BGC Partners, Inc.
Q4 2018 Earnings Call Transcript

Published: 14 Feb 2019

[Operator:]

Welcome to the BGC Partners, Inc. Fourth Quarter 2018 Earnings Conference Call. My name is Dylam, and I’ll be your operator for today’s call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session. [Operator Instructions] Please note that this conference is being recorded. I’d now like to turn the call over to Mr. Ujjal Basu Roy, Vice President of Investor Relations. Please go ahead.

[Ujjal Basu Roy:]

Good morning. We issued BGC’s fourth quarter 2018 financial results, press release and the presentation summarizing these this morning. You can find these at ir.bgcpartners.com. BGC spun off all of the shares of its former subsidiary in Newmark held by BGC to the stockholders of BGC on November 30th, 2018. BGC did not own any shares of Newmark as of year ended 2018, Newmark’s results are presented as discontinued operations within BGC’s consolidated results for all periods through the November 30, 2018 update. Newmark’s results are not included in BGC’s consolidated results presented after November 30th, 2018. Unless otherwise stated, all the tables and financial results in this document through the Outlook section provided on today’s call reflect only continuing operations of BGC and will not match the results and tables in the Company’s press release for the fourth quarter and full year of 2017 dated February 9th, 2018. The financial results from continuing operations of BGC do not present a distinct corporate segment and are generally comparable to the stand-alone results for BGC Partners excluding Newmark Group, referred to as post-spin BGC in previous documents. Post-spin BGC represented what BGC financial results would have been had the spin-off of Newmark occurred prior to the distribution date of November 30th, 2018. Post-spin BGC can also be defined as the results for BGC’s Financial Services segment plus its pro-rata portion of corporate items. Newmark released its fourth quarter and full year 2018 financial results on Tuesday, November 12th, 2019, and its related conference call took place at 10

[Howard Lutnick:]

Thank you, Ujjal. Good morning. Happy Valentine’s Day, and thank you for joining us for our fourth quarter 2018 conference call. With me today are BGC’s President, Shaun Lynn; our Chief Operating Officer and Interim Chief Financial Officer, Sean Windeatt. BGC had an excellent quarter, generating 8% revenue growth, 17% improvement in post-tax earnings per share, and 27% growth in adjusted EBITDA. The Company’s Board of Directors has declared a qualified dividend of $0.14 per share. This translates to a 9.1% dividend yield based on yesterday’s closing stock price. We are proud of the value we created in building our real estate business and completing the spin-off of Newmark to our shareholders. We expect to continue to deliver strong returns to our shareholders, as we grow our fully electronic Fenics business, build our insurance vertical and continue to hire and acquire accretively. With that, I will now turn the call over to Shaun Lynn.

[Shaun Lynn:]

Thank you, Howard, and good morning, everyone. Our full year revenue growth was virtually entirely organic across all of our asset classes. This was led by 12% improvement in our rates business, 16% growth in our foreign exchange business, and a 12% increase in energy and commodities. Our fully electronic Fenics business generated strong double-digit growth for the fourth quarter of 2018 across all of its major businesses. Fenics fully electronic brokerage revenues increased by 21%, while revenues from our high margin data, software and post-trade businesses were up by 26%. We expect to further grow as we continue to invest in technology, convert our voice and hybrid business to more profitable fully electronic trading and continue to rollout new initiatives across data, software and post-trade. Total Fenics revenues were up by 21% and once again increased as a percentage of our overall revenues. BGC’s growth was led by the 12% increase in revenue per producer for 2018, and 5% improvement for the quarter. This was the eighth consecutive quarter in which we generated a year-on-year increase in front office productivity. Our improvement is due to our ongoing investment in technology and the successful integration of recent acquisitions and additional fund office hires on to our platform. As we roll outnew products and services across Fenics and our brokers and salespeople further increase their productivity, we expect to continue to have strong performance and organically increase our market share and profits. We recently sold CSC Commodities, which we acquired as part of GFI, because CSC’s business was not consistent with our lower strategy. We expect to generate further growth from our energy and commodities business, both organically and through acquisitions. For example in November, we acquired Poten & Partners, a ship brokerage consulting and business intelligence firm specializing in liquefied natural gas, tanker and liquefied petroleum gas markets. On January 31st of this year, we completed the acquisition of Ed, an independent Lloyd’s of London insurance broker. Ed is now part of BGC’s grown insurance brokerage business, which we entered in 2017 with the acquisition of Besso Insurance. As we integrate Ed and continue to invest in our insurance brokerage vertical, we anticipate the acquisition to be accretive to earnings per share by the first quarter of 2020. We are proud of the value we created with Newmark, and we are excited about the opportunity to build another world class brokerage business. I’m now happy to turn the call over to Sean Windeatt.

