels of improvements in Q3, and that's probably in line with what you're seeing within the rest of the marketplace.

[Shaun Lynn, executive]

But I think one of the really positive things, though, that we've seen, Sean, is, obviously, the Fenics GO platform, our equity option platform, has continued to grow at a pace, taking more and more market share from the traditional brokers, a place that's actually in the market. So on euro stocks and on NIKKEI, we've continued to grow into that space with a different offering.

[Patrick O'Shaughnessy, analyst]

Okay. And then lastly for me, and thanks for handling all my questions here. You guys have continued to mention operational disruption at clients, and BGC is still serving as a headwind for the business. To what extent is this persisting into the third quarter versus maybe some of the headwinds that you're facing have more shifted to rate volatility and other macroeconomic factors?

[Howard W. Lutnick, executive]

The macro effect...

[Shaun Lynn, executive]

It's still...

[Howard W. Lutnick, executive]

Sean, do you want to answer that? Certainly, you can.

[Sean Windeatt, executive]

No, I was going to say that it's still a factor from a macro perspective. Across the globe, you're seeing different countries impose different restrictions, then loosen them and then restrict them again. We've had this in Singapore lately last week. We've seen it in Spain. We're hearing that we're going to have more restrictions in Paris.

We have many different regional offices, which we've really been very fortunate to have where we can -- where professionals can operate from and give the service to the clients, either from home, from our main offices or from our regional offices, but the technology has been driving that. So we don't have that crystal ball to turn and say that this is coming to an end. And we've seen -- we all read the news, this is just an ebbing and flowing. We continue to invest in our technology and invest in our telephone system to have the most flexibility possible to weather this very difficult situation.

[Howard W. Lutnick, executive]

So my view is the macro rates and credit -- those macros are surely the bigger driving factor. But what Sean pointed out is that these are not ordinary times that we're impacting those driving factors, and these are ebbing and flowing globally. With respect to our staff, we have -- obviously, we have the capacity to operate from home, but it is not as efficient as when they're in an office. As Sean said, we have these regional offices, which has -- which have worked very well for us, but it's just not as efficient. So that matters, but obviously, you're correct. The bigger macros are turning now to the broader points for the world and industry volumes.

[Operator]

[Operator Instructions] Our next question is from Rich Repetto from Piper Sandler.

[Richard Repetto, analyst]

My follow-up questions would be, first, is Fenics Integrated -- the revenues of Fenics Integrated, would they be just -- are they the Fenics revenue that we see, the $58.4 million? Or are they the same in one that we're talking about?

[Shaun Lynn, executive]

They're part of $58.4 million. That is correct. They're in the $58.4 million.

[Richard Repetto, analyst]

So Fenics Integrated -- is Fenics Integrated inside of that $58.4 million then or bigger?

[Shaun Lynn, executive]

That's correct.

[Richard Repetto, analyst]

Okay. All right. And then the next question would be, as far as the $50 million of incremental revenue, would it be the best sort of long-term guide would just -- do you expect that in the second half? Or is it more linear across the year building, but to realize $50 million over the whole year? Or how should we think about the growth, the sort of the traction you get?

[Howard W. Lutnick, executive]

So the $50 million breaks of $40 million in the Fenics line and $10 million in the insurance line. And they both will be sort of linear growth through the end of the year, right? So they will start slower and ramp up over the course of the year. But you'll see that growth all through the year. And then by the end of the year, we'll have made the business in the fully electronic stand-alone, breakeven and the insurance business will have eliminated any comparative tailwind.

So you have -- this year, we lost $10 million in insurance in the first half of the year, as I mentioned. And we expect those 2 things to net each other, right? We're going to lose some more money in the third quarter and turn profitable in the fourth quarter in insurance. So those will pretty much net each other, give or take a little bit. And then Fenics stand-alone business is down $40 million of investment this year, and we expect, over the course of the year, that those revenues will continue to grow and make that 0 by the end of the year.

[Richard Repetto, analyst]

Got it. That's helpful. Last question is, Howard, you've -- in the past, you paid, I would say, a material amount in equity-based, stock-based compensation. So that's been excluded from adjusted earnings. I guess you talked about going to cash comp. I know it helps the dilution, but how should we think about our -- the incremental -- the compensation ratio, let's say, impact as you go to a C-corp and you reduce the stock-based compensation dilution? What other, what you call, ramifications are there to the cash comp ratio?

[Howard W. Lutnick, executive]

You're right. If we use less equity-based compensation, which we have said we plan to do, that will increase our compensation -- our ordinary compensation, right? If we don't give it in equity, we'll be giving it in other forms, and those will go through our GAAP earnings pretty clearly. But that's why we have both Sean Windeatt and Steve Bisgay focused on our efficiencies and focused on our lesser performing brokers, so that we can offset that. So our current expectation is our efficiencies should be able to offset that, and there shouldn't be a material impact growing through.

But Sean Windeatt, you want to say something?

[Sean Windeatt, executive]

Yes. And also, Rich, that is reflected. You can see in the share count as in -- at the end of Q2 and where we say it will be at the end of -- our expectation as to the end of Q4. That already includes the fact that lower levels of equity. And therefore, that's included in our guidance we gave for Q3 and expectation for Q4.

[Howard W. Lutnick, executive]

It would have the effect if we can drive efficiency through our system. Instead of having our earnings grow from cost cuts, what's happening is our earnings are going to grow from lack of share issuance. So that's sort of the balance. And I think that's our focus, is to have those 2 net each other out.

[Richard Repetto, analyst]

Got it. So just to clarify that cash comp, I know it's in GAAP earnings as well as your stock-based comp was in GAAP as well, I believe, had to be. But on the adjusted basis, that this adjusted for cash...

[Howard W. Lutnick, executive]

Yes. If we pay more cash, it's in our adjusted earnings period.

[Richard Repetto, analyst]

Yes. It is...

[Howard W. Lutnick, executive]

It's a simple thing. Right. Correct. So we expect to offset it with efficiencies and for it to be generally, obviously, not specifically, but generally, they should offset each other, and we should just have less issuance.

[Richard Repetto, analyst]

And those efficiencies would be head count reductions or just ballpark -- just...

[Howard W. Lutnick, executive]

Well, less -- an example would be, in the last couple of quarters, we reduced our head count of less productive brokers. And that's just more efficient economics, hiring better brokers, who are more productive and letting go the lesser productive brokers is just good math for the company. Plus, we've been consolidating systems, driving our platform, just focused on making our business -- our voice business more efficient and therefore, earning more money, which allows us to offset the change from issuing shares -- issuing less shares and more cash.

[Operator]

This concludes our question-and-answer session. I would now like to turn the conference back over to Howard Lutnick for closing remarks. Go ahead.

[Howard W. Lutnick, executive]

Well, thank you all for spending time with us this quarter. I wish you all a safe time, and enjoy the rest of the summer, and we look forward to speaking to you next quarter. Look forward to speaking then. Bye.

[Operator]

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.