Q2 2021 BGC Partners Inc Earnings Call
Ladies and gentlemen, thank you for standing by the conference for will begin shortly please continue to hold and thank you for your patience.
[music].
Welcome to the BGC partners second quarter 2021 the earnings conference call. At this time, all participants will be in a listen only mode.
After the speaker presentation, there will be a question and answer session. Please be advised that today's conference is being recorded I would now like to hand, the conference over to your speaker today.
Craig C tests head of Investor Relations. Thank you and please go ahead.
Good morning, everyone. Today, we should be just the second quarter 2021. The last result press release the presentation filings.
Signings of IR, the BGC partners Dot com we.
We thought you can find additional details on our quarterly results from today's press release, the investor presentation.
Unless otherwise stated of the result of vital on today's call compare only the second quarter of 2021 with the year earlier period.
We will be referring to our results on this call only on an adjusted earnings basis, unless otherwise stated.
We may also refer to adjusted EBITDA as well as liquidity, which we define the cash cash equivalents plus marketable securities that have not been financed reverse repurchase agreements and securities owned less securities loaned and repurchase agreements with.
We define total capital as redeemable partnership interest total stockholders' equity and Noncontrolling interest in subsidiaries. Please.
Please see today's press release for results under GAAP. Please also see the relevant sections in the back of today's press release for the complete and updated definitions of any non-GAAP terms reconciliations of these items the corresponding GAAP results and how when and why management uses of the purse.
Additional information with respect of our GAAP and non-GAAP results mentioned on today's call is available on our website at IR Dot BGC partners Dot com and in our Investor presentation.
We refer to the company's technology driven businesses as facts. The next offerings include Phoenix markets for our platforms for next integrator in market data software solutions and post trade services.
Businesses are categorized as Phoenix integrated at the utilized sufficient levels of technology, such that amounts of their transaction can be or are executed without broker intervention and have expected pre tax adjusted earnings margins of at least 25 per cent.
I also remind you that the information regarding our business on the base.
Call that are not historical are forward looking statements.
These include payments of the effects of the COVID-19 pandemic on results financial position liquidity and the outlook any forward looking statements involve risks and uncertainties.
As required by law of PTC undertakes no obligation to update any forward looking statements and the outlook and targets discussed on this call assumes no material acquisitions, the extraordinary transactions or meaningful changes of the company's stock price for.
For a discussion of additional risks and uncertainties, which could cause actual results differ from those contained in the forward looking statements see because he is the SEC filings, including but not limited to the risk factors in the special note on forward looking information set forth in these filings and any updates to the of disclosures.
And so from reports on form 10-K form 10-Q or form 8-K with that I'm now happy to turn the call over to Howard Lutnick Chairman of the board and CEO of BGC partners.
Thank you Jason.
Morning, and thank you for joining us for our second quarter 2021conference call. Joining me for today's call are <unk>, Chief Financial Officer, and our Chief operating Officer, Sean <unk>.
Our profitability improved across all of adjusted metrics during the quarter, primarily driven by Phenix, which had net revenue growth of 23, 5%. This industry, leading growth reflected strong improvements in rates FX and of our Phoenix worth platforms.
We executed a number of our objectives in the second quarter, including entering into an agreement to sell of our insurance brokerage business for $500 million of cash.
In anticipation of closing the transaction in October we purchased of redeemed $21.2 million shares in units during the second quarter.
While also repurchasing an additional 10 million shares so far in the third quarter.
Additionally, I'm happy to report that yesterday of Bgc's Board of directors increased our share in unit repurchase authorization to $100 million.
<unk> revenue growth was underpinned by strong performance across both the Spanish markets and growth platforms, which improved 21 and over 48%, respectively as compared to last year.
<unk> represented over 21% of BGC total financial services revenue is highest ever contribution.
We expect Phoenix, the continued to outpace our overall business and peer electronic trading platforms with the accelerating conversion of our $1.4 billion voice hybrid business.
Continued JAK innovation, we expect to further expand the growth of Fintech marketplace.
With that I'd like to turn the call over to Steve.
Thank you Howard and Hello, everyone.
