Q3 2022 BGC Partners Inc Earnings Call

Thank you for your patience the BGC Partners, Inc. Third quarter 2022 earnings conference call will begin shortly.

[music].

Yes.

Okay.

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

Time, all participants are in a listen only mode. After the speaker presentation that will be a question and answer session. Please be advised that today's conference is being recorded.

I'd now like to hand, the conference over to your speaker for today, Jason Christine <unk> head of Investor Relations. Thank you and please go ahead.

Good morning, everyone. Today, we issued Bgc's third quarter 2022 financial results press release, and the presentation summarizing these results prior to market open.

You can find these at IR Dot BGC partners Dot Com. Please note you can find additional details on our quarterly results in today's press release and Investor presentation.

Unless otherwise stated the results provided on today's call compare only the third quarter of 2022 for the prior year period.

Revenue, excluding insurance due to its sale on November one 2021.

You're referring to our results on this call only on an adjusted earnings basis, unless otherwise stated.

May also refer to adjusted EBITDA, Please refer to our liquidity, which we define as cash and cash plus marketable securities that have not been financed reverse repurchase agreements and securities owned less securities loans and repurchase agreements, we define total capital as being full partnership interest total stockholders' equity and Noncontrolling interest in subsidiaries.

C generates a significant amount of its revenue in non us dollar denominated currencies, particularly in the euro and pound Sterling BGC.

BGC presents revenue comparisons on a constant currency basis in order to present, a better comparison of the company's revenues during the period, which exhibited volatile foreign exchange movements.

This constant currency movements in foreign exchange rates used to determine the company's prior fee revenues apply to the current period revenues. Please see today's press release for results under generally accepted accounting principles or GAAP. Please ask to the relevant sections in the back of today's press release for complete and updated definitions of any non-GAAP terms reconciliations of these items to the corresponding GAAP results and how when and why.

Management uses such terms.

Additional information with respect to 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.

Please refer to the Companys technology driven businesses aesthetics.

<unk> offerings include Phoenix markets and Phoenix both platforms.

Also remind you that information regarding our business on today's call that are not historical are forward. Looking statements. These include statements about the effects of COVID-19 pandemic on the company's business results financial position liquidity and outlook any forward looking statements involve risks and uncertainties, except as required by law.

No obligation to update any 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 or.

For a discussion of additional risks and uncertainties, which could cause actual results from those contained in the forward looking statements.

<unk> 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 the subsequent reports on Form 10-K Form 10-Q.

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 Good morning, Thank you for joining us for our third quarter 2022 conference call with me today are Bdc's, Chief operating officer short window.

<unk> financial Officer, Jason.

Our pre tax adjusted earnings margin expanded by over 300 basis points. This represents the eighth consecutive quarter of adjusted earnings margin improvement driven by our high margin electronics, Genex business, which now represents over a quarter of our total revenue.

For more than 14 years <unk> seen the entire financial service industry is trading volumes have been constrained by ultra low interest rates and quantitative easing.

For example in the U S credit markets issuance is up over two five times and trading volumes.

Of what they were in 2008.

Over the same period U S. Treasury issuance is up two five times.

Trading volumes are flat 2008, and you can see this on page five of our Investor presentation, which you can get to at IR Dot BGC partners Dot com.

Yes.

Throughout this period, we've worked to automate our business and improve our margins. We expect the return of interest rates to restore trading volumes to their historical correlation with issuance over time.

This dramatic increase in trading volumes will drive our revenue growth for the foreseeable future coupled with our improved margins, we expect <unk> to produce record levels of profitability.

With that I'd like to turn the call over to Jason.

Thank you Howard and Hello, everyone.

BGC generated total revenue of $416 6 million.

A decline of one 3% as compared to last year.

On a constant currency basis, our revenue was up four 1% versus a year ago.

During the quarter. The US dollar continued to appreciate against the Euro and pound Sterling both of which were approximately 15% lower.

Total revenue would have been $23 million higher on a constant currency basis.

By asset class rates increased by one, 1% and 10, 2% on a constant currency basis.

FX increased five 7% and two 4% in constant currency.

Credit decreased by one 3%, but increased by six 4% in constant currency.

Energy and commodities decreased by seven 2% and five 5% in constant currency.

And equities decreased by 11, 611, 6%, but only five 1% in constant currency.

