BGC Partners, Inc. — Form 10-Q Summary
Entity note: The supplied filing is for BGC Partners, Inc., not a registrant named BGC Group, Inc. It reports the quarter ended September 30, 2016, and was filed November 8, 2016. Amounts below are in U.S. dollars; financial statement amounts are generally in millions unless stated otherwise.
Business context and reporting period
BGC Partners operates Financial Services, a global brokerage and electronic-trading business, and Real Estate Services, a commercial real estate services platform. Comparisons are with the third quarter and first nine months of 2015. The periods are not fully comparable: BGC completed its acquisition of GFI in January 2016, while GFI was included for only part of the comparable 2015 period; BGC also sold Trayport in December 2015.
Key financial metrics
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Total revenue | $643.5 | $685.3 | $1,934.5 | $1,902.0 |
| Income before taxes | $104.5 | $83.3 | $156.8 | $136.9 |
| Consolidated net income | $74.3 | $54.6 | $111.1 | $95.8 |
| Net income available to common stockholders | $60.9 | $38.4 | $90.3 | $61.8 |
| Basic EPS | $0.22 | $0.15 | $0.33 | $0.26 |
| Fully diluted EPS | $0.21 | $0.15 | $0.32 | $0.25 |
| Operating cash flow | Not separately reported for the quarter | $(248.0) | $126.6 |
Q3 income before taxes equaled 16.2% of revenue, versus 12.2% a year earlier; this measure includes substantial other income and should not be read as a measure of recurring operating margin. Total expenses were $638.4 million in Q3 and $1,885.3 million year to date.
- Balance sheet at September 30: Assets were $4,811.9 million; liabilities were $3,568.4 million; total equity was $1,187.0 million. Cash and cash equivalents were $448.5 million.
- Liquidity: Management-defined liquidity, comprising cash, marketable securities and securities owned, was $840.5 million, down from $1,026.1 million at December 31, 2015. This measure is not the same as cash alone and includes securities subject to market-price risk.
- Debt: Notes payable and collateralized borrowings totaled $969.1 million, up from $840.9 million at year-end 2015. The balance included $300 million principal of 5.125% senior notes issued in May 2016; the $160 million 4.50% convertible notes were repaid at maturity in July. A $150 million revolving facility had no borrowings outstanding.
- Cash flow: Nine-month operating cash use of $248.0 million included a $948.5 million increase in broker-dealer and customer receivables, partly offset by a $897.5 million increase in related payables. Investing activities provided $375.1 million, largely reflecting marketable-security sales; financing activities used $142.8 million.
Material changes versus prior comparable periods
- Q3 revenue declined 6.1%, while income available to common stockholders rose 58.7%. Revenue pressure included lower foreign-exchange, energy and commodities, and equities brokerage; the Trayport sale reduced data, software and post-trade revenue by $18.9 million year over year.
- Management attributed an approximately $14 million Q3 revenue reduction to the final eight business days of August, following implementation of initial U.S. margin requirements for certain uncleared derivatives. It also reduced Financial Services front-office personnel by more than 140 year over year, lowering revenue but improving profitability.
- Real Estate Services revenue increased 3.7% in Q3. Real estate capital markets revenue rose 16.6%, while leasing and other services revenue fell 3.2%. Segment pre-tax income declined 7.8%, which management attributed largely to investment in hires and the business.
- For the first nine months, revenue increased 1.7% and common-stockholder income increased 46.1%. The year-to-date comparison reflects GFI consolidation timing, acquisitions, and the loss of Trayport revenue; it is not a like-for-like growth comparison.
- Q3 other income was $91.7 million, including a $67.0 million Nasdaq earn-out gain and an $18.3 million gain from reducing future acquisition earn-out payments. These unusual items materially supported reported earnings. The Nasdaq earn-out is conditional on Nasdaq meeting specified annual revenue thresholds.
- Class A shares outstanding rose to 243.3 million from 219.1 million at December 31, 2015, reflecting acquisition and other issuances partly offset by repurchases. The company repurchased 9.3 million shares and redeemed 5.0 million partnership units during the first nine months.
Outlook, management commentary and risks
- Management expressed confidence in growth from GFI integration, cost synergies, acquisitions, hiring and further migration of voice and hybrid brokerage to electronic trading. It expected newer real estate brokers to become more productive over time. The filing provides no specific numeric revenue or earnings guidance.
- Management cited subdued financial-market activity amid very low interest rates, central-bank asset purchases, bank capital rules and regulatory changes. It noted that initial uncleared-margin requirements disrupted some client activity and could cause further disruption as requirements are phased in.
- The U.K. vote to leave the EU may affect market access, regulation, currency values and client activity. Management said increased volatility could benefit brokerage volumes, but the outcome and timing remained uncertain.
- Other disclosed risks include transaction-volume sensitivity, competition and execution of acquisitions, liquidity and financing access, market and counterparty exposures, foreign-exchange movements, employee-loan collectability, cybersecurity and operational disruptions, and extensive regulation.
- Legal claims and regulatory matters arise in the ordinary course. Management stated it could not estimate possible losses beyond existing accruals and believed currently pending matters would not materially adversely affect the financial statements as a whole. The company also disclosed $1.4 million of letters of credit and unquantifiable, though management-deemed-remote, clearinghouse and exchange guarantees.
- As of September 30, regulated subsidiaries held $544.2 million of net assets and had regulatory net capital $284.3 million above aggregate requirements. The company reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- How much of reported earnings and cash generation is recurring, given the Nasdaq earn-out, acquisition earn-out adjustment, investment gains and other non-operating income.
- The drivers and persistence of negative operating cash flow, particularly settlement-related receivables, payables and employee/partner loans, which reached $254.0 million net.
- Debt maturities, interest costs, credit-rating outlook and remaining liquidity after the GFI transaction, debt repayment, dividends, acquisitions and repurchases.
- The conditions, expected timing and market value of future Nasdaq earn-out shares, and the sensitivity of reported results to securities valuations and hedges.
- Whether GFI integration and real estate hiring produce the revenue growth, productivity and margin improvements management anticipates, while accounting for acquisition timing and Trayport’s disposal.
- Potential dilution and voting implications from share issuance, exchangeable partnership interests and Cantor’s Class B shares; also review related-party arrangements with Cantor.
- Confirm the registrant identity: the filing itself names BGC Partners, Inc., despite the request metadata naming BGC Group, Inc.