Q1 2022 BGC Partners Inc Earnings Call

May 3, 2022

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Ladies and gentlemen, and welcome to the BGC Partners Inc.

First quarter 2020 earnings call just said, even though we will be starting in a couple of moments. Thank you for your patience.

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Welcome to the BGC Partners, Inc. First quarter 2022 earnings conference call.

This time all participants are in listen only mode. After the speaker's presentation. There will be a question answer session. Please be advised that today's conference is being recorded I would now like to hand over the conference to your speaker to today, Jason <unk> head of Investor Relations. Thank you and please go ahead.

Thank you and good morning.

We issued Ptc's first quarter 2022 financial results press release, and the presentation summarizing. These results yesterday after market close you can find these at IR Dot BGC partners Dot com.

Please note you can find additional details on our quarterly results in yesterday's press release and Investor presentation.

Unless otherwise stated the results provided on today's call apparently the first quarter of 2022 with the prior year period and compare revenue excluding insurance due to the.

On November one 2021.

We will be referring to our results on this call only on an adjusted earnings basis, unless otherwise stated.

You may also refer to adjusted EBITDA.

You may refer to our liquidity, which we define as cash and cash equivalents plus marketable securities that have not been financed reverse repurchase agreements and securities owned less securities loaned and repurchase agreements.

Total capital as redeemable partnership interest total stockholders' equity and Noncontrolling interest in subsidiaries.

Please see yesterday's press release results under generally accepted accounting principles or GAAP.

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 to corresponding GAAP results and how when and why management uses such terms.

Digital information with respect to our GAAP and non-GAAP results mentioned on today's call is available on our website at IR BGC partners Com and in our Investor presentation.

We refer to the company's technology, driven business as Phenix Phenix offerings include Phoenix markets and Phoenix growth platforms.

I also remind you that the information regarding our business on today's call that are not historical are forward looking statements.

These statements about the effects of COVID-19.

Impact on the company's business results financial position liquidity and outlook any forward looking statements involve risks and uncertainties, except as required by law BGC undertakes no obligation to update forward looking statements.

Any outlook and targets discussed on this call assumes no material acquisitions buybacks extraordinary transactions or meaningful changes to the company's stock price for.

For a discussion of additional risks and uncertainties, which could cause actual results to the most contained in the forward looking statements see bgc's SEC filings, including but not limited to the risk factors and special note on forward looking information set forth in these filings and any updates to such risk factors and special note on forward looking information contained in subsequent reports on Form 10-K Form 10-Q or form 8-K.

I'm now happy to turn the call over to Howard Lutnick Chairman of the board and CEO of BGC partners.

Thank you Jason good morning, and thanks for joining us on our first quarter 2022 conference call.

I have with me today, BGC, Chief Financial Officer, and our Chief operating Officer, Sean wind yet.

Bgc's adjusted earnings margins continued to improve representing the sixth consecutive quarter of year over year margin expansion, which reflects the increased conversion of our voice hybrid revenue into our higher margin technology, driven Phoenix business.

<unk> continued to grow at an industry, leading pace and represented 25% of Bgc's overall revenue during the first quarter.

We continue to make significant progress building out our <unk> platform, which combines <unk>, leading U S Treasury business with a new state of the art U S interest rate futures platform.

FX partnering with the LCA, which will deliver a comprehensive and efficient cross margining platform across the U S. Dollar based futures and interest rate swaps. Our objective is to create a competitive offering and the enormous currently monopolistic U S interest rate futures market.

We are also progressing on our comprehensive crypto currency offering which includes the expansion of <unk> infrastructure across the crypto currency ecosystem, leveraging our wholesale global electronic trading network to connect the world's largest capital markets participants to the exchanges and market makers.

That class loose.

<unk> is now connected to 26 of the deepest crypto currency liquidity pools with a strong pipeline of additional clients venues and digital custodians to be added throughout the year.

