Q1 2023 BGC Partners Inc Earnings Call

Speaker 1: Co.

Speaker 2: Ladies and gentlemen, thank you for standing by. BGC partners call will begin in just a couple of minutes.

Speaker 2: Once again, please continue to stand by. PGC partners will begin shortly.

Speaker 1: I.

Speaker 1: And.

Speaker 2: quarter 2023 earnings call. At this time all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference please press star 0 on your telephone keypad.

Speaker 2: As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Jason Krasikas, head of Invest Relations for B2C Partners. Thank you. You may begin.

Speaker 3: Good morning. We issued BGC's first quarter of 2023 financial results press release and the presentation summarizing these results this morning prior to the market open. You can find these at IR.BGCpartners.com. Please note you can find additional details on our quarterly results in today's press release and investor presentation.

Speaker 3: Unless otherwise stated, any historical results provided on today's call since our only the first quarter of 2023 with a prior year period.

Speaker 3: Certain revenue figures provided for the current period as indicated.

Speaker 3: 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. We 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 loaned and repurchased agreements. We will be referring to our results on this call only on an adjusted earnings basis, unless otherwise stated. We may refer to our results on this call only on an adjusted earnings basis, plus marketable securities that have not been financed, reverse repurchase agreements and securities loaned

Speaker 3: We define total capital as redeemable partnership interest, total stockholders' equity, and non-controlling interest in subsidiaries.

Speaker 3: BGC generates a significant amount of its revenues in non-US dollar-denominated currencies, particularly the euro and pound sterling. 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 currency improvements.

Speaker 3: BGC's cost of currency movements assume foreign exchange rates used to determine the company's prior period revenues apply to the current period revenues. Please see today's press release for results under generally accepted accounting principles.

Speaker 3: Please also see the relevant sections of the back-to-face press release for the complete and updated definitions of any non-GAAP terms, reconciliation of these items to corresponding GAAP results, and how, when, and why management uses such terms.

Speaker 3: Additional information with respect to our GAAP and non-GAAP results mentioned on today's call is available on our website at ir.btcpartners.com.

Speaker 3: We refer to the company's technology-driven businesses as FedEx. FedEx offerings include FedEx markets and FedEx growth platforms.

Speaker 3: I also remind you that the information regarding our business on today's call that are not historical are forward-looking statements. These include statements about the effects of the COVID-19 pandemic, results, financial position, liquidity, and outlook. Any forward-looking statements involve risks and uncertainties except as required by law. We undertake no obligation to update any forward-looking statements.

Speaker 3: Any outlook and targets discussed in this 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 different 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.

Speaker 3: and any updates to such risk factors in a special note on solar lift information contained in the subsequent reports on Form 10-K and 10-Q and Form 8-K. I am now happy to turn the call over to Howard Lutnick, Chairman of the Board and CEO of B2B Partners.

Speaker 4: Thanks Jason. Good morning and thank you for joining us for our first quarter 2023 conference call. With me today are BGC's Chief Operating Officer Sean Windyat and our Chief Financial Officer Jason Hall. As we expected, long term growth for BGC has begun.

Speaker 4: the first quarter saw growth across each of our business lines. Our quarterly revenue grew by over 5% or 7% in constant currency, with growth accelerating so far in the second quarter, with revenue up 9% through the first 19 trading days.

Speaker 4: We expect BGC's revenue to continue to grow as a relationship between trading volumes and the enormous increase in bond issuance returns following the end of zero interest rates.

Speaker 4: Zenix had a record quarter with market leading revenue growth of 12% or over 14% in constant currency representing over 26% of our total revenue in the first quarter.

Speaker 4: We expect to complete our corporate conversion on June 30th and trade under our new ticker BGC at the beginning of July . With respect to FMX, progress continues with the CFTC on the final approval of our futures exchange and we intend to announce our strategic partners prior to the launch.

Speaker 4: But that'll turn the call over to Sean.

Speaker 5: Thanks and good day everyone. Our revenue grew by 5.2% to $532.9 million in the first quarter of 2023.

Speaker 5: as our trading volumes increased following the end of zero interest rates.

Speaker 5: This represents our second highest ever QWERTY revenue, excluding insurance of course, second only to the first quarter of 2020 when the onset of the COVID-19 pandemic drove trading volumes to record levels.

Speaker 5: Both our Voice Hybrid and Fenix businesses saw solid growth with revenue up across all asset classes.

