BGC Partners, Inc. — Form 10-Q Summary
Reporting period: First quarter ended March 31, 2016; financial statements are unaudited. The filing is by BGC Partners, Inc. (the company identified in the request as BGC Group). BGC operates Financial Services brokerage and technology businesses and Real Estate Services, including Newmark Grubb Knight Frank.
Financial results and position
Unless stated otherwise, amounts below are in millions of dollars. Income-statement and cash-flow comparisons are for the three months ended March 31, 2016 and 2015.
| Metric | Q1 2016 | Q1 2015 | Change / context |
|---|---|---|---|
| Total revenue | $639.0 | $547.6 | Up 16.7%; brokerage revenue rose 17.0% to $567.5. |
| Total expenses | $615.5 | $543.1 | Up 13.4%; compensation and benefits, including partnership allocations, totaled $442.1. |
| Income before income taxes | $21.1 | $36.3 | Down 41.7%; pretax margin was 3.3%, versus 6.6%. |
| Consolidated net income | $16.3 | $26.2 | Down 37.9%. |
| Net income available to common stockholders | $13.7 | $14.1 | Basic and diluted EPS were $0.05, versus $0.06. |
| Operating cash flow | $(202.1) | $(63.3) | Greater cash use, primarily reflecting working-capital movements and employee/partner loans. |
| Cash and cash equivalents | $456.1 | $461.2 at Dec. 31, 2015 | Quarter-end balance. |
| Company-defined liquidity | $680.6 | $1,026.1 at Dec. 31, 2015 | Cash, marketable securities and securities owned; down $345.5. |
| Notes payable and collateralized borrowings | $838.6 | $840.9 at Dec. 31, 2015 | Includes $160.0 principal of 4.50% convertible notes due July 15, 2016. |
Investing activities provided $324.8 million net, including $511.2 million in proceeds from marketable-security sales; financing activities used $130.2 million. Cash decreased $5.1 million during the quarter. The company reported $150 million of available revolving credit capacity, with no borrowings outstanding at March 31. Its public long-term ratings were BBB- with stable outlooks from Fitch and S&P.
At March 31, total assets were $4.55 billion and total liabilities were $3.32 billion. The balance sheet included $191.7 million of marketable securities and $228.0 million of net employee and partner loans, up from $158.2 million at year-end. The company declared and paid $0.14 per common share for the quarter; on April 26, the board declared a subsequent quarterly dividend of $0.16 per share.
Material changes versus the prior comparable period
- Comparisons are affected by the GFI acquisition: BGC included GFI for the full first quarter of 2016 but only from February 27, 2015 in the prior-year reported results. GFI became wholly owned following the January 12, 2016 back-end merger, for which BGC issued approximately 23.5 million Class A shares and paid $111.2 million cash.
- Financial Services revenue rose 21.9% to $416.0 million and segment pretax income rose 39.8% to $93.1 million. Real Estate Services revenue rose 8.1% to $214.5 million and segment pretax income rose 3.6% to $16.8 million. Corporate items reported a pretax loss of $88.8 million.
- Brokerage growth included energy and commodities revenue up 129.6% to $67.5 million, credit up 25.8% to $84.5 million, and equities and other asset classes up 41.4% to $51.2 million. Rates revenue fell about 3% to $118.5 million. Real estate capital markets revenue grew 15.6% to $62.1 million; leasing and other services grew 2.0% to $105.6 million.
- Reported pretax income was pressured by the comparison with Q1 2015, which included a $29.0 million gain on previously held GFI shares. Q1 2016 other income included a reported $11.3 million net realized and unrealized loss on ICE shares received in the Trayport sale, partly offset by an $11.0 million Nasdaq earn-out-related gain in Financial Services.
- Weighted-average fully diluted shares rose to 434.9 million from 338.5 million, reflecting acquisitions and other share and unit activity. BGC repurchased 7.2 million Class A shares for $62.7 million and redeemed partnership interests; the net reduction in fully diluted share count from these actions was approximately 7.6 million.
Outlook, management commentary and risks
- Management said it achieved at least $50 million in annualized Financial Services expense reductions by Q1 2016 and raised its target to at least $100 million of annual savings by year-end 2016. It had previously projected at least $90 million by Q1 2017.
- Management expects Real Estate Services revenue growth to outperform the overall industry by approximately 20% for full-year 2016, citing market-share gains and newly hired brokers expected to become more productive. It provided no overall numerical earnings or revenue guidance in the text provided.
- Management described financial-market volumes as mixed: rates and credit remained pressured by subdued trading and regulation, while some FX, equities, energy and commodities markets improved. It cited low volatility, central-bank policies, bank capital requirements, regulatory changes and competition as factors affecting brokerage activity.
- BGC expected effective cash taxes of no more than $64 million related to the Trayport sale. It had sold more than 80% of the ICE shares received as consideration by March 31. The filing also cites more than $765 million of anticipated Nasdaq earn-out shares over time, based on the April 26 share price; this future value is not recorded on the balance sheet.
- Key risks include market and transaction-volume changes, regulatory and capital requirements, counterparty and market risk, integration and execution of acquisitions and cost savings, employee-loan collectability, cybersecurity and operational disruption, litigation, and uncertainty surrounding the UK’s June 2016 EU membership referendum. The company reported pending legal matters but said it could not estimate losses beyond recorded accruals; management did not expect currently pending matters, taken as a whole, to have a material adverse effect.
Most important facts for investors to verify
- Whether the announced $100 million annualized savings target was achieved by year-end 2016, and the costs and timing of realizing those savings.
- How much of Q1 revenue and segment growth was organic versus attributable to GFI and other acquisitions, given the unequal GFI comparison periods.
- How BGC addressed the $160 million convertible-note maturity in July 2016, and the resulting refinancing cost, dilution or liquidity impact.
- Whether the lower company-defined liquidity reflects recurring working-capital needs, acquisition spending, share repurchases, taxes or other one-time uses, and how much cash is available outside regulated subsidiaries.
- The future value and timing of Nasdaq earn-out shares, the remaining ICE-share exposure, and the company’s progress toward its stated cash-tax estimate for the Trayport sale.
- The dilution and governance implications of acquisition-related shares, partnership units, potential note conversion and Cantor’s voting control; Class B shares carry ten votes per share.