As reported in today's earnings release, BGC recorded total revenue of 500 of $12.5 million, 1.3% lower than a year ago.
This performance reflected improved trading activity in May and June following softer industry wide trading volumes in April for Bgc's financial services revenue was 10, 7% lower versus the year ago period.
By geography, we saw Europe, Middle East and Africa revenue declined by 1.3%.
The Americas were down by 2.2%, while Asia Pacific revenues increased by <unk> 9 per cent.
I asked the class rates energy commodities and insurance increased by 2.648, and 18, 6% respectively.
And the equity derivatives and cash equities were down by 2.1, and 1.5% respectively.
Additionally, credit decreased by 24, 2%, reflecting significantly lower industry wide credit trading activity.
Beginning last year, we selectively reduced from the office head count for the focus on underperforming or less profitable brokers.
As a result for.
All of his head count was 8% lower this quarter versus a year ago.
While the slower revenue in the short term it was partially offset by a 6% improvement in average productivity, which drove profitability higher.
As we continue to automate more of our overall business, both the profitability and productivity are expected to increase.
Moving onto the Phenix.
This quarter kind of generated net revenue of $97 million, an improvement of $23.5 per cent.
The next markets recorded revenue of $86.4 million, an increase of 21% and had a pretax adjusted earnings margin of 29, 9% in second quarter.
The next growth platform has generated revenue of $10.6 million, an improvement of $48.4 per cent.
Insurance brokerage had revenue of $54.3 million growing by 18, 6%.
And generated its third quarter, albeit small quarterly profit.
Excluding the results of the insurance brokerage business Bgc's overall pretax margin would have been 2 points higher in the second quarter.
Now moving on to expenses.
Our compensation and employee benefits expense under GAAP and adjusted earnings decreased in the second quarter of 2021 due to lower revenue and cost reduction initiatives previously executed.
Equity based compensation increased 109, 5% due to a substantially lower ordinary share price in the second quarter of 2020.
However, it is important to note that this increase had no impact on share count.
Our non compensation expenses under adjusted earnings decreased 2.2%, reflecting lower occupancy and equipment and other expenses, partially offset by higher selling and promotion expense as COVID-19 restrictions were relaxed Russ many of the major geographies in which we operate.
Moving on to adjusted earnings per.
Pretax income was $98 million, an increase of $6.5 per cent and represents a 140 basis point margin expansion from last quarter.
The record of post tax adjusted earnings of $86.6 million, an increase of 9.3% and the 165 basis points of margin expansion.
We generated adjusted EBITDA of $119.8 million, an improvement of $6.5 per cent and a 171 basis point margin expansion.
Turning to share count.
Our fully diluted weighted average share count increased by 1.2% sequentially to $563.9 million unadjusted earnings in the second quarter of 2021.
It is important to note that all of our share in unit repurchases or redemptions of occurred after the announcement of the sale of our insurance brokerage business on May 26, 2021, and thus had minimal impact on the fully diluted weighted average share count during the quarter.
As of June 32021, our spot share count was 539.3 million a decrease of 3.2% sequentially.
Which reflect the approximately $21.2 million share repurchases for redemptions during the quarter.
In addition, during the third quarter, we had repurchased a further 10 million class a common shares.
We continue to expect to use relative to the more cash with respect of compensation and acquisitions to minimize dilution.
As a result of the agreement to sell of our insurance brokerage business the assets and liabilities associated with this business are presented as held for sale on the balance sheet for the period ending June 32021.
As such balance sheet line items, including cash and cash equivalents are not fully comparable to prior periods. For example, there was $39 million of insurance related cash and cash equivalents included in liquidity at December 31st 2020, whereas all insurance for the cash and cash equivalents are excluded from liquidity as of June 32 does.
Towards the 1 instead of presented within the line item assets held for sale.
In addition to the $500 million cash proceeds from the sale.
We will also receive working capital adjustments related to the cash remaining in the business.
With that said.
As of June 32021 of our liquidity was $469.9 million compared with $652.6 million as of year end 2020.
Cash and cash equivalents were $422 million versus $593.6 million as of December 31st 2020.
It's payable and other borrowings were 1 billion $243.2 million compared with 1 billion surge of $15.9 million.
