Q4 2022 BGC Partners Inc Earnings Call
Thank you for your patience Your conference calls beginning in just a few minutes again, we want to thank you for your patience conference, we'll be beginning in a few minutes.
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Welcome to BGC partners incorporated fourth quarter 2022 earnings conference call. At this time all participants are in a listen only mode. After the speaker presentation. There will be a question and answer session. Please be advised that today's call is being recorded I would now like to turn the call.
Conference over to your speaker today, Christy Cactus head of Investor Relations. Thank you. Please go ahead.
Good morning, everyone, we issued Bgc's fourth quarter and full year 2022 financial results press release and the presentation summarizing. These results. This morning prior to the market open you can find me that IRR Dot BGC partners Dot Com. Please note you can find additional details on our results in today's press release and Investor presentation.
Unless otherwise stated any historical results provided on today's call apparently the fourth quarter of 'twenty two with the prior year period, because their revenue excluding insurance due to its sale on November one 2021 certain revenue figures are provided for the first 35 trading days in the first quarter to date in 2023, we.
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 EBITA, We may refer to our liquidity, which we defined 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, we define total capital as redeemable partnership.
Total stockholders' equity and Noncontrolling interest in subsidiaries.
Do you see generated a significant amount of its revenue and non U S dollar currencies, particularly in the euro and pound Sterling.
He 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.
Bgc's constant currency movements assume no foreign exchange rates.
You've determined the company's prior period revenues apply to the current period revenues.
Please see today's press release results under generally accepted accounting principles or 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 to the corresponding GAAP results and how and when and why management uses such terms.
Information with respect to our GAAP and non-GAAP results mentioned 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 business Hispanics.
X 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.
Any forward looking statements involve risks and uncertainties and except as required by law BGC undertakes no obligation to update any forward looking statements.
Any outlook and targets discussed on the call assume no material acquisitions buybacks extraordinary transactions or meaningful changes to the company's stock price for discussion of additional risks and uncertainties, which could cause actual results to differ from those 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.
Any updates to such risk factors and special note on forward looking information contained in the subsequent Portsmouth Form 10-K Form 10-Q and 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.
Thank you Jason.
Morning. Thank you all for joining us for our fourth quarter and full year 2022 conference call with me today are Bgc's, Chief operating officer, Sean Wendy yet and.
And our Chief Financial Officer, Jason Hoff.
Today I have the pleasure of discussing how our business fundamentally changed starting in December of 2022.
BGC came a growth company.
Historically huge issuance, which we've seen over the past decade would have produced record trading volumes instead of zero or near zero interest rates over the last 14 years have caused rates trading volumes to remain flat in credit volumes to actually declined since 2008. This.
Despite an over three times increase in global issuance.
The trading environment that has been overshadowed by manufactured zero interest rates, which created in over decade long headwind for our business.
During the last 14 years of these zero interest rates the relationship between new issuance and trading volume growth broke down and disappeared.
Leaving catalysts transactions and electrification as the best tools available to BGC to dampen the impact of these headwinds.
In catalysts transactions, we sold E speed for 12 times revenues are $1 2 billion.
We built newmark, which was spun off to our shareholders with a market cap of $2 3 billion.
We bought <unk> for $780 million and so one of its technology assets trade port for $650 million. Shortly thereafter, we built and sold an insurance brokerage business we.
We built and sold an insurance brokerage business producing over $500 million in gross proceeds.
The results of all these catalysts transactions was that BGC shareholders have earned a total return of over two five times their investment since BGC went public in April of 2008.
Additionally over the last decade, we have made a massive investment in Fedex technology building the infrastructure to electronic by our business.
This differentiates us from our historical peers.
Today, these higher margin furniture businesses represent a quarter of Bgc's overall revenues, we believe Phoenix alone is worth more than Bgc's current market capitalization.
Since 2008, our voice hybrid business the largest part of our company faced a difficult trading environment.
You were to look at BGC, GSI and the dozen or more other financial service acquisitions. We have made their pro forma revenues in 2008 would have been close to $2 $5 billion.
This 14 year macro environment, resulting in these business was producing one $8 billion of revenue in 2022.
It should have been impossible given that global issuance has more than tripled during this period.
Historically trading volumes have been directly correlated with issuance when issuance with double trading volumes would grow on average 60%.