[Sean Windeatt:]

Thank you, Shaun, and hello, everyone. BGC generated quarterly revenues of $466.4 million, up 8%. Our revenues from Americas were up by 3%; the revenues from Europe, Middle East and Africa were up by 10%, while Asia-Pacific revenues increased by 12%. Fourth quarter 2018 revenues would have been at least $8 million higher, but for the strengthening of the U.S. dollar. We expect a stronger dollar to have a similar impact on our first quarter results. With respect to expenses, compensation increased by 4.3%, which was primarily driven by higher revenues. Our quarterly compensation ratio improved by approximately 180 basis points to 50.7%. BGC’s non-compensation expenses decreased by 4.4% to $143.1 million. As a percentage of revenue, our non-compensation expenses improved by approximately 400 basis points to 30.7% of revenues. Our overall expenses were up by 0.8% to $379.7 million in the quarter. Moving on to our earnings. Our pre-tax earnings before non-controlling interest in subsidiaries and taxes were up by 47.7% to $85.5 million. Our tax rate for 2018 for adjusted earnings was approximately 11.7%, which is above the midpoints of the previous outlook of approximately 11% to 11.8%. We expect our adjusted earnings tax rate to stay between 11% and 12% in 2019. Due to the change in corporate structure with respect to the spin-off of Newmark, BGC’s non-controlling interest declined with an offsetting increase in its fully diluted share count as of year-end. This has no impact on earnings or on earnings per share. Our post-tax earnings were up by 25.8% to $70.4 million. Our post-tax earnings per share were up by 16.7% to $0.14. Our fully diluted weighted average share count was 498.5 million for adjusted earnings and 331.4 million for GAAP. The GAAP weighted average share count excludes certain share equivalents in order to avoid anti-dilution. Going forward, we expect to take a number of steps to reduce future share issuance. This may include using a greater percentage of cash with respect to acquisitions, employee compensation, and new hires. We anticipate these steps having no impact on our ability to attract and retain industry-leading talent or to make accretive acquisitions. We expect our year-end fully diluted share count to grow by between 5% and 6% year-over-year in 2019. This outlook includes no material acquisitions, buybacks or meaningful changes to the company stock price. With respect to our balance sheet, as of quarter end, our liquidity was $410.9 million. Notes payable and other borrowings was $763.5 million at year end 2018, compared to $575 million. Book value per common share was $2.28, as compared to $2.17. And total capital was $887.9 million, as compared to $1,186.2 million, all versus a year earlier. Total capital, cash and liquidity decreased primarily due to the spin-off of Newmark. I would like to point out in the first quarter of 2018 included a mark-to-market gain of approximately $11 million, primarily related to NASDAQ shares. Since NASDAQ payments now go to Newmark, BGC doesn’t expect similar gains going forward. We believe we have a strong and liquid balance sheet as our debt, net of liquidity, is approximately 0.7 times adjusted EBITDA. Between our $410.9 million of liquidity, our strong cash generation and our $350 million revolving credit facility, we have ample resources to invest for growth. With that, I’m happy to turn the call back over to Shaun Lynn.

[Shaun Lynn:]

Thank you, Sean. Turning to our outlook for the first quarter. We expect to generate revenues of between $515 million and $555 million, as compared with $524.8 million in the first quarter of last year. We anticipate pre-tax adjusted earnings to be in the range of $98 million to $112 million, compared with $121 million in the prior year period. We anticipate our adjusted earnings tax rate to be in the range of approximately 11% to 12% for the full year of 2019, as compared to 11.7% for the full year of 2018. We expect to update our guidance toward the end of March. With that, operator, we’d like to now open the call for questions.

