BGC Partners, Inc. — Form 10-Q Summary
Reporting period: Three months ended March 31, 2013; unaudited. The filing identifies the registrant as BGC Partners, Inc., not BGC Group, Inc. Its business spans Financial Services brokerage and technology and Real Estate Services. Comparisons with Q1 2012 are affected by the 2012 Grubb & Ellis acquisition and the resulting expansion of the real estate business.
Financial performance and position
| Metric | Q1 2013 | Q1 2012 / comparison |
|---|---|---|
| Total revenue | $445.0 million | $395.0 million; up 12.7% |
| Operating income before taxes | $13.7 million | $18.9 million; down 27.6% |
| Pre-tax margin | 3.1% | 4.8% |
| Consolidated net income | $10.6 million | $11.7 million |
| Net income available to common stockholders | $7.0 million | $8.2 million |
| Basic and diluted EPS | $0.04 | $0.06 |
| Operating cash flow | $7.5 million | $(11.8) million |
- Revenue mix and segments: Brokerage revenue rose 4.2% to $386.7 million. Real Estate Services revenue increased 172% to $112.7 million, substantially reflecting acquired operations; the segment reported a $3.1 million pre-tax loss, compared with a $1.2 million loss. Financial Services revenue declined 6.0% to $323.8 million, while its pre-tax income fell 16.2% to $64.1 million.
- Drivers and costs: FX revenue increased 1.1%, while Credit revenue declined 18.1% and Equities and Other Asset Classes declined 8.8%. Total expenses rose 14.7% to $431.3 million. Compensation and benefits, including partnership allocations, increased to $296.8 million, or 66.7% of revenue, from $252.8 million, or 64.0%.
- Cash and liquidity: Cash and cash equivalents were $338.4 million at quarter-end, down from $388.4 million at December 31, 2012. Including unencumbered securities, the company-defined cash position was $370.4 million, down from $420.4 million at the start of the quarter. Management attributed much of the decline to quarter-end matched-principal settlement and fail funding, which it said substantially reversed early in Q2.
- Debt: Notes payable and collateralized borrowings totaled $446.5 million, including $150 million of 8.75% notes payable to Cantor Fitzgerald. The $130 million revolving credit facility had no borrowings outstanding; it was due to expire June 23, 2013, and the company said it was reviewing a possible extension or renewal. Fixed-rate debt outstanding was $446.5 million.
- Balance sheet: Total assets were $2.50 billion, up from $1.64 billion at year-end, primarily because broker-dealer and clearing-related receivables and payables increased with settlement activity. Total equity was $411.9 million, versus $427.4 million at year-end. Regulated subsidiaries held $354.9 million in net assets and had regulatory net capital $192.2 million above aggregate requirements.
- Distributions and shares: The company declared and paid $0.12 per share in Q1, versus $0.17 in Q1 2012. Class A shares outstanding were 130.9 million at March 31; fully diluted weighted-average shares were 317.8 million.
Material changes, outlook and risks
- Revenue growth was more than offset by expense growth, and pre-tax income, common-stockholder earnings and EPS declined year over year. The company reported front-office headcount up more than 16% to 2,535, while average revenue per front-office employee fell about 14% to approximately $154,000.
- Management cited low market volatility and lower activity across several Financial Services products as near-term headwinds, while saying it believed BGC gained share relative to inter-dealer broker competitors. It expects electronic trading adoption and continued expansion of the real estate platform to support longer-term growth and profitability. The filing gives no numerical earnings or revenue guidance.
- Proposed NASDAQ OMX transaction: Announced April 1, 2013, after quarter-end, the proposed sale of specified fully electronic benchmark on-the-run U.S. Treasury brokerage, market-data and co-location assets is for $750 million cash at closing, subject to adjustments, plus up to $484 million in NASDAQ OMX stock over 15 years, subject to revenue and other conditions. Closing was expected in the second half of 2013 and remained subject to regulatory and other conditions. BGC said it expected to use proceeds for acquisitions and organic investment, repurchases or debt repayment; it did not expect a special dividend and expected to maintain its regular $0.12 dividend for the foreseeable future. BGC and Cantor would be restricted from specified electronic Treasury brokerage activity for three years after closing, subject to exceptions.
- Contingencies and unusual items: The filing describes significant employment and competitor-related litigation, including Tullett claims seeking very large damages; management said it believed the claims were unwarranted and that pending matters would not materially adversely affect the company, but noted outcomes could not be assured. It also reports patent litigation and regulatory matters. The company disclosed $1.7 million of letters of credit, a maximum exposure of $43.2 million to unconsolidated variable-interest entities, and clearinghouse guarantees whose potential liability it said was not quantifiable but remote. Q1 included $3.3 million of losses on equity investments. Real Estate Services’ reported pre-tax result excludes $5.4 million related to acquired receivables and associated acquisition-accounting expenses.
- Key risks include transaction-based revenue sensitivity to volumes and volatility, regulatory and capital requirements, counterparty and settlement exposure, market and foreign-exchange risks, operating and technology disruptions, financing access and credit ratings, litigation, and the possibility that the NASDAQ OMX transaction does not close. Fitch’s outlook was negative; S&P’s was stable.
Investor verification priorities
- Confirm the registrant and ticker/security identity: this supplied filing is for BGC Partners, Inc., for Q1 2013.
- Assess how much revenue growth and balance-sheet expansion reflect acquisitions and temporary matched-principal settlement balances, rather than recurring organic growth.
- Track compensation costs, segment profitability and productivity as management integrates acquired real estate operations and pursues expense and margin improvements.
- Verify the status, final consideration, closing conditions and proceeds allocation of the proposed NASDAQ OMX asset sale; the earn-out is conditional and spread over 15 years.
- Review debt maturity and refinancing plans, liquidity after distributions and settlement needs, and potential dilution from equity issuance and convertible notes.
- Monitor material litigation and regulatory developments, including the stated contingent exposures and management’s loss assessments.