Speaker 5: Fenix grew by 12%, or 14.4% in constant currency, generating a record $140.4 million in the first quarter, representing 26.3% of BGC's total revenue.

Speaker 5: This growth was driven by higher trading volumes across all our asset classes. The combination of meaningful interest rates and improving trading conditions led to higher client activity across rates and credit, driven by shorter dated interest rate products and strong credit volumes.

Speaker 5: Additionally, our renewable energy and ship chartering business saw strong double-digit growth, driving our energy and commodities business higher. Data, software and post-trade revenues improved by 12.4%.

Speaker 5: driven by Phoenix market data and Lucera.

Speaker 5: We expect the growth of these recurring revenue businesses to continue to outperform the industry.

Speaker 5: Our growth has accelerated in the second quarter with overall revenue up 9% through the first 19 trading days of the quarter.

Speaker 5: Higher revenue and record front office productivity, which increased 9.2% versus last year, drove profitability higher across our business.

Speaker 6: Turning to FedEx.

Speaker 5: Fenix's industry-leading growth of 12% or 14.4% in constant currency was led by our growth platforms which improved by 33.1%.

Speaker 5: This strong improvement in Phoenix growth platforms was driven by Phoenix UST's portfolio match and Phoenix GO. Our Phoenix Markets revenues increased 9.5% or 12.2% in constant currency. This growth reflects the strength of our comprehensive Phoenix offerings.

Speaker 5: and conversion of our voice hybrid volumes to our higher margin, technology-driven Phoenix businesses. We saw stronger trading volumes across our electronic fixed income products, particularly credit.

Speaker 5: With that, I'm pleased to provide the following outlook for the second quarter of 2023.

Speaker 5: We expect to generate total revenue of between $450 and $500 million as compared to $435.8 million last year.

Speaker 5: We anticipate pre-tax adjusted earnings to be in the range of $90 to $110 million versus $90.2 million.

Speaker 5: And we anticipate our pre-corporate conversion adjusted earnings tax rate to be in the range of 5 to 8% versus 7.3% for full year 2022.

Speaker 5: With that, I'd like to turn the call over to Jason.

Speaker 7: Thank you, Sean, and hello everyone. BGC generated total revenue of $532.9 million, an increase of 5.2% as compared to last year.

Speaker 7: On a constant currency basis, our revenue is up 7% versus a year ago. By asset class, rates increased by 3.7% and 6.6% in constant currency.

Speaker 7: And that's increased by 0.2% and 1% in constant currency.

Speaker 7: Credit increased by 6.7% and 9% in constant currency.

Speaker 7: Energy and commodities increased by 8.8% and 9.5% in constant currency.

Speaker 7: and equities increased by 1.5% and by 3.5% in constant currency.

Speaker 7: By geography, America's revenue increased by 14%, and Europe , Middle East, and Africa revenues increased by 3.4%, while Asia-Pacific revenues decreased by 7.4%.

Speaker 7: Moving on to expenses.

Speaker 7: Our compensation and employee benefits under both GAAP and adjusted earnings increased by 3.9%.

Speaker 7: Our non-compensation expenses under GAAP and adjusted earnings increased by 2.1% and 4.2% successfully.

Speaker 7: Moving on to our adjusted earnings.

Speaker 7: Our pre-tax income was $124.6 million, a 10.2% improvement, with a 105 basis point margin expansion to 23.4%. We recorded post-tax adjusted earnings of $115.6 million, a 12.1% increase from last year.

Speaker 7: Adjusted EBITDA of $151.1 million with 7% higher.

Speaker 7: Turning to share count, our weighted average share count increased 1.7% sequentially, but decreased 0.4% year-over-year to 501.1 million shares.

Speaker 7: Our fully diluted spot share count as of March 31 increased by 2.3% sequentially to 505.2 million shares. Our fully diluted spot share count as of March 31 increased by 2.3% sequentially to 205.2 million shares.

Speaker 7: The first quarter generally has greater share issuance due to annual prophylaxis.

Speaker 7: In April 2023, we repurchased approximately 3 million shares. We expect the majority of our share repurchases to take place in the second half of the year.

Speaker 7: As of March 30th, our liquidity was $534.8 million compared with $524.3 million as of year-end 2022.

Speaker 7: On April 6, 2023, BDC Group Inc. filed a registration statement on Form S4 with the SEC in connection with its previously announced corporate conversion.

