BGC Partners, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; filed May 9, 2023. The filing is by BGC Partners, Inc., not BGC Group, Inc. BGC Group was the planned successor holding company under the proposed Corporate Conversion.
Business context
BGC is a global financial brokerage and technology company serving institutional markets across Rates, Credit, FX, Equities, Energy and Commodities, and other products. It reports one segment, brokerage services, and provides Voice, Hybrid and Fully Electronic execution alongside data, software, clearing and post-trade services.
Financial performance
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Total revenue | $532.9 million | $506.5 million | +5.2% |
| Total expenses | $500.0 million | $463.4 million | +7.9% |
| Income before income taxes | $33.2 million | $45.4 million | -26.7% |
| Consolidated net income | $21.2 million | $30.7 million | -31.1% |
| Net income available to common stockholders | $19.0 million | $26.0 million | -26.9% |
| Basic and fully diluted GAAP EPS | $0.05 | $0.07 | Down |
| Operating cash flow | $24.5 million | $(9.9) million | Improved |
Revenue growth came mainly from brokerage commissions and electronic/data-related services. Brokerage revenue rose 4.2% to $492.2 million; commissions increased 5.8%, while principal-transaction revenue was nearly flat. Data, software and post-trade revenue grew 12.4% to $27.1 million. Interest and dividend income rose to $5.3 million from $2.4 million, primarily reflecting higher rates.
By product, Rates revenue increased 3.7% to $164.7 million; Energy and Commodities rose 8.8% to $89.7 million; Credit increased 6.7% to $89.5 million; FX was essentially flat at $80.2 million; and Equities rose 1.5% to $68.1 million. Fully Electronic brokerage revenue increased 11.9% to $113.2 million and represented 23% of brokerage revenue.
Profitability and costs: Pretax margin declined to about 6.2% of revenue from 9.0%; common-stockholder net income margin fell to about 3.6% from 5.1%. Total compensation expense rose 10.6% to $348.6 million, including a 40.6% increase in equity-based compensation and partnership allocations to $81.4 million. Higher compensation was the principal reason expenses grew faster than revenue.
Cash flow, balance sheet and debt
- Cash and cash equivalents were $493.5 million at March 31, 2023, versus $485.0 million at December 31, 2022. Management’s non-GAAP liquidity measure, cash plus financial instruments owned and adjusted for specified financing items, was $534.8 million, up from $524.3 million.
- Operating cash flow was $24.5 million. Investing activities used $39.0 million, including $26.2 million for acquisitions and $12.2 million of capitalized software development. Financing activities provided $16.7 million, including $135.0 million of debt and collateralized borrowing proceeds and $61.6 million of repayments.
- Total assets were $4.48 billion and total liabilities were $3.67 billion. Broker-dealer and customer receivables and payables rose sharply from year-end, primarily reflecting unsettled matched-principal transactions; the filing says substantially all reported fails and pending trades subsequently settled at contracted amounts.
- Notes payable and other borrowings totaled $1.12 billion at quarter-end, including $449.6 million carrying value of 5.375% senior notes due July 24, 2023, $298.8 million of 3.750% notes due October 2024, $298.3 million of 4.375% notes due December 2025, and $73.3 million carrying value under a $375 million revolving facility. The revolver balance was reported net of deferred financing costs; MD&A describes a $75 million draw. Short-term borrowings were $2.0 million.
- Management said it intended to refinance the July 2023 notes or use cash on hand, operating cash flow or the revolver to repay them. After quarter-end, BGC drew an additional $35 million on the revolver; reported total outstanding borrowings were $105 million as of April 27, 2023, at a 6.8% rate.
- Management stated cash flows and financing arrangements were sufficient for requirements over the next twelve months and beyond. Regulated subsidiaries held $743.9 million of net assets and aggregate regulatory net capital exceeded requirements by $417.6 million; regulatory restrictions may limit transfers of capital.
