BGC Partners, Inc. — Q1 2015 Form 10-Q
Issuer note: The filing identifies the registrant as BGC Partners, Inc.; the request metadata names BGC Group, Inc. The unaudited quarter ended March 31, 2015, compared with the three months ended March 31, 2014, unless otherwise noted. BGC operates Financial Services and Real Estate Services businesses. GFI results were consolidated beginning March 2, 2015.
Key financial results
| Metric | Q1 2015 | Q1 2014 | Change / context |
|---|---|---|---|
| Total revenue | $547.6 million | $444.8 million | Up 23.1%; includes $64.4 million of GFI revenue after acquisition |
| Total expenses | $543.9 million | $429.0 million | Up 26.8%, including higher compensation, acquisition-related costs, and interest expense |
| Income before taxes | $36.3 million | $11.2 million | Includes a $29.0 million realized gain on previously held GFI shares |
| Consolidated net income | $26.2 million | $10.5 million | Net income attributable to noncontrolling interests was $12.2 million |
| Net income available to common stockholders | $14.1 million | $8.0 million | Basic and fully diluted EPS were $0.06, versus $0.04 |
| Cash from operating activities | $(63.3) million | $0.1 million | Negative cash flow was substantially affected by working-capital movements, including broker-dealer receivables and payables |
| Cash and cash equivalents | $425.6 million | $648.3 million at year-end 2014 | Down $222.6 million during the quarter |
Revenue less expenses before other income was $3.7 million, compared with $15.7 million a year earlier. Thus, the reported improvement in pretax income depended materially on the $29.0 million GFI remeasurement gain and other income.
At March 31, total assets were $5.29 billion and total liabilities were $4.31 billion. The company reported $841.4 million of notes payable and collateralized borrowings, $150.0 million of notes payable to related parties, and $60.0 million of short-term borrowings. Total interest-bearing obligations across these categories were approximately $1.05 billion. Reported liquidity under management’s definition was $458.3 million; $56.7 million of marketable securities were excluded because they had been lent.
Q1 comprehensive income was $1.1 million, versus $10.8 million, reflecting $25.2 million of other comprehensive losses, including foreign currency translation and unrealized losses on available-for-sale securities.
Material changes and business performance
- In February, BGC acquired control of GFI after paying $331.1 million for tendered shares; together with shares already held, BGC owned approximately 56% at March 31. The acquisition added substantial goodwill and intangible assets and increased reported assets and debt.
- Financial Services revenue rose to $341.4 million from $286.7 million; pretax income increased to $66.6 million from $56.4 million. Reported brokerage growth reflected GFI and other acquisitions as well as organic gains, particularly in foreign exchange and energy and commodities.
- Real Estate Services revenue rose to $198.4 million from $149.1 million; pretax income increased to $16.2 million from $14.4 million. Growth reflected ARA and Cornish & Carey acquisitions, stronger capital-markets activity, and organic growth.
- Brokerage revenue was $485.1 million, up 26.6%. Fully electronic brokerage revenue was $35.4 million, or 7.3% of brokerage revenue, versus $21.2 million, or 5.5%. Separately, electronic trading, market data, and software revenue excluding Trayport was reported at $40.8 million.
- Compensation and employee benefits, including partnership allocations, totaled $383.9 million, or 70.1% of revenue, versus $306.6 million, or 68.9%. Front-office headcount increased 62% year over year to 3,872.
Outlook, risks, and unusual items
- Management expected at least $50 million of annualized GFI-related cost savings by Q1 2016 and at least $90 million by the second anniversary of the transaction. These are targets, not guaranteed results.
- Management stated confidence in a goal of at least $1 billion of Real Estate Services revenue for full-year 2015. It anticipated a Trayport sale before year-end 2015 and cited more than $635 million of additional NASDAQ OMX stock expected over time. These expectations depend on transactions and market conditions.
- The $100 million Tullett Prebon settlement was paid during Q1; it had been accrued at December 31, 2014. The agreement also restricted hiring of each other’s senior employees for one year.
- GFI’s acquired $240 million principal amount of 8.375% senior notes carried 200 basis points of penalty interest following rating downgrades. The $150 million 8.75% convertible notes matured in April 2015 and were converted into approximately 24.0 million Class A shares after quarter-end.
- Risks include market-volume and volatility changes, regulation and capital or clearing requirements, acquisition integration and leverage, access to financing, counterparty and trading exposures, foreign exchange, technology and operational disruption, and related-party arrangements with Cantor. Management reported regulatory net capital above minimum requirements, but $523.4 million of net assets were held in regulated subsidiaries and may be restricted from transfer.
- The filing describes ongoing legal and regulatory matters; management said it could not estimate losses beyond recorded accruals and other disclosed amounts. Clearinghouse guarantees were described as unquantifiable, with the likelihood of payment considered remote. Disclosure controls were assessed as effective as of March 31, 2015.
Important facts for investors to verify
- How much of revenue and earnings growth is organic versus attributable to GFI and other acquisitions, and how results develop after GFI is included for a full quarter.
- Whether the projected $90 million of annualized savings and the $1 billion Real Estate Services revenue target are achieved, and what costs are required to realize them.
- The sustainability of operating cash generation, given negative Q1 operating cash flow and the large decline in reported liquidity.
- Debt, refinancing, and interest-cost developments, including the acquired GFI notes, short-term facility, and post-quarter conversion of the 8.75% notes.
- Whether the Trayport sale and expected NASDAQ OMX stock receipts occur on the anticipated terms and timing; neither is assured by the filing.
- The effect of dilution from note conversions, partnership interests, equity awards, and any further share issuance or redemptions.