By geography, and excluding insurance Americas revenue increased by nine 3%.

While Europe , Middle East and Africa, and Asia Pacific revenues decreased by five 4% and eight 5% primarily related to FX headwinds.

Thanks <unk>.

<unk> higher margin technology, driven business represented 25, 4% of total revenue its highest mark effort.

And grew at a market leading rate of 10, 8% to $105 6 million.

Or 17.

7% growth on a constant currency basis.

Automation has been a key to driving the company's margins higher.

Adjusted earnings margins and average front office productivity, both improved year over year for the eighth consecutive quarter.

That is growth platforms recorded revenue of $12 7 million an.

An improvement of 19, 4% or 21, 5% on a constant currency basis.

Yes.

Our Phoenix market business generated revenue of $292 9 million.

An increase of nine 7% or 717, 2% on a constant currency basis and had a pre tax adjusted earnings margin of 38% an expansion of 107 basis points.

Moving on to expenses.

Our compensation and employee benefits under both GAAP and adjusted earnings decreased by 21, 4% and 26% respectively due to increased automation.

Sale of our insurance brokerage business and.

The positive FX impact on the company's UK and European expenses.

Our adjusted earnings compensation as a percentage of total revenue was 48%, which was over 500 basis points lower versus a year ago.

Our non compensation expenses under GAAP and adjusted earnings decreased by 11, 3% and eight 8% respectively.

Driven by lower occupancy and equipment expense due to the sale of our insurance brokerage business as well as lower commissions and floor brokerage communication interest and other 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 geographies in which we operate.

Moving on to our adjusted earnings.

Our pretax adjusted pretax income was $82 $8 million with 318 basis point margin expansion to 19, 9%.

We recorded post tax adjusted earnings of $77 5 million and generated third quarter adjusted EBITDA of $107 million.

Turning to share count.

Our weighted average share count decreased 2% sequentially and six 3% year over year to 497 million shares.

Our fully diluted spot share count as of September 30 decreased by 6 million shares or one 2% sequentially to $494 7 million shares.

It reflects a $12 6 million shared unit repurchase in the quarter.

Compared to a year ago Bgc's fully diluted spot share count has decreased by $22 5 million shares or four 3%.

As of September 30, our liquidity was $510 8 million compared.

Compared with $594 8 million as of year end 2021.

The change in our liquidity reflects payments per share and unit repurchases and redemptions dividends and distributions and new hires.

Cash and cash equivalents were $473 3 million as of September 30 versus $553 6 million as of December 31, 2021.

Notes payable and other borrowings were 1 billion $50 1 million compared.

Compared with 1 billion $52 8 million at year end.

Total capital was $727 3 million.

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

The joint Committee of our independent directors of the Board has agreed to pursue and move forward with our conversion to a full C Corporation.

The conversion would occur pursuant to definitive agreements, which the company expects to execute prior to the end of this year.

The Congress the converging to a simpler more transparent corporate structure aims to improve operational efficiencies and provide investors with an easier to understand organizational structure.

Following execution of the agreement and prior to the closing of the corporate conversion details related to the conversion will be publicly filed with the SEC and distributed to BGC stockholders.

We continue to work through identifying operational synergies, which we expect to significantly offset the increase in our corporate tax rate.

We expect to provide this detail is detailed update prior to the end of the year.

Yes.

With that I'm happy to turn the call over to Sean.

Thanks, Jason and good day, everyone.

Phoenix, our technology, driven higher margin business generated record third quarter revenue of $105 6 million.

Growing at a market, leading pace of 10, 8% or 17, 7% on a constant currency basis.

Phoenix represented 25, 4% of our overall revenue and is expected to become an ever larger part the bdc's overall business going forward.

Looking at Fedex in more detail.

Thanks growth platforms revenue improved 19, 4% or 21, 5% on a constant currency basis, driven by growth across banks U S. Treasuries loose era, having setbacks phenix go and portfolio match, partially offset by compression from alchemy.

Turning to U S treasuries revenues increased over 24% driven by ADB growth of 14%.

<unk> market share was 18% during the quarter.

<unk> Ust saw significant growth in each streaming offering which reached record levels in the third quarter.

Dreaming and significantly higher fee capture.

Thanks, USD <unk> offering continues to scale with ADB growth of 266% compared to a year ago.