We repaid the remaining $255.8 million on our 5.125 per cent senior notes that matured on May 27.2021.
The reduced both our cash and debt balances.
Total capital was $808.9 million compared with $828.9 million.
The company continues to explore the possible conversion into the simpler corporate structure.
Bgc's Board of committees of hired advisors and are reviewing the potential structure and details of such conversion.
Should the company decided to move forward with the corporate conversion. It will continue to work with regulators lenders and rating agencies and with that I'm happy to turn the call over to Sean.
Yeah.
Thank you, Steve and good day everyone.
Our Phoenix businesses generated strong net revenue growth of 23, 5% and represented over 21% of our total financial services revenue.
Looking at Phoenix in more detail.
Phoenix markets revenue improved by 21% driven by strong growth across rates FX and market data, partially offset by lower industry wide credit trading activity.
Phoenix made effects, which is the leading wholesale of FX hedging platform grew its revenue by approximately 25% the last year.
Building on the platforms long standing success in the spot FX, we launched Asian, non deliverable forwards the NDS at the beginning of 2021, which has continued to gain traction throughout the year.
Phoenix direct out of web delivered FX option platform had a record quarter and more than doubled its volume and revenues.
Thanks, Mohit data signed a record number of new contracts during the quarter with total contracted value increasing by nearly 150 per cent compared to last year.
Capital Labs N. The match business, our advanced web based matching platform that helps clients reduce foreign exchange exposure generated record revenue during the quarter.
Since its launch in 2017 and the F match has grown its market share and has become a leading solution for post trade risk reduction.
Looking at our Finnish growth platforms.
Revenue improved 48, 4% from a year of gay as these newest standalone platforms continued to scale onboarding, new clients and capture market share.
Phoenix U S. Treasury average daily volumes grew by over 71% this quarter significantly outpacing the overall industry.
Phoenix U S Treasury club market share increased from 10% of year ago to over 17% in the second quarter another quarterly record.
In the second quarter, nearly 65% of all Phenix U S Treasury trades with transacted at price is only off but on the platform.
Has it continued to offer the tightest pricing in the market.
Additionally, Phenix U S T, we'll be launching U S. Repos on the platform. This month, which follows our recent successful launch of U S T bills.
With the increased issuance in the market place CME broker tech volumes were up 30% in July versus last year.
While phenix Ust volumes improved by 113% over the same period.
Please Sandra Bgc's infrastructure and software business generated strong double digit revenue growth of 26% the last year driven by record revenue within the salaries loom the markets and connect businesses.
<unk> connect provides banks and market makers with on demand connectivity to over 1000 endpoints across buy side clients trading firms marketplaces and exchanges.
In addition, the set of connect has become the leading infrastructure network in foreign exchange and is rapidly expanding in other asset classes.
The new markets is the low latency aggregator providing a single access point across multiple fragmented marketplaces and exchanges.
The service revenues are highly recurring and long term.
Thanks go the Bdcs global options electronic trading platform launch the Korean Cosby index options in May 2021, which quickly grew to over 12% of estimated block size front month market share in June <unk>.
Additionally, <unk> go has continued to scale hang thing Hs cei option volumes, where it go represented over 26% of estimated market share in June 2021, only 6 months after launch.
Following on the success of its recent APAC expansion Phenix go plans to launch the U S listed options by the end of 2021.
Fedex portfolio of match of newly developed the session based credit portfolio trading solution continued to gain traction during the quarter with volume quadrupling versus the first quarter of 2021.
Since its fourth quarter 2020 launch over 30 bank Counterparties of uploaded bond portfolios totaling over $650 billion in notional value to the platform.
Portfolio of Max currently supports U S and European investment grade credit and European high yield credit, we expect to rollout U S high yield credit sessions in the fourth quarter of 2021.
I've always hybrid business generated revenue of $361.1 million.
Down 8.5% due to continued conversion of voice hybrid to Phoenix revenue.
We saw a favorable rates trading environment during the quarter, particularly across our U S government bond inflation and interest rates swap the businesses.
Our environmental business also saw revenue growth of 51% as.