[Operator:]

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Rich Repetto from Sandler O’Neill. Please go ahead.

[Rich Repetto:]

Yes. Good morning, Howard and good morning – excuse me, team. I guess the first question is on the tax rate and share count, so both through on an adjusted basis. I think, we calculated 14% on the adjusted tax rate. Just trying to see whether that’s the correct number? And then why is that higher than the usually 11% to 12%?

[Shaun Lynn:]

Hi, Rich, it’s Shaun. So what we said in our guidance previously, as I said in my prepared notes, the tax rate for the year would be between 11.2% and 11.8%. So our tax rate for the year came in 11.7%, which was in line with our previous guidance.

[Rich Repetto:]

Okay. And then the share count jump is that due to the acquisitions, quarter-over-quarter, it jumped by a couple – over a couple of percent?

[Shaun Lynn:]

Yes. I think our share count was up by 7%, which again, was in line with our previous guidance. And I think also give some extra color, we stated that we expect our share issuance to increase into the normal circumstances by between 5% and 6%, as we look to increase the share count going forward.

[Rich Repetto:]

Okay. And I guess the last thing for me is just on Fenics. Howard, just an update on strong revenue growth? Just trying to see when we might expect to get operating margin, whether we’re getting closer to that? I guess, the outlook on – I guess, you gave the outlook for Fenics, but just the operating margin and [indiscernible]?

[Howard Lutnick:]

Well, Shaun, why don’t you talk about the business for a minute, and then I’ll answer his question about the margin and [indiscernible].

[Shaun Lynn:]

Rich, as we said in 2018, we have been really focusing on the growth of the revenue. The growth on our post-trade, pre-trade market data, best execution. The overall package of what we deliver. The data within overall growth is vast, and we wanted to capture that, build it, and show that in 2019. So it’s been an exciting time. You’ve seen the revenue performance, but we – I think I’ll leave it to Howard to talk about how we’re going to look going forward.

[Howard Lutnick:]

So we feel that Fenics is the most extraordinary opportunity in our space, maybe that we’ve seen in our careers, our position, our scale of connectivity, our technology. We feel really good about the opportunity. We have lots to do and – but we have, we feel we have the tools to do it, and the market position to take advantage of it. So I think we want to nail down those numbers. Make sure, we can, when we’re ready to talk about Fenics, its margins with detail we want to be able to clarify the investment amounts, how that’s going to impact our margins, how that’s going to impact our growth rates and how this will come together. So I think we are examining those things. And as we get a better handle on that, we will come out with them, we will keep putting out revenues in the matter consistent with how we’ve done them in the past. So I think we’re going to plan to and are working on a much more complete and full explanation of our business opportunity. But it is what is really exciting everyone inside this company. It is – it’s just a great, great opportunity to add electronics to our business across our whole platform. And I think it’s going to be fundamental to the future of the company.

[Rich Repetto:]

So Howard, would you say this is more of a – then sort of a strategic issue of trying to determine how much you’re going to invest in it versus just an accounting issue? And I guess, maybe just to change the subject a little, but just a quick little update on the Fenics U.S. treasuries? And that’s all I have.

[Howard Lutnick:]

Okay. So I would say, yes, that it is more – what happens is, each time you – we take another step up the mountain, the view gets better, the view gets bigger and the view gets broader. Just that – just the connectivity that we have to our clients that we can now provide clients, the ability to connect to each others in business in a wildly less expensive and impressive way that they can do it technologically quickly, technologically efficiently. I don’t think most of the clients of the world have thought about using our technological rail to transact business in a way they want to do it. But as those expenses, as the expense of operating these giant banks continues to become more clear, our connectivity, our way of doing business will become, something that becomes ever more attractive to them. And so I think, it is a matter of scaling. We have the infrastructure. So it’s scaling up of that infrastructure, scaling out of that infrastructure, deciding how much we’re going to invest, where we’re going to invest it, and how much do we invest in sales, what kind of things, like that. I think, we need to really button those things down, so that we can show you how much that investment will mean, or what kind of revenue growth, right? When you start bringing in sales people, we need to put those things together. So I think it is more strategic than just an accounting issue for sure. Okay. And with respect to U.S. treasuries, we continue to grow. It is meaningful to that business, our growth rate. We are growing. Every quarter is significantly better than the prior quarter. We are continuing to add clients apace. And I think we feel very good about where we are and how we are doing. It still remains third, right. We are the third largest club. And so that is third. But we are growing and we are growing in a way that is consistent to or above our expectations. And we have very high expectation.

