BGC Group Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
May 3, 2023

Key Takeaways

  • Revenue Growth: Q1 revenue rose 5.2% to $532.9 M (7% constant currency), marking the second‐highest quarterly total and accelerating growth in Q2 (+9% through 19 trading days).
  • Fenics Performance: Technology‐driven Fenics unit delivered record revenue growth of 12% (14.4% constant currency), accounting for over 26% of total Q1 revenue, led by 33.1% expansion of growth platforms.
  • Q2 Outlook: Management projects Q2 revenue of $450 M–$500 M (vs. $435.8 M a year ago) and pretax adjusted earnings of $90 M–$110 M, with an anticipated adjusted tax rate of 5%–8%.
  • Corporate Conversion: BGC expects to convert to BGC Group Inc. on June 30, list on NASDAQ under ticker BGC, and become eligible for S&P inclusion, potentially driving up to $40 M in passive demand shares.
  • FMX Futures Exchange: CFTC approval is underway for the new U.S. rates futures exchange, with strategic partners to be announced pre‐launch, positioning BGC to challenge CME’s market share.
AI Generated. May Contain Errors.
Earnings Conference Call
BGC Group Q1 2023
00:00 / 00:00

There are 6 speakers on the call.

Operator

Greetings, and welcome to the BGC Partners First Quarter 2023 Earnings 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. I would now like to turn the conference over to your host, Jason Krasikis, Head of Investor Relations for BDC Partners.

Operator

Thank you. You may begin.

Speaker 1

Good morning. We issued BGC's Q1 2023 financial results press release and the presentation summarizing these results this morning prior to the market open. You can find these at ir.bgcpartners.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 compare only the Q1 of 2023 with the prior year period.

Speaker 1

Certain revenue figures 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. You may also refer to adjusted EBITDA. We 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 securities owned, securities, loans and repurchase agreements. We define total capital as redeemable partnership interest, total stockholders' equity and non controlling interest in subsidiaries.

Speaker 1

BGC generates a significant amount of its revenues in non U. S. Dollar denominated currencies, particularly the euro and pound sterling. BGC presents revenue comparisons on a constant currency basis in order to present a better comparison of the company's revenues during the period, which exhibited volatile foreign exchange movements. BGC's constant currency movements assume foreign exchange rates used to determine the company's prior period revenues applied to the current period revenues.

Speaker 1

Please see today's press release for results under Generally Accepted Accounting Principles. Please also see the relevant sections of the back of today's press release for the complete and updated definition of any non GAAP terms, Reconciliations of these items to corresponding GAAP results and how, when and why management uses such terms. Additional information with respect to our GAAP and non GAAP results mentioned Today's call is available on our website at ir.dcpartners.com. We refer to the company's technology driven businesses as Fenics. FedEx offerings include FedEx Markets and FedEx Growth Platforms.

Speaker 1

I also remind you that the information regarding our business on today's call that are not historical are forward looking statements. These include statements about the effects of the COVID-nineteen pandemic, results, financial position and liquidity and outlook. Any forward looking statements about risks and uncertainties, except as required by law. We undertake 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.

Speaker 1

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 I'll admit to the risk There's a special note on forward looking information set forth in these filings and any updates to such risk factors in special note on forward looking information I'm now happy to turn the call over to Howard Ludmick, Chairman of the Board And CEO of BGC Partners.

Speaker 2

Thanks, Jason. Good morning and thank you for joining us for our Q1 2023 conference call. With me today are BGC's Chief Operating Officer, Shawn Windiat and our Chief Financial Officer, Jason Hall. As we expected, long term growth for BGC has begun. The Q1 saw growth across each of our business lines.

Speaker 2

Our quarterly revenue grew by over 5% We're 7% in constant currency with growth accelerating so far in the second quarter with revenue up 9% through the 1st 19 trading days. We expect BGC's revenue to continue to grow as a relationship between trading volumes and the enormous increase in bond issuance returns following the end of 0 interest rates. FENICS had a record quarter with market leading revenue growth of 12% or over 14% in constant Currency representing over 26% of our total revenue in the Q1. We expect to complete our corporate conversion on June 30 And trade under our new ticker BGC at the beginning of July. With respect to FMX, Progress continues with the CFTC on the final approval of our futures exchange, and we intend to announce our strategic partners prior to the launch.

