Q1 2024 BGC Group Inc Earnings Call
Good morning, ladies and gentlemen, thank you for your patience to teleconference will begin momentarily.
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Okay.
Speaker Change: Greetings and welcome to the BGC group first quarter 'twenty 'twenty four earnings conference 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 zero on your telephone keypad. As a reminder, this conference is being recorded it is now my pleasure to introduce your host Jason Christy. Please go ahead.
Jason Chryssicas: Thank you and good morning, we should BGC as first quarter 2024 financial results press release and the presentation summarizing. These results. This morning prior to the marked up and you can find these at IR Dot BGC Qi Dot Com. Please note you can find additional details on our quarterly results in today's press release and Investor presentation.
Speaker Change: Unless otherwise stated and historical results provided on today's call compare only the first quarter of 2024 with the prior year period.
Are you referring to our results on this call only on an adjusted earnings basis, unless otherwise stated.
Speaker Change: Also refer to adjusted EBITA, we may refer to our liquidity, which we define as cash and cash equivalents reverse repurchase agreements and peninsulas with someone that fair value less securities loaned and repurchase agreements. We define total capital as redeemable partnership interest total stockholders' equity and Noncontrolling interest in subsidiaries.
Speaker Change: We refer to the company's technology driven businesses as Phenix Phenix offerings include Phoenix markets and Fedex growth platforms.
Speaker Change: To remind you that the information regarding our business on today's call that are not historical are forward looking statements. These include savings 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. We undertake no obligation to update any forward looking statements anyhow.
Any outlook and targets discussed this call assume 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.
Speaker Change: As set forth in these filings and any updates to such risk factors and special note on forward looking information contained in subsequent reports on Form 10-K Form 10-Q or form 8-K, now with that I'm happy to turn the call over to Howard Lutnick Chairman of the board and CEO of BGC group.
Howard W. Lutnick: Thank you Jason Good morning, and welcome to our first quarter 2024 conference call with me today are Chief operating Officer, Sean Wendy <unk>, and our Chief Financial Officer, Jason.
Howard W. Lutnick: This is a great time for BGC.
Howard W. Lutnick: Today, we reported record first quarter revenues and adjusted earnings and last week, we completed our F L X transaction and announced our strategic partners.
Howard W. Lutnick: These 10 major financial institutions joined us in the formation of <unk> investing $172 million at a post money equity valuation of $667 million.
Howard W. Lutnick: Our success in the U S Treasury and FX markets their investments further validates both our technology and our visions to reshape the U S interest rate markets.
Howard W. Lutnick: This extraordinary group of partners brings enormous value to SMS far beyond this initial valuation with that I'll turn the call over to Sean.
Sean A. Windeatt: Thanks, and good day everyone.
Sean A. Windeatt: First quarter revenues grew by eight 6% to a record $578 $6 million, reflecting broad based growth across all geographies and growth across energy commodities and shipping rates and foreign exchange businesses.
Sean A. Windeatt: Again, this quarter, we renamed energy and commodities to energy commodities and shipping to better reflect the integrated operations of these businesses.
Sean A. Windeatt: Total brokerage revenues grew by seven 3% to $528 million.
Sean A. Windeatt: Rates revenues increased by six 3% to $175 $1 million, reflecting strong growth across interest rate derivatives government bonds and emerging market rates products.
Sean A. Windeatt: Energy commodities and shipping revenues grew by 32, 1% to $118 $5 million driven by strong double digit volume growth across the energy complex and environmental business.
Sean A. Windeatt: This asset class has become our second largest providing additional diversification to our client base and macro drivers.
Sean A. Windeatt: Foreign exchange revenues improved by four 8% to $84 million driven by higher volumes across emerging market currencies and options.
Sean A. Windeatt: Credit revenues decreased by two 2% to $87 6 million.
Sean A. Windeatt: Primarily due to lower trading volumes and Asian credit, partially offset by strong European credit activity.
Sean A. Windeatt: Equities revenues decreased by seven 7% to $62 $9 million due.
Sean A. Windeatt: Due to the lowest secondary trading volumes in equity derivative products, partially offset by higher cash equity volumes consistent with the industry wide trends.