With meaningful interest rates and issuance that is multiples above 2008 levels. We believe the return of this strong positive correlation will drive our trading volumes significantly higher.
It is only a matter of time before we believe BGC will exceed the $2 $5 billion I. Just mentioned we are now a growth company.
We will remain an opportunistic catalyst company, we will remain a company that is driving high margin electronic vacation, but.
But we now have the macro environment that will drive fundamental growth across all of our businesses.
And with that I will turn the call over to Sean.
Thanks, Howard and good day, everyone.
As Hal just mentioned in order to highlight the growth of the company my focus today will be on providing updates on how our business is performing so far two almost two months of the first quarter of 2023.
For the first 35 trading days of the first quarter Bgc's total revenue is up 8% or 10% on a constant currency basis.
We are seeing revenue growth across all our asset classes rates increased 6% or 8% on a constant currency basis, FX increased 6% or 7% in constant currency credit increased 4% or 6% in constant currency.
Additionally, energy and commodities increased 15% or 16% in constant currency and equities increased 14% or 16% in constant currency.
<unk>, our higher margin technology, driven business generated strong growth through the first 35 trading days of the first quarter with revenue currently up 11% or 13% on a constant currency basis.
This strong electronic momentum has been driven by rates credit foreign exchange and market data.
<unk> markets revenue increased 10% or 12% on a constant currency basis. This.
This growth reflects the strength of our comprehensive phenix offering that provide access to the deepest wholesale liquidity pools, using our safety technology.
<unk> growth platforms revenue increased 22% for the first 35 trading days of 2023.
This growth has been led by a broad range of fully electronic platforms, such as furniture U S. Treasuries loose era Phenix go and portfolio match.
With the details Ive just described I'm pleased to provide the following outlook for the first quarter of 2023.
We expect to generate total revenue of between 515 and $565 million.
As compared to $506 $5 million last year.
Revenue guidance would be approximately $10 million higher on a constant currency basis.
We anticipate pretax adjusted earnings to be in the range of $118 million to $138 million versus $113 1 million.
And we anticipate a pre corporate conversion adjusted earnings tax rate to be in the range of $8 four to 10, 4% versus seven 3% for full year 2022.
I'd like to turn the call over to Jason.
Thank you Shaun and Hello, everyone.
Our fourth quarter and full year 2022 financial results press release, and other investor materials were made available. This morning and can be found on our Investor Relations website.
With respect to share count for the fourth quarter of 2022 are fully diluted weighted average share count decreased <unk>, 9% sequentially and three 3% year over year to 492 5 million shares.
This also represents a 71 million shares 71 million share or approximately 13% decrease compared to the second quarter of 2021, after we announced the sale of our insurance brokerage business.
Our fully diluted share spot count as of December 31 decreased by $1 1 million shares.
0.2% sequentially to $493 6 million shares.
Compared to a year ago bgc's fully diluted spot.
Share count has decreased by $3 9 million shares or 0.8%.
Generally speaking, we expect to make the majority of our share repurchases in the second half of the year as.
As we invest in our business to accelerate growth, we expect our share count declined slightly for the year.
Turning to our electronic U S Treasury rates platform Fms, we expect all regulatory filings and submissions will be completed by the end of the first quarter.
We remain on track for a soft launch of our futures platform and we expect to announce <unk> strategic investors prior to the launch.
The <unk> partnership brings together <unk>, the largest holder of interest rate collateral strategic investors, representing the largest users of U S interest rate products and furniture industry, leading technology and distribution.
Getting enormous value for BDC as it competes in the world's most valuable futures markets.
With respect to the corporate conversion, we expect to file a form S. Four registration statement in the second quarter of 2023.
We also expect to provide additional information with respect to our expected tax rate going forward as soon as practicable.
With that I'd like to turn it back to Howard for closing remarks.
Thank you Jason.
We were at the beginning of Bgc's growth trajectory driven by a return of meaningful interest rates, which means we don't really worry about whether they go up or down just like we have meaningful interest rates and the reemergence of the strong positive correlation between issuance and increasing trading volumes.
We believe these improving training volumes will benefit those with strong technological capabilities and scale across the capital markets.