Speaker 7: Following receipt of regulatory approvals and subject to other customer-ready closing conditions, including shareholder approval, all of which are expected to be satisfied, we currently expect to close the corporate conversion effectively immediately after closing of BGC's second quarter on June 30, 2023.

Speaker 7: The company will rename BGC Group Inc. and its shares of Class A common stock will trade on NASDAQ under our new ticker, BG Signal. We will provide additional information with respect to our expected tax rate going forward as soon as practicable following the close of the corporate conversion. With that, I'd like to turn to Howard for closing remarks.

Speaker 4: Thank you, Jason. As you can see from today's results, it is an exciting time to be part of BGC. Our business is continuing to improve with our growth accelerating through the first 19 trading days of the second quarter. Our corporate conversion will be complete at the end of this quarter. And the two most recent examples of company conversions from an up-seat to a full C-corp.

Speaker 4: So our average daily trading bonds increased by 40% and institutional ownership doubled year following conversion.

Speaker 4: Recent updates to S&P's index policies mean that dual share class companies like us.

Speaker 4: are now eligible for inclusion.

Speaker 4: A recent research note estimated that if BGC is included in the S&P 600 alone, this could translate into 40 million shares of passive demand.

Speaker 2: So with that operator, we'd be happy to open the call for questions. Thank you. If you'd like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue.

Speaker 2: You may press star 2 if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key.

Speaker 2: Our first question comes from the line of Rich Repetto with Piper Sandler. Please proceed with your question.

Speaker 8: Yeah, good morning Howard and team and congrats on a strong quarter. I guess first question is Howard, I know you the.

Speaker 8: Good morning Howard and team and congrats on a strong quarter. I guess first question is Howard. I know you the first

Speaker 8: what do you call it, second quarter, the data is still up, the guidance is up 9% for the second quarter. But I guess the question is that volumes have slowed down compared to a pretty robust first quarter.

Speaker 8: your very positive, optimistic outlook for fixed income, is that, you know, is this just a momentary pause to pull back? Again, I acknowledge that.

Speaker 8: year-over-year numbers, the guidance you put out is strong.

Speaker 4: When you look at volumes, you know, CME volumes are down pretty strongly compared to the first quarter. Well, look, we are seeing the healing process of the relationship between issuance and trading volume broadly around the world.

Speaker 4: We've got meaningful interest rates around the world, and we've been expecting that healing process, meaning volumes are starting to be more ahead towards more consistency to issuance. So we were up 9% for the month of April , and our expectation is we will remain with that pace.

Speaker 4: through the balance of this quarter. So we're not seeing a pullback. We know that certain areas have less volume, certain have more volume. There's very idiosyncratic issues in the banking system in America, but globally we're feeling pretty confident that things feel good at BGC. volumes are growing, issuance is up big.

Speaker 4: We expect issuance to be up big for the rest of, probably the rest of my life. And that's our expectation.

Speaker 8: And these issuances up, I guess over the longer term, but don't you expect that there has been a little bit, due to the debt ceiling, a little bit of delay of issuance? And do you think that the back half, this will all come back in the back half? And how would that impact BGCP?

Speaker 4: I do. I think that the debt ceiling has created constraints and the short end of the treasury market issuance has been idiosyncratically modified by movements of the treasury to try to stay within bounds of the...

Speaker 4: US's particular issues with respect to the debt ceiling, which we assume will be resolved one way or the other in the relative near term. I don't see that impacting BGC and its global business, not even in the near term.

Speaker 4: I mean, I think if it resolves itself, it'll be beneficial for BGC. If it becomes chaotic, it will be beneficial to BGC. And if it's just sorted ordinarily, I think the scale of issuance for the U.S. deficit is so large that volumes at interest rates in and around 5% are just...

Speaker 4: going to continue to improve. So I think we're in a good spot pretty much either way. I mean, we're just... Volumes have been constrained for so many years.

Speaker 4: That as they heal, whether they heal fast or they heal slow, you're getting better every day. And I think you saw that first quarter was up 5.2%. We started the second quarter at 9%. Our expectation is we'll keep that pace going and we feel pretty good.

Speaker 4: whether they heal fast or they heal slow, you're getting better every day. And I think you saw that first quarter was up 5.2%. We started the second quarter at 9%. Our expectation is we'll keep that pace going and we feel pretty good. …

Speaker 8: I guess one other Howard, you talked about the corporate conversion and I, you know, come and be completed at the end after June 30th or on June 30th. And just trying to understand, I know you talked about the tax rate and you'll tell us then.