Speaker 2

With that, I'll turn the call over to Sean.

Speaker 3

Thanks, and good day, everyone. Our revenue grew by 5.2% $532,900,000 in the Q1 of 2023 as our trading volumes increased Following the end of 0 interest rates. This represents our 2nd highest ever quarterly revenue, excluding insurance, of course, 2nd only to the Q1 of 2020 when the onset of the COVID-nineteen pandemic drove trading volumes to record levels. Both our voice hybrid and Fenics businesses saw solid growth with revenue up across all asset classes. Fenics grew by 12% or 14.4% in constant currency, generating a record 140 $400,000 in the Q1, representing 26.3 percent of BGC's total revenue.

Speaker 3

This growth was driven by higher trading volumes across all our asset classes. The combination of meaningful interest rates and improving trading conditions led to higher client activity across rates and credit, driven by shorter dated interest rate products and strong credit volumes. Additionally, our Renewable Energy and Ship Chartering business saw strong double digit growth, Driving our Energy and Commodities business higher. Data, software and post trade revenues improved by 12.4%, driven by Fenix Market Data and Lucira. We expect the growth of these recurring revenue businesses to continue to outperform the industry.

Speaker 3

Our growth has accelerated in the 2nd quarter with overall revenue up 9% Through the 1st 19 trading days of the quarter, higher revenue and record front office productivity, Which increased 9.2% versus last year, drove profitability higher across our business. Turning to FENICS. Fenix's industry leading growth of 12% or 14.4% in constant currency was led by our growth platforms, Which improved by 33.1 percent. This strong improvement in FENICS growth platforms was driven by FENICS UST's Portfolio Match And Fenix Go. Our Fenix Markets revenues increased 9.5% 12.2% in constant currency.

Speaker 3

This growth reflects the strength of our comprehensive Fenics offerings And conversion of our voice hybrid volumes to our higher margin technology driven Fenics businesses. We saw stronger trading volumes across our electronic fixed income products, particularly credit. With that, I'm pleased to provide the following outlook for the Q2 of 2023. We expect to generate total revenue between $450,000,000 $500,000,000 as compared to $435,800,000 last year. We anticipate pretax adjusted earnings to be in the range of $90,000,000 to $110,000,000 versus $90,200,000 And we anticipate our pre corporate conversion adjusted earnings tax rate to be in the range of 5% to 8% Versus 7.3 percent for full year 2022.

Speaker 3

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 $532,900,000 an increase of 5.2% as compared to last year. On a constant currency basis, our revenue was up 7% versus a year ago. By asset class, rates increased by 3.7% and 6.6% in constant currency. FX increased by 0.2% and 1% in constant currency.

Speaker 4

Credit increased by 6.7% and 9% in constant currency. Energy and commodities increased by 8.8% and 9.5% in constant currency, And equities increased by 1.5% and by 3.5% in constant currency. By geography, Americas revenue increased by 14% and Europe, Middle East and Africa revenues increased by 3.4%, while Asia Pacific revenues decreased by 7.4%. Moving on to expenses. Our compensation and employee benefits under both GAAP and adjusted earnings increased by 3.9%.

Speaker 4

Our non compensation expenses under GAAP and adjusted earnings increased by 2.1% and 4.2% respectively. Moving on to our adjusted earnings. Our pre tax income was $124,600,000 A 10.2% improvement with 105 basis point margin expansion to 23.4%. We recorded post tax adjusted earnings of $115,600,000 a 12.1% increase from last year. Adjusted EBITDA of $151,100,000 was 7% higher.

Speaker 4

Turning to share count. Our weighted average share count increased 1.7% sequentially, but decreased 0.4% year over year to 501,100,000 shares. Our fully diluted spot share count as of March 31 increased by 2.3% sequentially to 505.2 1,000,000 shares. The Q1 generally has greater share issuance due to annual broker bonuses. In April 2023, we repurchased approximately 3,000,000 shares.

