BGC Group Q3 2023 Earnings Call Transcript

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October 30, 2023

There are 6 speakers on the call.

Operator

Greetings. Welcome to the BGC Group Third Quarter 2023 Financial Results Conference Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded.

Operator

At this time, I would like to hand the call over to Jason Krysikis, Head of Investor Relations. Thank you. You may begin.

Speaker 1

Thank you, and good morning. We issued BGC's Q3 2023 financial results press release the presentation is summarizing these results this morning prior to the market open. You can find these at ir.bgcg.com. Please note you can find additional details on our quarterly results in today's press release and investor presentation. Unless otherwise stated, any historical results provided on today's call only the Q3 of 2023 with the prior year period.

Speaker 1

Certain revenue figures are provided for the current period as indicated. We will be referring to our results on this call only on an adjusted earnings basis unless otherwise stated. We may also refer to adjusted EBITDA. You may refer to our liquidity, which we define as cash and cash equivalents plus marketable securities that have not been financed, reverse repurchase agreements and financial instruments owned at fair value, We define total capital as redeemable partnership interest, total stockholders' equity and non controlling interest in subsidiaries. Please see today's press release for the results under Generally Accepted Accounting Principles or GAAP.

Speaker 1

Please also see the relevant sections in the back of today's press release with complete and updated definitions of any non GAAP terms, Reconciliations 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.bgcg.com and in our investor presentation. We We refer to the company's technology driven businesses as FENICS. FENICS offerings include FENICS Markets and FENICS Growth Platforms. I also remind you that the information regarding our business on today's call that are not historical are forward looking statements.

Speaker 1

These include statements about the company's business, results, financial position, liquidity and outlook. Any forward looking statements involve risks and uncertainties. Except as required by law, BTC undertakes no obligation to update any forward looking statements. Any outlook and targets discussed in this call assume no material acquisitions, buybacks, extraordinary transactions or meaningful changes to the company's stock price. For a discussion of additional risks and 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 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 in the subsequent reports I am now happy to turn the call over to Howard Lutnick, Chairman of the Board and CEO of BTC Group.

Speaker 2

Thank you, Jason. Good morning, and welcome to our Q3 2023 conference call. With me today are our Chief Operating Officer, Shawn Windiat And our Chief Financial Officer, Jason Hoff. We had another outstanding quarter, generating revenue growth of 16%, Reflecting increased volumes across each and every one of our asset classes. BGC is extraordinarily well positioned To benefit from the return of interest rates, which we expect to drive our trading volumes, revenues and profitability higher for the foreseeable future.

Speaker 2

Fenics revenues improved 19%, outperforming both its electronic trading platform and exchange peers. This was led by another record quarter for FENICS Growth Platforms, which grew by over 45%. FENICS UST, Our electronic U. S. Treasury platform reached a record 25% market share of volume traded on U.

Speaker 2

S. Treasury Exchange Marketplaces during the Q3. With that, I'll turn the call over to Sean.

Speaker 3

Thanks, and good day, everyone. Our revenue grew 66 $100,000 or 15.9 percent to $482,700,000 in the Q3 of 2023, growing across every geography. Total brokerage revenues grew by 14.8%, driven by strong growth Across all of our asset classes, our fixed income brokerage volumes were significantly higher during the period as interest rates and wider credit spreads continue to provide favorable macro trading conditions across rates, credit and FX. Rates and credit revenues improved by 12.1% and 9.6%, respectively, while FX revenues We're 8.6% higher. Energy and commodities revenue grew by 35%, driven by strong double digit growth across our energy complex and our environmental products.

Speaker 3

Excluding our Trident acquisition, Organic Energy and Commodities Growth would have been 23%, outperforming the overall market. Our equities business increased by 8.8%, reflecting higher volumes across equity derivatives and European cash equities. We generated strong double digit growth across all earnings metrics during the quarter, driven by higher revenues across Fenics and voice hybrid along with record front office productivity. Turning to FENICS. FENICS generated industry leading revenue growth 18.7% compared to last year.

