BGC Partners, Inc. — Form 10-Q Summary
Filing identity: The supplied filing is for BGC Partners, Inc. (not BGC Group, Inc.). It covers the quarter and six months ended June 30, 2016; financial statements are unaudited. Unless noted otherwise, amounts below are in U.S. dollars.
Business context and reporting period
BGC Partners operates global Financial Services brokerage, trading-technology and post-trade businesses, and commercial Real Estate Services through Newmark Grubb Knight Frank. The period includes the January 2016 completion of the GFI merger, giving BGC and affiliates 100% ownership of GFI. Comparisons with first-half 2015 are affected by GFI being consolidated for only part of that earlier period and by the December 2015 sale of Trayport.
Financial results and key metrics
| Metric | Three months ended June 30, 2016 | Three months ended June 30, 2015 | Six months ended June 30, 2016 | Six months ended June 30, 2015 |
|---|---|---|---|---|
| Total revenue | $652.0 million | $669.1 million | $1,291.0 million | $1,216.7 million |
| Total expenses | $631.4 million | $654.9 million | $1,246.9 million | $1,198.0 million |
| Income before income taxes | $31.1 million | $17.3 million | $52.2 million | $53.6 million |
| Consolidated net income | $20.6 million | $15.0 million | $36.9 million | $41.2 million |
| Net income available to common stockholders | $15.7 million | $9.3 million | $29.4 million | $23.4 million |
| Basic and fully diluted EPS | $0.06 | $0.04 | $0.11 | $0.10 |
- Margins: Pretax income was 4.8% of revenue in Q2 2016 versus 2.6% a year earlier; for the six-month periods, 4.0% versus 4.4%. Total expenses were 96.8% and 96.6% of revenue, respectively, in those 2016 periods.
- Segment performance, Q2: Financial Services revenue was $390.9 million, down 7.3%; pretax income was $52.9 million, approximately flat. Real Estate Services revenue was $253.8 million, up 6.3%; pretax income was $24.7 million, down 8.5% as investment and hiring costs rose.
- Segment performance, first half: Financial Services revenue was $806.9 million, up 5.7%, and pretax income was $138.5 million, up 15.6%. Real Estate Services revenue was $468.2 million, up 7.1%, while pretax income was $40.6 million, down 6.1%.
- Cash flow, first half: Operating activities used $479.2 million, versus $6.7 million used in 2015. Investing activities provided $348.9 million, including $566.3 million of marketable-security sale proceeds; financing activities provided $93.7 million, including net proceeds from the new senior notes. Cash and equivalents declined $33.6 million to $427.6 million.
- Liquidity and balance sheet: Company-defined liquidity—cash and equivalents, marketable securities, and securities owned—was $899.1 million at June 30, down from $1,026.1 million at year-end. Total assets were $5.11 billion; total liabilities were $3.90 billion.
- Debt: Notes payable and collateralized borrowings totaled $1.13 billion at June 30, including $300 million of 5.125% notes issued in May, due 2021. The $160 million principal amount of 4.50% convertible notes matured and was repaid on July 15, 2016. A $150 million revolving credit facility was undrawn at quarter-end.
- Shareholder distributions and capital: The company declared and paid $0.16 per share for Q2, compared with $0.14 in Q2 2015. It repurchased about 8.0 million Class A shares for $69.7 million and redeemed partnership interests during the first half; approximately $201.8 million remained under its $300 million authorization.
Material changes versus the prior comparable period
- Q2 revenue decreased 2.6%, while pretax income rose to $31.1 million from $17.3 million and common-stockholder income increased to $15.7 million from $9.3 million. Expenses fell 3.6%; lower occupancy costs and GFI-related synergies contributed, while partnership-unit allocations increased.
- Q2 Financial Services revenue was affected by the Trayport sale and weaker rates, foreign exchange, and equities activity. Data, software and post-trade revenue fell 55.1% year over year, primarily because Trayport was no longer included. Real estate capital-markets revenue grew 35.2%, partly offset by a 4.4% decline in leasing and other services.
- For the first half, revenue increased 6.1%, but pretax income declined 2.5% and consolidated net income declined 10.6%. Common-stockholder income increased 25.6%, partly reflecting a lower share of income allocated to noncontrolling interests after full ownership of GFI.
- The first-half comparison includes a $29.0 million GFI-share appreciation gain in 2015 that did not recur. Conversely, Q2 2016 other income included gains primarily related to ICE shares. The company sold most of its ICE shares received for Trayport during the first half.
- Class A shares outstanding rose to 241.3 million from 219.1 million at year-end 2015, reflecting acquisition-related issuances and other activity, partly offset by repurchases. The filing reports 437.3 million fully diluted weighted-average shares for Q2 2016, including partnership interests and convertible notes.
Outlook, management commentary, risks and contingencies
- Management expected revenue and earnings to grow over time, citing GFI integration and further cost reductions, growth in electronic trading and FENICS, and recent acquisitions and front-office hires. It stated that previously announced GFI cost synergies had been achieved and anticipated additional expense reductions.
- Management expected NGKF’s top-line growth to outperform the overall industry for full-year 2016; no specific consolidated earnings or revenue guidance range is provided in the filing. It also said newly hired real-estate brokers typically become more productive in their second year.
- On July 19, 2016, BGC announced an agreement to acquire Sunrise Brokers, subject to approvals and closing conditions. Management also described possible uses of resources including debt repayment, dividends, repurchases, hiring and acquisitions; the filing does not commit to a specific allocation.
- Management cited low interest rates, subdued rates and credit volumes, bank capital rules, and market conditions as headwinds. Brexit had caused market volatility and pound weakness; management expected periodically elevated volatility, which could increase financial-market activity, while noting potential uncertainty for real-estate investors.
- Key risks include transaction-volume and market-price volatility, counterparty and settlement exposures, changes in regulation and capital requirements, foreign-exchange movements, technology or cybersecurity disruption, access to financing, and dependence on Cantor-related services and arrangements. A 10% weakening of the U.S. dollar against the pound and euro was estimated to reduce net income by about $1.5 million.
- Regulated subsidiaries held $546.8 million of net assets and had aggregate regulatory net capital $283.0 million above aggregate requirements; these rules can restrict transfers of capital. The company reported $1.9 million of contingent liability under letters of credit. It said pending litigation outcomes could not be determined with certainty and that currently available information did not indicate a material adverse effect from the matters as a whole.
- Management expected effective cash taxes related to the Trayport sale to be no more than $64 million. The filing also disclosed $38.0 million remaining on a previously committed charitable contribution liability at June 30, 2016.
Important facts for investors to verify
- How much of operating cash-flow use reflects temporary matched-trade and working-capital movements, and whether cash conversion improves in subsequent periods.
- The composition and liquidity of the reported $899.1 million liquidity measure, particularly securities owned and marketable securities, and the effect of regulatory restrictions on cash availability.
- The durability of GFI integration savings and FENICS growth, and whether NGKF hiring investments translate into higher revenue and margins.
- The full economic cost and funding plan for debt, including the July 2016 repayment of the convertible notes, and the company’s ability to maintain its investment-grade ratings while pursuing acquisitions and distributions.
- Share dilution and compensation effects from partnership units, equity awards, acquisition consideration, and the substantially larger fully diluted share count relative to basic shares.
- The timing, conditions and actual value of future Nasdaq earn-out shares: management cited more than $840 million based on a July 2016 share price, but this was not recorded as balance-sheet liquidity and depends on specified conditions and future issuances.
- Related-party transactions and governance, including Cantor’s voting control, service arrangements, underwriting and sales-agency roles, and purchases of BGC securities.