BGC Partners, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2022. The filing is by BGC Partners, Inc. (Nasdaq: BGCP), a global financial brokerage and technology company; the supplied filing identifies the registrant as BGC Partners, not BGC Group.
Business context and performance
BGC brokers rates, foreign exchange, credit, equities, energy and commodities, and futures products through voice, hybrid and electronic channels. It also provides data, software, connectivity and post-trade services. Results are exposed to trading activity, market conditions, currency movements and regulation. The insurance brokerage business was sold on November 1, 2021, affecting year-over-year comparisons.
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Total revenue | $416.6m | $473.7m | $1,358.8m | $1,553.8m |
| Income (loss) before tax | $19.0m | $(20.6)m | $95.8m | $71.8m |
| Consolidated net income (loss) | $8.2m | $(13.9)m | $55.3m | $64.7m |
| Net income (loss) available to common stockholders | $5.8m | $(11.4)m | $46.5m | $47.6m |
| Basic EPS | $0.02 | $(0.03) | $0.13 | $0.12 |
| Operating cash flow | Nine-month figures: $131.9m | Prior-year nine-month: $306.1m |
Financial position, liquidity and capital
- Revenue and margins: Q3 revenue fell 12.1%; management attributed most of the decline to the prior-year insurance business, which contributed $51.5m in Q3 2021. Brokerage revenue excluding insurance fell 2.7%. Q3 pretax margin was 4.6%, versus a 4.4% pretax loss margin a year earlier. For the nine months, revenue declined 12.5%, while pretax income increased to $95.8m.
- Revenue mix: Q3 Fenics revenue rose 10.8% to $105.6m, or 25.4% of company revenue. Fenics Markets revenue grew 9.7% to $92.9m; Fenics Growth Platforms revenue rose 19.4% to $12.7m. Data, software and post-trade revenue increased 7.1% in Q3.
- Cash and liquidity: Cash and cash equivalents were $473.3m at September 30, 2022. Company-defined liquidity was $510.8m, down $84.1m from December 31, 2021, primarily due to working-capital movements, repurchases and redemptions, dividends and distributions, taxes, hiring and Fenics investment. Management said cash flows and financing arrangements were sufficient for requirements over the next 12 months and beyond.
- Debt: Notes payable and other borrowings totaled $1,050.1m, plus $1.9m of short-term borrowings. Senior notes include $450m principal at 5.375% due July 2023, $300m at 3.750% due October 2024, and $300m at 4.375% due December 2025. The $375m revolving facility, extended to March 2025, had no borrowings outstanding. The 5.375% notes are the nearest major maturity.
- Cash flow and shareholder returns: Nine-month operating cash flow was $131.9m, compared with $306.1m in 2021. The company repurchased $79.3m of Class A stock and paid $11.1m in dividends during the first nine months. A $0.01-per-share Q3 dividend was declared after quarter-end. Management said it expects to prioritize share and unit repurchases over dividends and distributions.
Material changes and management outlook
- The insurance disposition reduced reported revenue and expenses versus 2021; it generated $534.9m of gross cash proceeds and a $312.9m gain in 2021. Excluding that disposed business, Q3 brokerage revenue declined 2.7%.
- A stronger U.S. dollar weighed on reported results: management estimated Q3 revenue would have been $23m higher absent currency effects, excluding insurance. The dollar also reduced U.K. and European expenses.
- Q3 product performance was mixed: rates revenue increased 1.1% and FX 0.7%; equities fell 11.6%, energy and commodities 7.2%, and credit 1.3%. Management cited stronger rates and FX activity but weaker activity in several other markets.
- Management expects sustained higher secondary-market volumes in rates, credit and FX through 2023, and broad-based growth across most products going into 2023. It cautioned that unusually high volatility had reduced activity for some participants and that future trading volumes remain uncertain.
- FMX’s regulatory approvals were expected in Q1 2023, with a targeted Q2 2023 launch. BGC also anticipated launching a cryptocurrency exchange in 2023 and continued developing related brokerage and infrastructure offerings.
- The company was pursuing conversion from an Up-C to a full C-corporation, with definitive agreements expected before year-end 2022. Management said it was identifying operational synergies it expected to significantly offset the higher corporate tax rate; completion and financial effects were not assured.
Risks, contingencies and unusual items
- BGC recorded $10.8m of CECL reserves during the first nine months for potential losses associated with Russia’s invasion of Ukraine and sanctioned Russian counterparties. It disclosed up to $1.4m of possible incremental exposure at September 30, based on unsettled-trade securities values. The company had ceased trading with sanctioned clients; Moscow and sanctioned-counterparty revenue had been less than 1% of total revenue.
- Receivables from and payables to brokers, clearing organizations and customers rose substantially, largely reflecting unsettled matched-principal trades and fails. Management said substantially all open fails and pending trades at quarter-end subsequently settled at contracted amounts.
- The company faces market, counterparty, foreign-exchange, interest-rate, operational, cybersecurity, regulatory and liquidity risks. It also notes that regulated subsidiaries’ capital may not be freely available to the parent.
- Legal proceedings are ongoing. In a derivative suit challenging the Berkeley Point and real-estate investment transactions, the court ruled for BGC and entered final judgment on September 27, 2022; plaintiffs notified the court they intended to appeal. Management considers the appeal without merit but says litigation outcomes are uncertain. Management stated other pending matters were not expected to have a material adverse effect based on currently available information.
- The filing reports effective disclosure controls as of September 30, 2022 and no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- How much of the reported revenue decline reflects the insurance sale and currency translation, versus underlying brokerage activity and volume trends.
- Whether operating cash flow and the $510.8m company-defined liquidity measure remain adequate as working capital, regulatory capital needs and investment spending change.
- Plans and funding for the July 2023 maturity of the 5.375% notes, and the terms and availability of the undrawn $375m revolving facility.
- Updates to Russian-related credit reserves and unsettled-trade exposure, as well as the collectability and concentration of employee loans and receivables.
- Execution, approval timing, capital needs and expected economics for FMX, cryptocurrency initiatives and the proposed corporate conversion.
- Potential dilution and voting control: at quarter-end, Cantor and CFGM held all 45.9m Class B shares, representing approximately 58.6% of voting power; fully diluted weighted-average shares were 497.0m for Q3.