BGC Group Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
July 30, 2024

There are 6 speakers on the call.

Operator

Greetings. Welcome to BGC Group Incorporated Second Quarter 2024 Earnings Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. Please note this conference is being recorded.

Operator

I will now turn the conference over to Jason Krysikas, Head of Investor Relations. Thank you. You may begin.

Speaker 1

Thank you and good morning. We issued BGC's Q2 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. Except as otherwise specified, any historical results provided on today's call compare only the Q2 of 2024 with the prior year period and we will be referring to our results only on a non GAAP basis, which include the terms adjusted earnings and adjusted EBITDA. Please refer to today's press release, investor presentation, supplemental tables and our website for additional details on our quarterly results and for complete updated definitions of any non GAAP terms, reconciliations of these items to the corresponding GAAP results and how, when and why management uses them as well as relevant industry or economic statistics.

Speaker 1

The outlook discussed today assumes no material acquisitions or meaningful changes in our stock price. Our expectations are subject to change and based on various macroeconomic, social, political and other factors, none of our targets or goals beyond 2024 should be considered formal guidance. Also, I remind you that information on this call contains forward looking statements, including without limitation, statements concerning our economic outlook and business. Such statements are subject to risks and uncertainties, which could cause our actual results to differ from expectations. Except as required by law, we undertake no obligation to update any forward looking statements.

Speaker 1

For a complete discussion of the risks and other factors that may impact these forward looking statements, see our SEC filings, including but not limited to the risk factors and disclosures regarding forward looking information and our most recent SEC filings, which are incorporated by reference. Now before opening the call, I would like to take I would like to address some recent inaccurate statements made by FMX by the CME. Mr. Duffy, the CEO of the CME, mistakenly spoke of FMX seeking to clear U. S.

Speaker 1

Treasuries in the UK. We are not. FMX UST, identically like the CME's BrokerTec, clears U. S. Treasuries at the FICC in the United States.

Speaker 1

The LCH is our fully approved CFTC Derivatives Clearing Organization and holds $225,000,000,000 of interest rate swap margin, which is available for cross margin efficiencies against futures. This is considerably more than the approximately $37,000,000,000 that the CME holds. So for futures are near perfect offsets for interest rate swaps and FMX sulfur futures will produce enormous cross margin efficiencies against the much larger LCH collateral pool to which the CME does not have access. Over time, we expect our cross margin efficiencies to be many multiples of theirs. With that, I'm happy to turn the call over to Howard Lutnick, Chairman of the Board and CEO of BDC Group.

Speaker 2

Thank you, Jason. Good morning and welcome to our Q2 2024 conference call. With me today is Sean Windyak, our Chief Operating Officer and Jason Hoff, our Chief Financial Officer. BGC delivered record second quarter revenues and adjusted earnings with continued growth across our business and geographies. Our revenue growth of 12% delivered earnings growth of over 19%, demonstrating BGC's operating leverage.

Speaker 2

Higher revenues along with improved profitability in our FMX and FENX businesses contributed significantly to our profit growth and margin expansion in the Q2. We are excited about FMX, which continues to outperform its peer. FMX UST volumes were up 37% and FMX FX was up 30%. FMX together with its clearing partner LCH has full CFTC approval to open our futures exchange. Together with our 10 partners, Bank of America, Barclays, Citadel, Citi, Goldman Sachs, JPMorgan, Jump Trading, Morgan Stanley, Tower Research and Wells Fargo, we look forward to the launch of SOFR Futures, the largest notional futures contract in the world in September next month.

Speaker 2

With that, I would like to turn the call over to Sean.

Speaker 3

Thanks and good day everyone. Our 2nd quarter revenues grew by 11.7% to $550,800,000 representing record 2nd quarter revenues and reflecting broad based growth across all geographies. BGC generated strong double digit revenue growth across its 3 largest businesses, rates, ECS and foreign exchange. Total brokerage revenues grew by 11.3 percent to $493,500,000 Rates revenues increased by 15.1 percent to $166,000,000 reflecting higher volumes across interest rate derivatives, including our euro, U. S.