As we support the reduction of global carbon emissions and promote clean and renewable energy through the facilitation of marketplaces for environmental credits and renewables.
Now turning to our outlook.
I look for the third quarter of 2021 is as follows.
Bgc's revenues of approximately 5% higher for the first 21 trading day of the third quarter 2021, when compared to the same period in 2020.
Therefore, looking forward for the third quarter, we expect to generate total revenue of between 465 and $515 million as compared to $455 million.
We anticipate pretax adjusted earnings to be in the range of $78 million to $98 million versus $69.2 million.
We anticipate our full year 2021 of adjusted earnings tax rate to be in the range of 10% to 12% for us is 11% the full year 2020.
And with that lots of hand over to Howard for closing remarks.
Thank you Sean.
During the second quarter, we executed on the number of our previously stated objectives, we delivered value to our shareholders by entering into the agreement to seller of insurance brokerage business.
As of yesterday, we've repurchased or redeemed over 31 million shares and units since the sales announcements.
All while continuing to grow of aesthetics business at the market leading pace.
We are excited about our growth prospects remain highly confident in our Phoenix business. We have built a world class competitor to the CME in cash U S. Treasuries and we recently added U S. T bills, along with plans to launch U S. Repos of this month, we continued to build our future infrastructure to prepare the ENT.
For the U S rates futures business next year.
Our sizable voice hybrid revenue base leaves us uniquely positioned to convert significant amounts of our revenue to higher margin technology, driven Fedex revenues and capitalize on accelerating electronic trading trends.
With that operator wed like to open the call for questions. Please.
We will now begin the question and answer session to ask the question you May Press Star then 1 on your Touchtone phone. If you are using a speakerphone. Please pick up of your handset before pressing the keys. If at anytime you question. That's been addressed and you would like to withdraw your question. Please press Star then 2.
At this time, we will pause momentarily to assemble our roster.
Okay.
Our first question will come from Rich Repetto with Piper Sandler. Please go ahead.
Yes, good morning, Howard and Steve and Sean.
Yes.
The the.
The question I have is first on the update you just gave on AR.
Oh on the expression of the value of Phoenix.
Sometime next.
Great I guess did you say interest rate futures are and interest rate product could you could you just give us more detail I didn't catch all of the.
All of the statement that you made about it Howard.
Sure. So we are we are building our futures infrastructure.
Looking forward to the expectation of launching U S interest rate futures next year.
Inc.
Could you elaborate.
Like for example, who up.
When you launch it will you have a consortium would you likely have a consortium.
To support it and who would be the clearinghouse that would clear of the products.
Yes, so I guess the macro answer is to stay tuned but your your instincts are correct, which is that our expectation is we would like to have a clearer already has margin in the business. So there are 3 for.
There are 3 institutions that have margin there as the CME, obviously, they're not going to do it with us.
ICC.
And there's the sch and we would like to do business with those counterparties of central clearer as to give cross margining and 1 pipe clearing to those who trade on our rates platform secondarily. We work, we have been talking to our customers and clients and.
And we think we've gotten the great reception and are very excited about the opportunity to create a competitor to the Chicago mercantile exchange's monopoly in rates futures and so I think we will have broad support from those players and works for them and exactly how I look forward to updating you next quarter.
Okay. So plans, even though we didn't launch until next year you might have planned the.
The structure of it.
Outlined as far as who's involved outlined sooner much sooner.
My objective.
Jim I don't control.
All things, but the objective of myself for my company is to have a.
And other.
Dave for you.
With some level of precision next quarter on this call.
Yeah.
Great great Okay.
Hey al.
Stay tuned as you put it Howard.
The next question is for Steve.
On the fees on the interest and dividends they went up substantially quarter to quarter and I'm just trying to see.
You might have mentioned this in prepared remarks, I might've missed but I think I know, but can you just tell us what what the increase was driven by.
Yeah, you're talking about specifically of the line, which is the the combination of fees from related parties and interest and dividends. It specifically relates the real change is embedded within that quarter over quarter is driven by dividend income from our specific investments.
That's what's driving that.
And would that be.
By any chance the NASDAQ private market sale or.
I'm not in a position to answer to that answer the question.
Pretty good guess alright good.
Anyway.
