Q4 2023 BGC Group Inc Earnings Call
Morning, Ladies and gentlemen, please standby our conference will begin momentarily once again all conference will begin momentarily. Thank you.
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Speaker Change: Greetings and welcome to the BGC group fourth quarter and full year 2023 conference call. At this time all participants are in a listen only mode. A brief question answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad as a reminder, this conference is being weak.
Speaker Change: It is now my pleasure to introduce your host Mr. Jason can speak as head of Investor Relations. Please begin sir.
Jason: Thank you and good morning, we used to BGC as fourth quarter and full year 2023 financial results press release and the presentation summarizing. These results. This morning, you can find these at IR Dot BGC G Dot com.
Jason: Please note you can find additional details on our quarterly results in today's press release and Investor presentation.
Speaker Change: Unless otherwise stated any historical results provided on today's call apparently the fourth quarter of 2023 with the prior year period.
Speaker Change: Certain revenue figures are provided for the current period as indicated.
Speaker Change: 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 define as cash and cash equivalents reverse repurchase agreements and financial instruments at fair value less securities loaned and repurchase agreements, we define total capital S T mobile.
Speaker Change: The partnership interest total stockholders' equity and Noncontrolling interest in subsidiaries.
Speaker Change: Please see today's press release for 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 when and why management uses such terms.
Speaker Change: Additional information with respect to our GAAP and non-GAAP results mentioned on today's call is available on our website at IR dot be D. C G dot com and in our Investor presentation.
Speaker Change: We refer to the company's technology, driven businesses Phenix Phenix as offerings include Phoenix markets and Phoenix both platforms.
Speaker Change: I also remind you that any information.
Speaker Change: On today's call that is not historical are forward looking statements. These include statements about the company's business results financial position liquidity and outlook.
Speaker Change: Any forward looking statements involve risks and uncertainties and except as required by law BGC undertakes no obligation to update any forward looking statements.
Speaker Change: Any outlook and targets discussed on this call assumes no material acquisitions buybacks extraordinary transactions or meaningful changes to the company's stock price.
Speaker Change: For a 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 and any updates to such risk factors and special note on forward looking information contained in subsequent reports on Form 10-K.
Speaker Change: Form 10-Q and form 8-K.
Speaker Change: I'm now happy to turn the call over to Howard Lutnick Chairman of the board and CEO of BGC group. Thank you, Jason Good morning, and welcome to our fourth quarter and full year 2023 conference call with me today are Chief operating officer, Sean Wendy at and our Chief Financial Officer, Jason off E.
Howard William Lutnick: G C had its best fourth quarter with record revenues and adjusted earnings our revenues improved over 18% and the strong year, where we delivered accelerating year over year revenue growth each quarter.
Howard William Lutnick: We expect favorable macro trading conditions to continue throughout 2024 with our global scale, we will continue to capitalize on the interest rate and energy market volatility to higher fixed income issuance across both government and corporate bonds. We are pleased with the C. O T sees recent unanimous approval.
Howard William Lutnick: And next to operating exchange for U S interest rate futures products, which are the largest and most widely traded futures contracts in the world. We intend to launch the FX futures exchange in the summer of 'twenty, four and we plan to discuss our strategic partners and further details on or before our first quarter earnings call.
Howard William Lutnick: Now like to turn the call over to Sean.
Sean: Thanks, and good day everyone.
Sean P. Galvin: Our fourth quarter revenues grew by 18, 4% to $516 $8 million and represented our highest ever fourth quarter revenue performance.
Sean P. Galvin: This growth was driven by the Americas, and EMEA, which improved by $21 nine and 25% respectively.
Sean P. Galvin: Total brokerage revenues grew by 16, 1% driven by strong growth across energy and commodities rates and foreign exchange.
Sean P. Galvin: Revenues from our energy and commodities business improved by 42, 3%, while we saw strong double digit growth across the energy complex and environmental products, including our new weather derivatives business.
Sean P. Galvin: Rates revenues increased by 26, 1%, reflecting broad based growth across interest rate products.
Sean: Foreign exchange revenues improved by seven 5% driven by higher volumes across G to N and emerging markets currencies.
Sean: Bgc's revenues decreased by three 6%, primarily due to a strong comparable period, a year ago, partially offset by higher volumes across emerging markets U S and UK credit products.
Sean: We expect Bgc's credit business to grow in line with our overall business in 2020 for benefiting from record new issuance and interest rate volatility.
