BGC Group Q1 2024 Earnings Call Transcript

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April 30, 2024

There are 7 speakers on the call.

Operator

Greetings, and welcome to the BGC Group First Quarter 20 24 Earnings Conference Call. At this time, all participants are in a listen only mode.

Operator

A brief question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Jason Krysikis. Please go ahead.

Speaker 1

Thank you, and good morning. We issued BGC's Q1 2024 financial results press release and the presentation 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 compare only the Q1 of 2024 with the prior year period.

Speaker 1

We'll be referring to our results of this call only on an adjusted earnings basis unless otherwise stated. We may also refer to adjusted EBITDA. We may refer to our liquidity, which we define as cash and cash equivalents, reverse repurchase agreements and financial instruments owned at fair value, less securities loaned and repurchase agreements. We define total capital as redeemable partnership interest, total cycles as equity and non controlling interest in subsidiaries. Please see today's press release for the results under Generally Accepted Accounting Principles.

Speaker 1

Please also see the relevant sections in the back of today's press release for 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 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. And 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 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 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 in the subsequent reports on Form 10 ks, Form 10 Q or Form 8 ks.

Speaker 1

Now with that, I'm happy to turn the call over to Howard Lutnick, Chairman of the Board and CEO of BGC Group.

Speaker 2

Thank you, Jason. Good morning and welcome to our Q1 2024 conference call. With me today are our Chief Operating Officer, Sean Windyatt and our Chief Financial Officer, Jason Huff. This is a great time for BGC. Today, we reported record 1st quarter revenues and adjusted earnings.

Speaker 2

And last week, we completed our FMX transaction and announced our strategic partners. These 10 major financial institutions joined us in the formation of FMX, investing $172,000,000 at a post money equity valuation of $667,000,000 Recognizing our success in the U. S. Treasury and FX markets, their investment further validates both our technology and our vision to reshape the U. S.

Speaker 2

Interest rate markets. This extraordinary group of partners brings enormous value to FMX far beyond this initial valuation. With that, I'll turn the call over to Sean.

Speaker 3

Thanks and good day everyone. Our first quarter revenues grew by 8.6 percent to a record $578,600,000 reflecting broad based growth across all geographies and growth across Energy Commodities and Shipping, Rates and Foreign Exchange Businesses. Beginning this quarter, we renamed Energy and Commodities to Energy Commodities and Shipping to better reflect the integrated operations of these businesses. Total brokerage revenues grew by 7.3 percent to $528,000,000 Rates revenues increased by 6.3 percent to $175,100,000 reflecting strong growth across interest rate derivatives, government bonds and emerging market rates products. Energy Commodities and Shipping revenues grew by 32.1 percent to $118,500,000 driven by strong double digit volume growth across our Energy Complex and Environmental business.

Speaker 3

This asset class has become our 2nd largest, providing additional diversification to our client base and macro drivers. Foreign exchange revenues improved by 4.8% to $84,000,000 driven by higher volumes across emerging market currencies and options. Credit revenues decreased by 2.2 percent to $87,600,000 primarily due to lower trading volumes in Asian credit, partially offset by strong European credit activity. Equities revenue decreased by 7.7% to $62,900,000 due to lower secondary trading volumes in equity derivative products, partially offset by higher cash equity volumes consistent with the industry wide trends. Data, network and post trade revenues improved by 13.9%, driven by broad based revenue growth across FENICS Market Data, Lucira, our network business and CapitalLab, our post trade business.

Speaker 3

Turning to FENICS. In the Q1, Fenics generated revenues of $149,300,000 a new quarterly record. These higher margin technology driven businesses accounted for 26% of BGC's total revenue during the period. Fenics Markets Businesses generated revenue of $127,400,000 in the 1st quarter, an increase of 3.6%. This was driven by higher electronic rates and credit volumes along with stronger FENICS market data subscription revenues.

Speaker 3

Our FENICS growth platforms generated 1st quarter revenues of $21,900,000 up 26.2 percent, primarily driven by FMX UST, Portfoliomatch, Lucira and Capital Lab. As a reminder, Fenix UST is now renamed FMX UST, part of our FMX product suite following last week's transaction. FMX UST revenues increased by over 33% on a 21% improvement in average daily volume. FMX UST grew its market share to 28% in the Q1, up from 26% in the Q4 of 2023 and 21% a year ago. FMX UST continues to be the fastest growing U.

