BGC Partners, Inc. — Form 10-Q summary
Entity note: The filing identifies the registrant as BGC Partners, Inc.; the request metadata names BGC Group, Inc. The filing covers the unaudited quarter and six months ended June 30, 2019. Unless noted, figures are in U.S. dollars and continuing operations.
Business context and reporting period
BGC is a global brokerage and financial technology company serving financial markets through voice, hybrid and electronic brokerage, data, software and post-trade services. On November 30, 2018, BGC spun off Newmark; therefore, 2018 comparative results classify Newmark as discontinued operations. BGC reported one operating segment in this filing. Acquisitions during the first half included Ed Broking and Ginga Petroleum; Poten & Partners was acquired in November 2018.
Financial performance and key metrics
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $551.2m | $491.0m | $1,095.9m | $1,015.8m |
| Brokerage revenue | $511.4m | $463.5m | $1,025.2m | $963.3m |
| Income before tax | $36.8m | $46.9m | $153.8m | $141.2m |
| Net income from continuing operations | $21.8m | $32.4m | $108.9m | $105.0m |
| Net income available to common stockholders | $13.6m | $20.0m | $75.5m | $64.0m |
| Basic EPS from continuing operations | $0.04 | $0.06 | $0.22 | $0.20 |
- Q2 revenue rose 12.2% year over year, while pretax income fell 21.7%. Pretax margin was 6.7%, versus 9.6% in Q2 2018; continuing-operations net margin was 3.9%, versus 6.6%.
- First-half revenue increased 7.9% and pretax income increased 9.0%. Pretax margin was 14.0%, versus 13.9%; continuing-operations net margin was 9.9%, versus 10.3%.
- Q2 total expenses rose 15.0% to $513.7m. First-half expenses rose 7.9% to $983.5m. Interest expense increased to $15.0m for Q2 and $28.2m for the half-year.
- First-half operating cash flow was positive $58.3m, compared with negative $316.6m in 2018. Large movements in matched broker-dealer receivables and payables materially affected working capital and cash flow.
- At June 30, cash and cash equivalents were $399.4m; cash segregated for regulatory purposes was $216.7m. BGC’s stated liquidity measure was $460.9m, up from $410.9m at year-end, primarily reflecting revolving-credit and collateralized borrowings. Total assets were $5.39bn and total liabilities $4.52bn.
- Total borrowings, including short-term borrowings, were $1.067bn: $743.1m of senior notes, $278.7m drawn on the revolving facility, $40.5m of collateralized borrowings and $5.2m of short-term borrowings. The revolving facility matures November 2020; senior notes include $300m due 2021 and $450m due 2023. Credit ratings were BBB- with stable outlooks from Fitch and S&P.
- The board declared a $0.14-per-share Q2 dividend, payable August 28, 2019. First-half dividends paid were $89.0m. The company had $257.3m remaining under its $300m share repurchase and unit-redemption authorization.
Material changes versus the prior comparable period
- Revenue growth was led by energy and commodities (+30.5% in Q2), equities, insurance and other asset classes (+19.3%), and rates (+8.2%). FX revenue declined 0.4%; credit rose 3.5%.
- Data, software and post-trade revenue increased 21.9% in Q2 and 20.3% in the first half. Management reported Q2 Fenics revenue growth of 4.5% and described continued electronic-market expansion.
- Q2 expenses grew faster than revenue, driven by variable compensation, acquisitions and hiring, technology investment, higher occupancy costs and increased interest expense. Occupancy expense also reflected the build-out of BGC’s new U.K. headquarters.
- The first-half comparison includes a $18.4m gain on divestitures and investment sales in 2019. Other income was $21.4m for the half-year, including investment-related gains; these items make reported pretax growth less indicative of underlying operating trends.
- The 2018 comparison includes Newmark discontinued operations: Q2 2018 reported $17.6m of consolidated discontinued-operations income, and first-half 2018 reported $42.4m. BGC’s continuing-operations figures above exclude Newmark.
Outlook, management commentary, risks and unusual items
- No formal revenue or earnings guidance is provided. Management expects to use available resources for debt repayment, hiring, acquisitions, dividends and repurchases while maintaining or improving its investment-grade rating.
- Management expects a $50m net loss in 2019 from investment in newer Fenics offerings, compared with $32.7m in 2018, and expects losses to decline over time as products scale. The new offerings are not yet fully scaled or generating significant revenue.
- Management said it was studying a possible simplification of BGC’s partnership structure, including a possible conversion to a corporation, with an update expected before year-end; there is no assurance a restructuring will occur.
- Key risks include market volume and volatility, interest-rate and foreign-exchange movements, regulatory and capital requirements, Brexit and cross-border access, financing and refinancing needs, acquisition integration, cyber and operational disruptions, and dependence on key personnel and customers.
- A derivative action challenges the Berkeley Point and related commercial real-estate transactions, alleging fiduciary-duty breaches and seeking unquantified damages. Defendants moved to dismiss; the court had not issued a decision by the filing date. Management disputes the claims and intends to defend them.
- Other contingencies include ordinary-course litigation and regulatory matters, clearinghouse guarantees, $2.1m of letters of credit, and contingent acquisition consideration. Management said it could not estimate losses beyond recorded accruals for specific legal matters and did not expect pending matters, based on available information, to materially adversely affect the statements as a whole.
- Adoption of the lease standard on January 1, 2019 resulted in an initial $192.4m right-of-use asset and $206.0m lease liability. At June 30, reported operating lease assets were $176.1m and liabilities $193.1m; the adoption did not affect reported earnings or cash flows.
Important facts for investors to verify
- Reconcile Q2 revenue growth with the decline in pretax income and assess the durability of acquisition-driven revenue and related cost growth.
- Review the composition and cash-flow effects of matched-trade receivables and payables, and distinguish operating liquidity from cash segregated under regulatory requirements.
- Track revolving-facility utilization, interest costs, debt maturities and the capacity to sustain dividends, acquisitions and repurchases.
- Assess Fenics investment losses against the company’s stated 2019 outlook and its ability to convert electronic growth into profitable scale.
- Consider the effect of 2019 investment-sale gains and other nonrecurring or valuation-related items when evaluating underlying earnings.
- Monitor the derivative litigation, contingent acquisition payments, related-party dealings with Cantor, and any decision on the proposed organizational review.