Sean: Equities revenues declined by three 8%, reflecting lower cash equity volumes, partially offset by higher equity derivatives activity.
Sean: Data network and post trade revenues improved by 17, 9% driven by Phoenix market data and Lee Sarah on network business.
Sean: Turning to Phoenix in more detail.
Sean: In the fourth quarter Phoenix revenues grew by 21% to $138 million.
Sean: These high margin technology, driven businesses accounted for more than 25% of Bdcs total revenue during the period.
Sean: For the full year 2023, Phenix generated $521 7 million an improvement of 16, 1%.
Sean: <unk> fourth quarter and full year revenue growth was led by our electronic rates credit and data network and post trade businesses.
Sean: This record performance drove Phoenix revenue about $500 million for the first time.
Sean: At this scale Phenix is now one of the largest electronic platforms across the capital markets.
Sean: Our Phoenix markets businesses generated revenue of $109 6 million in the fourth quarter, an increase of 16, 5%.
Sean: This growth was driven by higher electronic rates credit and foreign exchange volumes, along with stronger Phoenix market data subscription revenues.
Sean: Chinese market data sign a new customer contracts in the fourth quarter with an aggregate contract value is 30% higher compared to the same period last year.
Sean: I'd like to highlight Phoenix market data is continued success in his regulatory solutions business, which we expect to enhance our growth.
Sean: Often these growth platforms generated fourth quarter revenues up to $21 $2 million up 43, 3%, primarily driven by Phoenix U S T portfolio match and catheter lab.
Sean: I think as U S. T revenues increased by over 70% on a 38% improvement in average daily volume.
Sean: NHS tea grew its market share to 26% in the fourth quarter up from 25% in the third quarter of 2023, and 20% a year ago.
Sean: This momentum has carried forward into January achieving new record Adv was 44% higher than January last year.
Sean: Portfolio matches U S credit volumes improved more than three fold driven by new accounts and deepening relationships in this fast growing segment of the market.
Sean: We are pleased with the success that this platform has seen which in just two years has gained significant share in a market that has historically been dominated by a single incumbent.
Sean: Catheter lab post trade business generated revenue growth of nearly 90% driven by higher interest rate compression and foreign exchange matching volumes.
Sean: We expect demand for our catheter lab post trade products to grow as global banks optimize their balance sheets in an ever evolving regulatory regime.
Sean: Lew Sarah on network infrastructure business saw double digit revenue growth led by new client contracts and broadening product coverage with existing clients.
Sean: <unk> continues to see strong demand for its new markets offering a multi asset trading system used by many of the world's largest banks.
Sean: Turning to our outlook.
Sean: And please provide the following guidance for the first quarter of 2024.
Sean: We expect to generate total revenue of between 560 and $610 million as compared to $532 $9 million in the first quarter of 2023.
Sean: We anticipate pretax adjusted earnings to be in the range of $126 million to $144 million versus $124 $6 million last year.
Sean: Our business continues to expand and our guidance reflects investments in several growth areas. For example, we have made a substantial investment in our global interest rate derivative product suite. We all say recently re entered the Japanese interest rates market.
Sean: After 20 years of ultra low and even negative interest rates, we expect positive interest rates and the related transaction volumes to return the Japanese rights market.
Sean: Additionally, we continue to invest in our <unk>.
Sean: M ex futures exchange in preparation for its summer launch.
Sean: These investments will increase our revenues and expand our margins in the near term.
Sean: With that I'd like to turn the call over to Jason.
Jason: Thank you Shaun and Hello, everyone.
Jason: BGC generated total fourth quarter revenue of $516 $8 million, an increase of 18, 4% as compared to last year.
Jason: By geography, Americas revenues increased by 21, 9% Europe Middle East and Africa revenues increased by 25% and Asia Pacific revenues increased by two 8%.
Jason: Turning to expenses.
Jason: Our compensation and employee benefits under adjusted earnings increased by 21, 8%.
Jason: This increase was primarily driven by higher revenues as well as an increase in newly hired brokers and new business lines with Sean just highlighted.
Jason: New brokers are typically less productive in their first year, which can temporarily contribute to a higher compensation ratio all else equal.
Jason: Non compensation expenses under adjusted earnings increased by nine 7%, primarily driven by higher interest expense of $6 million.
Jason: Moving on to earnings we generated.
Jason: <unk> strong double digit growth across all metrics during the quarter.
Jason: Our pre tax adjusted earnings were $110 8 million, a 27, 3% improvement with a 149 basis point margin expansion to 21, 4%.