Speaker 3

Dollar and new yen rates businesses. ECS revenues grew by 19.3% to $117,700,000 driven by strong organic growth across the business. Foreign exchange revenues improved by 14.7 percent to $88,900,000 driven by emerging markets products and G10 options volumes. Credit revenues increased by 5.4% to $69,400,000 on higher trading volumes across European Emerging Markets and U. S.

Speaker 3

Credit products, partially offset by lower Asian credit activity. Equities revenues decreased by 10.4 percent to $51,400,000 due to lower equity derivative trading volumes, partially offset by higher cash equity derivative. Data, network and post trade revenues improved by 14.1% to $30,800,000 driven by broad based revenue growth across Fenix Market Data, Lucira and Capital Lab. Turning to FENICS. In the 2nd quarter, FENICS revenues grew by 9.7 percent to $137,300,000 driven by higher electronic trading activity as well as strong improvement in data, network and post trade subscription revenues.

Speaker 3

FEMEX Markets produced revenue of $115,100,000 in the 2nd quarter, an increase of 7.5%. This growth was driven by strong electronic foreign exchange, credit and rates volumes along with higher FENICS market data revenues. We're excited about our ECS business, which will provide future electronic growth opportunities for our FENICS markets business. Our Fenics Growth Platforms generated 2nd quarter revenues of $22,200,000 up 22.4 percent driven by Portfoliomatch, NUCERA and FMX. Portfolio Match more than doubled its U.

Speaker 3

S. Credit volumes versus a year ago and increased its European volumes by nearly fivefold. LUCERRA revenues grew by 16%, its 18th consecutive quarter of double digit year over year revenue growth. Nucera continues to expand its customer base and deepen its existing customer agreements adding to its recurring revenue base. FMX includes the world's fastest growing cash U.

Speaker 3

S. Treasuries marketplace and its spot foreign exchange platform along with its fully approved U. S. Futures exchange. FMX is challenging the CME's monopoly in U.

Speaker 3

S. Interest rate futures and its leading position in cash U. S. Treasuries and spot foreign exchange. Efemex UST produced record market share of 30% for the 2nd quarter, up from 28% last quarter and 23% a year ago.

Speaker 3

FMX UST average daily volumes improved by 37% versus the prior year period, achieving new record ADV of $47,000,000,000 for the 2nd quarter. This translated to revenue growth of 34%. FMXFX average daily volumes improved by over 30% versus the prior year period on record ADB of $8,100,000,000 FMXFX continues to grow faster than the overall market is expected to significantly grow its market share in the enormous global foreign exchange market. Turning to our outlook, I'm pleased to provide the following guidance for the Q3 of 2024. We expect to generate total revenue of between $505,000,000 $555,000,000 as compared to $482,700,000 in the Q3 of 2023.

Speaker 3

We anticipate pretax adjusted earnings to be in the range of $110,000,000 to $127,000,000 versus $101,900,000 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 second quarter revenue of $550,800,000 reflecting growth across all geographies. Europe, Middle East and Africa revenues increased by 14.4%. Americas revenues increased by 9.5% and Asia Pacific revenues increased by 7.9%. Turning to expenses.

Speaker 4

Our compensation and employee benefits under adjusted earnings increased by 13.1% 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 5.1% driven by higher selling and promotion, communications and interest expense. Moving on to earnings. Our profitability increased across all earnings metrics during the quarter. Our pre tax adjusted earnings grew by 19.2% to $125,800,000 with a margin of 22.8%.

Speaker 4

This is our 15th consecutive quarter of year over year margin expansion. Post tax adjusted earnings increased by 14.7 percent to $114,700,000 and post tax adjusted earnings per share improved by 15% to $0.23 per share. Our 2nd quarter adjusted EBITDA was $162,400,000 a 20.2 percent improvement. Turning to share count. Our fully diluted weighted average share count for adjusted earnings was $496,800,000 during the 2nd quarter, a 1.7% decrease compared to the Q2 of 2023.

Speaker 4

BGC continues to expect its fully diluted weighted average share count to remain approximately flat for the full year 2024, excluding acquisitions or extraordinary transactions. As of June 30, our liquidity was $759,100,000 compared with $701,400,000 as of the year end 2023. With that, operator, we would like to open the call for questions.

Operator

Thank Our first question comes from Patrick Mahle with Piper Sandler. Please proceed.