[Rich Repetto:]

Got it. Okay. Thank you, Howard and team.

[Operator:]

Thank you. [Operator Instructions] Our next question comes from Patrick O’Shaughnessy from Raymond James. Please go ahead.

[Patrick O’Shaughnessy:]

Hey, good morning. So, with Ed, I think you spoke to it starting to become accretive in the first quarter of 2020. What gets it from where it is now to being accretive at that point? Are there cost synergies that you’re going to be able to take out over the next year? Is it revenue growth combination of the two?

[Shaun Lynn:]

Well, first of all, let’s take the cost synergies. Of course by acquiring Besso, maybe two years ago now, we started to look very quickly at how we can grow organically, which we’ve been doing with investor and then we came across that we saw the opportunity to make synergies we think the back office and operationally. And then becoming that super attractive broker within the UK market alone, and then into the U.S., we’ve been able to organically attract significant producers very much it on the lines as how Howard and valued it with regards to Newmark and the growth that we enjoyed very quickly to build a $2 billion separate public company now. So with regards to the growth in Ed, and how Ed comes out into 2020 have been the company that we would expect. I think you’re going to see us continue to grow, build, acquire throughout 2019 to add significantly to our insurance business. And that sits behind Ed and Besso and continues to build within it.

[Howard Lutnick:]

So no exogenous Ed’s model with our synergies produces accretive numbers to 2020. Our additions of growth will just enlarge those numbers.

[Patrick O’Shaughnessy:]

Got it. And then can you remind me the margin profile of that insurance brokerage business as compared to the legacy inter-dealer brokerage business?

[Shaun Lynn:]

I’m sorry, we don’t normally give that. But, its – yeah…

[Howard Lutnick:]

Yeah , I mean, the business is slightly higher than traditional financial brokerage. So I think actually into the low 2020s, but that’s obviously an aim of ours.

[Patrick O’Shaughnessy:]

Got it, appreciate that. Switching to the traditional financial services brokerage business. There have been some headlines of late about, I think it is Goldman Sachs talking about want to shrink the capital that allocates to fixed income and commodities market making. And certainly I think a lot of dealers were disappointed with the fourth quarter results. Do you get the sense that the dealer community is going to be pulling back from fixed trading? And if so, do you think that presents a headwind at all to your business?

[Shaun Lynn:]

I think we’ve always seen these ebbs and flows in the marketplace. And we’ve built a company that’s robust to withstand these sorts of market shifts with regards to how we’re going to continue to grow and build within that and against into that headwind is to as we’ve always done, which is to grow and build and upgrade our offering to our clients and take more market share. We’ve diversified over the years, you’ve seen us do with commercial real estate and now into insurance. We’re growing in commodities. You’ve seen just by Poten. So we always say we guide, what we see and we have basically projected out as we could see currently, but we will continue to be relentless of the growth of our Company in building it across the whole landscape.

[Howard Lutnick:]

So the raw material of the financial service transactions is issuance. Issuance is at an all-time high and continues to grow, wealth of the world, assets of the world, securities of the world are getting bigger. So the raw material that we’re discussing is getting bigger, a headwind would be a reduced global economy and a reduced issuance, a reduced scale of raw material. That is a fundamental headwind. The current world is not. The particular model between a full service investment bank providing sales, research, capital, enormous value proposition to its clients, we’ll always have is, I think Shaun exactly said it, we’ll have the ebb and flow of the timing of the particular market. But you have seen the growth of the new type of market mix. The technologically advanced and savvy trading firm that is adding enormous liquidity to these markets and changing the dynamic of those markets. How that changing dynamic works amongst and between all players, right? And how that evolves amongst hedge funds and all those players? And how these things move will change the fortunes, right, plus or minus, some maybe small, maybe medium and maybe large of all sorts of institutions. But our place of being a central hub for those professionals which trade irrespective of what type of professional they are is something that we pride ourselves on and is not something that we see as being a long-term, strategically change. So I think, sure, any particular quarter, little plus, little minus, of course, long-term, no way.