Jason: This was our 13th consecutive quarter of year over year margin expansion, which reflects the gear and potential of our business.
Jason: Our post tax adjusted earnings increased by 29, 2% to $101 $3 million or 21 per share a 31, 3% improvement.
Jason: Our adjusted EBITDA was $151 6 million, a 22, 3% improvement.
Jason: Turning to share count our.
Jason: Our fully diluted weighted average share count increased by <unk>, 1% sequentially to $490 7 million shares.
Jason: As of December 31, our liquidity was $701 million compared to $524 3 million as of year end 2022.
Jason: With that I'd like to turn to Howard for closing remarks. Thank you Jason 'twenty 'twenty. Three we are proud we achieved record revenues and earnings and completed our corporate conversion to BGC group.
Howard William Lutnick: With the historical manufactured zero interest rate environment behind Us BGC will continued to demonstrate the strength of our business and deliver growth far superior than our current trading multiple reflects with that operator, we're ready to take the call to questions.
Howard William Lutnick: Thank you we will now conduct a question and answer session. If he would like to ask a question. Please press star one on your telephone keypad, a confirmation 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 for participants using speaker equipment, it may be necessary to pick up your.
Jason: Handset before pressing just darkies once again Thats star one to ask a question at this time one moment, while we poll for our first question.
Jason: Okay.
Jason: Yeah.
Jason: Our first question comes from Patrick <unk> with Piper Sandler. Please proceed.
Patrick: Yes, good morning.
Patrick: Thanks for taking my question I was hoping that we could just start off with F. M X in and where we sit today C. FTC approval was obviously, a big hurdle, but in terms of the strategic partner announcement, it seems like things might be taken a little bit longer than expected. So I was just hoping you could maybe provide some color on how those conversations have maybe evolved since the last.
Patrick: Earnings call, where they sit today and I guess your confidence level Howard and in in your ability to kind of get this get this announcement made before the first quarter call. Thanks.
Patrick: My confidence level remains off the charts.
Patrick: I am positive excited and looking forward to the opening in.
Patrick: This summer.
Speaker Change: Know that everyone would like me to announce everything today they have not.
Speaker Change: The thing to say Tomorrow. The next day. The next day. The next day I think about it this way if we get to see Mtc approval in January we're going to open in the summer.
Patrick: Just think it would be more fun to talk about the partners in the middle kind of like we finished the Super Bowl kind of between the two goalposts. So we are excited we are happy that there are of course i's to dot and T's to cross and we will be delivering when we announced that our.
Patrick: It would be to deliver.
Patrick: Not only just the list of the names, but actually the full details of the transaction and how everybody owns it and how it's going to work in all those details. So instead of expecting just a simple call from us.
Patrick: Of the names I think you should now start would expect we will be very transparent very detailed.
Patrick: And Barry ex planet.
Patrick: Tori.
Patrick: Yeah.
Speaker Change: Alright, Thanks for that and then just a follow up on revenue growth continued to accelerate in the fourth quarter first quarter guide implies a little bit of a slowdown, but you know it's still I think is implying a 10% growth and you've said that.
Speaker Change: In 2024, you expect topline growth to be around 10%. So I guess are you know do you still think that that's achievable. This year and then maybe as we look at the overall growth algorithm for the business and consider some of the investments that Sean mentioned that you're making do you still think that that kind of 10% revenue growth producing.
Patrick: Mid teens earnings growth is kind of a.
Patrick: A good way to think about things going forward.
Patrick: And I guess overall like what do you think that's sustainable in this higher rate environment. Thanks.
Patrick: We do so I think you've got it just right, which is you know we guide what we see.
Speaker Change: And we.
Patrick: We have the numbers.
Patrick: What we've guided but no last quarter. If you look we started at a certain percentage we guide at around nine right now and we ended up delivering 18, because the business kept accelerating through the balance of the quarter. So you know when we guide tenants because we're a month into the quarter. We're about 10, it's not it's not that exciting words sort of.
Patrick: Up 10, my expectation for the year was 10.
Patrick: I like the market the way it is right remember we don't really.
Patrick: Worry about whether rates are five in a quarter or four and three quarters of five and three quarters as long as they're not 1% or a quarter of a percent or some other manufactured right.
Patrick: This interest rate global interest rate environment is very attractive and the only place really where its not yet attractive is Japan, but we feel Japan is coming and so we've made those investments so when the bank of Japan.