Speaker 3

S. Treasuries platform, with its market share increasing 1 to 2 points each sequential quarter. Portfolio Match more than doubled its U. S. Credit volumes versus a year ago.

Speaker 3

These record volumes drove revenues 87% higher. PortfolioMatch continues to increase its market share in this rapidly growing segment of the market. LUCERRA grew by 36%, primarily driven by new clients and expansion of existing client agreements. LUCERIS subscription based revenues have consistently grown by strong double digits. Capital Lab generated revenue growth of 40% driven by higher interest rate compression activity.

Speaker 3

Turning to our outlook, I'm pleased to provide the following guidance for the Q2 of 2024. We expect to generate total revenue of between $520,000,000 $570,000,000 as compared to $493,100,000 in the Q2 of 2023. We anticipate pretax adjusted earnings to be in the range of $120,000,000 to $130,000,000 versus $105,500,000 last year. With that, I'd like to turn the call over to Jason.

Speaker 4

Thank you, Sean, and hello, everyone. BGC generated total 1st quarter revenue of $578,600,000 an increase of 8.6% as compared to last year. We saw revenue growth across all geographies. Europe, Middle revenues increased by 3.5%. Turning to expenses.

Speaker 4

Our compensation and employee benefits under adjusted earnings increased by 9 percent. This increase was primarily driven by higher revenues as well as an increase in newly hired brokers and new business lines. Non compensation expenses under adjusted earnings increased by 7.7%, primarily driven by higher interest expense. Moving on to earnings. Profitability increased across all earnings metrics during the quarter, including GAAP net income for fully diluted shares, which improved by 92.2%.

Speaker 4

Our pre tax adjusted earnings grew by 8.6% to a record 135 $400,000 with a margin of 23.4%, its 14th consecutive quarter of year over year margin expansion. Post tax adjusted earnings increased by 6.6 percent to $123,200,000 or $0.25 per share, an 0.8 percent improvement. Going forward, we expect our traditionally strong gearing to continue. This is reflected in our Q2 guidance, where our revenue midpoint is expected to be up 10.5% and our pre tax adjusted earnings midpoint is expected to be up 18.4%. Our first quarter adjusted EBITDA was $208,400,000 a 37.9% improvement.

Speaker 4

Turning to share count. Our fully diluted weighted average share count was 495,000,000 shares during the Q1, a 1.2% decrease compared to the Q1 of 2023. We expect our fully diluted weighted average share count to remain approximately flat for the full year 2024 barring any extraordinary transactions. As of March 31, our liquidity was $615,700,000 compared with $701,400,000 as of year end 2023. Cash uses are typically larger in the first half of the year as we pay bonuses and taxes.

Speaker 4

With that, I'd like to turn the call over to Howard for closing remarks.

Speaker 2

Thank you, Jason. The United States interest rate markets are the largest in the world. We have built the fastest growing U. S. Treasury platform and now with the support of our partners, FMX is the only competitor to the CME.

Speaker 2

Following our best quarter on record and reflecting our strong balance sheet and future growth $0.02 per share. With that, operator, we're happy to open the call for questions.

Operator

Thank you. We will now be conducting a question and answer session. Your first question comes from Patrick Mollie with Piper Sandler. Please go ahead.

Speaker 5

Yes, good morning. Thanks for taking the question. I just wanted to start on FMX and dive a little deeper into a few of the items there. First, can you talk about the pricing structure and the incentives that are being offered to these partners and how that may evolve over time? And then second, can you help us just understand and maybe even quantify those volume targets that need to be hit for the investors to retain that 10% ownership stake?

Speaker 5

Is that company specific? Is that based on the group? Any color there would be great.

Speaker 2

Sure. So the 10 partners have volume targets related to their equity, meaning they have growing volume targets across the businesses throughout the whole ecosystem of the business. So that treasuries, foreign exchange and futures, obviously some of the partners, for instance, will be more focused on SOFR futures, some more on treasury futures, some more on treasury cash. And so those were individually crafted to be more attuned to the type of trading that that particular firm does. The FCMs, what is spectacular about those partners is many of them have the greatest FCMs in the business and those FCMs will be connecting.