<unk> recently launched its automated off the run spreads facility.

This technology enhances trading volumes banks market data and will create trading synergies across SMS interest rate futures.

Sarah infrastructure and software business had a record quarter generating strong double digit revenue growth of 30% versus last year.

<unk> saw an increase in clients trading crypto currencies and fixed income products through its new market platform.

Additionally, in the third quarter, <unk> launched a crypto currency hosting offering for exchanges and traders.

Phenix FX ultra low latency electronic FX trading platforms generated volume growth of 44%.

That makes FX continues to win market share onboard leading market participants and is growing at market leading levels throughout 2022.

Thanks go global options electronic trading platform saw strong volume growth across its Asian business, where HFC EI coffee and MSCI index option volumes were up four seven times versus a year ago.

Additionally, Thanks go saw volume growth of over 120% across the Euro Stoxx 50 index options offering.

Portfolio match.

Matching platform continued to scale during the quarter.

Nearly 70% of total portfolio match volumes were executed by algorithmic trading during the quarter.

Portfolio matched supports U S and European investment grade and high yield credit.

The platform Onboarding numerous new clients and this momentum has carried forward into the fourth quarter setting new records across volumes and trading participants.

Looking at the Phoenix markets.

Revenues improved by nine 7% or 17, 2% on a constant currency basis, driven by FX credit and market data.

Turning to market data signed 48, new contracts during the third quarter and grew revenue 18% year over year.

F&B continues to see strong demand for its interest rates inflation and <unk>.

FX data packages.

Phenix direct web delivered multi dealer FX options platform more than doubled its ABB in the quarter.

Thanks, mid FX, a leading wholesale FX hedging platform at its second highest quarter on record.

Only by the seasonally busiest first quarter of 2022.

<unk> mid FX Asian, NDS, Adv improved by 63% and he stops becoming the preferred platform for Asian, MBS hedging as clients seek the same highly efficient risk neutral policies. The platform offers a spot FX.

FX, which combined spending to U S Treasury business with our state of the U S interest rate futures platform continues to make significant progress.

With required regulatory approvals now expected in the first quarter of 2023 <unk> is targeting its launch in the second quarter.

We will announce the names of the strategic investors prior to the launch.

<unk> will offer an alternative to U S rates futures platform. The U S Treasury eurodollar and so for futures products.

Our voice hybrid business generated revenues of $311 million down four 9% or up 1% on a constant currency basis.

The overall macro trading environment improved during the quarter.

This improvement continue to be uneven across products and geographies for instance, we saw significant revenue growth in areas such as European government bonds interest rate options credit derivatives corporate bonds and G 10 spot foreign exchange. These.

These gains were offset by challenging market conditions in areas, such as oil UK and European power and European and Asian equity derivatives.

Additionally, the company saw strong performance during the quarter from potent charter shipping and consultancy business.

<unk> is the market leader in global LNG shipping and charter, which is seeing significant demand and pricing driven by geopolitical complex and LNG disruptions across Europe .

Going into 2023, we expect broad based growth across the majority of our products and asset classes.

The current macro environment of rapidly rising interest rates and divergent central banks and monetary policy has led to very high levels of volatility.

This has caused some market participants to transact less.

At this extreme volatility dissipates, we expect higher levels of trading activity, beginning in 2023 and growing from there.

Now turning to our fourth quarter 2022 outlook.

Bgc's revenues grew approximately 7% lower or flat on a constant currency basis for the first 21 trading days of the fourth quarter when compared to the same period last year excluding insurance.

Therefore, we expect to generate total revenue of between 390 and $440 million as compared to $441 $7 million last year, which excludes $19 $9 million of insurance revenue.

Revenue guidance would be approximately $20 million higher on a constant currency basis.

We anticipate pretax adjusted earnings to be in the range of <unk> $71 million to $91 million.

Versus $86 5 million.

And we anticipate our full year 2022, adjusted earnings tax rate to be in the range of 7% to 9% versus six 4% for the full year 2021 window.

With that operator wed like to open the calls for questions.

As a reminder, if you'd like to ask a question you can press star one on your telephone keypad to withdraw your question you May Press Star two please.

Please ensure you're on mute locally when asking your question.

First question for today comes from Tom <unk> from Credit Suisse. Your line is now open. Please go ahead.

