BGC Partners, Inc. — Form 10-Q Summary
Entity note: The supplied filing is for BGC Partners, Inc., not BGC Group, Inc. It covers the quarter and nine months ended September 30, 2012; the financial statements are unaudited.
Business context and reporting period
BGC is a global brokerage and financial technology company serving wholesale financial and real estate markets. Its businesses include Financial Services and, following acquisitions, Real Estate Services under the Newmark Grubb Knight Frank platform. The company acquired Newmark in October 2011 and substantially all Grubb & Ellis assets in April 2012; 2011 comparisons therefore exclude those real estate operations.
Key financial metrics
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Total revenue | $440.3 million | $379.9 million | $1,284.8 million | $1,109.5 million |
| Operating income (loss) before tax | $3.6 million | ($4.5 million) | $27.0 million | $43.5 million |
| Consolidated net income (loss) | $1.0 million | ($3.1 million) | $17.1 million | $31.4 million |
| Net income (loss) available to common stockholders | ($0.5 million) | ($2.0 million) | $9.7 million | $16.3 million |
| Basic EPS | $0.00 | ($0.02) | $0.07 | $0.15 |
| Operating pretax margin | 0.8% | (1.2%) | 2.1% | 3.9% |
- Revenue and segments: Q3 revenue grew 15.9%, but Financial Services revenue fell 20.6% to $292.6 million as market activity declined. Real Estate Services contributed $136.3 million. For nine months, Financial Services revenue fell 11.9% to $946.5 million, while Real Estate Services contributed $308.9 million.
- Costs and margins: Q3 total expenses rose 13.6% to $436.7 million; compensation and benefits were $288.7 million, or 65.6% of revenue. Nine-month expenses increased 18.0% to $1,257.8 million, outpacing revenue growth.
- Cash flow: Nine-month operating cash flow was $95.7 million, versus $37.3 million in 2011. Investing used $103.5 million and financing used $48.3 million. Cash and cash equivalents were $313.3 million at September 30, down from $369.7 million at year-end 2011. Management’s broader cash position, including unencumbered liquidity securities, was $345.3 million, down $40.4 million from the start of the year.
- Debt and liquidity: Notes payable and collateralized borrowings totaled $446.5 million, including $150 million of 8.75% convertible notes, $142.2 million carrying value of 4.50% convertible notes, $108.8 million carrying value of 8.125% senior notes, and $45.5 million of collateralized borrowings. No short-term borrowings were outstanding at quarter-end; the $130 million revolving facility had no borrowings as of October 31. Current assets and current liabilities are affected substantially by matched brokerage settlement balances, so the filing does not provide a conventional current ratio as a standalone liquidity measure.
- Capital and regulatory liquidity: Regulated subsidiaries held $347.8 million of net assets and had aggregate regulatory net capital $157.3 million above requirements. The company paid $72.3 million in dividends and $68.0 million in partnership distributions during the first nine months.
Material changes versus prior comparable periods
- Reported revenue growth mainly reflects the addition of Newmark and Grubb & Ellis; underlying Financial Services brokerage weakened. Q3 brokerage revenue rose 6.5% overall, as real estate brokerage offset declines across financial asset classes.
- Q3 Financial Services pretax income fell 48.7% to $44.2 million; nine-month segment pretax income fell 22.2% to $179.2 million. Real Estate Services reported pretax income of $9.8 million for Q3 and $13.7 million for nine months.
- Common-stockholder results remained negative in Q3 despite positive consolidated net income, reflecting income allocated to noncontrolling interests. Nine-month consolidated and common-stockholder income both declined year over year.
- Cash from operations improved, but cash balances and the broader cash position declined, reflecting dividends and distributions, investment activity, and settlement-related cash use.
- Debt increased with the June 2012 issuance of $112.5 million of 8.125% senior notes; proceeds repaid short-term borrowings and supported general corporate purposes, including acquisitions. The company’s Moody’s rating was downgraded to Ba2 from Ba1 on October 4, 2012, with a stable outlook.
Outlook, commentary, risks, and unusual items
- Management gave no numerical earnings or revenue guidance. It cited low volatility and lower industry volumes as near-term headwinds, while expecting long-term support for Rates from government borrowing and anticipating possible recovery in Credit as regulatory uncertainty eases.
- Management expects electronic brokerage to expand and says technology investment and growth of the real estate platform may improve profitability over time. Fully electronic, market data, and software revenue was $42.5 million, or 14.5% of Financial Services segment revenue, in Q3; electronic brokerage represented 8.7% of total brokerage revenue.
- Front-office headcount rose 44% year over year to 2,562, while average Q3 revenue per broker or salesperson fell 26.5% to approximately $154,000. Management attributed the decrease to lower Financial Services volumes and the productivity ramp-up of new hires.
- Q3 other revenue included a $2.4 million legal settlement. Nine-month equity-method investment losses were $8.1 million, including losses associated with ELX; the company disclosed up to $46.8 million of maximum exposure to loss for unconsolidated variable-interest entities.
- Material legal matters include Tullett-related employment and competition disputes, including a FINRA arbitration with claimed damages of at least $779 million plus exemplary damages of at least $500 million, and a separate arbitration seeking at least $14 million. The company disputes the claims and says management does not expect pending matters to materially adversely affect results, but outcomes are uncertain.
- The FSA’s risk-mitigation program was considered concluded after a skilled-person review largely endorsed the remediation; a small number of recommendations remained for consideration. The company also faces ongoing regulatory and market risks, including changing OTC derivatives rules, low trading volumes, counterparty and settlement exposures, and possible further effects from credit-rating changes.
- On November 1, the board declared a $0.12 quarterly dividend payable November 30. The filing also disclosed subsequent equity issuance and, on November 5, approval of a new 10 million-share controlled equity offering and a shelf registration relating to 20 million shares.
Most important facts for investors to verify
- Confirm the reporting entity: the filing is BGC Partners, Inc., notwithstanding the request metadata naming BGC Group, Inc.
- Separate acquisition-driven Real Estate Services growth from underlying Financial Services performance, and assess whether integration and acquired-business profitability are sustainable.
- Reconcile consolidated earnings to common-stockholder earnings, including noncontrolling-interest allocations, and evaluate compensation and equity-award costs.
- Review cash availability at regulated subsidiaries, settlement-related receivables and payables, debt service, covenant compliance, and the impact of the Moody’s downgrade.
- Track dilution from convertible notes, partnership-unit exchanges, equity offerings, and the newly approved offering program, along with dividend and redemption cash demands.
- Monitor the outcomes and potential costs of the Tullett disputes, regulatory reviews, and commitments to ELX and Epsilon Networks.