Understand the importance of technology, we made the investment in Phoenix, with coupled which coupled with our global scale will deliver strong growth earnings and cash flow.
Given our highly attractive trading multiple our growth outlook and are highly valuable Phoenix assets. We believe BGC offers the best value proposition in the industry.
With that operator, we're happy to turn the call over for questions.
Yeah, if you would like to ask a question. Please press star one on your telephone keypad.
Formation tone will indicate your line is in the question queue. You May press star two if he would like to remove your question from the queue and for participants using speaker equipment may be necessary to pick up your handset before pressing the star key.
Our first question is from Gaza slot with credit Suisse. Please proceed.
Good morning, Howard, Sean and Jason. Thank you for taking my questions can we please start with the momentum youre seeing within the voice hybrid business, how the activity could evolve over the course of 2023 and in terms of the better broker production and the better outlook is that being driven by larger notional sizes trader.
Across the platform and is there a positive mix shift I guess amongst the asset classes being traded.
So we'll start we'll start at the beginning the the return of the positive correlation between issuance and trading volume.
We are feeling it and seeing it across our business now.
Now it is only just begun so for example, there was the relationship and credit where since 2008 credit issuance was up about two seven times and credit volume has actually decreased and was five of what it was in 2008 margin issue.
It's up two seven times and volumes, having and Thats simply because it's just no fun to trade when interest rates are near zero just a spread there is a reason for the clients to trade.
That relationship going from 0.52, 0.6, which is nothing.
It means volumes are going to grow 20%. So you just have so much.
Up volume coming that youre going to see our numbers improve relentlessly over the course of the year and for years to come Youre going to see banks.
Trading.
Arms.
Improve and dramatically deliver better results because these things are just good for our clients and good for us. So the industry is going to do better and you're going to see it across the platforms are you going to see it in larger volume you will or you're going to see it in smaller volumes you will in fact, youre going to see it across bro.
Productivity volume is big and small across our platform. These are just fundamental returns to core mathematical relationships that were broken because interest rates were driven to zero by incredibly aggressive actions by governments and buying their own.
That quantitative easing and driving interest rates to zero or near zero.
That has gone.
My expectation is that as gone for the balance of my lifetime. So I think interest rates are here, they're here to stay and I think the results for BGC will relentlessly improve as those relationships take hold and they will do so relentlessly over quarter and quarter going forward.
In our opinion.
Got it and then just switching gears to Phoenix growth platforms, given the 22% year over year revenue growth to $53 million can you give us a sense of the revenue mix.
I'm looking at like <unk>, 30% year over year growth I'm, just trying to determine how that kind of breaks out relative to the U S T and maybe the other platforms.
Yes, I think your what I did as a highlighted highlighted for four or five of them. We've seen youre correct to say the growth levels in this era.
There are up at around those levels remember 35 days in which is why I gave you which is why I gave 22% across the board.
But I would say youre seeing double digit growth in every single one of them in U S treasuries and looser or Fedex go and obviously portfolio, Matt because that's credit related.
So at this at this early point I'd say strong double digits and in the five main areas of Outstandings growth platforms, and you can imagine with.
Our our position in U S treasuries and Phoenix Ust you have issuance at five times, what it historically was and volumes.
<unk> equal to what it was in the past and if you. If you think about that for say into how can issuance be up five times and anyone who says it's structural just go visit any bank go visit any trading from you would see it has nothing to do with structure. It had to do with in Treasury bills.
ROE in two year notes for zero it wasn't much to trade with all those rates, 4%, 5%, maybe there'll be lower maybe there'll be higher.
This is great for U S Treasury volumes and you should expect volume on that platform to grow in volume across our rate our growth platforms to relentlessly grow as these relationships return our business is back to where it should have always been which is volume and <unk>.
Issuance are directly and highly correlated and those issuance volumes are gigantic and the volumes in our business will grow and you will see these numbers continuously grow and we are very excited about where things are going because they are just going back to where they always should have been this is not a new path.
Got it.
Just shocking that we were off the path for 14 years made no sense, but then again if I told you of 14 years ago. The governments were going to buy all of their debt and printed with their own money into laughed at me.
Yeah.
Thanks, and just last question here for me on the capital deployment priorities can you expand on the Trident Act.
Acquisition and I.