Additionally, we are expanding our electronic and voice hybrid crypto currency execution capabilities globally.

During the first quarter for example.

Do you see brokered the first ever block trade of micro bitcoin options on CMA.

<unk> also added new clients to its crypto currency options, offering, which Leverages its award winning analytics pricing and distribution software.

Our crypto platform is powered by a multibillion dollar global infrastructure and state of the Arts Phenix trading technology.

FX and crypto currencies represent extraordinary opportunities for PTC as they scale in 2023.

On a personal note I'm happy to report that I am cancer free as of March 1st.

I don't want to say, thank you to all of you for your support along the along the way it really made a big difference.

You would like more details about my health.

My most recent update video is available on our website on rumble or on Youtube.

And with that I'll turn the call over to Steve.

Thank you Howard and Hello, everyone.

BGC generated total revenue of $506 5 million slightly lower by 117% as compared to last year excluding insurance.

Total revenue would have been over $10 million higher were up 0.2% over last year, but for the strengthening of the U S. Dollar.

Overall industry wide trading volumes were mixed during the first quarter.

Energy and commodity volumes were higher due to global volatility across the complex.

Rising interest rates and volatility drove trading activity higher in short duration U S rates products. However, a flattening out in an eventual inversion of the U S yield curve significantly.

<unk> and long term cash rates and interest rates swap volumes during the quarter.

Bgc's rates business continues to be well positioned as the market acclimated to the pace of rising interest rates and inflation.

And as the Federal reserve unwind, it's non trillion dollar balance sheet and a piece of <unk> $95 billion per month.

We continue to expect headwinds in our rates business to begin in the latter half of this year.

By geography.

And excluding insurance.

Americas revenue increased by four 9%.

While Europe , Middle East and Africa, and Asia Pacific revenues, both decreased by <unk>, 6% compared to last year.

Yeah.

By asset class.

Energy commodities increased by eight 6% while rates FX equities and credit decreased by 1841, $4 seven and six 8% respectively.

Deeper integration of Phoenix technology across the entire business through front office productivity seven 2% higher during the first quarter.

As we continue to automate our business, we expect productivity and profitability to continue moving higher.

Now turning to finished quarterly performance.

<unk> generated first quarter revenue of $125 3 million.

An improvement of 16, 4%.

Dennis growth platforms recorded revenue of $13 1 million an improvement of 23, 5%.

The next markets generated revenue of $112 3 million.

An increase of 15, 7% and had a pre tax adjusted earnings margin of 34, 2% an improvement of 336 basis points.

Moving on to expenses.

Our compensation and employee benefits under both GAAP and adjusted earnings decreased.

Decreased in the first quarter of 2022 due to the sale of the insurance brokerage business and cost reduction initiatives.

Our adjusted earnings compensation as a percentage of total revenue was 57%, which was over 300 basis points lower versus a year ago.

Our non compensation expenses under GAAP and adjusted earnings decreased by six eight and eight 9% respectively driven.

Driven by lower occupancy and equipment expense due to the sale of our insurance brokerage business.

As well as lower interest and communications expenses.

These expense reductions were partially offset by higher selling and promotion charges as COVID-19 restrictions have relaxed across many of the major geographies in which we operate.

Moving onto our adjusted earnings are.

Our pre tax income was $113 $1 million with a 226 basis point margin expansion to 22, 3%.

We recorded post tax adjusted earnings of $103 2 million.

An increase of two 1% and a 256 basis points margin expansion.

We generated first quarter adjusted EBITDA of $141 3 million.

Down 4%.

Turning to share count.

Our weighted average share count decreased one 2% sequentially and nine 7% year over year to $502 9 million.

Our fully diluted spot share count as of March 31 increased by one 1% sequentially to $502 9 million shares.

Compared to a year ago, bgc's fully diluted spot share count decreased by $54 1 million shares or nine 7%.

As of March 31.