Speaker 8: where that's going, but what about cost? Any more clear review on what type of cost savings that'll come out of this?

Speaker 4: I think we'd rather give a holistic view of both. Our tax rate will go up. Our cost savings will mitigate that somewhat. And as we've said, it won't mitigate it entirely. It'll mitigate it somewhat.

Speaker 4: So our overall effective cost will rise, but it will be a much simpler company and hopefully able to attract broader institutional holding and therefore have a stronger shareholder base.

Speaker 4: things that we will say. So our expectation is as soon as the voting process is complete, we will come out with a complete model. But we are constrained while this process is taking place. We are confident, or maybe even beyond confident, that the votes will be achieved.

Speaker 4: since we've spoken to those who are planning to vote positive and that is sufficient to carry the day. So this is just process now, lots of work as you know to complete things like this but we will come out with a robust model but as I said rate higher.

Speaker 8: costs lower mitigating but not completely mitigating therefore higher overall cost not not significant, but certainly by

Speaker 8: I believe got all of the submissions in for the regulatory approval. I guess since your last talk, you know, it's gotten plenty of publicity. And any incremental update on is it the same players that you know were that are...

Speaker 8: potential investors and partners? Is it the same as what you had lined up prior? Any incremental update on the talks with customers?

Speaker 8: and so forth as we get closer to the launch.

Speaker 9: Sure.

Speaker 4: You know, I've become as we get closer and closer.

Speaker 4: I feel our popularity is rising. I think the desire to participate with us, to be part of FMX, either as partners or as clients and users continues to rise.

Speaker 4: And I've yet to have the meeting where someone said, Nah, I'm not really interested in participating in the competitor to the CMEs monopoly in America. I haven't had that meeting yet. It's always a possibility. But so far I haven't attended that one yet.

Speaker 4: My sense is that there will be more partners, not less.

My sense is that the CME, which is an extraordinarily important and powerful enterprise in America, will maybe have backroom conversations with the CFTC and ask them to go a little slower. So I'm not expecting things to go swiftly necessarily as they might otherwise because...

That's a possibility. I don't know it, but that's certainly a possibility. And so we await the CFTC's approval whenever that process runs its course. And...

And so our expectation would be as follows. We will receive, we know of no reason why we won't receive CFTC approval. And we will work through that process over the coming months. We will receive CFTC approval. We will then have a, what we'll call our soft launch, which means,

Once approved, we will be ready and available to do business as an exchange. We will then start onboarding clients. And remember, we are trying to launch one of the US rates futures which is one of the great marketplaces of the world. And we are going to try to have a broad base of onboarding clients.

that process we will begin straight away upon CFTC approval. We'll call that our soft launch. And when we have sufficient clients on board it, to have a broad-based opening, we will then say we are having our official launch. But the soft launch is just the beginning of onboarding as many clients as we possibly can. Do we have a long line of them? We do.

do we expect to be successful in this process? We do. Is it just work? Yes. Is it more than just work? It is not. And so we are going to work hard at it and we are going to stand up an extraordinary competitor to the Chicago Mercantile Exchange and we do not think anyone has ever seen anything quite like that.

And the announcement of the strategic partners or investors, would that occur prior to the soft launch? I think that's a discussion with them whether it's certainly before the full launch. It may be before the soft launch.

or it may be somewhere after the soft launch, but well before the full launch.

So that's just a discussion of theater. Okay, got it. Thanks for all the info, Howard. Thank you.

Thank you. Ladies and gentlemen, as a reminder, if you'd like to join the question queue, please press star 1 on your telephone keypad. We'll pause a moment to allow for any other questions.

Thank you. Our next question comes from Line.

I'm sorry, one moment please. We'll pause a moment to allow for any other questions.

Hi operator.

Yes.

Are there any more questions or I'll just wrap up, is that right? Yes, I'm sorry. There are no further questions at this time.

Okay. Thanks everyone. Thank you for joining us this morning. You know, the process of BGC's growth as we head towards trading volumes growing more in line with...

really incredibly large fixed income issuance will continue to underpin BGC's growth going forward. We feel good and we look forward to speaking to you and updating you as we finish the corporate conversion going forward. Thanks everybody, we look forward to speaking to you soon.

Thank you. This concludes today's conference call. You may disconnect your lines at this time. Thank you for your participation.