Sean A. Windeatt: Data network and post trade revenues improved by 13, 9% driven by broad based revenue growth across Phoenix market data, new Sarah on network business and capital strength.
Sean A. Windeatt: Strike business.
Sean A. Windeatt: Turning to face.
Sean A. Windeatt: In the first quarter Phenix generated revenues of $149 $3 million, a new quarterly record.
Sean A. Windeatt: These high margin technology, driven businesses accounted for 26% to BGC total revenue during the period.
Sean A. Windeatt: Thanks markets businesses generated revenue of $127 $4 million in the first quarter, an increase of three 6%.
Sean A. Windeatt: This was driven by high electric rates and credit volumes, along with stronger Phoenix market data subscription revenues.
Sean A. Windeatt: Our Phoenix growth platforms generated first quarter revenues of $21 9 million.
Sean A. Windeatt: 26, 2%, primarily driven by <unk> Ust portfolio match loose, Sarah and catheter lab.
Sean A. Windeatt: As a reminder, phenix Ust is now renamed <unk> Ust part of our <unk> product suite following last week's transaction.
Sean A. Windeatt: <unk> revenues increased by over 33% on a 21% improvement in average daily volume.
Sean A. Windeatt: <unk> Ust grew its market share to 28% in the first quarter up from 26% in the fourth quarter of 2023, and 21% a year ago.
Sean A. Windeatt: <unk> Ust continues to be the fastest growing U S treasuries platform.
Sean A. Windeatt: With these market share increasing one to two points each sequential quarter.
Sean A. Windeatt: Portfolio match more than doubled its use credit volumes versus a year ago.
Sean A. Windeatt: These record volumes drove revenues, 87% higher.
Sean A. Windeatt: <unk> continues to increase its market share in this rapidly growing segments of the market.
Sean A. Windeatt: <unk> grew by 36%, primarily driven by new clients and expansion in existing client agreements.
Sean A. Windeatt: <unk> subscription based revenues have consistently growing by strong double digits.
Sean A. Windeatt: Capital App generated revenue growth of 40% driven by higher interest rate compression activity.
Sean A. Windeatt: Turning to our outlook I am pleased to provide the following guidance for the second quarter of 2024.
Sean A. Windeatt: We expect to generate total revenue of between 520 and $517 million as compared to $493 1 million in the second quarter of 2023.
Sean A. Windeatt: We anticipate pretax adjusted earnings to be in the range of $120 million to $130 million.
Sean A. Windeatt: $105 $5 million last year.
Sean A. Windeatt: With that I'd like to turn the call over to Jason.
Jason: Thank you Shaun and Hello, everyone.
Jason: BGC generated total first quarter revenue of $578 6 million, an increase of eight 6% as compared to last year.
Jason: We saw revenue growth across all geographies.
Jason: Europe Middle East and Africa revenues increased by 11, 5%.
Jason: Americas revenues increased by six 2% and Asia Pacific revenues increased by three 5%.
Jason: Turning to expenses.
Jason: Our compensation and employee benefits under adjusted earnings increased by 9%.
Jason: This increase was primarily driven by higher.
Jason: Revenues as well as an increase of newly hired brokers and new business lines.
Jason: Non compensation expenses under adjusted earnings increased by seven 7%, primarily driven by higher interest expense.
Jason: Moving on to earnings profitability increased across all earnings metrics during the quarter, including GAAP net income for fully diluted shares which improved by 92, 2%.
Jason: Our pretax adjusted earnings grew by eight 6% to a record $135 $4 million with a margin of 23, 4% its 14th consecutive quarter of year over year margin expansion.
Jason: Post tax adjusted earnings increased by six 6% to $123 2 million.
Jason: Or <unk> 25 per share an 8% improvement.
Jason: Going forward, we expect our traditionally strong gearing to continue.
Jason: This is reflected in our second quarter guidance, where our revenue midpoint is expected to be up 10, 5% and our pre tax adjusted earnings midpoint is expected to be up 18, 4%.
Jason: First quarter adjusted EBITDA was $208 4 million, a 37, 9% improvement.
