BGC Partners, Inc. — Form 10-Q Summary
Issuer note: The filing identifies the registrant as BGC Partners, Inc.; the request metadata names BGC Group, Inc. Verify the issuer identity. The unaudited reporting period ended September 30, 2011. Amounts below are in millions of dollars except per-share data, percentages, and where stated.
Business context and reporting period
BGC Partners is a global wholesale financial-markets brokerage and financial intermediary, offering voice, hybrid and electronic execution, clearing, processing, market data and software services. It reported one operating segment. Results cover the three and nine months ended September 30, 2011, with comparisons to the corresponding 2010 periods.
Financial performance and position
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Total revenue | $379.9 | $326.5 | $1,109.5 | $1,009.4 |
| Total expenses | $384.4 | $300.1 | $1,066.0 | $979.4 |
| Income (loss) before tax | $(4.5) | $26.4 | $43.5 | $30.0 |
| Consolidated net income (loss) | $(3.1) | $19.5 | $31.4 | $21.4 |
| Net income (loss) available to common stockholders | $(2.0) | $6.2 | $16.3 | $9.4 |
| Basic and diluted EPS | $(0.02) | $0.07 | $0.15 | $0.11 |
| Operating cash flow | Nine months: $37.3 | Prior-year nine months: $(27.9) |
- Q3 revenue grew 16.4%; brokerage revenue rose 22.0%. Commission revenue increased 25.2%, while principal transaction revenue increased 13.9%.
- Q3 pretax margin was approximately negative 1.2%, versus 8.1% a year earlier. Nine-month pretax margin was approximately 3.9%, versus 3.0%.
- Q3 compensation and employee benefits rose 41.1% to $253.9, including a $50.4 charge tied to granting exchangeability of partnership units. Total expenses increased 28.1% and exceeded revenue growth.
- For the nine months, cash from operations was $37.3, investing cash use was $31.6 and financing cash provided was $57.0. Cash and cash equivalents increased $68.2 to $432.3.
- At September 30, total assets were $1,902.0, total liabilities $1,436.8, and total equity $377.9. Notes payable and collateralized borrowings were $336.7, including $150.0 of 8.75% convertible notes, $138.0 carrying value of 4.50% convertible notes, and $48.7 of collateralized borrowings.
- The company had a $130.0 unsecured revolving credit facility and no borrowings outstanding under it at September 30; it reported $15.0 outstanding as of October 31. Cash includes funds held at regulated subsidiaries and is not wholly available for general use.
- Declared dividends were $0.17 per share for Q3, or $0.48 per share for the first nine months. The board declared another $0.17 dividend on October 26, payable November 28.
Material changes versus the prior comparable period
- Q3 brokerage gains were broad-based: rates revenue increased $16.2, foreign-exchange revenue $16.7, credit revenue $9.6, and equities and other asset classes $21.7. Management cited market volumes, sovereign debt issuance, hiring and the Mint Partners contribution.
- Fully electronic brokerage revenue increased 34.5% year over year to $38.9, according to management; electronic activity represented 9.6% of brokerage revenue versus 8.7% a year earlier. The filing also reports electronic brokerage revenue of $34.2 in its product-channel table; verify the differing reported measures and definitions.
- Q3 profit turned to a loss despite higher revenue. Besides the partnership-unit exchangeability charge, professional and consulting fees increased 82.2% to $19.6, partly due to legal, regulatory and UK remediation costs. Other revenue fell because Q3 2010 included a one-time $11.6 receipt from REFCO Securities.
- For the first nine months, revenue grew 9.9% and common-stockholder income increased to $16.3 from $9.4. Compensation expense included $84.5 of exchangeability-related charges in 2011; 2010 included a $41.3 one-time restructuring charge.
- Balance-sheet growth included higher broker-dealer receivables and payables, employee and partner loans, and debt. Operating cash flow benefited from higher adjusted income but working capital used $126.5, notably from increased receivables and lower accrued compensation and payables.
Outlook, management commentary, risks and unusual items
- No quantified company-wide revenue or earnings guidance is provided. Management expected electronic trading performance to continue, citing technology investment and market adoption, and said the Newmark acquisition was expected to be accretive.
- On October 14, 2011, BGC completed its Newmark acquisition for approximately $63.0 cash and 339,000 shares, with up to approximately 4.83 million additional shares contingent on future revenue targets. The acquisition occurred after the reporting date.
- In August 2011, BGC acquired CantorCO2e for assumption of approximately $2.0 of liabilities. Related-party transactions, including services, financing and an affiliate serving as advisor on transactions and equity offerings, are significant features of the filing.
- The UK regulator, the FSA, identified weaknesses in risk, compliance, control and governance functions. BGC agreed to limit acquisitions of FSA-regulated businesses or entry into new regulated lines, faced increased capital and liquidity requirements, and was undertaking a remediation program expected largely to be completed by December 31, 2011. The FSA also required an independent review.
- Material litigation includes Tullett-related employment and competition disputes, including FINRA claims seeking at least $779 million in compensatory damages and $500 million in exemplary damages; BGC disputes the claims. A separate patent dispute with Trading Technologies remains pending. Management stated that current matters were not expected to materially harm financial condition, results or cash flows, but outcomes are uncertain.
- Other risks include market-volume and volatility dependence, counterparty and unmatched-principal exposures, regulatory and clearing-capital constraints, foreign-exchange and operational risks, and the possibility of financing needs on unacceptable terms. The filing states that clearing-house guarantee exposure is not quantifiable, though management considers payment under those arrangements remote.
- Management reported disclosure controls were effective as of September 30, 2011 and no material change in internal control over financial reporting during the nine-month period.
Most important facts for investors to verify
- Confirm the issuer identity and reconcile the reported fully electronic brokerage revenue figures and definitions.
- Assess whether revenue growth can translate into profit after partnership exchangeability charges, compensation and higher professional costs; distinguish recurring expenses from unusual items.
- Review liquidity availability at regulated subsidiaries, working-capital volatility, the October credit-facility draw, debt maturities, interest costs and facility covenant compliance.
- Track the FSA remediation timetable, any additional restrictions or capital requirements, and the effect on acquisitions and cash mobility.
- Monitor outcomes and potential exposure from the Tullett proceedings and patent litigation, notwithstanding management’s stated assessment.
- Evaluate Newmark’s integration, contingent share issuance and real-estate cyclicality, plus the impact of related-party dealings and potential equity dilution.