BGC Partners, Inc. — Form 10-Q Summary
Issuer note: The supplied filing is for BGC Partners, Inc., not BGC Group, Inc. It reports the quarter and nine months ended September 30, 2019; financial statements are unaudited. Amounts below are in U.S. dollars.
Business context and reporting period
BGC is a global brokerage and financial technology company serving financial markets through voice, hybrid and electronic brokerage, data, software and post-trade services. Its products include rates, credit, foreign exchange, equities, insurance, energy and commodities, and futures. Newmark was spun off on November 30, 2018 and is presented as discontinued operations in the 2018 comparisons; BGC’s 2019 results therefore reflect continuing operations without Newmark.
Key financial metrics
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $521.1 million | $455.6 million | $1,617.1 million | $1,471.5 million |
| Total expenses | $516.0 million | $409.5 million | $1,499.5 million | $1,320.7 million |
| Pre-tax income from continuing operations | $8.7 million | $62.6 million | $162.6 million | $203.7 million |
| Net income from continuing operations | $2.6 million | $39.6 million | $111.5 million | $144.6 million |
| Net income (loss) available to common stockholders | $(3.5) million | $120.3 million | $72.0 million | $214.3 million |
| Operating cash flow | Not presented quarterly | Not presented quarterly | $133.6 million | $(477.5) million |
Revenue increased 14.4% in Q3 and 9.9% for the nine-month period. Expenses rose 26.0% in Q3 and 13.5% year to date. Pre-tax margin was approximately 1.7% in Q3 versus 13.7% a year earlier, and 10.1% for the nine months versus 13.8%. The Q3 common-stockholder loss reflects allocations to noncontrolling interests; the prior-year common-stockholder profit also included Newmark discontinued operations.
Q3 brokerage revenue was $484.6 million, up 13.9%. Rates revenue rose 28.5%, energy and commodities 24.8%, equities, insurance and other asset classes 18.9%, and credit 7.9%; foreign exchange fell 10.8%. Data, software and post-trade revenue grew 11.0% to $18.4 million. Fully Electronic revenue across brokerage, data, software and post-trade rose 11.5% to $66.8 million.
For the nine months, investing cash flow was $(13.1) million and financing cash flow was $103.4 million. Cash, cash equivalents and cash segregated under regulatory requirements totaled $637.5 million at period end, including $223.5 million segregated. BGC’s defined liquidity measure was $472.7 million, up from $410.9 million at December 31, 2018.
Notes payable and other borrowings were $1,105.5 million, with an additional $4.8 million of short-term borrowings. Debt included $300 million of 5.125% notes due 2021, $450 million of 5.375% notes due 2023 and $300 million of new 3.750% notes due 2024. The company also had $28.9 million drawn on its revolving facility. Fitch and S&P rated its long-term debt BBB- with stable outlooks.
Material changes versus the prior comparable period
- Q3 profitability declined sharply despite revenue growth: pre-tax income fell to $8.7 million from $62.6 million. Management attributed higher costs to acquisitions and hiring, variable compensation, technology investment, the U.K. headquarters build-out, higher interest expense and regulatory settlements.
- Acquisitions expanded the business: Ed Broking was acquired in January 2019 and Ginga Petroleum in March; Poten & Partners, acquired in November 2018, also contributed to 2019 results. The company recorded $18.4 million of nine-month gains from the sale of CSC Commodities.
- Front-office headcount reached 2,940, up 18% year over year; average revenue per front-office employee declined 4% for Q3 and 6% for the nine-month period, as reported by management.
- Debt increased, including issuance of $300 million of 3.750% senior notes in September. The company said the increase in defined liquidity was primarily related to that issuance and other net borrowings.
- The balance sheet reflects adoption of the new lease standard: BGC recognized a $168.3 million operating lease right-of-use asset and $186.2 million lease liability at September 30, 2019. The filing states adoption did not affect earnings or cash flows.
Outlook, commentary, risks and unusual items
- Management expected approximately $55 million of net losses in 2019 from newer standalone Fenics offerings, an improvement of $15 million in 2020, and break-even during 2021. These offerings were not yet fully scaled or generating significant revenue.
- Management said the insurance brokerage business was expected to operate around break-even for the next two years while seeking to double revenue, with profitability and margins above 15% targeted for 2022.
- BGC continued to study restructuring its partnership as a corporation, with an update expected before year-end 2019 and any action not expected until 2020. The filing provides no firm commitment to proceed.
- The board declared a Q3 dividend of $0.14 per share, payable November 26, 2019. The stated dividend policy targets quarterly distributions based on at least 75% of post-tax Adjusted Earnings per fully diluted share; future dividends remain at the board’s discretion.
- In September 2019, BGC settled CFTC and New York Attorney General investigations involving alleged misrepresentations by certain emerging-markets FX options brokers. It agreed to pay $25 million and have a monitor for two years; the settlements included a non-prosecution agreement and no criminal penalty.
- A derivative lawsuit challenging the Berkeley Point and CCRE transactions was allowed to proceed to discovery after the court denied defendants’ dismissal motions on September 30, 2019. BGC said it believes the allegations are without merit and intends to defend the case.
- Principal risks include market volumes and volatility, regulatory and capital requirements, Brexit and potential market-access disruption, counterparty and settlement exposure, leverage and refinancing, cyber and operational risks, and dependence on Cantor-related arrangements. The company reported regulated subsidiaries held $579.5 million of net assets and regulatory capital exceeded aggregate requirements by $308.5 million.
- Management’s outlook is subject to uncertainty: forward-looking statements identify risks from economic and geopolitical conditions, competition, acquisitions, funding access, and regulatory change. The filing does not provide formal consolidated revenue or earnings guidance.
Most important facts for investors to verify
- Confirm the issuer identity: this is a BGC Partners, Inc. filing, despite the request metadata naming BGC Group, Inc.
- Review the drivers and repeatability of the Q3 pre-tax profit decline, especially the $25 million regulatory settlement and elevated other expenses.
- Assess the quality of operating cash flow and the liquidity measure, including the effects of matched-trade receivables and payables and cash restricted by regulatory requirements.
- Verify debt maturities, revolver availability and the company’s ability to maintain its BBB- ratings while funding dividends, acquisitions and technology investment.
- Track Fenics investment losses and progress toward the stated 2021 break-even expectation, and test the assumptions behind insurance growth and 2022 margin targets.
- Monitor the derivative litigation, acquisition earn-outs and other contingencies, as well as execution and integration risks from recent acquisitions.