Changes, outlook and management commentary
- Management attributed the quarter’s revenue growth to higher client activity and trading volumes, particularly in Rates and Credit, growth in renewable energy and ship chartering, and expansion in Fenics. Fenics revenue increased 12.0% to $140.4 million; Fenics Growth Platforms revenue rose 33.1% to $17.4 million, though management said newer platforms were not yet fully scaled.
- Management expected a robust macro trading environment and sustained higher secondary-market volumes in Rates, Credit and FX during 2023, with continued growth. It reported overall revenue up 9% through the first 19 trading days of Q2 2023. These are forward-looking statements, not a quantified full-year revenue or earnings forecast.
- BGC UST revenue grew 24% in Q1, with average daily volume of approximately $37 billion; Portfolio Match average daily volume grew more than tenfold. FMX, the planned electronic U.S. Treasury and Rates futures platform, remained subject to final CFTC approval; strategic investors were expected to be announced before launch.
- BGC completed its acquisition of Trident, a commodity brokerage and research business, on February 28, 2023. Total consideration for Q1 acquisitions was approximately $35.9 million, subject to adjustments; purchase accounting remained preliminary.
- The planned Corporate Conversion was expected to close immediately after Q2 ended June 30, 2023, subject to regulatory approvals, shareholder approval and other closing conditions. BGC expected to become BGC Group, Inc., with Class A shares trading on Nasdaq under ticker BGC. The filing provides no clear numeric estimate of the conversion’s future tax rate.
- Capital allocation priorities shifted toward share and unit repurchases over dividends, while continuing investment in Fenics. The Board declared a $0.01-per-share Q1 dividend, payable May 31, 2023. The company had $372.1 million remaining under its $400 million share repurchase and unit redemption authorization at March 31.
Risks, contingencies and unusual items
- Transaction-based revenue is exposed to trading volumes, market volatility, interest rates, client activity and liquidity conditions. Management also cited macroeconomic uncertainty, inflation, the stronger U.S. dollar and disruption or stress among financial institutions. A 10% strengthening of the dollar against both the euro and pound sterling was estimated to reduce net income by approximately $3.1 million.
- The company recorded a $2.0 million Q1 2023 CECL provision associated with unsettled trades related to Russia’s invasion of Ukraine; its total CECL reserve was $16.8 million at quarter-end. BGC said it had ceased trading with sanctioned Russian clients and had derived less than 1% of total revenue from its Moscow branch and sanctioned Russian counterparties.
- Two notable legal matters remain: an appeal of a 2022 Delaware judgment in favor of BGC and related defendants concerning the Berkeley Point/Real Estate L.P. transaction, with oral argument scheduled for May 24, 2023; and a March 2023 putative class action by former limited partners alleging contract and antitrust violations, seeking at least $5.0 million in damages and injunctive relief. BGC stated it believes the latter suit has no merit. Management said it could not estimate losses beyond recorded accruals and did not expect pending matters to have a material adverse effect.
- Other exposures include regulatory capital and compliance requirements, counterparty and settlement risk, cyber and operational risk, foreign-exchange risk, and dependence on key personnel. The filing reported no material change to previously disclosed risk factors and no material change in internal control over financial reporting; disclosure controls were assessed as effective.
- Equity-based compensation and partnership allocations increased substantially and affected GAAP expenses. The company’s Adjusted Earnings and Adjusted EBITDA are non-GAAP measures that exclude specified items; investors should assess them alongside GAAP results.
Most important facts for investors to verify
- How BGC plans to repay or refinance the $450 million of 5.375% notes due July 2023, and the subsequent revolver balance, cost and availability.
- Whether trading-driven revenue growth and Q2 momentum continue, and whether higher compensation costs moderate enough to support margin recovery.
- Progress, approval status, launch timing and funding needs for FMX, and whether Fenics Growth Platforms can scale toward profitability as management expects.
- Corporate Conversion closing conditions, actual completion date, resulting tax rate and any effects on ownership, governance or reported results.
- Developments in Russia-related credit reserves, the Delaware appeal and the former-partner class action; also review related-party arrangements and dilution from share and partnership-unit issuances.