I guess decision, making around repurchases in the fourth quarter of 2022, and how we should think about I guess, the the level of repurchases in the second half of 2023.
So basically speaking.
We make more money in the first half of the year, but we collected in the second half of the year. So generally speaking as Jason said will be more.
Aggressive in buying back shares in the second half of the year, because our cash flow was just better because we collect.
The bigger numbers in the second half of the year.
You are correct, we just bought a commodities.
Brokerage company.
Called Trident, and we're going to continuously invest in the business. Obviously, we view our growth path is very very attractive now so we're going to buy other companies and buy assets that we think are going to grow more quickly. However, we did say that we feel that our stock.
<unk> is a very attractive at these multiples and you should expect us to buy more shares. So I think we're going to continuously balance that as we go forward through the year, but we have great opportunity to grow now, which we just didn't have in the past right. We were a catalyst company because thats. All we can do is just.
Buy and sell companies and build businesses, because our core business really wasn't growing now our core business is growing across the board and our opportunity to invest across our business is just much more exciting. So we have to balance that that is different than the past I know many of our shareholders in the past would say why.
When you're buying back shares and when you saw when we sold our insurance business. We bought back a huge amount of shares as Jason said 71 million shares, but the opportunity of this company has changed the growth is there and our ability to grow our business and get great returns for shareholders.
I think is in front of us and we're going to balance buying our shares back, which we find very attractive, but also investing in our business, which we now also find very attractive that may be different from what it was five years ago and seven years ago, but it is a really really good place now and it has a lot of fun to debate, which is better.
Because they are both great choice.
Okay.
Understood. Thank you very much.
As a reminder, this star one on your telephone keypad, if he would like to ask a question.
Our next question is from Rich Repetto with Piper Sandler. Please proceed.
Good morning Howard.
Good to speak with you so.
So the first question is more of a nuanced question I believe rates help here as well.
But just trying to understand I looked I just looked at you know the brokerage revenue in rates and credit.
Uh huh.
We're actually down a little bit 22, 2022 versus 21, and I know that could be FX, but when you look at the Cme's interest rate.
Revenue and volume.
It was up 18%. So can you talk about like the nuances of why I guess.
The banks.
And your customers.
Better.
There'll be more activity with the banks this coming year rather than.
Last year, when the CME and the CME is also up 23% year to date so far.
In volume.
Excuse me in rates, but can you talk about why that lag effect with.
With your platform.
Well, maybe I'll start that rich has shown.
You are right to say as of last year last year rates rates for us.
<unk> was up.
In constant currency of four 3% as we said last year last year as you're going into the.
The rising interest rate environment, you get you get.
A bit of Choppiness or lumpiness in terms of in some of the business. As you can remember we pointed out in Q3 and Q4 due to thought that inflation inflation business.
Actually be.
Lower volumes during during Q3 and four of 22 at a time and rate the rates were rising that piece is <unk> is behind us now and hence the fact and I spent all of my prepared remarks talking about what's.
What's happened in in Q1 and in Q1, you'll notice that all of the asset classes outperforming are increasing their yes up 8% overall, 10% on constant currency, but that's actually across the board.
And albeit not at the start of it started in December and has continued favorably into into Jan and fab and I think.
And I think thats, how to pointed out before.
It takes the lag between getting into the interest rate rising interest rate environment. Now we are there and thats, where trading that's wide trading volumes are increasing for us starting in December and continued strongly into Q1, so the CME had.
Is very pure and in short term rates and you saw you saw last year. They had volume growth in short term rates. They had less volume growth and long term rates you were going to watch.
The volume just smoothly go out across the curve across products across our entire.
Product mix, so I don't think it matters, which product it is it's not going to be.
Smoothed was the wrong word it's going to be relentless would be the right word.
I think volumes will go to the long end I think volumes will go again up in the short end, where the fed is moving things wear market.
Perception is will change volumes up or down, but the answer is going to be.
<unk> issuance of treasuries, the vast issuance credit.
Vast issuance that's coming we will not be met with the government buying it it will be met by trading volume happening and that velocity will go through the business as we return.
To the traditional volume so I would think youre going to see it now.
Told you this in the right in the middle of the year I said, we're going to be choppy, they're going to be many of our businesses that are going to be up big.