Speaker 3

These higher margin technology driven businesses generated total revenues $125,400,000 in the 3rd quarter and represented approximately 26% BGC's total revenue. FENICS revenue growth was led by electronic rates and credit products as well as data, network and post trade businesses. FENICS Growth Platforms had another record quarter, Generating revenue of $18,400,000 a 45.4% improvement versus last year. Fenics Markets had strong revenue growth of 15.1%. Fenics UST revenue Increased by over 55% on 26% higher average daily volumes and our market share increased Over 25% for the 3rd quarter, up from 23% in the Q2 of 2020 3% and 18% a year ago.

Speaker 3

Banc's UST is the 2nd largest and fastest growing treasury marketplace globally. Portfolio Match grew its U. S. Credit volumes over 9 fold compared to the year ago period. PortfolioMax continues to win market share in electronic credit portfolio trading, a rapidly growing segment of the credit market.

Speaker 3

Fenix Go, the only fully electronic block size equity options exchange platform, saw year on year revenue growth of 65%, driven by strong growth across Delta 1 Products and Eurostox 50 Index Options. Data, network and post trade revenues grew by 16.8%, led by strong double digit improvements across Lucira, our Network and Infrastructure Business and Capital Lab, our post trade business. Fenix Market Data Also recorded double digit growth and had record 3rd quarter sales, further adding to its subscription revenue pipeline. Our data and network businesses have long term recurring revenue contracts. Turning to our outlook.

Speaker 3

I'm pleased to provide the following guidance for the Q4 of 2023. We expect to generate total revenue between $450,000,000 $500,000,000 as compared to $436,500,000 In the Q4 of 2022, we anticipate pretax adjusted earnings to be in the range of 88 to $108,000,000 versus $87,100,000 last year, which at the midpoint of our guidance Would represent over 15% earnings growth for the full year 2023. And with that, I'd like to turn the call over to Jason.

Speaker 4

Thank you, Sean, and hello, everyone. BGC generated total revenue of $482,700,000 an increase of 15.9% as compared to last year. By geography, Americas revenue increased by 19%. Europe, Middle East and Africa revenues increased by 16.9% And Asia Pacific revenues increased by 5.9%. Turning to expenses.

Speaker 4

Our compensation Employee benefits under adjusted earnings increased by 16.6%. Non compensation expenses under adjusted earnings increased by 10 point 8%, primarily driven by higher interest expense of $6,300,000 As anticipated, Interest income also increased by a similar amount offsetting this expense. Moving on to adjusted earnings. Our pre tax income was $101,900,000 a 23.1 percent improvement With a 125 basis point margin expansion to 21.1%, our 12th consecutive quarter of year over year margin expansion. Our post tax adjusted earnings increased by 21.4 percent to $94,100,000 or $0.19 per share, an 18.8% improvement.

Speaker 4

Our adjusted EBITDA was $135,900,000 a 27% improvement. Turning to share count. Our fully diluted weighted average share count decreased by 15,400,000 shares, a 3% sequentially This significant share reduction was primarily driven by our corporate conversion and the related unit redemptions as well as share repurchases during the quarter. As of September 30, our liquidity was $605,000,000 compared with $524,300,000 as of year end 2022. With that, I'd like to turn to Howard for closing remarks.

Speaker 2

Thank you, Jason. It is obviously an exciting time to be part of BGC. Our top line and bottom line growth clearly demonstrate the extraordinarily positive position we have built in the global capital markets. We continue to make significant progress with FMX. And as we've said, we look forward to communicating additional updates and details during this quarter.

Speaker 2

With that, operator, we're happy to turn the call over for questions.

Operator

Thank you. We will now be conducting a question and answer session. One moment please while we poll for your questions. Our first questions come from the line of Patrick Moly with Piper Sandler, please proceed with your questions.