Patrick: Says that rates are now part of their life BGC will be ready to take advantage of it and we expect because those expectations are in that market. Now there is money to be made now. So we think the back end of this year is when we will see returns on the investments that we have.
Patrick: So these are not long term kind of things. These are gonna give us returns of this year. So we are comfortable with the 10%. We are comfortable with mid mid teens earnings growth with that gearing and you know we are excited about the world that we're in and where we see it going forward BGC is in a great place.
Patrick: <unk> said for a long time, we we have a really really big sales, okay, and and for a lot of years. It just wasn't windy.
Patrick: It is now windy and you are all going to see.
Patrick: The wonderful business that is BGC group, it's a wonderful business. It will continue to deliver earnings for the long time going forward and I think I think your stats are.
Patrick: We're very comfortable with it.
Speaker Change: Alright, Thanks Howard.
Speaker Change: I've heard your success as maybe attracted some some new sooner so I'm going to hop back in the queue and let somebody else ask a question.
Speaker Change: [laughter] once again to ask a question Thats Star one at this time. Our next question comes from Owen Lau with Oppenheimer. Please proceed.
Owen Lau: Hi, Good morning. Thank you for taking my question, so going back to <unk> I'm not sure how much you want to talk about it but I would fly.
Owen Lau: So you'll launch the exchange in the summer could you. Please talk about some of the key milestones before he got launch and then on the pricing fund I'm not exactly like going into the number but how competitive you expect thanks a lot.
Speaker Change: Okay. So.
Owen Lau: We expect to launch in the summer of 2024 with C FTC approval behind us.
Speaker Change: There is really a we do not see barriers.
Owen Lau: To the launch ahead. These are just we would call them plumbing.
Owen Lau: We have to connect to all the FC EMS Ah, it's really just process now signing up clients. So we would expect after we launch that the first year, it's really the execution of connecting the world's trading firms to US now we havent huge.
Owen Lau: Vantage because in the rates business were already connected to virtually all of the trading firms of the world. So our network is already connected the system is already connected so there I don't know that there's ever been affirmed with a better advantage in that regard have speed now the.
Owen Lau: F. C. M is that those that clear for clients, that's more new for us. So that's a part of the process of connecting them now it does positively work out for us that the biggest clients in the world who are our clients also own the bigger.
Owen Lau: <unk> in the world. So all of the banks, who are already connected to us Fortunately for US also on the biggest at CMS. So the technical connection is actually quite simple, but processes process. So our view is that the first year will be one of a robust connectivity.
Owen Lau: The second year will be transactions, meaning making sure everybody is on everybody is playing everybody's in the game.
Owen Lau: And then we view the third year as fundamental competition to the Chicago Mercantile exchange. So step one is connecting step two is make sure. The water is flowing nicely and step three is perennial.
Owen Lau: Okay.
Speaker Change: Got it that's super helpful. And then on the savings side. Your competitor just indicated indicated that they have achieved 75% to 80% and same thing for the initial clearing members and I remember how it a couple of quarters ago, you mentioned the margin offsets could be 95% to 97% weapon.
Speaker Change: F M X could you please expand on that point a little bit.
Speaker Change: Can you achieve that 95% to 97% offset and its a still hold true for <unk>. Thanks a lot.
Speaker Change: It does still hold true. So the concept is one where its best to understand that by the names of them won with the CME does is called two parts.
Speaker Change: And what we will be doing with the L. C. H is called one pot clearer. So two part clearing in one part clearly see with Tupac clearing the CME holds lots of margin and the DTC holds lots of March and they are a nice working relationship with each other and they trust each other.
Speaker Change: And they compare things to each other and they give each other a a discount because the offsetting position is in your friend.
Owen Lau: They're held by them and you can go only so far right, whereas if you held both parts right you would literally net them and you would say, okay, if you're long cash and Youre short futures.
Owen Lau: You only have basis risk and that's 3% risk its not 75% off its 97% off but you can't go past, 75% off when you don't hold both pieces of the puzzle and so the <unk> and the <unk> have worked to nice.
Owen Lau: Together to.
Owen Lau: To create efficiency, but they're kind of at the edge of their efficiency and it's difficult to actually get to that 75% range. Most of our clients are tend to be in the 50% to 60% range, but now you're going to see with y'all CH that we're able to get beyond that level.
Owen Lau: Basically what the right answer to think about that is is this will be the proper first time, the CMA has ever actually add a real competitor, who can provide margin offsets and that type of capital efficiency that they have done so we will be as good but obviously we.