Jason: Turning to share count.
Jason: Fully diluted weighted average share count was 495 million shares during the first quarter, a one 2% decrease compared to the first quarter of 2023.
Jason: We expect our fully diluted weighted average share count to remain approximately flat for the full year of 2024 barring any extraordinary transactions.
Jason: As of March 31.
Jason: Our liquidity was $615 7 million compared.
Jason: Compared with $701 4 million as of year end 2023.
Jason: Cash uses are typically larger in the first half of the year as we pay bonuses and taxes.
Jason: With that I'd like to turn the call over to Howard for closing remarks, Thank you Jason.
Howard W. Lutnick: I'd stage interest rate markets are the largest in the world. We have built the fastest growing U S Treasury platform and now with the support of our partners <unk> is the only competitor to the CME.
Howard W. Lutnick: Following our best quarter on record and reflecting our strong balance sheet and future growth prospects I am pleased to announce that our board of directors has improved an increase in our quarterly dividend to <unk> <unk> per share.
Speaker Change: With that operator, we're happy to open the call for questions.
Speaker Change: Thank you we will now be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad a confirmation tone 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 and may be necessary to pick up your handset before.
Speaker Change: Pressing the star keys.
Speaker Change: Your first question comes from Patrick Mali with Piper Sandler. Please go ahead.
Patrick Malcolm Moley: Yeah. Good morning, Thanks for taking the question.
Patrick Malcolm Moley: First can you talk about the pricing structure and the incentives that are being offered to these partners and how that may evolve over time, and then second can you help us just understand and maybe even quantify those volume targets that need to be hit for the investors. We retain that 10% ownership stake is that company specific that based on.
Speaker Change: Group any.
Speaker Change: Any color there would be great.
Speaker Change: Sure so.
Speaker Change: The 10 partners have.
Speaker Change: Volume.
Speaker Change: Targets.
Speaker Change: Related to their equity, meaning they have growing volume targets across the businesses.
Speaker Change: Throughout the whole ecosystem of the business, so that treasuries foreign exchange futures, obviously some of the partners for instance will be more focused on so for futures some more on treasury futures so more on treasury cash.
Speaker Change: So those were individually crafted.
Speaker Change: To be more attuned to the type of trading that that particular firm does the F C Adams.
Speaker Change: What is spectacular about those partners as many of them have the greatest FCS in the business and those S fans will be connecting.
Speaker Change: For them, they can't really drive their client business in particular, but what they can do what they can connect their clients and have that be a seamless connection. So that is also part of the transaction is that they connect across all of their areas of the of the FERC.
Speaker Change: They have.
Speaker Change: Subscription arrangements, which grow over time, meaning the revenues will continue to grow but they do not have unit economics in the ecosystem, meaning that those partners can drive business.
Speaker Change: And drive volume through the ecosystem without marginal cost and that is a fundamental part of the company's view is that we think breaking unit economics and driving the subscription based pricing model is something that we are open minded to other clients as well. So that is a model that we like that we embrace.
Speaker Change: And we look forward to driving across the ecosystem.
Speaker Change:
Speaker Change: Both for our partners and for other companies as well.
Speaker Change: Yes.
Speaker Change: Great. Thanks, and then just on the on the fixed pricing structure I guess, just overall what impact do you expect the formation of bathroom, Mexico have on BGC topline.
Speaker Change: In the short term is there do you expect there to be a revenue step up just from the fact that these partners are switching from a variable plans to fixed pricing plans.
Speaker Change: And then I guess, just adding onto that from a market share standpoint, with these volume incentives.
Speaker Change: Do you expect the.
Speaker Change: Club market share and maybe even your share of volumes and FX to evolve just from the formation of this over the next quarter.
Speaker Change: A quarter call it two quarters or so.
Speaker Change: So question number one.
Speaker Change: Revenues will grow because there are there.
Speaker Change: Subscription.
Speaker Change: <unk> price.
Speaker Change: Succeeds.
Speaker Change: The amount of revenue we currently receive so number one our revenues will grow.
Speaker Change: Number two.