Speaker 2

And really for them, they can't really drive their client business in particular, but what they can do is they can connect their clients and have that be a seamless connection. So that is also part of the transaction is that they connect across all of their areas of the firms. They have subscription arrangements, which grow over time, meaning the revenues will continue to grow, but they do not have unit economics in the ecosystem, meaning that those partners can drive business and drive volume through the ecosystem without marginal cost. And that is a fundamental part of the company's view is that we think breaking unit economics and driving a subscription based pricing model is something that we are open minded to other clients as well. So that is a model that we like, that we embrace and that we look forward to driving across the ecosystem of FMX, both for our partners and for other companies as well.

Speaker 5

Great. Thanks. And then just on the fixed pricing structure, I guess, just overall, what impact do you expect the formation of Efimax to have on BGC's top line in the short term? Is there do you expect there to be a revenue step up just from the fact that these partners are switching from a variable plans to fixed pricing plans? And then I guess just adding on to that, from a market share standpoint, with these volume incentives, how do you expect the clob market share and maybe even your share volumes and FX to evolve just from the formation of this over the next quarter, call it 2 quarters or so?

Speaker 2

So question number 1, revenues will grow because their subscription price the amount of revenue we currently receive. So number 1, our revenues will grow. Number 2, across our ecosystem, for example, our foreign exchange business, we have an excellent platform in foreign exchange that has enormous scale to grow. And now with these partners connecting to it, to those who haven't connected to it and using it, I think we will demonstrably grow our foreign exchange business, which will both add market share as well as to really create a wonderful marketplace for others to transact business at very attractive price. So we are excited about our foreign exchange platform.

Speaker 2

Obviously, our treasury platform was growing 1% or 2% per sequential quarter and that was without these partners being owners. Now with them being owners, we think over the next 2 3 quarters, you're going to see substantial growth in our treasury platform, both in terms of volume, average daily volume, market share and revenues as well across the board. And in futures, as we've said, we plan to open in September. We are not expecting to charge a material amounts of money for our futures business. Our expectation in the 1st year is to charge a very low to no price, so people can connect and people can trade and people can grow their volume and understand the benefits of this system, the technology, its speed.

Speaker 2

And so our futures business is not where we expect in the 1st year to be gaining material revenues. However, our foreign exchange business and U. S. Treasury businesses should be growing their revenues nicely across the year.

Speaker 5

Okay. And then just on the futures piece, I think in the past you've said that it might take a year or 2 before you would expect to meaningfully start growing the market share in futures and taking share from CME? Can you just kind of update us on how you're thinking about the timeline until you kind of get everyone at the starting line and have the ability to take share and then how you would expect that to maybe evolve once you get everyone there?

Speaker 2

Sure. There's depth and breadth conversations. So with our partners, we have sufficient capacity to light up our markets when we open our futures. I've used the term like a Christmas tree. I would expect our futures markets to have wonderful pricing because when you have 10 of the greatest trading firms in the world as your partner, they have more than sufficient capacity to transact in healthy volumes with the marketplace.

Speaker 2

So but I do understand that it takes time to connect the global infrastructure of trading firms across the world to our new futures exchange. So we think that will take could well take a year. And so while we're starting now, we know there are different firms going to be coming on all across the timeline between now and the end of the year. That's just going to happen. We hope many of them will happen by the time we open in September, but it is a reasonable view that some of the big FCMs will be coming on, their clients will be coming on through the end of the year.

Speaker 2

And we are aware of it, we are working on it and we expect it. And so we think the 1st year will be one of adding breadth, having everybody connect, making sure the model is full where the playing field is full of all the players. So we hope a year from when we open, we will have all the players on the playing field and then it will truly begin. So I would say year 2 would be the beginning where we have all the players on the field and then we begin. And then year 3 when everybody has all of the ecosystem completely connected, completely available, totally knowledgeable about the benefits of our technology, the speed, the capacity, the atomic nature where you can trade A against B in built into the software, into the platform, something that the CME can't really do because they bought BrokerTec and it's separate from their cash business is separate from their futures business.

