BGC Partners, Inc. (BGCP) — Form 10-Q Summary
Business context and reporting period
Unaudited results cover the three months ended March 31, 2019, compared with the three months ended March 31, 2018; balance-sheet figures are compared with December 31, 2018. The filing identifies the registrant as BGC Partners, Inc. The company brokers and provides technology and post-trade services across global financial markets. Newmark was spun off on November 30, 2018, so its results are presented as discontinued operations for the 2018 comparison and are excluded from 2019 continuing operations.
Key financial metrics
- Revenue: $544.8 million, up 3.8% year over year. Brokerage revenue rose 2.8% to $513.8 million; commissions increased 5.3% to $429.5 million, while principal transactions declined 8.4% to $84.2 million.
- Product trends: Energy and commodities revenue increased 16.2% to $69.9 million; credit rose 4.5% to $85.7 million; rates rose 1.9% to $163.8 million; equities, insurance and other asset classes rose 3.3% to $101.0 million. Foreign exchange fell 5.7% to $93.4 million. Data, software and post-trade revenue grew 18.6% to $17.9 million.
- Profit: Pretax income from continuing operations was $117.1 million, versus $94.2 million. Continuing-operations net income was $87.2 million, versus $72.7 million. Net income available to common stockholders was $61.9 million; reported 2018 net income available to common stockholders of $58.8 million included discontinued operations.
- Per-share results and margins: Basic and fully diluted continuing-operations EPS were each $0.18, versus $0.14. Pretax income was 21.5% of revenue, versus 18.0%; continuing-operations net income was 16.0% of revenue, versus 13.8%. Results include gains and other non-operating income described below.
- Expenses: Total expenses were $469.7 million, up 1.1%. Total compensation and employee benefits fell to $300.1 million from $317.2 million, largely reflecting lower equity-based compensation and partnership allocations; occupancy and equipment expense increased to $46.0 million from $37.1 million, and interest expense rose to $13.2 million from $9.4 million.
- Cash flow: Net cash used in operating activities was $60.8 million, compared with $347.3 million in 2018. Investing activities provided $12.1 million and financing activities provided $158.8 million. Cash, cash equivalents and regulatory-segregated cash totaled $528.1 million at quarter-end; cash and cash equivalents alone were $331.7 million.
- Liquidity and debt: Management-defined liquidity was $392.4 million, down from $410.9 million at year-end, after acquisition spending, bonus payments, working-capital movements and investment in hires, partly offset by a $250 million revolving-credit draw. Total notes payable, other borrowings and short-term borrowings were $1.013 billion, including $248.4 million drawn on a $350 million revolver, $742.5 million carrying value of senior notes, and $17.3 million of collateralized borrowings. Long-term ratings were BBB- with stable outlooks from Fitch and S&P.
- Other balance-sheet items: Total assets were $5.045 billion and total liabilities $4.141 billion at March 31. Employee and partner loans, net, were $240.3 million. Lease adoption added a $190.2 million operating lease right-of-use asset and $204.9 million lease liability.
Material changes and unusual items
- The Newmark spin-off makes year-over-year comparisons less directly comparable: 2018 continuing-operations results exclude Newmark, which is separately reported as discontinued operations.
- 2019 included a $20.1 million gain on divestiture and sale of investments. Other income was $21.2 million; management attributed the year-over-year decrease in that line primarily to larger Nasdaq-share gains in 2018. The filing also reports a $20.4 million unrealized gain on investments measured using observable transactions.
- Acquisitions included Ed Broking, completed January 31, 2019, and Ginga Petroleum, completed March 12, 2019; Poten & Partners had been acquired in November 2018. Total consideration for first-quarter 2019 acquisitions was approximately $102.3 million, including cash, restricted shares and RSUs; approximately $55.9 million of goodwill was recorded.
- Quarterly fully electronic brokerage revenue was $58.8 million, up 10.4% according to management; fully electronic and data, software and post-trade businesses together generated $76.7 million, up 12.2%. Fully electronic brokerage represented 11.5% of brokerage revenue, compared with 10.7%.
- Management cited lower global volumes across several markets, lower FX volatility, and increased costs from acquisitions, hires, interest on debt and the build-out of the new U.K. headquarters. Average revenue per front-office employee fell 6% year over year to approximately $195,000, while front-office headcount was slightly higher at about 2,800.
Outlook, risks and contingencies
- The filing gives no quantified earnings or revenue guidance. Management expects continued growth in Fenics, electronic trading, market data, software and post-trade services, and expects to use resources for debt repayment, hiring, acquisitions, dividends and repurchases while maintaining or improving its investment-grade rating.
- Management’s outlook depends on trading volumes, volatility, interest rates, client activity, competition, regulation and successful execution of technology investments and acquisitions. It described long-term support for rates from elevated sovereign debt, but near-term headwinds from low rates and accommodative monetary policy.
- Risks include market downturns and reduced transaction activity; Brexit and potential disruption to cross-border market access; extensive and changing financial regulation; refinancing, leverage and funding needs; counterparty, settlement, market and foreign-exchange exposures; and operational, cybersecurity and business-continuity risks. A 10% weakening of the U.S. dollar against the euro and pound was estimated to reduce net income by approximately $1.8 million, all else equal.
- A putative Delaware derivative action challenges the Berkeley Point acquisition and related investment from Cantor affiliates, alleging fiduciary-duty breaches and seeking unquantified damages. Defendants moved to dismiss the amended complaints; the company says it believes the claims lack merit, but the outcome is uncertain. Management says pending legal matters, based on information currently available, are not expected to have a material adverse effect, while noting that outcomes cannot be determined with certainty.
- Other exposures include clearinghouse and exchange guarantees whose potential liability management says is not quantifiable, though payment is considered remote; $1.0 million of letters of credit; and $14.8 million remaining on a charitable contribution commitment. Regulated subsidiaries held $605.7 million of net assets and had regulatory net capital $375.2 million above aggregate requirements.
- Related-party dealings with Cantor include services, clearing, securities lending and other arrangements. Cantor controls all outstanding Class B shares, representing approximately 61% of voting power, and also controls Newmark following the spin-off.
Most important facts for investors to verify
- Whether revenue and earnings growth persist excluding the $20.1 million divestiture gain and other investment-related gains, and considering the altered comparison after Newmark’s spin-off.
- Cash conversion and working-capital movements, including the large broker-dealer receivable and payable balances and the use of revolving-credit borrowings to support liquidity.
- Debt repayment capacity, revolver availability and terms, upcoming maturities, interest costs, and the effect of leverage on ratings, dividends and acquisitions.
- Whether acquisitions contribute sustainable revenue and earnings, and whether integration costs, contingent payments and goodwill assumptions prove reasonable.
- Execution and profitability of Fenics and other electronic businesses, alongside market-volume trends, hiring productivity and the decline in revenue per front-office employee.
- Developments in the derivative litigation, regulatory requirements and related-party transactions, including any material changes to reported contingencies or governance arrangements.