BGC Partners, Inc. — Q1 2020 Form 10-Q
Issuer note: The supplied filing is for BGC Partners, Inc. (Nasdaq: BGCP), not “BGC Group, Inc.” as stated in the request metadata. The unaudited quarter ended March 31, 2020; comparisons are with Q1 2019 unless otherwise noted.
Business context and reporting period
BGC Partners is a global brokerage and financial technology company serving institutional markets through voice, hybrid and electronic execution, along with data, software and post-trade services. It reports one operating segment. The filing reflects the post-2018 Newmark spin-off; Newmark is no longer consolidated.
Financial results and liquidity
| Metric | Q1 2020 | Q1 2019 / comparison |
|---|---|---|
| Total revenue | $603.2 million | $544.8 million; up 10.7% |
| Brokerage revenue | $569.2 million | $514.4 million; up 10.6% |
| Data, software and post-trade revenue | $19.4 million | $17.9 million; up 8.3% |
| Total expenses | $568.4 million | $469.7 million; up 21.0% |
| Income before taxes | $29.7 million | $117.1 million |
| Consolidated net income | $21.0 million | $87.2 million |
| Net income available to common stockholders | $14.3 million; $0.04 per basic and diluted share | $61.9 million; $0.18 per share |
| Operating cash flow | $(71.6) million | $(60.8) million |
GAAP income before taxes equaled 4.9% of revenue, compared with 21.5% a year earlier; net income available to common stockholders equaled 2.4% of revenue, compared with 11.4%. Compensation and employee benefits, including equity-based compensation and partnership allocations, totaled $387.0 million, or 64.2% of revenue, versus $300.1 million, or 55.1%.
Revenue gains included rates (+7.5%), credit (+13.4%), energy and commodities (+18.2%), equities and other asset classes (+18.1%), and insurance (+42.8%, mainly reflecting Ed Broking). FX revenue declined 7.1%. Fully electronic revenue across brokerage, data, software and post-trade fell 1.7% to $75.5 million, although data, software and post-trade revenue grew.
At March 31, 2020, cash and cash equivalents were $455.0 million and cash segregated for regulatory requirements was $202.3 million. Company-defined liquidity was $512.3 million, up from $473.2 million at year-end, primarily reflecting a $230 million draw on the revolving credit facility. Operating cash flow was negative, with large offsetting changes in broker-dealer receivables and payables associated mainly with unsettled trades.
Notes payable and other borrowings were $1.368 billion, plus $3.8 million of short-term borrowings. Revolver borrowings were $297.2 million, versus $68.9 million at year-end; the $350 million facility matures February 2023. Senior notes include $300 million at 5.125% due May 2021, $450 million at 5.375% due July 2023, and $300 million at 3.750% due October 2024. The company reported $683.8 million of net assets in regulated subsidiaries and regulatory net capital exceeding aggregate requirements by $395.5 million.
Material changes and unusual items
- Pre-tax income fell by $87.3 million year over year, as expense growth and lower other income outweighed higher revenue. Q1 2019 included a $20.1 million gain on divestiture and substantial investment-related gains; Q1 2020 had no divestiture gain and recorded a $6.0 million other loss.
- Equity-based compensation and partnership allocations rose to $42.2 million from $12.1 million, including higher share/exchangeability charges and LPU amortization. Compensation and employee benefits also included $22.7 million of charges associated with a cost-reduction program.
- Q1 2020 included $7.3 million of impairment charges: $4.8 million related to software and fixed assets and $2.5 million related to equity-method investments. The company acquired Algomi for $9.8 million in total consideration.
- Adoption of CECL on January 1 reduced retained earnings by approximately $1.3 million after tax. The credit-loss allowance reached $2.7 million by March 31, with the quarter’s increase attributed to COVID-related macroeconomic assumptions and credit-rating migration, and employee terminations.
- Class A shares outstanding increased to approximately 311.1 million from 307.9 million at year-end, principally reflecting partnership-interest exchanges, vesting and other issuances. The company sold 0.2 million shares under its sales agreement for $0.7 million and made no open-market share repurchases.
Outlook, management commentary and risks
- Management said market volumes and volatility increased in many asset classes from mid-February through March, benefiting brokerage activity, but remote-work and client dislocations constrained results. It cautioned that elevated volumes may not persist and that COVID-19’s duration and financial impact were uncertain.
- The company expects 2020 net investment costs for newer stand-alone Fenics businesses to be under $40 million and continues to expect those businesses to break even in 2021. Management expects the insurance brokerage business to be profitable in 2021 and has discussed a target of approximately 15% margins by 2022; it forecast Q2 2020 insurance results well below Q2 2019 and below breakeven for the remainder of 2020.
- The cost-reduction program is expected to reduce compensation expense by more than $35 million for the remainder of 2020. Management cautioned that COVID-related impairment, restructuring, remote-work and other costs may continue, but their amounts and timing are uncertain.
- On May 4, the board declared a Q1 dividend of $0.01 per share, down from $0.14, payable June 8 to holders of record May 22. The company said the reduction and lower partner distributions were precautionary measures to strengthen the balance sheet; future dividends remain discretionary. Partner distributions are expected at least to cover related tax payments.
- Risks highlighted include the pandemic’s effect on clients, staff, trading volumes, electronic execution and technology; market, counterparty, credit and liquidity risks; remote-work cybersecurity and operational risks; Brexit and potential loss of UK-EU market access; regulatory and capital requirements; and access to financing. The company’s next bond maturity is May 2021. Credit ratings were BBB- with stable outlooks from Fitch and S&P.
- A derivative lawsuit concerning the Berkeley Point acquisition and investment in Real Estate, L.P. proceeded to discovery after dismissal motions were denied; management disputes the allegations. The filing says it cannot estimate losses beyond recorded accruals for other pending matters and does not expect current matters, based on available information, to materially adversely affect results.
Important facts for investors to verify
- Confirm the issuer identity: this filing names BGC Partners, Inc. (BGCP), rather than BGC Group, Inc.
- Track whether trading volumes, brokerage mix and Fenics electronic revenues normalize or continue to be affected by pandemic conditions.
- Assess the sustainability of earnings and cash generation given higher compensation costs, negative operating cash flow and settlement-related working-capital swings.
- Monitor revolver utilization, refinancing of the May 2021 notes, regulatory capital availability and the effect of the dividend reduction.
- Review credit-loss allowances, impairments, restructuring savings, insurance profitability targets and the outcome of the derivative litigation.