[Patrick O’Shaughnessy:]

Got it. And then to follow-up on that point, Howard. So as you start to interact more with these less traditional market makers, new sources of liquidity. Does that help both the voice hybrid and the Fenics part of your business? Or is that primarily a Fenics benefit?

[Howard Lutnick:]

It is. Well, not entirely excluding the voice people because they – it does participate with them. It is a majority or a significant majority towards electronic. So it is a modifying fundamental client base heading toward Fenics in a really good way. And it is really part of what excites us the most.

[Patrick O’Shaughnessy:]

Got it. A question on your commentary on using more cash as part of your compensation, incentive, bonuses and such. Should we expect that to have any impact on your margin profile going forward?

[Howard Lutnick:]

No. That’s the simple answer.

[Patrick O’Shaughnessy:]

Okay. And then I guess the flip side of the coin. So you spoke to 5% to 6% share count dilution in 2019. As you do kind of reallocate your expenditures from stock to cash, is there potential, I guess, downside? So maybe less dilution 5% to 6% number 2019, or we thinking kind of the out years that the share dilution growth slows down a little bit?

[Sean Windeatt:]

I mean, I think, as we said Patrick, we gave the range of 5% to 6%, we gave it with the highlight of the intention. So I think we’re comfortable with that range.

[Howard Lutnick:]

Right. If we – so we said for example, if we choose to buyback stock that would reduce that amount. If we do a material acquisition and use some sort of stock that would raise it. So we’re seeing, all other things equal, 5% to 6%. But as you all know rarely can everything always be equal. So there is lots on the horizon, but our objective is to reduce it. We’ve said so as a team and we are going to be focused on that. We have substantial cash generation and we’re going to use it to make sure we’re focused on reducing our issuance going forward.

[Patrick O’Shaughnessy:]

Sure. But all other things equal, would we expect that 5% to 6% to be more like 3% to 4% in 2020 and beyond? Or does that 5% to 6% already reflect your efforts to reduce your stock issuance?

[Shaun Lynn:]

No, the 5% to 6% is just where we are today and then as we do better, we hope to get lower. So I think we need to really examine it based on the scale of the company and what we do and grow. But we’re seeing our ordinary business would produce 5% to 6%, and then we’re going to start to take action to reduce that. But I can’t – as we sit here today, since we just announced, we’re going to take that action, say how that’s going to mathematically impact us next quarter. I mean, it’s just – it’s too early for me to – us to say that, but we are long-term owners and investors in this company and we are going to reduce our issuance because of our strong cash generation.

[Patrick O’Shaughnessy:]

Got it. Now, I appreciate the directional guidance at least. And then last one from me. Obviously, FX has been a headwind of late. Your first quarter revenue guide, I presume that also embeds a dollar headwind?

[Sean Windeatt:]

It does. And I think in the prepared notes, we said – we expect it to be around the same sort of impact as Q4, So around which is $8 million, so around that number. Obviously, it’s anywhere around – it’s Feb 14, but around that number and that’s included in our guidance.

[Patrick O’Shaughnessy:]

Great. Thank you very much.

[Howard Lutnick:]

Okay.

[Operator:]

Thank you. We have no further questions at this time. This concludes our Q&A session. I would like to turn the call over to Shaun Lynn for closing remarks. Please go ahead.

[Shaun Lynn:]

Thank you for joining us today and we look forward to speaking to you again next quarter.

[Howard Lutnick:]

Thank you.

[Operator:]

Thank you, ladies and gentlemen for attending today’s conference. This concludes the program. You may all disconnect. Good day.