BGC Partners, Inc. — Form 10-Q Summary
Business context and reporting period. The filing is for the unaudited quarter ended March 31, 2012, compared with the quarter ended March 31, 2011. The registrant’s name in the filing is BGC Partners, Inc. (not BGC Group, Inc.). BGC is a global brokerage and financial technology company serving wholesale financial markets, and also operates commercial real estate services through Newmark.
Financial performance and position
| Metric | Q1 2012 | Q1 2011 / prior date |
|---|---|---|
| Total revenue | $395.0 million | $365.0 million; up 8.2% |
| Brokerage revenue | $372.2 million | $342.8 million; up 8.6% |
| Income before taxes | $18.9 million; 4.8% of revenue | $24.5 million; 6.7% of revenue |
| Consolidated net income | $11.7 million | $17.1 million |
| Net income available to common stockholders | $8.2 million; basic and diluted EPS $0.06 | $8.7 million; EPS $0.09 |
| Operating cash flow | $(11.8) million | $60.9 million provided |
| Cash and cash equivalents | $310.5 million | $369.7 million at Dec. 31, 2011 |
| Cash position (cash plus unencumbered securities held for liquidity) | $348.8 million | $385.7 million at beginning of quarter |
| Total assets | $1.85 billion | $1.41 billion at Dec. 31, 2011 |
| Borrowings in debt schedule | $398.3 million, including $60.0 million short-term borrowings | $345.5 million at Dec. 31, 2011 |
Expenses totaled $376.0 million, up 10.4%; compensation and employee benefits, including partner allocations, were $252.8 million, or 64.0% of revenue, versus $218.2 million, or 59.8%. The filing does not provide a single overall net profit margin measure; consolidated net income was 3.0% of revenue versus 4.7%.
Operating cash use chiefly reflected a $40.3 million cash use for securities settlements and a large increase in broker-dealer and customer receivables, partly offset by related payables and short-term borrowing. Investing activities used $50.9 million, including a $16.0 million ELX investment and $22.0 million purchase of notes receivable. Financing activities provided $2.1 million; dividends and distributions totaled $53.4 million.
Material changes versus the prior comparable period
- Revenue increased $29.9 million, reflecting Newmark’s contribution, higher foreign-exchange activity, and a 26.3% increase in front-office headcount to 2,170. Newmark contributed $38.4 million of real estate brokerage revenue.
- Results were mixed across brokerage products: foreign-exchange revenue rose 8.3%, while rates revenue fell 3.9%, credit fell 3.2%, and equities and other asset classes fell 9.8%, according to management.
- Compensation and employee benefits rose 18.1%, including a $25.9 million expense associated with granting exchangeability to limited partnership units. Total expenses rose faster than revenue, reducing pretax income by $5.6 million.
- Basic weighted-average shares increased to 136.1 million from 97.3 million; fully diluted weighted-average shares were 264.2 million, including partnership interests. Dilution and allocations materially affect per-share comparisons.
- Fully electronic brokerage revenue increased 4.0% to $35.5 million, but electronic brokerage’s share of brokerage revenue was 9.5%, versus 10.0% a year earlier. Fully electronic volumes fell 10.3% year over year.
Outlook, risks, contingencies and unusual items
- Management said it expects short-term borrowings to increase in the near term and expects normal operating activities to generate adequate cash for ordinary needs, including dividends. No quantified earnings or revenue guidance was provided.
- Management cited near-term headwinds for rates from quantitative easing, while expecting longer-term support from high sovereign debt issuance. Results remain exposed to market volumes and volatility, competition, regulation, counterparty and principal-trading risks, and access to funding.
- On April 13, 2012, after quarter-end, BGC completed its acquisition of substantially all Grubb & Ellis assets. Consideration included credit bids of approximately $30.0 million of prepetition debt and $5.5 million of debtor-in-possession loans, plus $16.0 million cash for unsecured creditors and certain assumed costs and liabilities. Purchase accounting was not complete in the filing.
- On March 28, BGC invested a further $16.0 million in ELX. Its voting interest increased to 49.0% and equity interest to 56.7%; it received authority to manage day-to-day operations subject to supervisory-board oversight.
- The FSA had identified weaknesses in U.K. risk, compliance and control functions. It relaxed a temporary acquisition and new-business undertaking on March 1, 2012, subject to prior notice for certain changes; remediation items were scheduled for completion during 2012.
- Legal matters include substantial claims by Tullett-related entities, including a FINRA arbitration seeking at least $779 million in compensatory damages and $500 million in exemplary damages, and other litigation. Management says it believes the pending matters will not have a material adverse effect, but outcomes cannot be predicted. A derivative action also challenges certain related-party transactions with Cantor and other matters.
- Related-party relationships with Cantor include a $150.0 million 8.75% convertible note, clearing and support arrangements, and Cantor-affiliated CF&Co’s role as sales agent in controlled equity offerings. Moody’s outlook was negative; Fitch and S&P outlooks were stable.
- The board declared a $0.17 per-share quarterly dividend on May 1, payable May 31, 2012. This was a subsequent event, not a Q1-period payment.
Most important facts for investors to verify
- Whether revenue growth can translate into improved earnings, given rising compensation costs and lower pretax margin.
- Whether cash flow and liquidity normalize as settlement fails resolve, and how short-term borrowing evolves against the $130 million revolving facility.
- The final Grubb & Ellis acquisition accounting, integration costs, broker transfers, and resulting contribution to revenue and profitability.
- The impact of share issuance, partnership-unit exchangeability, convertible notes, and related dilution on common-stockholder earnings per share.
- Progress on FSA remediation and developments in the Tullett-related and derivative litigation, including any changes to recorded legal reserves.
- Related-party transactions, Cantor clearing dependence, debt terms and covenants, and the implications of Moody’s negative outlook.