BGC Partners, Inc. — 2019 Form 10-K Summary
Entity note: The supplied filing is for BGC Partners, Inc. (Nasdaq: BGCP), not an issuer named BGC Group, Inc. It covers the fiscal year ended December 31, 2019; the filing was signed February 28, 2020. Unless indicated otherwise, amounts are U.S. dollars.
Business context and reporting period
BGC is a global brokerage and financial technology company serving financial, energy, insurance and other markets. Revenue comes primarily from brokerage commissions and principal transactions, with additional data, software, post-trade, related-party and other fees. Brokerage may be voice, hybrid or fully electronic.
Following the November 2018 spin-off of Newmark, the 2019 results are continuing operations and exclude Newmark. The 2018 comparison is retrospectively presented to show Newmark as discontinued operations through the spin-off date. BGC reported one operating segment.
Financial performance and liquidity
| Metric | FY 2019 | FY 2018 | Change / context |
|---|---|---|---|
| Total revenue | $2,104.2 million | $1,937.8 million | Up 8.6% |
| Brokerage revenue | $1,967.7 million | $1,824.6 million | Up 7.8%; 93.5% of 2019 revenue |
| Data, software and post-trade revenue | $73.2 million | $65.2 million | Up 12.2% |
| Total expenses | $2,021.6 million | $1,815.8 million | Up 11.3%; 96.1% of revenue versus 93.7% |
| Income before income taxes | $138.1 million | $179.8 million | Down $41.7 million; pretax margin about 6.6% versus 9.3% |
| Net income from continuing operations | $84.9 million | $103.7 million | Down 18.1%; net margin about 4.0% versus 5.4% |
| Net income available to common stockholders | $55.7 million | $197.5 million | 2018 includes discontinued-operation results; continuing-operations common income was $73.7 million |
| Diluted EPS from continuing operations | $0.16 | $0.23 | 2019 diluted weighted-average shares rose to 524.6 million, principally reflecting partnership units in the diluted calculation |
| Cash from operating activities | $239.1 million | $(67.3) million | Improved; working-capital movements were significant |
| Cash from investing activities | $(40.6) million | $9.2 million | 2019 included fixed-asset/software investment and acquisition-related activity |
| Cash from financing activities | $18.2 million | $50.9 million | Includes debt issuance and repayments, dividends and partnership distributions |
At year-end, cash and cash equivalents were $415.4 million, while cash segregated under regulatory requirements was a further $220.7 million. BGC’s defined non-GAAP liquidity was $473.2 million, up from $410.9 million. Notes payable and other borrowings were $1,142.7 million, up from $763.5 million; total liabilities were $3,148.7 million and total assets $3,916.1 million. The company reported $291.2 million of regulatory net capital in excess of aggregate regulatory requirements, but regulated-entity assets are subject to restrictions on transfers.
Year-end debt included $300 million of 5.125% notes due 2021, $450 million of 5.375% notes due 2023, $300 million of 3.750% notes due 2024, $68.9 million drawn on a $350 million revolving facility, and collateralized and short-term borrowings. The company issued the $300 million 3.750% notes in September 2019. The revolver maturity was extended to February 2021 in December 2019 and subsequently to February 2023 in February 2020.
Material changes versus the prior comparable period
- Revenue growth was driven by energy and commodities (+25.6%), equities, insurance and other asset classes (+14.3%), rates (+8.2%) and credit (+5.0%). FX revenue fell 6.5% to $370.3 million.
- Acquisitions contributed materially: Ed Broking was acquired in January 2019 and Ginga Petroleum in March 2019; Poten & Partners, acquired in November 2018, also contributed. Energy and commodities growth was partly offset by the sale of CSC Commodities, which generated an $18.4 million gain.
- Expenses grew faster than revenue. Compensation and benefits rose to $1,293.5 million in total, while interest expense increased 41.6% to $59.1 million. Other expenses increased 67.0% to $107.4 million, including costs related to regulatory settlements and acquisitions.