Speaker 2

We have the benefits of gross margin in sulfur futures against interest rate swaps. I think you're going to really see tremendous competition for market share. So it's a process, that process takes time, you got to trust the process, but I think early on, people will be surprised by the quality of our markets. And as I said, kind of will remind me of the holidays.

Speaker 5

Okay. And then just switching to the quarter and the guidance, I think in the Q2, the midpoint of the guidance range implies a little bit more margin expansion than the Street was expecting. Last quarter, you'd mentioned that you'd made some investments that you didn't really expect to bear fruit until the second half of this year. Is that margin expansion in the second quarter? Is that any indication that you're starting to see kind of those benefits come through earlier than expected?

Speaker 5

Or is that maybe just driven by some of the lower expenses from the formation of FMX and kind of the capital that's freed up or expenses that that's kind of deterred?

Speaker 2

I think you will see from here on out a more clear view of our the Fenics business and how that adds margin to our company. We have been big investors in first our U. S. Treasury platform, then our FMX Futures platform. And when you're investing big like that, when you look at us holistically, what you haven't seen is you haven't seen the benefits of our higher margin FedEx business flow through to the bottom line because we've made big investments across our scale.

Speaker 2

You've seen us invest in Lucera, which is now winning and Capital Lab, which is now winning and a whole variety of our businesses portfolio match, which is now winning. So all of those things reduced our margin over the many years that you've seen past. The lion's share of those investments are now behind us. And now we are in harvesting mode. We are going to start harvesting FMX even though futures has not opened yet.

Speaker 2

Just the our growth in treasuries and our growth in foreign exchange will more than satisfy, I think in our view, the expense of our futures exchange. We're now in a really wonderful position where you will start to see the benefits of our Fenics platform and those margins, right? And I think so from here on out, starting the second quarter, our margins are going to be healthy. They are going to have expanded from what you've seen in the past. And I think that will continue going forward.

Speaker 2

So it's both things are moving more quickly, things are moving well and the company has started to fire on all cylinders.

Speaker 5

All right. And just shifting to capital allocation in the press release, I think you said that just the tens of 1,000,000 of dollars of working capital that it was going to free up would be available for you mentioned share repurchases, increasing the dividend, which you obviously did this quarter and then investing for growth. So can you just kind of help us understand how you'd prioritize those 3? And then I have one other one on capital allocation, but I'll leave it there.

Speaker 2

Right. So the dividend is pretty easy. A $0.01 is $20,000,000 a year or so. That's kind of black and white. So we are going to return an extra $0.01 a share now.

Speaker 2

We like buying back our shares. So Jason said, we plan to keep it all other things constant. We plan to keep our shares flat. They've been flat. I think they were down 1% year over year.

Speaker 2

We've held it there just below $500,000,000 and that's our expectation. It does not mean that we won't beneficially buy back shares as we see. We've said this before, if one of our shareholders decides to sell, we encourage you to call us because then we can do a block transaction and buy them, things like that. So I mean, we're open minded to do things like that. We are seeing opportunities to invest in our business.

Speaker 2

The business is growing. Others don't have the technology. They don't have the scale. And we are seeing that opportunity. And we're going to continue to take advantage of those.

Speaker 2

It doesn't be comparatively small, generally comparatively small, but you never know. And those opportunities are in front of us. And if we can buy things at the right price and drive them through our ecosystem, we're going to do that. We have the technology, We have the scale. We have Fenics.

Speaker 2

We have Lucera. We have a lot of tools to make money. And as I said, the market is growing. Our market share is growing compared to everybody else. We feel really good about where we are.

Speaker 2

We feel really excited about the validation that is clear from our partners joining us in FMX that is the defining characterization of the transaction is that these partners appreciate our technology, they appreciate its capacity, they know it could compete in the world, They are certain of it. They've seen it in U. S. Treasuries. This is not something to think about in the future, right?

Speaker 2

This technology just took 2 points market share this quarter past. And I hope we don't sound like we're backing away from our view of our growth on this call. We continue to feel good and those growth of 1 or 2 points sequentially per quarter were before we had partners. And so I think those partners will enhance the speed of our growth. And we are really excited about our opportunities, both to invest our capital.