Speaker 5

Yes. Good morning and congrats on the strong quarter. So I'll start with a question on the macro before getting into the quarter. But Howard, there's been a number of reports out there that are projecting a massive wave Of sovereign debt issuance next year, some are saying we could see upwards of 50% year over year growth in issuance in the U. S, 20% to 30% in the U.

Speaker 5

K. In Europe, so just wondering if you could maybe share your thoughts on what that means for BGC's business, particularly rates revenues going forward?

Speaker 2

So the historical relationship between issuance and secondary market trading volume Before the 'eight to 2020 2 0 interest rate period Was a 60% correlation. So for example, if you had a 50% increase in issuance Next year, you'd have a 30% increase in secondary market trading. You just take a 0.6 and multiply it to it. So I think that those relationships are healing, meaning they are coming back. Now you have so much issuance Since 2008 when we began this process that I think these markets have just growth for the foreseeable future, for the long foreseeable future.

Speaker 2

But that kind of issuance growth, I think should bode very, very well for those markets having 30% growth rates. I mean, if that's what happens, I think you're going to see it roll through the markets and that will bode well for everyone in these marketplaces as a macro.

Speaker 5

Sorry, that's good color. So I guess my next question is just on the guidance ranges for 4Q. I think at the midpoint, it implies revenue growth should slow down slightly from 16% this Fast quarter to 9% this quarter. So still obviously strong year over year growth against what appears to be a tougher comp in 4Q 2022. But just as we think about the growth algorithm for the business going forward, I was hoping to get your thoughts on what you view as an appropriate Kind of run rate for growth in both revenues and adjusted pretax earnings?

Speaker 2

Well, overall, I don't think we see any slowdown. So in fact, we would expect next year as we sit here today to be north of 10% top line revenue growth. Last year in Q4, began the broad based growth. And so and you could see that last year because our 4th quarter revenues were higher than our 3rd quarter revenues, which as you remember, We are seasonally the strongest in the Q1, then a little slow in the Q2, a little slow in the Q3, a little slow in the Q4. And the 3rd Q4 are the summer and you have Christmas and Thanksgiving and those kind of things.

Speaker 2

So The fact is when you outgrow it in the Q4, you're showing that something exogenous happened. And so that was the beginning of our growth. So I don't think we see it any deacceleration of our growth. I think our growth rate will remain steady. I'm sure it'll Bounce around a couple of points as the markets bounce around, but the fact is we're a plus 10% growing company going forward as far as we can

Speaker 5

Okay. And then just also on growth, market data growth has been strong. I think you're tracking towards 15% to 20% growth this year. Do you think that's kind of like a good run rate to use going forward for growth there? And then over the long term, I think market data has been around 5% to 6% of total revenue.

Speaker 5

So just wondering what you think That can get to, I guess, over the next few years in terms of as a percentage of revenue.

Speaker 2

I think that growth rate is consistent with our expectations. And along with that, I think it should outgrow even our growth rate, so it should be about it should be an accelerated to our growth rate. And I think it's got hundreds of basis points of growth as compared to our overall revenue. So I think it's got a long trajectory. We see a path to doubling those revenues.

Speaker 2

And so I don't see an end Anywhere near about. I think we have a long way to go. Our data sets are getting better, broader and deeper, And that will only bode well for the gross level of that and its percentage in the company.

Speaker 5

All right, great. And then one on Fenics, another record quarter there. I know you have some ancillary Businesses within FedEx that you said in the past you could potentially look to sell at some point later on down the line. So just How do you think about the opportunity there to potentially divest some of those non core electronic businesses and potentially Use the proceeds to buy back shares and I guess just building or in addition to that, just maybe if you could update us on your Capital return plans going forward?

Speaker 2

I wouldn't use the term non core. These are all deeply these are businesses that are deeply consistent with our business model Across the capital markets, they are I think the term that people like to understand is they are Completely separable. It means we have numerous products that if an exchange or electronic peer marketplace wish To acquire from us, they would be easily separable and able to be Sold. So I think we are open minded to it. We cannot understand why that company trades at the multiple trades at, But we understand that.