Our liquidity was $539 6 million.

<unk> with $594 8 million as of year end 2021.

The change in our liquidity reflects payments for year end bonuses tax payments and timing differences between commissions earned in the seasonally busier first quarter and commissions collected from the seasonally slower fourth quarter.

Cash uses have historically been the greatest in the first quarter.

Cash and cash equivalents were $509 2 million versus $553 6 million as of December 31, 2021.

Notes payable and other borrowings were 1 billion $51 9 million.

Compared with 1 billion $52 8 million.

Total capital was $753 5 million.

Compared with $682 1 million as of year end 2021.

In February 2022.

U S U K EU and other countries imposed sanctions on Russia, Counterparties and as a result, we have ceased trading with those clients for context, we derive less than 1% of total revenue from both our Moscow branch and sanction Russian Counterparties.

As of March 31.

PDC is reserved $6 million in connection with unsettled trades and receivables with sanction Russian entities and with that I'm happy to turn the call over to Sean.

Thanks, Steve and good day, everyone.

Our technology, driven higher margin business continued to grow at a market leading rate.

<unk> strategy is focused on converting the company's $1 $4 billion voice hybrid revenue base into higher margin technology, driven Phoenix markets revenues, whilst concurrently skating is state of the art fully electronic phenix growth platforms, including SMS and crypto currencies.

Looking at Phoenix in more detail.

Our Phoenix growth platforms revenue improved 23, 5% from a year ago.

Driven by growth across banks U S treasuries, Lee, Sarah Phenix, FX and Phoenix.

Thanks U S Treasury revenues increased over 52% driven by market, leading ADB growth new product offerings and more trade is using the platform.

During the first quarter at Phoenix, USA had adv growth of over 18% outperforming the overall market.

Thanks, Ust club market share increased approximately 320 basis points year over year to 20% in the first quarter.

As of the end of the first quarter, all signings USD customers are paying to transact on the platform, which will drive revenue growth throughout 2022.

New Sara our infrastructure and software business continued its strong growth trajectory with revenue improving 56% year over year.

This growth was driven by Onboarding to large global investment banks, the expansion of existing relationships and adding new crypto currency clients.

Lew Sarah is providing connectivity to the world's deepest crypto liquidity pools buyers world class infrastructure.

During the first quarter.

Sarah adding connectivity to an additional 19 crypto currency venues and liquidity providers.

Thanks, Ed Thanks, Ultra low latency electronic FX trading platform had a record quarter generating strong double digit volume growth, which drove revenue, 47% higher versus last year.

Phenix FX growth outpaced both the FX ECM peers and the overall market.

Thanks, Joe our global options electronic trading platform saw revenue increased five fold from a year ago, driven by the integration of Matchbox as well as market share gains across HCI and Cosby index options.

Looking at Phoenix markets.

Revenues improved by 15, 7% driven by strong growth across FX rates credit and market data.

<unk> mid FX, the leading wholesale FX hedging platform continued to generate solid double digit volume and revenue growth across both FX and Asian NDS.

March 2022 marked a record month for this business as heightened FX volatility attracted record volume to the platform as large global banks look to hedge FX risk on Phoenix mid tiny efficient risk neutral platform.

Phoenix market data signed 47, new contracts during the first quarter with total contracted value, increasing 63% versus a year ago.

Thanks market data continues to see strong demand for its rates and regulatory service data packages with additional products rolling out in 2022.

Thanks market data, which has a highly recurring and compounding subscription revenue model grew over 21% year over year.

Thanks correct.

Web delivered multi dealer FX options platform nearly doubled its adv in the first quarter driving revenue, 101% higher versus the prior year period.

Capitalized MDF match business, which helps clients reduce foreign exchange exposure continued to capture market share driving double digit volume and revenue growth versus a year ago.

Our voice hybrid business generated revenues of $381 2 million down six 5% from last year due to the continued conversion of voice hybrid to Phoenix markets revenue.