Speaker 2

We're going to continue to buy back shares. An expectation of raising our dividend should be something. It's going to be constrained because we like buying our shares back. But we felt we had said it was one of the tools to use to return capital to shareholders, dollars 20,000,000 for a company that just said we're going to earn $125,000,000 in the quarter coming in midpoint of our guidance, it's pretty constrained.

Speaker 5

Great. And then just you're talking about seeing success in some of these Fenics businesses. I think in the past, you had said that you could potentially be open to maybe looking to sell some of the easily separable businesses within FENICS and giving that capital back to shareholders. Can you talk about or any update there on your thoughts around as

Speaker 2

a public company that trades oddly, as a public company that trades oddly with our growth rate of top line revenue of 10% growth and now bottom line revenue profits of 18%. We remain surprised being part of the S and P 600 that we're so we trade it at such a very attractive price as compared to the index writ large, which trades at about 15 times earnings. So we have lots of assets and if I wouldn't say they're for sale, that would be wrong. I would say that the exchanges of the world know who we are and sometimes they really like some of our products and if they come and talk to us and the multiples are like we've said in the past, 12 times revenues kind of things like that. We're open minded.

Speaker 2

And so I wouldn't put your money on for certain this is what we're doing in the past when I was when I've said for certain this is what I'm doing. We've said it and then we've done it, right. We said we were going to sell insurance. We said we would announce our partners in FMX and the way we did things like that. I mean, so nothing is for sale, okay, because it's growing rapidly within our business.

Speaker 2

However, if the exchanges want to buy something from us and pay us a healthy price and we can then go out and buy our own shares back at a very attractive spread for our shareholders. I think that we are absolutely open minded. So not for sale, no, but open minded for sure.

Speaker 5

Okay, great. And then just last question. Wanted to just know, what do you expect the run rate for stock based comp to be going forward? I think in the Q1, it was annualized and out to about 8% dilution. So is that a runway we should expect?

Speaker 5

Or would you expect that to kind of come down over time? And then how much noise, if at all, is still in that number from the corporate conversion?

Speaker 3

Patrick, I'd expect that first, I'd expect it

Speaker 6

to come down. Q1 is the quarter that we paid bonuses, a significant amount of hires that were in that period.

Speaker 3

So I would expect it to come down

Speaker 6

from the level that it was in Q1. The exact number, probably a couple of points from there would be my view. But yes, certainly Q1 is when we pay bonuses.

Speaker 5

Okay. So like 5% is a good run rate going forward?

Speaker 2

Yes. Pretty close to that. That's fine.

Speaker 5

Okay, great. All right, guys. Thanks so much. That's it for me.

Operator

There are no further questions. I would like to turn the floor over to Mr. Lutnick for closing remarks.

Speaker 2

Well, thank you very much for joining us. We are excited about our future. We're excited about FMX and building finally opening our futures exchange in September. The market, we're excited that we will be able to present and you'll see the margin growth from Fenics across the business. DGC just feels really good and we look forward to speaking to you next quarter as we update you on our success.

Speaker 2

Thank you everybody.

Operator

This concludes today's teleconference. You may disconnect your lines at this time and thank you for your participation.

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Key Takeaways

  • BGC reported a record Q1 revenue of $578.6 million (up 8.6% YoY) and adjusted pre-tax earnings of $135.4 million, marking its 14th consecutive quarter of margin expansion.
  • Completed the FMX transaction with 10 major financial institutions investing $172 million at a $667 million valuation, validating BGC’s technology and lifting FMX UST market share to 28% in Q1.
  • The Energy, Commodities and Shipping segment grew 32.1% to $118.5 million, while FENICS platforms achieved a record $149.3 million (26% of total revenue), driven by FMX UST, PortfolioMatch, Lucera and Capital Lab.
  • For Q2, BGC expects revenues of $520 million–$570 million (midpoint +10.5% YoY) and pre-tax adjusted earnings of $120 million–$130 million (midpoint +18.4% YoY), signaling continued margin growth.
  • Capital allocation priorities include a $0.01/share dividend increase, maintaining a flat share count, opportunistic share repurchases and selective investments in high-margin technology businesses.
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Earnings Conference Call
BGC Group Q1 2024
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