Speaker 2

And so therefore, if there were assets that the company had that would trade at the kind of revenue multiples and profit multiples That some of the electronic trading platforms and exchanges trade at, I think we would be open minded to such a transaction. And as you correctly said, selling things at double digit multiples of revenue And buying back your company at mid single digit multiples of earnings Sounds like a smart thing for management to do, especially since we are the biggest owners of this company's shares, And we really like that idea. So we understand it. You spoke to us about it. Some of our shareholders spoke to us about it.

Speaker 2

We understand it and we heard you and we're open minded. But those things happen if and when they happen. We are not making any promises, but that would be our thinking of return policy. We historically paid dividends. We're now buying back shares.

Speaker 2

We like that model of buying back shares that we have had the opportunity to buy other companies incredibly accretively to what we think our long term prospects are and we're going to continue to do that. So acquisitions, of course, If correctly priced, we're open minded to, and we're generating cash, buy back shares. And if we, of course, We're able to do a transaction, then we would just be much more aggressive in buying back those ships.

Speaker 5

Okay. Thanks. And then on FMX, I've got to ask it, but so just to clarify, you are planning to still Announce the strategic partners and financial details before the end of the year. Is that did I hear that right? And then just Once the CFTC approval comes, if you could maybe just talk a little bit about your expectations for Market share growth and volumes there, and maybe just what you view as some of the competitive advantages that FMX will offer its customers compared to Your biggest competition there in CME?

Speaker 2

So our current Plans are it's sort of one of 2 things. We'll either at least, it is the company's desire and expectation to at least this quarter announce our strategic partners. We may, in discussions with those strategic partners, be able to lay out all of the transaction details, But that, we are still in discussions with our strategic partners about. So it will be either at least the names, that's our objective, But also transaction details, we just need to work that out with all the partners. CFTC, we are again, we work closely with the CFTC going through the process of getting our Exchange approved.

Speaker 2

We are very confident we remain very confident that that will just come in its due course of time, And we are working through that. That is not a stress point for us internally. It's just work. Lastly, your question about market share. So the futures market is a gigantic opportunity for us, And it has wide breadth in the across the capital markets.

Speaker 2

So I would suggest our 1st year That we are open is going to be a year, which we would call breadth, opening every account that we possibly Can across the capital markets, having all the FCMs, all the trading firms, getting everybody on the network. Now as you know, because our treasury platform has been growing 7 points market share over the last year. We have broad based users, right? But the futures market It is much, much, much, much broader. And as you bring on those much broader number of users, of course, that will grow our treasury business dramatically as well.

Speaker 2

That's why we look at these things together. So 1st year, let's call it breadth, 2nd year then begins depth. And once those 2 years are completed, then you're going to see bare knuckle competition. So that's what I would say. It's sort of a 1, 2, 3.

Speaker 2

1st year, you're going to see us defining Breadth, 2nd year is making sure we have depth, meaning every customer, every area of every customer, every portion of every customer, How much are they doing? How much can we get them done? Get them on the network, get them using, get the network effect going. And then year 3 will be Significant, significant competition. And this is an opportunity for this company that is at a scale that is far, far different than the value of this company today.

Speaker 2

I think people undervalue our U. S. Treasury platform wildly. I think they have no idea of the incredible value that the Infrastructure and connectivity this company has to the world's capital markets players and that opportunity in futures, You have the CMEs worth between $70,000,000,000 $80,000,000,000 and we have around $3,000,000,000 That is just Illogical, I think that illogical will come over time as we go pounding forward. And we are very, Very excited about our prospects for FMX.

Speaker 5

All right. That's great, guys. I think that's it for me, But, congrats on the strong quarter.

Operator

Thank you. We have reached the end of our question and answer session. I would now like

Speaker 2

Thank you all for joining us today. We look forward to reporting and meeting with you next quarter and where we will have again,

Operator

Patient, you may disconnect your lines at this time. Enjoy the rest of your day.

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Earnings Conference Call
BGC Group Q3 2023
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