Speaker Change: Ross our ecosystem for example, our foreign exchange business, we have.
Speaker Change: An excellent platform in foreign exchange that has enormous scale to grow and now with these partners connecting to it for those who haven't connected to it and using it I think we will we will demonstrably grow our foreign exchange business, which will bolster our AD market share is.
Speaker Change: Well as to really create a wonderful marketplace for others to transact business at very attractive price. So we are excited about our foreign exchange platform. Obviously, our treasury platform was growing 1%, 2% per sequential quarter and that was without these partners being owners.
Speaker Change: Now with them being owners, we think over the next two and three quarters youre going to see substantial growth in our treasury platform. Both in terms of volume average daily volume market share and revenues as well across the board and then futures as we've said we plan to open in September we are not expecting.
Speaker Change: To charge.
Speaker Change: Immaterial amounts of money for our futures business our expectation in the first year is is to charge a very low to no price. So people can connect that people can trade and people can grow their volume and understand the benefits of the system the technology speed and so our futures business is not where we are.
Speaker Change: Expect in the first year to be gaining material revenues. However, our foreign exchange business and U S treasury businesses should be growing their revenues nicely across the year.
Speaker Change: Okay.
Speaker Change: Okay, and then just on on the futures piece I think in the past you've said that it might take a.
Speaker Change: A year or two before you would expect to meaningfully.
Speaker Change: Growing the market share and futures and taking share from CME can you just kind of update us on how youre thinking about the timeline until you kind of get everyone at the starting line and you now have the ability to take share and then how you would expect that to maybe.
Speaker Change: Evolved once you get everyone there.
Speaker Change: Sure there is.
Speaker Change: Theres depth and breath conversations so with our.
Speaker Change: With our partners we have sufficient.
Speaker Change: Capacity to light up our markets when we opened our futures.
Speaker Change: I've used the term like a Christmas tree I would expect our futures markets to have wonderful pricing.
Speaker Change: Cause you know when you have 10 of the greatest trading firms in the World is your partner they have more than sufficient capacity to transact.
Speaker Change: Healthy volumes with.
Speaker Change: With the marketplace. So.
Speaker Change:
Speaker Change: But I do understand that it takes time to connect.
Speaker Change: The global infrastructure of trading firms across the world to our new futures exchange. So we think that will take could well take a year and so while we're starting now.
Speaker Change: We know there are different firms going to be coming on all across the timeline between now and the end of the year, that's just going to happen and we hope many of them will happen by the time, we opened in September but it is a reasonable view that that's some of the big FCS EMS will be coming on in their clients will be coming on through the end of the year and we are.
Speaker Change: Adding breadth, having everybody connect making sure the model is.
Speaker Change: Full where the playing field is full of all the players so we hope.
Speaker Change: A year from when we open we will have all the players on the playing field and then it will truly begin so I would say year or two would be the beginning where we have all the players on the field and then we began and then year three when everybody has all of the ecosystem completely connected completely available totally knowledgeable.
Speaker Change: About the benefits of our technology to speed the capacity the atomic nature, where you can trade a against B in built into the software into the platform.
Speaker Change: That the CME can't really do because they bought broker tech and it's separate from their cash businesses separate from their futures business.
Speaker Change: We have the benefits of cross margining sulfur futures against.
Speaker Change: Interest rate swaps I think.
Speaker Change: Youre going to really see tremendous competition for market share. So it's a process that process takes time.
Speaker Change: You got to trust the process, but I.
Speaker Change: I think early on.
Speaker Change: People will be surprised by the quality of our markets.
Speaker Change: And as I said kind of will remind me of the holidays.
Speaker Change: Yeah.
Speaker Change: Okay, and then just switching to the.
Speaker Change: For the quarter and the guidance I think in the second quarter.
Speaker Change: The midpoint of the guidance range implies a little bit more margin expansion than than the street was expecting.
Speaker Change: Last quarter, you'd mentioned that you've made some investments that you.
Speaker Change: It didn't really expect to bear fruit until the second half of this year is that margin expansion in the second quarter or is that any indication that you're starting to see.