- Fully electronic brokerage was 10.4% of brokerage revenue, versus 10.7% in 2018. Fully electronic brokerage revenue increased 4.4%; data, software and post-trade revenue increased 12.2%.
- The 2019 quarterly pattern was seasonal: revenue was $487.2 million in Q4 versus $466.4 million in Q4 2018, but Q4 2019 recorded a $26.6 million consolidated net loss from continuing operations and a $16.2 million loss available to common stockholders. Q4 results included a $42.8 million “other expenses” charge; the filing attributes higher annual other expenses in part to settlements and acquisition costs.
- Operating cash flow improved substantially, while cash and cash equivalents increased from $336.5 million to $415.4 million. Liquidity growth was attributed primarily to the 2019 notes issuance and increased borrowings, partly offset by acquisitions, working-capital movements and investment in hires.
Outlook, commentary, risks and unusual items
- Management expected newer stand-alone Fenics offerings to incur approximately $40 million of net losses in 2020, an improvement of $15 million from 2019, and targeted break-even in 2021. These newer offerings were not yet generating significant revenue.
- Management expected the insurance brokerage business to operate around break-even for roughly two years while seeking to double its revenue, with a target of margins above 15% by 2022. Its 2019 pretax loss was $18.0 million; revenue growth largely reflected the Ed Broking acquisition.
- Management cited electronic trading, market data demand and post-trade automation as growth opportunities, while noting low rates, accommodative central-bank policies and market conditions as potential volume headwinds. The company is seasonally strongest in Q1 and weakest in Q4.
- BGC expected to propose converting its partnership structure into a corporation. At filing, the stated target was to begin execution around the end of Q3 2020 and complete it around year-end, subject to board review and tax, accounting, regulatory and other approvals.
- The company paid $25.0 million in October 2019 to settle CFTC and New York Attorney General investigations concerning alleged misrepresentations in emerging-market FX options trading in 2014–2015. It agreed to a two-year compliance monitor; the NYAG settlement included a non-prosecution agreement and neither agency imposed a criminal penalty.
- A derivative lawsuit challenging the Berkeley Point acquisition and investment in Real Estate L.P. survived motions to dismiss in September 2019 and proceeded to discovery. BGC said it considered the allegations without merit; the outcome was uncertain.
- Key risks include dependence on trading volumes and market conditions; concentration in the U.K. (about 41% of revenue) and U.S. (about 27%); customer concentration (top ten customers about 30.1% of revenue); regulatory and capital requirements; Brexit-related market access uncertainty; competition and technology execution; cybersecurity and operational disruptions; employee retention; and debt, refinancing and liquidity risks. The filing also discussed the emerging coronavirus outbreak as a potential source of economic and market uncertainty.
- Cantor and its affiliates held all Class B shares, representing about 59.8% of voting power at year-end. Related-party relationships include services, financing arrangements, clearing, sales-agency and other transactions; these may create conflicts of interest.
- The board declared dividends of $0.14 per share for each quarter of 2019, or $0.56 for the year. Future dividends remain discretionary. The annual report’s non-GAAP Adjusted Earnings and liquidity measures are management-defined and should be considered alongside GAAP results.
Important facts for investors to verify
- Review the reconciliation of GAAP earnings to Adjusted Earnings and confirm the assumptions underlying management’s dividend policy and non-GAAP tax rate.
- Assess debt maturities, variable-rate exposure, the revolving facility’s terms and covenants, and cash available after considering regulatory restrictions and the $19.4 million remaining transition-tax balance.
- Track the actual revenue, costs and break-even progress of newer Fenics offerings and the insurance brokerage business against management’s stated targets.
- Monitor the two-year compliance monitor, the derivative suit, acquisition earn-outs and contingent consideration; the filing reports a $42.2 million contingent-consideration liability at year-end.
- Evaluate the effect of the partnership-to-corporation proposal, Cantor’s voting control and related-party dealings, including potential dilution from share and partnership-unit issuance.
- Compare subsequent results with 2019 while accounting for acquisitions, the Newmark spin-off, seasonality, and the differing treatment of discontinued operations and diluted partnership units.