Owen Lau: <unk> will be superior, but the fact is it's pure on competition.
Owen Lau: Yes is it better 97 is better than 75, but.
Owen Lau: I think you've just put us toe to toe in the ring and we are on and as you can see what <unk> U S Treasury business.
Owen Lau: <unk> has grown its market share one or two market share points sequentially.
Owen Lau: Every single quarter for years, now going up to 26% last quarter is 25% the quarter before that was 23 or the quarter before that was 21 and these are points being taken off the Chicago Mercantile exchange So the big Heavyweight Champ.
Owen Lau: Can be hit you're watching <unk> do it and we are comment with futures launching this summer.
Speaker Change: Got it thanks a lot.
Owen Lau: Thank you we have a follow up from Patrick Morley with Piper Sandler. Please proceed.
Owen Lau: Yeah.
Patrick Morley: Howard I was just wondering I, hoping you could update us on your capital return plans I know.
Patrick Morley: Last quarter, you had sort of mentioned that you might look to sell some of those easily separable electronic assets or you'd be open to possibly selling them and using the proceeds to buy back shares. So can you kind of just update us on your thinking there.
Patrick Morley: Thanks.
Patrick Morley: We we.
Owen Lau: We agree that at roughly nine times, our earnings with mid teens growth. The best use of our capital return policy is to buy back shares.
Owen Lau: I have had for those who on the call who are who don't have a variety of shareholders.
Owen Lau: I have come to us and said if you have separable technology divisions that you sell at prices wildly higher on the multiple than your nine times earnings would not be an attractive.
Owen Lau: You know transaction for our shareholders.
Owen Lau: For those who have heard me listen to those questions.
Owen Lau: They just watch me not an agreement that is a that is a thoughtful and reasonable way to think about things. If you have followed the company for a while you would remember that there was lots of people asking me when I was going to sell my insurance business or what I said was things take time.
Owen Lau: Do you want to get the right price.
Owen Lau: And it took time longer than some of our shareholders wished it would but we got the right price and we bought back a shed load of our shares so I like your question I like that thinking.
Owen Lau: I have to find the right buyers and the right timing and the right products that are not a key part of our future, but we have assets that are not a key part of our future. We have assets had lots of people would like to buy and I think that is a reasonable thing for us to work on in the year 2024 timing I can't help you with because it's not up.
Owen Lau: To me, but I think Thats a good question. It's a good set of thoughts the company agrees with that but and if we can find the right transaction, we will execute it we will buyback more shares because I think it's in the best interest of our shareholders to do exactly that so I liked the device. When you guys gave it and I want to be clear.
Owen Lau: That I haven't forgotten.
Owen Lau: Yeah.
Speaker Change: Okay, Great and then just another one on.
Speaker Change: The energy brokerage business been really impressed with the growth. There I think you know revenues were up 42% in the fourth quarter. So just as we look forward I know that last year I think you acquired tried it in the first quarter.
Speaker Change: How should we think about growth in that business going forward given that we might be lapping some.
Owen Lau: Some impact from some acquisitions.
Speaker Change: Just what have you been seeing there if you could dig into that a little bit what are the biggest drivers where do you see the biggest opportunities. Thanks.
Speaker Change: Sure.
Speaker Change: So Patrick we still remain.
Owen Lau: Whilst you've grown significantly we still remain.
Owen Lau: Slightly undersized in that business, if you strip that our acquisition for.
Owen Lau: For Q4, we'd be up 25% so excluding.
Owen Lau: Excluding the Trident acquisition up 25%.
Owen Lau: And we're still seeing.
Owen Lau: Still seeing strong growth of 25 in Q4, we bought tried in March last year, but still opportunities both in.
Owen Lau: In the U K and indeed state in the U S with the growth that you've seen has been primarily on the on the oil side, but <unk> also got good growth in var environmental business and also in our power business. So so still strong double digit growth and opportunities.
Owen Lau: In commodities.
Owen Lau: Yeah.
Howard William Lutnick: Thank you at this time I would like to turn the floor back over to Mr. Lutnick for closing comments.
Lutnick: Well. Thank you for joining us today BGC had an excellent year in 2023, and we look forward to a strong performance going forward. So thanks for spending the morning with us and we look forward to speaking to you next quarter. Thanks, everyone.
Speaker Change: This concludes today's teleconference. You may disconnect. Your lines at this time. Thank you for your participation and have a great day.
Speaker Change: Okay.
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Speaker Change: Oh.
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