Speaker Change: Kind of those benefits come through earlier than expected.
Speaker Change: Or is that maybe just driven by some of the <unk>.
Speaker Change: Expenses.
Speaker Change: From from the formation of Aframax in front of me capital that's freed up.
Speaker Change: Our expenses, but that's all.
Speaker Change: Deterred.
Speaker Change: I think you will see from here on out.
Speaker Change: A more clear view.
Speaker Change: The furniture business and how that adds margin to.
Speaker Change: We have been big investors in first our U S Treasury platform then or.
Speaker Change: Alright, FX futures platform and when you're investing.
Speaker Change: Big like that it is when you when you look at Us Holistically.
Speaker Change: You haven't seen is you haven't seen the benefits of our higher margin Fedex business low through to the bottom line because we've made big investments across our scale you've seen us invest in Lucerne, which is now winning in catheter lab, which is now winning in a whole variety of our businesses portfolio match, which is not winning so all of those things.
Speaker Change: <unk>.
Speaker Change: Reduced our margin over the many years that <unk> seen past.
Speaker Change: The lion's share of those investments are now behind us and now we are in harvesting mode with regard to start harvesting Fms, even even though futures has not opened yet just the outgrowth in treasuries that are growth and foreign exchange will more than satisfy I think in our view.
Speaker Change: Expanse of our futures exchange, we're now in a really wonderful position, where you will start to see the benefits of our Phoenix platform and those margins right and.
Speaker Change: I think so from here on out starting the second quarter, our margins are going to be healthy they're going to have expanded from what you've seen in the past and I think that will continue going forward. So it's both things are moving more quickly things are moving well and.
Speaker Change: The company is starting to fire on all cylinders.
Speaker Change: Alright, and then just shifting to capital allocation in the press release.
Speaker Change: I think you said that just tens of millions of dollars of <unk>.
Speaker Change: Working capital that it was going to free up would be available for you.
Speaker Change: You mentioned share repurchases, increasing the dividend, which you obviously did this quarter and then investing for growth.
Speaker Change: So can you just kind of help us understand how you prioritize.
Speaker Change: Those three and then I have one other one on capital allocation, but I'll leave it there.
Speaker Change: Alright, so the dividend is pretty easy Penny is $20 million a year, so that's kind of black and white.
Speaker Change: So we are going to return an extra penny a share now.
Speaker Change: We like buying back our shares so.
Speaker Change: Jason said, we plan to keep it all other things constant we plan to keep our.
Speaker Change: Our shares flat they've been flat I think they were down 1% year over year, we withheld that they are just below 500, and that's our expectation.
Speaker Change: It does that mean that that we won't.
Speaker Change: Beneficially buy back shares as we see.
Speaker Change: Said this before it's one of our shareholders decides to sell and encourage you to call us and we can do a block transaction and buy them.
Speaker Change: Things like that so I mean, we're open minded to do things like that.
Speaker Change: We are seeing opportunities to invest in our business.
Speaker Change: The business is growing.
Speaker Change: Others don't have the technology. They don't have the scale and we are seeing that opportunity and we're going to continue to take advantage of those.
Speaker Change: Comparatively small.
Speaker Change: Generally comparatively small but.
Speaker Change: You never know when those opportunities are.
Speaker Change: The vessel, if we can buy things at the right price and drive them through our ecosystem, we're going to do that we have the technology. We have the scale. We have Fedex we have in this era, where we have a lot of tools.
Speaker Change: Make money and as I said the market is growing our market share is growing compared to everybody else. We'd feel we feel really good about where we are we feel really excited about the validation that is clear from our partners joining us in Fms that is the defining characteristic.
Speaker Change: Nation of the transaction is that.
Speaker Change: These partners appreciate our technology. They appreciate its capacity they know it could compete in the world. They are certain of it they've seen it in U S. Treasuries. This is not something to think about in the future right.
Speaker Change: This technology just took two points market share this quarter past.
Speaker Change: I hope, we don't sound like we're backing away from our view of our growth on this call. We continue to feel good to know and those growth in one or two points sequentially per quarter, where before we had partners and so I think those partners will enhance the speed of our growth and we are really we are really excited.
