Business context and reporting period
The filing is BGC Partners, Inc.’s unaudited Form 10-Q for the three months ended March 31, 2021, filed May 7, 2021. The company is a global brokerage and financial technology business spanning rates, credit, FX, equities, energy and commodities, insurance, and electronic trading and data services. The filing identifies the registrant as BGC Partners, Inc., which differs from the request metadata’s “BGC Group, Inc.”
Key financial metrics
Amounts are in millions of dollars, except per-share data.
| Metric | Q1 2021 | Q1 2020 |
|---|---|---|
| Total revenue | $567.6 | $603.2 |
| Expenses | $500.4 | $567.1 |
| Income before income taxes | $74.1 | $31.0 |
| Consolidated net income | $59.1 | $20.2 |
| Net income available to common stockholders | $43.1 | $13.7 |
| Basic / fully diluted EPS | $0.12 / $0.11 | $0.04 / $0.04 |
| Operating cash flow | $44.2 | $(71.6) |
Revenue declined 5.9% year over year, while expenses fell 11.8%. Income before taxes was 13.0% of revenue, compared with 5.1% a year earlier; net income available to common stockholders was 7.6% of revenue versus 2.3%. Operating cash flow improved, but reflected substantial offsetting changes in broker-dealer and customer receivables and payables, including unsettled trade balances.
At March 31, 2021, total assets were $5.57 billion, total liabilities $4.68 billion, and total equity $870.4 million. Cash and cash equivalents were $574.4 million; reported company-defined liquidity was $634.2 million, down from $652.6 million at year-end 2020. Notes payable and other borrowings totaled $1.313 billion, with no revolving-credit borrowings outstanding. The debt was principally fixed-rate senior notes; quarterly interest expense was $17.9 million. The $255.8 million carrying value of 5.125% notes was due May 27, 2021, and management expected to repay it.
Material changes versus the prior comparable period
- Brokerage revenue fell 6.2% to $534.0 million, largely reflecting unusually high volatility and trading volumes at the onset of COVID-19 in Q1 2020. Insurance brokerage revenue rose 16.8% to a record $52.4 million, while rates revenue declined 3.3% to $161.8 million.
- Fenics revenue increased 40.0% to $105.6 million: Fenics Markets rose 36.5% to $95.1 million and Fenics Growth Platforms rose 82.1% to $10.6 million. Fully Electronic brokerage revenue increased to $83.7 million, or 15.7% of brokerage revenue, from $56.1 million, or 9.9%.
- Compensation and employee benefits declined 10.7%, and total compensation expense declined 11.7%. Lower variable compensation, lower headcount and the cost-reduction program contributed. Selling and promotion expense fell 60.0%, partly reflecting pandemic-related travel restrictions and cost controls.
- Other income improved to $5.4 million from a $6.0 million loss. Management cited mark-to-market movements and a gain from a litigation resolution in Q1 2021, as well as an equity-method investment impairment in Q1 2020. The filing does not provide a clear amount for the litigation-resolution gain.
- Cash dividends declared and paid were $0.01 per share, versus $0.14 in Q1 2020. The company repurchased about 1.0 million Class A shares for $4.4 million.
Outlook, risks, contingencies and unusual items
- Management expects electronic trading, data and post-trade demand to support Fenics growth, and cited rising U.S. rates, volatility and elevated government debt issuance as potential tailwinds for rates brokerage. Newer Fenics Growth Platforms were not yet fully scaled or generating significant revenue; management expects them to become profitable as they grow. No quantified company-wide earnings or revenue guidance was provided.
- For 2021, management said it intends to prioritize share and unit repurchases over dividends and distributions while continuing investment in Fenics; it planned to reassess the dividend with an aim to increase it modestly toward year-end. Future dividends remain at the board’s discretion.
- Principal risks include market volumes and volatility, COVID-19 effects, regulatory and capital requirements, Brexit-related market access uncertainty, cyber and operational disruptions, counterparty and settlement risk, financing and refinancing needs, and reliance on key personnel. Management noted that a 10% adverse currency scenario would reduce net income by approximately $2.8 million.
- Management concluded disclosure controls and procedures were not effective as of March 31, 2021 because of a material weakness involving U.K. vendor wire-payment validation and certain partnership payment reconciliations. Remediation measures were implemented, but management had not yet established that they operated effectively for a sufficient period.
- A derivative lawsuit concerning the Berkeley Point acquisition and investment in Real Estate L.P. remained pending. Defendants sought summary judgment; trial was set for October 2021 if the motions were not granted. The company said it could not determine the outcome with certainty. Management stated that pending matters overall were not expected, based on available information, to materially adversely affect financial condition, results or cash flows.
- Other items to monitor include the planned repayment of the May 2021 notes, the remaining $40.1 million fair value of acquisition contingent consideration, and $12.2 million of unrecognized tax benefits. The company also continued to explore a possible corporate conversion, subject to tax-policy uncertainty and further review.
Most important facts for investors to verify
- Confirm the registrant identity: the supplied filing is for BGC Partners, Inc., not BGC Group, Inc.
- Check the subsequent repayment and funding impact of the $255.8 million 5.125% notes due May 27, 2021.
- Assess how much of the operating cash-flow improvement reflects sustainable earnings versus settlement and working-capital movements.
- Track whether Fenics Growth Platforms scale and reach profitability, and whether electronic revenue growth offsets weaker voice/hybrid and cyclical brokerage activity.
- Review remediation testing and any later disclosure regarding the material weakness in internal controls.
- Follow the derivative litigation, contingent acquisition payments, dividend policy and any corporate-conversion decision.