Lastly on the on the buyback.
I got debt the buyback the level that you had this quarter was only for 1 month of it.
I understood it right from.
When you talk about the proceeds from the insurance sale does that.
The way it should be interpreted debt.
That's correct the button.
The the buyback is heavily weighted towards the end of the quarter.
I'm sorry, it's the lab.
So last quarter, obviously, we didn't start buying back shares until after we announced the the insurance sales, which was at the end of May and so we did buy back.
21 million shares, but right at the end of the quarter and then in July we purchased 10 million class a.
The shares in the month of July and most of you what happens in August and September.
So if you were to get proceeds from besides.
The insurance well, let me just ask quick the NASDAQ private markets I'm, just trying to understand.
Would that sale generate more cash proceeds that could be potentially used.
Okay.
Share repurchase.
I don't think we have.
Another event that is producing cash to do of share repurchase other than the fact that as you recall company is currently paying a 1 cent dividend and is a strong cash flow generator. So I think our ability to buy back shares going forward.
The strength in both by our insurance sale and the cash flow generation of the company.
Okay, and now I would think of them remember the the NASDAQ stock that's not with BGC P.
The payments or any additional debt would go to.
The.
The real estate company right.
The trial that you'd like to hear if you'd like to hear all of that the manufacturer transaction, yes, the chimney into new marks the earnings on Friday.
Understood understood. Okay. That's all I have thank you.
Again, if you have a question. Please press Star then 1 our next question will come from Patrick O'shaughnessy with Raymond James. Please go ahead.
Hey, good morning in the credit space trade web seems to be having a lot of success with the dealer sweep solution. You guys. Today mentioned Phoenix portfolio of match is that essentially of competitive response to dealer sweeps.
Yes.
[laughter].
And how would you differentiate relative to dealers.
Come on come out of Patrick you've never heard me answer so short.
Yeah.
Yes.
It is what it is.
It isn't the same genre.
As dealer sweeps.
Of these broad based and we have connectivity to a broad range of market participants.
But it is intellectually understand genre, obviously with a multiple nuanced difference because we built the more recently and therefore.
I think it has much more nuance, it's much more effective for the clients.
But in the same genre of Krishna.
Okay appreciate that.
The update on your plans to.
Do full segment reporting breaking up the phenix from the rest of the business.
Yeah.
I guess the simple answer is no update on that I do I did say before when I was answering the.
The question that we do expect to have a more detail.
Conversation with respect to our futures business, and who will participate with us and exactly how we plan to be clearing that and all of those pieces next quarter. So I think that will.
Go a long way towards defining.
Our first step in that process.
Okay, and then speaking of.
The longer duration processes any update on the potential.
Conversion away from the partnership structure or is that still kind of where it's been.
The the.
Prepared remarks said Steve game.
Were to show you that they are the board and its advisers are hard at work.
Trying to execute on that and to be in a position to make the decision to whether they'd like to go forward, but they are hard at work on it they're examining it.
And moving moving forward. It is it is something we want to deeply consider and we are getting in a position to be able to make such a decision hopefully by the end of the year.
Got it I appreciate that.
Steve balance sheet question for you there was a.
Relatively large drop in your segregated cash quarter over quarter is that just a function of moving the insurance brokerage assets into assets held for sale.
Really entirely of that.
Okay I appreciate that.
And your GAAP.
GAAP to non-GAAP reconciliation in the non compensation expenses, there was a $9.3 million.
Add back this quarter I think in the press release. It just kind of said just the non recurring item can you provide any additional color on what that charge was.
Those are as.
As we've had in the past from time to time, those could be things such as litigation settlements or corresponding fees.
Reserves and the like.
Okay. Thank you very much.
Yes.
As there are no more questions. This concludes our question and answer session I would like to turn the conference back over to Mr. Lutnick for any closing remarks.
Okay. Thank you all for joining us and we look forward to.
Kevin together with you next quarter.
We are excited that we have been able to execute on a number of fronts that we discussed and we look forward to continuing that process and updating you next quarter on both sides.
Share repurchases and the success of the company. Thank you all for spending time with US. This morning, and we look forward to speaking to you again shortly.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.