Speaker 4

We expect the majority of our share As of March 30, our liquidity was $534,800,000 compared with $524,300,000 as of year end 2022. On April 6, 2023, BDC Group Inc. Filed a registration statement on Form S-four with the SEC in connection with its previously announced corporate conversion. Following receipt of regulatory approvals and subject to other customary closing conditions, including shareholder approval, all of which are expected to be satisfied. We currently expect to close the corporate conversion effectively immediately after The company will be named BGC Group Inc.

Speaker 4

And its shares of Class A common stock will trade on NASDAQ under our new ticker BGC. We will provide additional information with respect to our Going forward as soon as practicable following the close of the corporate conversion. With that, I'd like to turn to Howard for closing remarks.

Speaker 2

Thank you, Jason. As you can see from today's results, it is an exciting time to be part of BGC. Our business is continuing to improve with our growth accelerating through the 1st 19 trading days of the second quarter. Our corporate conversion will be At the end of this quarter, and the two most recent examples of company conversions from an up seat to a full seat comp So our average daily trading volumes increased by 40% and institutional ownership doubled the year following conversion. Recent updates to S and P's index policies mean that dual share class companies like us Are now eligible for inclusion.

Speaker 2

A recent research note estimated that if BGC is included in the S and P 600 alone, This could translate into 40,000,000 shares of passive demand. So with that, operator, we'd be happy to open the call for questions. Thank

Operator

Our first question comes from the line of Rich Repetto with Piper Sandler. Please proceed with your question.

Speaker 5

Yes. Good morning, Howard and team, And congrats on the strong quarter. I guess, first question is, Howard, I know you the First, what do you call it, Q2 to date is still up, the guidance is up 9% for the Q2. But I guess the question is that volumes have slowed down compared to a pretty robust first quarter. Your very positive optimistic outlook for fixed income, is that is this just a momentary pause to pull back?

Speaker 5

Again, I acknowledge the year over year numbers. The guidance you put out is strong. But When we look at volumes, CME volumes are down pretty strongly compared to the Q1.

Speaker 2

Well, look, we are seeing the healing process of the relationship between issuance And trading volume broadly around the world. We've got meaningful interest rates around the world, and we've been expecting that Healing process, meaning volumes are starting to be more ahead towards more consistency to issuance. So, we were up 9% for the month of April and our expectation is we will remain with that pace Through the balance of this quarter. So we're not seeing a pullback. We know that certain areas have less volume, certain have more volume.

Speaker 2

There's very idiosyncratic issues in the banking system in America, but globally, we're feeling pretty confident that things feel good at BGC. Lines are growing. Issuance is up big. We expect issuance to be up big for the rest of Probably the rest of my life and that's our expectation.

Speaker 5

And at least Issuance is up, I guess, over the longer term. But don't you expect that there has been a little bit due to the debt ceiling, a little bit Delay of issuance, and do you think that the back half this will all come back in the back half? And How would that impact VGCP, I guess?

Speaker 2

Yes, I do. I think that the debt ceiling has created constraint And the short end of the treasury market issuance has been idiosyncratically modified by Movements of the treasury to try to stay within bounds of the U. S. Particular issues with respect to the debt ceiling, which we assume will be resolved one way or the other In the relative near term, I don't see that impacting BGC and its global business, Not

Speaker 5

even in

Speaker 2

the near term. I mean, I think if it resolves itself, it will be beneficial for BGC. If it becomes chaotic, It will be beneficial to BGC and if it's just sorted ordinarily, I think the scale of issuance The U. S. Deficit is so large that volumes at interest rates and then around 5% are just Going to continue to improve.

Speaker 2

So I think we're in a good spot pretty much either way. I mean, we're just volumes have been constrained For so many years that as they heal, whether they heal fast or they heal slow, they're getting better every day. And I think you saw that Q1 was up 5.2%. We started the Q2 of 9%. Our expectation is We'll keep that pace going and we feel pretty good.

Speaker 5

Got it. I guess one other, Howard. You talked about the corporate conversion and come and We completed after June 30 or on June 30. And just trying to understand, I know you talked about the tax rate And you'll tell us then where that's going. But what about cost synergies?

Speaker 5

Any more Clearer view on what type of cost savings that will come out of this?