And some will be down illogically, but that will end by beginning of this year and ended by December .
But the answer is we are a growth business now and youre going to see it across our businesses some stronger than others.
Alright, and one quarter or another but you are going to feel the path relentlessly move forward in a positive way as these relationships which are.
Got it.
Going to be fun to watch out so.
Next Mike.
Follow up question would be asked Amex.
Our earnings release, you talked about it being on track, but you didn't mention that.
The launch date.
The soft launch to be.
Reaffirm and in the second quarter could you talk about what an.
On track means for FX.
Yes. It means nothing has really changed.
I mean, our perceptions are that we are with.
We finished.
We will finish this quarter the <unk>.
Tori answers to their questions, we will get approval soon after when the government chooses to give us those approvals.
We will then announce our soft launch date and we will begin so these processes are just.
We're moving forward, we're excited about it imagine being able to open a U S rates futures platform competing with the $67 billion Chicago Mercantile exchange into the greatest reemergence of rates and volumes in more than a decade.
I mean timing is.
You can't it can't be more excited this firm. These days. It is so exciting it is so exciting by the clients. They are ready for it they want it and this is the greatest timing Ford volumes are here volumes have gone to grow $67 billion monopoly ready for a little competition. This.
It's going to be fine.
Okay, So I'm still expecting.
Few soft launch no matter what.
Illegal counseling, probably watching Australia, let's say out.
Anyway last question is.
Around the corporate.
Conversion.
I've gotten a couple of questions. So could you just review how it what are the reasons for doing the benefits here and then Oh the issue of the tax rate.
Versus the savings and when would we expect to see sort of quantified quantification of that.
Okay.
As Jason mentioned.
We expect it.
I want to repeat what you said before Jason.
Okay.
We expect to provide additional information with respect to our expected tax rates going forward as soon as practicable, but what's the date we're doing it.
You said, we'll do it all we expect to file a form S. Four registration statement in the second quarter of 2020 right. That's all right. So in the second quarter, we will file our S. Four that then puts the legal documents to the SEC when they approve it.
And then we close so that's pretty much how it works there is nothing much in between you Jeff close as soon as practical thereafter.
And so that's where we are we'll file it in the second quarter.
Then we will come out and we will have a good understanding of tax rates and we will try to talk to everybody and go through the details simplicity.
We have meant we have met with many shareholders over time.
Who found the structure the up sea structure complex and they would prefer to have a simple C corp structure in order to buy our stock. So we will put that in place. It will be a simple C Corp structure, we will put that in place timing couldnt be better yes, the growth rate of the company coming hard and you've got a simpler structure I think.
It will be helpful. There will be some tax leakage.
No our rate will be higher, but we will have a much simpler structure, we should be able to save money and save expense, we should be able to bring as an example, we bought GFR. It had corporate broker dealers, we had BGC would add partnership broker dealers. So.
Doing all of this work that can now be simplified they can all be merged together it can be just simpler.
<unk> <unk>.
Capital efficient.
Less.
Work to do and so we think that will mitigate some of the tax cost wont be perfect. So our tax rate will be higher and we've said that all along however, we should be able to mitigate it to <unk>.
<unk> degree and I think simplicity will just make the company better it will be more transparent it will be easier to understand we'll get more shareholders to be able to buy the company and I think you'll work. So second quarter, we file should be able to close in the third.
Yeah. Thanks for the review how it that's helpful. Thank you.
We have reached the end of our question and answer session I would like to turn the conference back over to Mr. Lutnick for closing comments.
Well thank you all.
Our future is clearly bright.
We feel that the volume trading volumes are going to be excellent for the industry banks will do very very well trading firms will do well.
We feel that our technology.
Our global scale and the incredibly attractive position that we're in from a comparative valuation perspective makes BGC, a very very very attractive alternative in a marketplace, where lots of people are going to win but we feel of Bgc's just best positioned to have an extraordinary returns for our investors.
We look forward to talking to you again, we are delighted to call ourselves again, a growth company and we look forward to reporting going forward with higher volumes.
And interest rates to stick with us for the long future. Thank you all I look forward to speaking to you again next quarter.
Thank you. This does conclude today's conference you may disconnect. Your lines at this time and thank you for your participation.
Yeah.
Okay.
Okay.
Okay.
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Okay.