Bgc's energy and commodity business grew eight 6% in the first quarter driven by solid double digit growth across the energy complex, including Bgc's, leading environmental business.

Our rates business declined by one 8%, primarily due to the challenging market conditions across medium and long term rates products. For example interest rates swap industry volumes were down 35% compared to last year.

Primary dealer volumes U S treasuries maturities less than three years improved by 29% while volumes maturity of six years and greater with down 10%.

Now turning to our second quarter 2022 outlook.

Bgc's revenues were approximately two 5% lower for the first 19 trading days in the second quarter when compared to the same period last year excluding insurance.

We expect to generate total revenue of between 420 and $470 million as compared to $458 million last year.

Which excludes $54 $4 million.

Of insurance revenue.

Because the company generates a significant portion of its revenue in euros.

The recent strengthening of the U S dollar, which remain for the balance of the quarter BTC revenues would be reduced.

$20 million below the midpoint of the guidance.

The strengthening of the dollar didn't change the volumes of our revenues in euros. It just changes how we present ourselves in U S dollars.

We anticipate pre tax earnings to be in the range of $81 million to $101 million versus 97 4 million.

And we anticipate our full year 2022, adjusted earnings tax rate to be in the range, 8% to 10% versus six 4% for full year 2021.

And with that I'd like to turn the call back over to Howard.

Thank you Sean we are continuing to make important progress growing our Fedex business, which continues to drive our margin expansion.

We are excited about our near term initiatives, including the upcoming FX futures launch and our continued rollout of our comprehensive crypto currency offering we believe that both of these initiatives will drive value for our BDC shareholders.

And finally, we expect our board of directors and applicable committees to determine whether to proceed with our corporate conversion by the end of the second quarter.

That operator rapid open the call for questions.

Thank you very much so as a reminder, if you would like to ask a question. During this session. Please press star followed by one on your telephone keypad.

Followed by one on your telephone keypad.

And we did have a couple of questions. Our first question comes from two seconds.

From Credit Suisse. Your line is now open. Please go ahead with your question.

Hey, Howard good morning, with Gotham and thank you for taking my questions. It's also great to hear that you are cancer free and doing well.

Thank you.

Good for me.

Can you please expand on your macroeconomic perspective, and how it translates into the <unk> revenue guidance, we understand that volumes were mixed in the first quarter and the firm could have a $20 million FX headwind, but can you walk through the businesses that are punching above their weight and where revenues could be pressured.

Sure so.

While rates are rising and rising aggressively.

It is difficult for the rates community to figure out where to trade. So you have.

The flattening yield curve and potentially inverted yield curve and the longer and has held their volumes and you saw that on interest rate swap volumes being down 35%.

These are just short term issues, maybe over the next couple of quarters.

As this settles out and the fed gets to its final resting place at the end of the year. It is an enormous tailwind for the company our rates business is very very large and we are just thrilled.

That rates are coming back I mean, we've suffered with zero interest rates for years and try to make a living.

Brokering fixed income when rates are zero is really an extraordinary challenge once rates get into the couple of hundred basis points, making money.

Transacting business becomes much much more fun. So while these are in the rates world I would say.

Short and very busy long and deeply constrained over the next say two quarters and by the end of the year, you'll start to see a ramping up of.

Of rates volumes and that will continue through 2023. So we think that this is a great tailwind for the company, albeit a quarter or two to get through the rate process.

Until we get to the other side foreign exchange, obviously, while a headwind because the dollar is wildly appreciating you've got it last year remember the euro was $1 20.

So every time, we make euros, where we generate a significant amount of revenues in euros.

They were worth $1 20, now there are only worth $1 five.

So you have that that's the that's the headwind. However, you know that eventually that European Central Bank lets start raising rates quickly as well just a couple of quarters behind and so we think this goes.

It goes back the other way as the as.

As the European Central Bank starts to raise its rates.