Speaker 5

Yes, good morning. Thanks for taking the question. So starting off, maybe Howard, you could just elaborate on Jason's remarks and where you viewed the inaccuracies in the comments made by the CME. And then when it comes to FMX or LCH potentially looking to clear U. S.

Speaker 5

Treasuries, I don't know if that was ever in the cards that you would look to do it in house. I know that you'd mentioned potentially looking to strike a similar partnership that as like the CME has with the DTCC if you were going to offer margin offsets with treasuries, but maybe just update us on your thoughts and any future plans that FMX could have in offering treasury offsets?

Speaker 2

Okay. So let's start at the beginning. FMX and the LCH have all approvals necessary for us to open in September with SOFR Futures that will clear with the LCH, which is a fully approved CFTC derivatives clearing organization. Fully approved, redone, no ands, ifs or buts and our expectation is we're opening in September. They clear interest rate swaps as well and they will be doing cross margining between futures contracts transacted on the FMX, cleared with the LCH and interest rate swap collateral, of which they have 97.8% of all dollar based swaps are collateral in the LCH.

Speaker 2

So that cross margin efficiency is $225,000,000,000 of collateral. The CME has $37,000,000,000 of collateral. So sort of the LCH is 6.5x more and that's dollar based as well. So they have even more than that because some of the $37,000,000,000 by the CME is non dollar based. So it's evermore.

Speaker 2

So we think that will create enormous efficiencies. So that has nothing to do with clearing U. S. Treasuries at all. That was not in the cards.

Speaker 2

That is nothing we pursued. That is not a discussion. Obviously, FMX U. S. Treasuries, which announced it has 30% market share today, clears those U.

Speaker 2

S. Treasuries exactly the same way as BrokerTec at the FICC in America. So I couldn't figure out whether it was just a complete misunderstanding or just a confusing sort of set of statements to try to baffle people as we open, because we got lots of phone calls about it, but it makes no sense. So again, FMX and the LCH have all approvals to open in September, which is kind of like it's almost August. So it's in the quarter we're in, in the month that is after August to September, there's nothing in our way.

Speaker 2

We are fully approved and ready to go to open sulfur futures, which will have wonderful cross margin efficiencies against the LCH and a one pot clearing model, which we have discussed. It will bring beautiful efficiencies, taking nothing away from the CME's $20,000,000,000 of efficiencies. But think about it, they have $37,000,000,000 in collateral and they offer $20,000,000,000 of efficiencies. Let's call that above just above 50%. When LCH has 2 $25,000,000,000 you have all sorts we have all sorts of numbers.

Speaker 2

So almost any way you compare it, you will see that the LCH has the opportunity to offer vast amounts of capital efficiencies and cross margin, any way you slice. So I hope that helps.

Speaker 5

No, definitely. Thanks for clearing that up. But going back to FMX and some of the comments you just made about nothing being in your way launching in September, I'm assuming that's kind of a done deal. Have you set a date yet? And are there any potential bogeys at all that could push that out?

Speaker 5

And then once you launch, what kind of KPIs are you looking to disclose? And could you share any updated milestones that investors should be looking out for, whether it's volumes or open interest or market share that you're expecting to get to?

Speaker 2

Well, as I've said in the past, this is a marathon, not a sprint, okay? When we open for business, there's nothing about the Tuesday we open or the Thursday that is fundamental. This is the 1st year is the objectives for the exchange to get all players on the field, right? There are 50 or so FCMs in the world. We have to onboard them all, get them all up and running, have to speak to all the clients.

Speaker 2

Of course, will our partners be ready to trade? Sure. Will the rest of the client base of the whole wide world? I think that will take some time. So let's say our objectives are at the end of the 1st year to have all players on the field, right, all lines open, all accounts open and we will it's our expectation that we will have record open interest for a new exchange ever.

Speaker 2

So that's our objective, to have record open interest at the end of year 1 of any new exchange ever. Then year 2, we're going to build volume. We're going to build connectivity. We're going to make sure every client is trading. All volumes are there.

Speaker 2

We're going to then build and build. And then year 3 is going to be full on, full boat, everybody ready, everybody connected, all things go and we would expect full on competitive position of FMX and the CME in year 3. So that is a process. It is a steady process. So it doesn't really it is not fundamental to us in our coordination with LCH, which day we open in September.

