BGC Partners, Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022. The filing is by BGC Partners, Inc. (Nasdaq: BGCP), the company identified in the filing, rather than an entity named BGC Group, Inc. BGC is a global brokerage and financial technology company serving institutional markets across rates, credit, foreign exchange, equities, energy and commodities, and futures. Its services include voice, hybrid and electronic brokerage, data, software, clearing and post-trade services.
Key financial metrics
| Metric | Q1 2022 | Q1 2021 | Change / context |
|---|---|---|---|
| Total revenue | $506.5 million | $567.6 million | Down 10.8%; prior-year revenue included $52.4 million from the insurance brokerage business sold in November 2021. Excluding that business, revenue declined 1.7%. |
| Pretax income | $45.4 million | $73.5 million | Pretax margin was 9.0%, versus 13.0%. |
| Consolidated net income | $30.7 million | $58.6 million | Net margin was 6.1%, versus 10.3%. |
| Net income available to common stockholders | $26.0 million | $42.7 million | Basic and fully diluted EPS were both $0.07, compared with $0.11. |
| Operating cash flow | $(9.9) million | $44.2 million | Working-capital movements, especially broker-dealer and customer receivables and payables, were significant. |
| Investing and financing cash flows | $(12.3) million investing; $(24.0) million financing | $(13.1) million investing; $(48.3) million financing | Investing included $11.0 million of capitalized software development; financing included distributions, unit redemptions and dividends. |
| Management-defined liquidity | $539.6 million | $594.8 million at Dec. 31, 2021 | Down $55.2 million, attributed mainly to working capital, annual employee bonuses, taxes and investment in Fenics Growth Platforms. |
| Debt and borrowings | $1.056 billion | $1.056 billion at Dec. 31, 2021 | Includes $1.044 billion carrying value of senior notes and $4.2 million short-term borrowings. No revolver borrowings were outstanding. |
Material changes versus the prior year
- Brokerage revenue was $472.3 million, down 11.6% as reported. Excluding the sold insurance business’s prior-year contribution, brokerage revenue fell 1.9%.
- By product, energy and commodities revenue rose 8.6% to $82.4 million; rates fell 1.8% to $158.8 million; credit fell 6.8% to $83.9 million; FX fell 4.1% to $80.0 million; and equities fell 4.7% to $67.1 million.
- Fenics revenue increased 16.4% to $125.3 million. Fenics Markets rose 15.7% to $112.3 million and Fenics Growth Platforms rose 23.5% to $13.1 million. Data, software and post-trade revenue increased 9.7% to $24.1 million.
- Total expenses declined 7.5% to $463.4 million. Compensation and employee benefits fell, mainly reflecting the insurance sale and cost-reduction initiatives; equity-based compensation and partnership allocations rose to $57.9 million from $33.5 million, driven in part by increased exchangeability grants and share issuance.
- The company’s Q1 2021 comparison includes the Futures Exchange Group acquisition’s retrospective adjustment; the filing states this reduced prior-year pretax income by $0.5 million.
Outlook, commentary and risks
- Outlook: The filing gives no numerical companywide revenue or earnings guidance. Management expected elevated debt issuance, rate volatility and the unwinding of central-bank asset purchases to support rates business later in 2022. It also expected continued electronic-trading and data demand, and growth in Fenics. Fenics Growth Platforms were not yet fully scaled; management expected them to become profitable, higher-margin businesses as revenues grow.
- Product initiatives: FMX planned to begin offering U.S. rates futures in Q4 2022. BGC was expanding cryptocurrency connectivity and brokerage offerings; Lucera was connected to 26 cryptocurrency liquidity pools at quarter-end.
- Capital allocation: Management said 2022 priorities were returning capital to stockholders and investing in Fenics, with share and unit repurchases prioritized over dividends and distributions. The board declared a $0.01-per-share quarterly dividend after quarter-end. A possible corporate conversion was under review, with a decision whether to proceed expected by the end of Q2 2022.
- Ukraine-related credit risk: BGC recorded a $6.0 million reserve associated with Russia’s invasion of Ukraine and sanctions, including a $5.5 million CECL provision against unsettled broker-dealer/customer receivables. It said potential incremental exposure, considering securities related to unsettled trades, could be up to $6.2 million. Revenue from the Moscow branch and sanctioned Russian counterparties was less than 1% of total revenue.
- Liquidity and regulation: Management stated cash and financing were sufficient for requirements over the next 12 months and beyond. However, regulated subsidiaries held $637.7 million of net assets, which may constrain transfers; their regulatory net capital exceeded requirements by $306.0 million. The $375 million revolving facility was amended in March 2022, extended to March 2025 and transitioned to SOFR or a base rate plus margin.
- Contingencies: The company disclosed ongoing legal and regulatory matters and said it could not estimate losses beyond recorded accruals; management did not expect pending matters to have a material adverse effect. A derivative lawsuit concerning the Berkeley Point acquisition and Real Estate L.P. investment was awaiting a court ruling, expected around Q2 2022.
- Other risks: Results depend on transaction volumes and market conditions and are exposed to counterparty, market, foreign-currency, interest-rate, regulatory, operational and cybersecurity risks. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Separate the year-over-year revenue comparison from the insurance-sale effect; assess ongoing brokerage and Fenics performance against the company’s reported figures.
- Review the drivers and sustainability of lower GAAP earnings, including the increase in equity-based compensation and the Ukraine-related credit reserve.
- Track operating cash flow and the unusually large matched-trade receivable and payable balances; the filing says substantially all open fails and pending trades at March 31 subsequently settled at contracted amounts.
- Confirm debt maturities, refinancing needs and covenant or liquidity implications, including the 2023 maturity of the $450 million 5.375% senior notes and the unused revolving facility.
- Monitor the Ukraine-related reserve and potential exposure, the pending derivative litigation, and any regulatory or counterparty developments.
- Assess dilution and capital returns alongside the stated repurchase priority, including partnership-unit exchanges, outstanding awards and the company’s dual-class voting structure.