Consistently with how the U S is raising rates and that will dissipate. So I think again.

Two quarter World in terms of presentation, but in terms of macro view.

It's better than these foreign exchange rate books, I mean, it's great. It's.

Great for volumes. So these things do not impact volumes.

Do impact presentation.

Credit, which you've seen has taken as taken this rate rise on the chin volumes and credit are down and they will remain down until.

The rates stabilize at the end of the year. So I think the industry wide credit volumes are down you've seen it with market access you've seen it across the industry. It's not a BGC related event, it's really credit in general related event and I think that's just raising rates.

Companies, just stall and try to figure out what to do next the markets are much tougher in credit markets for deals to.

To get done and so I think youll see credit volumes declining so rates challenging for two quarters, and then really being positive foreign exchange really positive although because we are dollar based we present ourselves in dollars.

We're going to consider presenting ourselves in constant currency, which I think will make us easier to show that we're producing as many in Europe as we always expect to we're just talking about presenting them $1 credit being challenged.

And then the rest of our business.

Futures in crypto currency, we are really excited about.

Got it and just a follow up on you mentioned the futures business can you provide us with a progress update on bringing strategic investments into the FX interest rate derivative exchange as you're progressing towards the <unk> 22 launch with U S Treasury Euro dollar and so for futures.

Sure.

As you saw in our U S Treasury.

Business, our Fedex Ust.

We didn't have partners and we launched an 18 and now we've got 20% market share.

At the end of the first quarter of 2022, so that's sort of four years and so we're not really interested in waiting for years to come futures and the <unk>.

So basically we've decided we're going to bring in the banks as partners.

We're in active conversation with banks and market makers.

Our objective is to bring them over the line together.

And these are big institutions.

Thoughtful institutions, but ones with lots and lots of committees and bureaucracy and so our objective is to bring them across the line together. So we have a broad coalition of supporting institutions and that remains a pace. So that is our expectation that we will bring them in before the close.

I mean before it opens I would say and.

And close their investment.

Before we open that's our current expectation however.

It's hard to get everybody to cross the line at the same time, but that is our objective.

Thank you and last question for me can.

Can you provide us with how the firm is thinking about capital deployment priorities. This year as well as equity compensation given the level of uncertainty in 2022 is bgc's still tracking to a 3% equity issuance target. This year and could you. Please help us size the range of repurchases I know in the past you've talked about a potential 75% capital return.

Good.

So number one.

We will.

Constrain our issuance.

Debt issuance to well below 3%.

Let me give you sort of modeled 1% it would be.

Closer to where we expect to do it so our days of issuing significant amounts of equity.

Net are behind us.

It is our it as a corporate objective to have.

Issuance to be constrained.

So if you modeled 1% you'd be more.

More consistent with how the company is thinking.

Capital return policy.

We balanced two things rebalance.

I am back our stock, which we think is cheap and so we continue to buy back.

We bought back stock last year, and the enormous sums and.

While as Steve <unk>.

Said, the first quarter, we tend to pay bonuses and taxes. Those are the two big uses of money in the first quarter. So we tend to be constrained and our cash uses in the first quarter that dissipates going forward and we don't really have those issues.

Going forward, so we balanced buying back stock.

And acquisitions.

And what we can use to grow our business. We've made our investments in futures, we made our investments in crypto those do not any longer entail significant capital expense that has already been invested in the past. It's already been made so I think those are the two balances.

They're good companies for us to tuck in and add and and the balance we will be buying back buying back shares. So I think a 75% capital return policy, which has historically been the value.

Model of the company.

If you just add in acquisitions to that mix.

It would be closer to how the company's thinking.

Got it thank you for taking my questions.

Thank you very much. Our next question comes from Rich from Piper Sandler. Your line is now open. Please go ahead rich.

Yes, good morning, Howard and congrats on the health and I look forward to get together in June .

So first question is.

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