Speaker 2

That's not really a thing. Could there possibly be something that pushes it out? I'm not the kind of person that would say everything is impossible, but I wouldn't be saying September if it wasn't completely our expectation that we'll be opening in September. And I think we're ready. LCH is ready.

Speaker 2

We're ready. I'm sure there are my technology people and everybody are hustling around dotting I's and crossing T's. So I can't say right now every single bow is tied and shoelaces ready to go. But they all know September is not that far away. And I think we are confident would be the right answer that we will have a wonderful opening with more prices than people imagine.

Speaker 2

But I do want to temper people's expectations. Our objective is not to say Tuesday of our opening week is like the most important day. It is not. It is the beginning of a process of bringing fundamental competition to a market that is 100% at the CME today, right? If you look at an interview I gave to the Financial Times in 2,007 when the CME and the CBOT had announced their merger, right, I said, well, that creates 2 monopolies because you had the CMEs monopoly on sulfur futures and the Chicago Board of Trade's monopoly on treasury futures and that would combine them into 2 monopolies under one roof.

Speaker 2

Both of those are going to now have competition coming from FMX And we think with the efficiencies of our partner in the LCH and the extraordinary backing by these 10 enormous successful and wonderful partners, the best banks and trading firms in the world. I think you're going to see extraordinary competition, but that is delivered over next 3 years, not on any particular Tuesday or Thursday.

Speaker 5

Okay. All right. So maybe if we switch to 2Q, and I'm just going to keep asking questions. I know I've been flying solo on the call here for the last couple of quarters. So if there's anyone else in the queue that's going to ask a question, just kick me off after this one and I'll hop back in the queue.

Speaker 5

But on the quarter, you mentioned in the deck that Affenix UST revenues were up 34% year over year. I think last quarter you'd said that you'd expected to see a step up in revenues just from the partners switching over from variable fee plans to subscription plans, which I believe occurred on May 1. So just curious if you have any sense of how much of that growth in UST revenues, that fee plan change contributed? And then broadly speaking, prior to the formation of FMX, I think you were tens of 1,000,000 away from breakeven. Just curious on where FMX is today in terms of the breakeven point?

Speaker 5

And if not today, when do you think you'd expect that FMX would be a breakeven?

Speaker 2

So remember FMX is U. S. Treasuries, cash, foreign exchange, both growing wonderfully and futures, which is yet to open at all of the expenses of a full board futures exchange that's going to open in September, which means every person who needs to work at the exchange is standing there. All the computers are standing in there. Everything is ready, turned on and looking and it's been that way since we had our CFTC approval because obviously when the CFTC approves you, you are then allowed to open the next day.

Speaker 2

So you'd have to have everything ready. So we are suffering those expenses until we open, right? And then when we open, our objectives are to bring in volume. We're not going to charge a lot of money. That's not the kind of thing.

Speaker 2

So I would expect FMX will be in the black at the end of the year. I would expect that we had a partial period in the Q2. So that will improve obviously in the Q3. But the economics of their bump initially was not designed to have a big bump in our profitability. It was designed for us to have a bump in volume, which will then be a magnet for growth.

Speaker 2

So we have not seen that yet. You could see our market share growth was consistent with how it has been, right? We went from 23% to 30%, that's 7 points market share in the whole year. So we've averaged just under 2 points and we've had 2 points market share each of the last couple of quarters. So that remains consistent.

Speaker 2

We're happy with that, but we think there may well be a step transaction coming over the next couple of quarters if and when the banks benefit is coming, but we expect FMX to have nice growth in profits nice growth, sorry, in revenues, bringing the whole thing to breakeven, even though we're not really going to be charging very much at all for future. So I think it bodes extremely well for the profits. It's important to realize that FMX is competing with a $70,000,000,000 organization. Our market cap is between $4,000,000,000 $5,000,000,000 And we bring such an incredible type of competition, the likes of which obviously the CME has never seen and that it actually has caused them to comment both on their own conference call and on television, basically to talk about FMX almost the whole time. So I mean, I think that's just incredibly telling about what is coming.

Speaker 2

The LCH is $225,000,000,000 across margin efficiency together with FMX and its connectivity to all the banks and all those banks participating really brings enormous, enormous opportunity. So we're really excited about things and where they're going. But the near term profits are going to be attractive for the company, right, 11.7 percent revenues and 19.2 percent profit growth. We said we will expose how well the company is doing going forward. We are doing it this quarter.

