BGC Group, Inc. — Q2 2023 Form 10-Q
Business context and reporting period
This unaudited filing covers the three and six months ended June 30, 2023. BGC is a global brokerage and financial technology company serving institutional markets across rates, credit, foreign exchange, equities, energy and commodities, and futures and options. The reported results are those of BGC Partners, Inc.; on July 1, 2023, the company completed its conversion to a simplified C-corporation structure, with BGC Group, Inc. becoming the public holding company and its shares trading as BGC.
Financial results and liquidity
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Total revenue | $493.1 million | $435.8 million | $1,025.9 million | $942.2 million |
| Pre-tax income (loss) | $(31.3) million | $31.4 million | $2.0 million | $76.8 million |
| Net income (loss) available to common stockholders | $(19.7) million | $14.8 million | $(0.7) million | $40.7 million |
| Basic and diluted EPS | $(0.05) | $0.04 | $0.00 | $0.11 |
| Operating cash flow | Not presented quarterly | $(81.2) million | $54.0 million |
- Revenue and mix: Q2 revenue grew 13.2%; first-half revenue grew 8.9%. Brokerage revenue rose 11.5% in Q2 and 7.6% in the first half. Q2 Energy and Commodities revenue increased 48.0% to $98.7 million; Rates rose 5.2%, Credit 7.4%, and FX 4.3%, while Equities declined 1.6%. Data, network and post-trade revenue increased 15.4% to $27.0 million.
- Margins and costs: Q2 expenses were $525.8 million, or 106.6% of revenue, versus 93.9% a year earlier; pre-tax margin was negative 6.3%, versus positive 7.2%. First-half expenses were $1,025.7 million, or 100.0% of revenue, versus 92.5%; pre-tax margin was 0.2%, versus 8.2%.
- Cash flow: First-half operating cash flow was $(81.2) million, including substantial working-capital movements in broker-dealer receivables and payables. Investing cash outflow was $55.3 million; financing cash inflow was $164.9 million.
- Balance sheet and liquidity: At June 30, cash and cash equivalents were $526.3 million and total assets were $4.08 billion. Management-defined liquidity was $766.8 million, comprising cash, $200.0 million of reverse repurchase agreements, and $40.5 million of financial instruments. The reverse repo was facilitated by Cantor and collateralized by securities.
- Debt: Notes payable and other borrowings totaled $1.394 billion at June 30, including $450 million of 5.375% notes due July 24, 2023 and $350 million of new 8.000% notes due 2028. No revolving-credit borrowings were outstanding at quarter-end. After quarter-end, BGC drew $240 million under its revolver and repaid the $450 million notes. At August 4, the filing reported $950 million of fixed-rate debt and $240 million of revolver borrowings.
- Capital and credit: Total equity was $819.1 million. Regulated subsidiaries held $715.9 million of net capital, $388.8 million above aggregate regulatory requirements. Ratings were investment grade with stable outlooks as of June 30.
Material changes versus the prior comparable period
- Revenue improved, led by Energy and Commodities, alongside growth in Rates, Credit, FX, and electronic/data services. Management said Q2 brokerage revenue grew 11.5% year over year despite mixed industry volumes.
- Profitability deteriorated sharply because compensation costs increased. Equity-based compensation and limited-partnership allocations rose to $126.6 million in Q2 from $46.1 million; this included a $60.9 million charge related to conversion transactions and associated tax payments. Higher variable compensation also contributed.
- Interest expense rose to $19.9 million in Q2 from $14.3 million, partly reflecting the new 8.000% notes and higher revolver-related expense. First-half interest expense was $35.7 million, up from $28.6 million.
- First-half operating cash flow moved from positive $54.0 million to negative $81.2 million. Cash and cash equivalents increased to $526.3 million from $485.0 million at year-end 2022, while management-defined liquidity rose from $524.3 million to $766.8 million, in part due to the new notes and reverse repo.
- Q2 revenue grew across most products, but market conditions were uneven: the company cited lower industry volumes in some medium- and long-term rates, FX, and equities markets, and higher volumes in short-term rates and energy.
Outlook, commentary, risks and unusual items
- Management expected a robust macro trading environment and sustained higher secondary-market volumes in Rates, Credit, and FX through 2023. It cited meaningful interest rates, inflation-related activity, and elevated government debt issuance as potential supports. The filing provides no specific numerical earnings or revenue guidance.
- Management expects continued growth in Fenics and data, network and post-trade businesses, and continued investment in newer Fenics platforms. Fenics Growth Platforms revenue reached a Q2 record $18.1 million, up 46.1%; management noted these newer offerings are not yet fully scaled. FMX was awaiting CFTC approval, with strategic investors and transaction details expected to be announced in Q4.
- Capital allocation priorities are share repurchases and investment in Fenics; management said it plans to prioritize repurchases over dividends. The board declared a $0.01-per-share Q2 dividend, payable September 5, 2023. The $400 million repurchase authorization had $326.4 million remaining at June 30.
- Key risks include transaction-volume and market volatility, regulatory and capital requirements, financing costs and access to funding, credit and settlement exposure, foreign exchange movements, cybersecurity and operational disruptions, Brexit-related market-access uncertainty, and dependence on key personnel. A 10% strengthening of the U.S. dollar against the euro and pound sterling was estimated to reduce net income by approximately $8.3 million.
- Russia-related unsettled trades and receivables remained a credit concern: the company recorded $4.0 million of related CECL provisions in the first half and reported total CECL reserves of $18.5 million at June 30, including $11.0 million against broker-dealer and customer receivables.
- Legal matters include an appeal of a prior decision in favor of BGC in shareholder derivative litigation and a new former-partner class action seeking at least $5.0 million in damages, among other relief. Management believes the pending matters will not materially affect the company, but outcomes cannot be determined with certainty. Clearinghouse guarantee exposure is not quantifiable; management considers payment under those arrangements remote.
- The corporate conversion involved substantial equity-award changes. After conversion, the company reported issuing 38.6 million restricted stock awards, 25.3 million RSUs, and $123.1 million of RSU Tax Accounts. The filing also describes related-party arrangements with Cantor, including administrative services and the $200 million reverse repo.
Most important facts for investors to verify
- Whether underlying compensation and profitability normalize after the one-time $60.9 million conversion-related charge, and how future equity awards affect reported expenses and share dilution.
- The post-quarter debt position, including the use of cash and revolver borrowings to repay the $450 million notes, and the cost and terms of the 8.000% notes and revolver.
- Whether reported liquidity remains available after regulatory restrictions, working-capital needs, and the $240 million revolver draw; also monitor the related-party reverse repo exposure.
- Whether Fenics Growth Platforms, FMX and the data/post-trade businesses meet management’s growth and scaling expectations, including FMX’s regulatory approval and investor announcements.
- Developments in Russia-related credit reserves, litigation, regulatory requirements, and the completed corporate conversion’s effects on governance, voting control, compensation, and fully diluted share count.