Speaker Change: Our opportunities both to invest our capital we're going to continue to buy back shares.
Speaker Change: An expectation of raising our dividend should be something.
Speaker Change: Going to be constrained because we like buying our shares back.
Speaker Change: We felt we.
Speaker Change: You had said it was a.
Speaker Change: One of the tools to use to return capital to shareholders $20 million for a company that just said, we're going to earn $125 million in the quarter coming in mid point of our guidance.
Speaker Change: Okay.
Speaker Change: Great and then just.
Speaker Change: You're talking about.
Speaker Change: You're seeing success in some of these phenix businesses I think in the past you had said that you could potentially be open to.
Speaker Change: Maybe looking to sell some of the easily separable businesses within phenix.
Speaker Change: And given that capital back to shareholders can you talk about or any update there on your thoughts around potential sale of any of those assets and what you would use the proceeds.
Speaker Change: Yeah look we are open minded as a.
Speaker Change: As a public company that trades you know.
Speaker Change: Oddly with our growth rate of top line revenue of 10% growth in now Bottomline revenue profits of 18%, we remain surprise being part of the S&P 600 that were.
Speaker Change: So we.
Speaker Change: We trade it at such a very attractive prices compared to the index writ large which trades at about 15 times earnings so.
Speaker Change: We have lots of assets and if I wouldn't say, they're for sale that would be wrong I would say that the exchanges of the world know, who we are and sometimes they really like some of our products and if they come and talk to us and and the multiples are like we've said in the past 12 times revenues kind of things like that.
Speaker Change: We are open minded and so I wouldn't.
Speaker Change: Put your money on for certain this is what we're doing in the past when I was when Ive said for certain this is what I'm doing we've said it and then we've done it right. We said we were going to sell insurance. We said, we would announce our partners <unk> and the way we did things like that I mean.
Speaker Change: So.
Speaker Change: Nothing is for sale.
Speaker Change: Because it's growing rapidly within our business. However, if the exchanges want to buy something from us and pay us a healthy price and we can then go out and buy our own shares back at a very attractive spread for our shareholders.
Speaker Change: That we are absolutely open mic so not for sale, though but open minded for sure.
Speaker Change: Okay, Great and then just last question.
Speaker Change: Right.
Speaker Change: Wanted to just know what do you expect the run rate for stock based comp going forward.
Speaker Change: The first quarter it was annualized amount to about 8% dilution.
Speaker Change: So is that is that a run rate, we should expect or would you expect that to kind of come down over time, and then how much.
Speaker Change: If at all is still in that number from the from the corporate conversion.
Speaker Change: Patrick I would expect that first I would expect it to come down a key one is the quarter that we pay bonuses.
Speaker Change: A significant amount of hires.
Speaker Change: In that period, so I would expect it to come down from the level that it was.
Speaker Change: Was in Q1.
Speaker Change:
Speaker Change: <unk> number.
Speaker Change: Probably probably a couple of points from that would be my view, but certainly Q1 is when when we pay bonuses.
Speaker Change: Okay. So like 5% of it is a good run rate going forward.
Speaker Change: Yeah pretty close so that's fine.
Speaker Change: Okay great.
Speaker Change: Alright, guys. Thanks, so much that's it for me.
Speaker Change: Once again, if he would like to ask a question. Please press star one on your telephone keypad.
Speaker Change: Yeah.
Speaker Change: Yeah.
Speaker Change: There are no further questions I would like to turn the floor over to Mr. <unk> for closing remarks.
Speaker Change: Well, thank you very much for joining us.
<unk>: We are excited about our future we are excited about <unk> and and building finally opening our futures exchange in.
Speaker Change: In September.
Speaker Change: The market. We are excited that we will be able to present and youll see the margin growth from Fedex across the business.
Speaker Change: <unk> just feels really good and we look forward to speaking to you next quarter as we update you on our success. Thank you everybody.
Speaker Change: This concludes today's teleconference. You may disconnect your lines at this time and thank you for your participation.
Speaker Change: Okay.
Speaker Change: Yeah.
Speaker Change: [music].