Speaker 2

We expect these kind of gearing and margins to continue and we feel very, very confident and very positive about our future and the value of FMX, you ain't seen nothing yet.

Speaker 5

Okay, great. And then looking at the back half of this year, revenues in the first half of the year were up just I think right at 10%. You'd said that you expected revenues to finish the year with about 10% growth. You got a pretty tough comp in the 4th quarter. Revenues were up, I think 18% year over year and it was a record Q4.

Speaker 5

So just curious if you could is that 10% plus growth in revenue this year, is that still what you're expecting? And then on a go forward basis, do you think that is still achievable?

Speaker 3

Yes. Look, I mean Patrick, it's Sean. As you've seen in Q3, Q3 mid guidance 9.8%, with a 16.3% at mid guidance for profit. So that's Q3. Q4, yes, it's you quite rightly say it's a more challenging competence.

Speaker 3

The marketplace is changing. The marketplace continues to evolve. You've seen look at the growth that we had in our main products in ECS at 19% of rates at 15%. So and then we guided midpoint 9.8% to 3% and therefore we feel confident in and around those levels at 10% as we said at the end of Q1 as we're saying again now. So in and around those levels for sure.

Speaker 5

All right. Thanks guys. That's it for me.

Operator

With no further questions at this time, I would like to turn the conference back over to Mr. Letnik for closing remarks.

Speaker 2

The one comment I'll sort of make is when I look at our stock, obviously the stock has performed admirably over the last almost year and a half. But the fact is we are performing at the top 20% of the S and P 600, right? And that's an index we're in. And the other companies that perform consistent to where we are, with revenue growth of 10% or 11% and product growth something like 19% that kind of thing. Those companies traded 30 times earnings and we trade at 10 times earnings.

Speaker 2

Now if you go and look, we're at the we're about 30% off the bottom. So we trade about 30% off the bottom of the S and P 600. The other companies who trade at about 9 or 10 times earnings, they have revenue growth of negative 1%. So we are trading priced like companies that traded negative 1%, right, which I think is just a very attractive price for people to buy our stock, which may be why you see the company buying back its shares swiftly. So just giving a sense of the way we think about things and that's why we're buying back stock because it just seems the comparisons of who both our performance is at a much higher level than where we're trading.

Speaker 2

And I think that's just a great opportunity for people who are thinking about buying our stock to enter now because that doesn't even count FMX, which is just an extraordinary opportunity on the horizon. So we look forward to we had great performance last year. We've had excellent performance so far this year. I expect that the company is going to continue to perform going forward. And those who own our stock, including all of our employees and our management will have a wonderful experience in the stock.

Speaker 2

But thank you all for joining us for this quarter, and we look forward to updating you along the way. Thanks everybody and we'll see you for the opening of FMX in September. Thanks everybody.

Operator

Thank you. This will conclude today's conference. You may disconnect your lines at this time and thank you for your participation.

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Key Takeaways

  • BGC delivered record Q2 revenues of $550.8 million, up 11.7% year-over-year, and pre-tax adjusted earnings of $125.8 million, up 19.2%, driven by strong growth in rates (+15.1%), ECS (+19.3%) and FX (+14.7%).
  • The FMX business achieved a 37% increase in U.S. Treasury volumes and a 30% rise in FX volumes, reached a record 30% market share in UST trading, and is on track to launch SOFR futures in September with LCH for enhanced cross-margin efficiencies.
  • FENICS revenues grew 9.7% to $137.3 million, while Fenics Growth Platforms climbed 22.4% on strong PortfolioMatch and Nucera performance, and Lucera marked its 18th consecutive quarter of double-digit growth.
  • For Q3 2024, BGC expects revenues of $505 million–$555 million (vs. $482.7 million) and pretax adjusted earnings of $110 million–$127 million (vs. $101.9 million), reflecting continued margin expansion.
  • Management highlighted BGC’s ~10x forward earnings multiple—well below peers’ ~30x despite top-quartile revenue growth—driving accelerated share repurchases and signaling upside as FMX ramps up.
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Earnings Conference Call
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