Yes.

Sure.

Hey, good morning, and thank you for taking my questions can.

Can you please share your perspective on what gets you comfortable with the updated timelines for <unk> and can you give us the nature of the types of regulatory approvals that.

There'll be pending and if theres any factors that could push out the timeline further from this point.

Sure.

We are awaiting approval.

For our new products.

<unk>.

The exchange.

That we that was operated was primarily doing whether futures for the past number of years now that we are converting upon bgc's acquisition to interest rate futures.

Acquired in application.

To get that approved so that is what we are waiting on.

And we expect that.

In large part our expectation is.

We are confident that that will be received in the first quarter.

This process just takes more time than it used to take I think you all understand that the way things are working in the world. These days just take more time, but.

We have that expectation.

And we don't have any reason to believe that it would last.

Further out than the first quarter.

2023.

Yes.

And then.

When you are going to announce the partners how should we think about the timeline about the partner launches that come after the regulatory approval and then before the <unk> 23 platform launch.

I think that sort of discussion with the partners.

We would expect this to assure before launch.

And.

It may coincide with the regulatory approvals and our launch date of opening.

By extension would be.

We wanted to create the most excitement when you have an opening day.

To announce that Rihanna and George Clooney Youre attending the opening of your restaurants that you have no idea when it's going to open its just not as much fun as when you say, we're going to open the gate. So I think we're going to have great partners, that's our expectation and we want to announce them. When we have an opening date. So people can get excited about meeting.

That data as opposed to just generally we opened some debt.

Okay understood I wanted to stay on the <unk> topic, the club market share for the U S. T platform, it's declined to 18% relative to 19% in the last quarter and in the same quarter of 2021 are there any facts.

<unk> that are impacting the market share right now.

So these were.

The first period that.

Brokerage check.

<unk> picked up a little market share.

And and that stems back from the extreme volatility that was in the marketplace.

I've been in this business a long time.

<unk>.

When we were operating long long ago, the busier market.

Stronger.

Leader.

And extreme volatility. So this was an example of this extreme volatility outgrowth.

While we continue to grow in volume market share wins.

So the larger player.

It's just during this extreme volatility I think as debt just to pace. The extremes participate I think youll see our our growth continue and as obviously.

We announced the partners make joint.

Think we will see a material.

Proving that our market share thereafter.

Okay and just last question for me here on timelines can you provide us an update on your digital asset or crypto currency initiatives and if the timeline for those platforms have changed.

Sure.

Sarah we are connecting.

Market participants.

Two exchanges.

We are also hosting exchange as well our team that builds exchanges. Obviously is very very focused on that to Max Mitchell.

Dot T crossed to make sure our system is as good as it possibly can be and covers many.

Synchronic nuances that futures traders want to use in their system.

We are focused on that and once <unk> is launched we.

We will turn our attention to.

Building the exchange for crypto.

The timing and foreign exchange from Crypto, we are trying to meet with when the large traditional finance banks and trading firms decide to get into that space. So we're connected to all the banks all the trading firms in the world and we want to go into that business with <unk>.

Clients around the world are starting to trade tripped yet.

Think about it.

The right to do it.

A little bit of announcements you've seen every year in there now.

A few firms willing to cut for the year. This is all beginning so we're trying to meet that timing.

We are not.

We're not racing towards it I think we are doing <unk> first and then.

Brookdale and digital will be second, but I think the key for US is we're trying to time it to be ready open and available.

Locking when the large banks in the world decides that they're going to start training and that sort of hour.

Special sauce, if you will.

Got it thank you for taking my questions.

Yes, if you think about it big banks would they rather trade.

<unk> and BGC and the place where they're comfortable or would they rather trade.

Yes.

Thank you.

We've seen pretty.

The right choice.

Thank you.

Linda if you'd like to ask a question.

One on your telephone keypad.

As our funding wanted to ask a question star one on your telephone keypad.

Okay.

Okay. We currently don't have any further questions. So I'll hand back to Howard Lutnick for any further remarks.

Like our margins are improving we're getting more efficient throughout our conference call.

Thanks for spending the half hour with us.

We look forward to seeing you again and updating you.

On the corporate conversion updating you on after next and we look forward to speaking over the quarter. Thanks, everybody.

Thank you for joining today's call you may now disconnect.

Okay.

Yes.