BGC Group, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2023; filed November 9, 2023. BGC is a global brokerage and financial technology company serving institutional markets. On July 1, 2023, it completed a corporate conversion to a full C-corporation, with BGC Group becoming the public holding company and its Class A shares trading as BGC on Nasdaq.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $482.7 million | $416.6 million | $1,508.6 million | $1,358.8 million |
| Pretax income | $23.9 million | $19.0 million | $25.8 million | $95.8 million |
| Consolidated net income | $18.6 million | $8.2 million | $17.5 million | $55.3 million |
| Net income available to common stockholders | $17.0 million | $5.8 million | $16.3 million | $46.5 million |
| Basic EPS | $0.03 | $0.02 | $0.04 | $0.13 |
| Pretax margin | 4.9% | 4.6% | 1.7% | 7.1% |
- Q3 revenue rose 15.9%; brokerage revenue increased 14.8%. Energy and Commodities led product growth, up 35.0%, followed by Rates up 12.1%, Credit up 9.6%, Equities up 8.8% and FX up 8.6%.
- For the nine months, revenue increased 11.0%, but pretax income fell sharply. Total expenses rose 16.6%, including higher compensation and equity-based compensation.
- Operating cash flow was $231.7 million for the first nine months, compared with $131.9 million in 2022. Investing cash flow was $(60.5) million and financing cash flow $(97.5) million.
Balance sheet, debt and liquidity
- At September 30, cash and cash equivalents were $559.6 million; the Company’s defined liquidity measure, including $45.5 million of financial instruments owned, was $605.0 million.
- Notes payable and other borrowings totaled $1.183 billion: $238.9 million drawn on the $375 million revolving credit facility and approximately $944.6 million carrying value of senior notes. The revolver matures in March 2025. The 8.000% notes issued in May 2023 increased financing costs; the $450 million 5.375% notes were repaid at maturity in July.
- Total assets were $3.858 billion and total equity was $855.7 million. Employee and partner loans, net, were $348.5 million.
- Cash and liquidity increased from year-end 2022, supported by the new 8.000% notes, revolver borrowings and operating cash flow, partly offset by debt repayment, working capital, repurchases, taxes and investment spending.
Material changes and unusual items
- The corporate conversion replaced BGC Holdings partnership interests with shares and compensation awards. The conversion-related transactions included a $60.9 million equity-based compensation charge in the nine-month period. Total equity-based compensation and partnership allocations were $277.3 million, versus $161.7 million a year earlier.
- Q3 compensation and employee benefits totaled $302.4 million, or 62.6% of revenue, compared with $260.1 million, or 62.4%, in Q3 2022. Nine-month total compensation was 67.7% of revenue, versus 61.3%.
- Q3 interest expense rose 43.3% to $20.8 million; nine-month interest expense rose 30.8% to $56.4 million. Higher-cost 8.000% notes and revolver borrowings were partly offset by repayment of the 5.375% notes.
- On October 6, 2023, after quarter-end, BGC Group exchanged most outstanding 3.750%, 4.375% and 8.000% BGC Partners notes for substantially similar BGC Group notes, with corresponding principal amounts of $255.5 million, $288.2 million and $347.2 million. Amendments removed certain covenants, including change-of-control provisions, from the remaining BGC Partners notes. BGC Group also assumed the revolving credit agreement.
- For the nine months, BGC recorded $6.0 million of CECL reserve provisions related to unsettled trades and receivables associated with sanctioned Russian entities; the Q3 provision was $2.0 million. The total CECL reserve was $20.1 million at quarter-end.
Outlook, commentary and risks
- Management expected a robust macro trading environment through 2023, citing higher interest rates, trading activity and debt issuance. This is commentary, not formal quantified financial guidance.
- Fenics revenue grew 18.7% in Q3 to $125.4 million. Fenics Growth Platforms revenue rose 45.4% to a record $18.4 million, but management said newer platforms were not yet fully scaled and profitability depends on future growth. Fenics UST reached 25% market share of U.S. Treasury exchange-marketplace volume; FMX was described as progressing, with further updates expected in Q4.
- Management plans to prioritize share repurchases over dividends while continuing investment in Fenics. It declared a $0.01-per-share Q3 dividend payable December 1, 2023. The $400 million share repurchase authorization had $359.7 million remaining at September 30; 18.7 million shares were repurchased for $88.1 million in the first nine months.
- Key risks include transaction-volume and market volatility, interest rates and refinancing costs, regulation and capital requirements, competition and execution of electronic-platform growth, cybersecurity and operational disruptions, foreign-exchange exposure, and credit and counterparty losses. Management estimated a 10% strengthening of the U.S. dollar against the euro and pound sterling would reduce net income by about $4.5 million.
- A putative class action by former partners alleges breach of contract and antitrust violations and seeks at least $5 million in damages; the Company says it believes the suit lacks merit. A separate derivative suit concerning the Berkeley Point acquisition was resolved in defendants’ favor in August 2023. Management stated pending matters were not expected to have a material adverse effect, while noting outcomes cannot be determined with certainty.
Investor facts to verify
- How much of the nine-month earnings decline reflects the conversion-related compensation charge, recurring award expense and other operating costs.
- Post-exchange debt balances, covenant changes, interest burden and remaining maturity/refinancing needs.
- Cash availability after regulatory restrictions, working-capital movements, buybacks and continued Fenics investment.
- Whether Fenics Growth Platforms and FMX can scale, gain market share and become profitable as management expects.
- Future CECL reserves and recoveries related to Russian counterparties, plus developments in the former-partner class action.
- Potential dilution from conversion-related restricted stock and RSUs; the filing reports 62.5 million contingent shares and non-participating awards excluded from diluted EPS at quarter-end.