Speaker 2

I think we'd rather give a holistic view of both our tax rate will go up, our cost savings will Mitigate that somewhat. And as we've said, it won't mitigate it entirely, but

Speaker 1

it will mitigate

Speaker 2

it Somewhat. So our overall effective cost will rise, but it will be a much simpler company And hopefully able to attract broader institutional holding and therefore have a stronger shareholder base. So that is our expectation. I think we the process that we're in is we are hustling to get this done At the end of the quarter and while the voting process is taking place, that does constrain the things that we will say. So our expectation is As soon as the voting process is complete, we will come out with a complete model, but it is we are while this process is taking place.

Speaker 2

We are confident Or maybe even beyond confident that the votes will be achieved since we've spoken to those who are planning to vote And that is sufficient to carry the day. So this is just process now. Lots of work, as you know, to complete things like this, but we will come out with a robust model. But as I said, rate higher, Costs lower mitigating, but not completely mitigating, therefore higher overall cost, Not significant, but certainly higher.

Speaker 5

Got it. And if I can sneak one more in here. I guess on FMX, Howard, I know you, I believe, got all the submissions in For the regulatory approval, I guess since you last talked, it's gotten plenty of publicity. And any incremental update on, is it the same players that Our potential investors and partners, is it the same as what you've had lined up prior? And any incremental update on, I guess, the talks with, I guess, customers And so forth as we get closer to the launch?

Speaker 1

Sure.

Speaker 2

I become as we get closer and closer, I feel our popularity is rising. I think the desire to participate with us, to be part of FMX either as partners or As clients and users continues to rise and I've yet to have the meeting where Someone said, no, I'm not really interested in participating in the competitor to the CME's monopoly in America. I haven't had that meeting yet. It's always a possibility, but so far, I haven't attended that one yet. So My sense is that there will be more partners, not less.

Speaker 2

My sense is that The CME, which is an extraordinarily important and powerful enterprise in America, will Maybe have backroom conversations with the CMTC and ask them to go a little slower. So I'm not expecting things to go swiftly necessarily as they might otherwise because that's a possibility. I don't know it, But that's certainly a possibility. And so we await the CFTC's approval whenever that process runs its course. And so our expectation would be as follows.

Speaker 2

We will receive we know of no reason why we won't And we will work through that process over the coming months. We will receive CFTC approval. We will then have What we'll call our soft launch, which means once approved, we will be ready and available to do business As an exchange, we will then start on boarding clients. And remember, we are trying to launch one of the U. S.

Speaker 2

Rates Futures, which is one of the great marketplaces of the world, and we are going to try to have a broad base of onboarded clients. That process, we will begin straightaway upon CFTC approval. We'll call that our soft launch. And when we have Sufficient clients on boarded to have a broad based opening, we will then say we are having our official launch. But the soft launch is just the beginning of onboarding as many clients as we possibly can.

Speaker 2

Do we have a long line of them? We do. Do we expect to be successful in this process? We do. Is it just work?

Speaker 2

Yes. Is it more than just work? It is not. And so we are going to work hard at it, and we are going to stand up an extraordinary competitor to the Schagner Mercantile Exchange, And we do not think anyone has ever seen anything quite like this.

Speaker 5

And the announcement of the strategic partners or investors, that would that occur prior to the stock launch?

Speaker 2

I think that's a discussion with them whether it's it's certainly before the full launch, it Maybe before the soft launch or

Speaker 1

it may

Speaker 2

be somewhere after the soft launch, but well before the full launch. So that's just a discussion of theater.

Speaker 5

Yes. Okay, got it. Thanks for all the info, Howard. Thank you.

Operator

Thank you. We'll pause a moment to allow for any other questions.

Speaker 4

Hi, operator.

Operator

Yes.

Speaker 2

Are there any more questions or I'll just wrap up. Is that right?

Operator

Yes. I'm sorry. There are no further questions at this time.

Speaker 2

Okay. Thanks everyone. Thank you for joining us this morning. The process of BGC's growth As we head towards trading volumes growing more in line with Really incredibly large fixed income issuance will continue to underpin BGC's growth going forward. We feel good and we look forward to speaking to you and updating you as we finish the corporate conversion going forward.

Speaker 2

Thanks, everybody. We look forward to speaking to you soon.

Powered by Quartr