BGC Partners, Inc. (NASDAQ:BGCP) Q4 2022 Earnings Call Transcript

BGC Partners, Inc. (NASDAQ:BGCP) Q4 2022 Earnings Call Transcript February 27, 2023

Operator: Welcome to BGC Partners Incorporated Fourth Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. Please be advised that today's call is being recorded. I would now like to turn the conference over to your speaker today, Chryssicas, Head of Investor Relations. Thank you. Please go ahead.

Jason Chryssicas: Good morning, everyone. We issued BGC's fourth quarter and full year 2022 financial results press release and the presentation summarizing these results this morning prior to the market open. You can find it at ir.bgcpartners.com. Please note, you can find additional details on our results in today's press release and investor presentation. Unless otherwise stated, any historical results provided on today's call comparably the fourth quarter of '22 with the prior year period, and compare revenues, excluding insurance due to the sale on November 1, 2021. Certain revenue figures are provided for the first 35 trading days in the first quarter to-date 2023. 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 owned, less securities loaned and repurchase agreements. We define total capital as redeemable partnership interest, total stockholders' equity and non-controlling interest in subsidiaries. BGC generated a significant amount of its revenue in non-US dollar denominated currencies, particularly in 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 exchange movements. BGC's constant currency movements assume no foreign exchange rates, used to determine the company's prior period revenues applied to the current period revenues.

Please see today's press release, the results under Generally Accepted Accounting Principles or GAAP. Please also see the relevant sections in the back of today's press release for the complete and updated definitions of any non-GAAP terms, reconciliations of these items to the corresponding GAAP results and how and when and why management uses such terms. Additional information with respect to our GAAP and non-GAAP results mentioned on today's call is available on our website at ir.bgcpartners.com and in our investor presentation. We refer to the company's technology-driven business as Fenics. Fenics offerings include Fenics markets and Fenics growth platforms. I also remind you that the information regarding our business on today's call that are not historical are forward-looking statements.

Any forward-looking statements involve risks and uncertainties, and except as required by law, BGC undertakes no obligation to update any forward-looking statements. Any outlook and targets discussed on the call assume no material acquisitions, buybacks, extraordinary transactions or meaningful changes to the company's stock price. For 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 the subsequent reports on Form 10-K, Form 10-Q and Form 8-K.

And with that, I'm now happy to turn the call over to Howard Lutnick, Chairman of the Board and CEO of BGC Partners.

Howard Lutnick: Thank you, Jason. Good morning. Thank you all for joining us for our fourth quarter and full year 2022 conference call. With me today are BGC's Chief Operating Officer, Sean Windeatt; and our Chief Financial Officer, Jason Hauf. Today, I have the pleasure of discussing how our business fundamentally changed starting in December of 2022, BGC became a growth company. Historically, huge issuance, which we've seen over the past decade, would have produced record trading volume, instead, zero and near-zero interest rates over the last 14 years have caused rates trading volumes to remain flat and credit volumes to actually declined since 2008. This despite an over 3 times increase in global issuance. The trading environment has been overshadowed by manufactured zero interest rates, which created an over decade-long headwind for our business.

During the last 14 years of these zero interest rates, the relationship between new issuance and trading volume growth broke down and disappeared, leaving catalyst transactions and electronification as the best tools available to BGC to dampen the impact of these headwinds. In catalyst transactions, we sold eSpeed for 12 times revenues or $1.2 billion. We built Newmark, which we spun off to our shareholders with a market cap of $2.3 billion. We bought GFI for $780 million and sold one of its technology assets, Trayport for $650 million shortly thereafter. We built and sold an insurance brokerage business, producing over $500 million in gross proceeds. The results of all these catalyst transactions was that BGC shareholders have earned a total return of over 2.5 times their investment since BGC went public in April of 2008.

Additionally, over the last decade, we have made a massive investment in Fenics technology, building the infrastructure to electronify our business. This differentiates us from our historical peers. Today, these higher margin Fenics businesses represent a quarter of BGC's overall revenues. We believe Fenics alone is worth more than BGC's current market capitalization. Since 2008, our Voice Hybrid business, the largest part of our company, faced a difficult trading environment. If you were to look at BGC, GFI and the dozen or more other financial service acquisitions we have made, their pro forma revenues in 2008 would have been close to $2.5 billion. This 14 year macro environment resulting in these businesses producing $1.8 billion of revenue in 2022, which should have been impossible, given that global issuance has more than tripled during this period.

Historically, trading volumes have been directly correlated with issuance. When issuance would double, trading volumes would grow on average 60%. With meaningful interest rates and issuance that is multiples above 2008 levels, we believe the return of this strong positive correlation will drive our trading volumes significantly higher. It is only a matter of time before we believe BGC will exceed the $2.5 billion I just mentioned. We are now a growth company. We will remain an opportunistic catalyst company. We will remain a company that is driving high margin electronification, but we now have the macro environment that will drive fundamental growth across all of our businesses. And with that, I will turn the call over to Sean.

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Sean Windeatt: Thanks, Howard, and good day, everyone. As Howard just mentioned, in order to highlight the growth of the company, my focus today will be on providing updates on how our business is performing so far through almost two months of the first quarter of 2023. For the first 35 trading days of the first quarter, BGC's total revenue is up 8% or 10% on a constant currency basis. We are seeing revenue growth across all our asset classes. Rates increased 6% or 8% on a constant currency basis. FX increased 6% or 7% in constant currency. Credit increased 4% or 6% in constant currency. Additionally, energy and commodities increased 15% or 16% in constant currency, and equities increased 14% or 16% in constant currency. Fenics, our higher margin technology-driven business generated strong growth through the first 35 trading days of the first quarter, with revenue currently up 11% or 13% on a constant currency basis.

This strong electronic momentum has been driven by rates, credit, foreign exchange and market data. Fenics markets revenue increased 10% or 12% on a constant currency basis. This growth reflects the strength of our comprehensive Fenics offering that provide access to the deepest wholesale liquidity pools using our state-of-the-art technology. Fenics growth platforms revenue increased 22% for the first 35 trading days of 2023. This growth has been led by our broad range of fully electronic platforms, such as Fenics US Treasuries, Lucera, Fenics GO and Portfolio Match. With the details I've just described, I'm pleased to provide the following outlook for the first quarter of 2023. We expect to generate total revenue of between $515 million and $565 million, as compared to $506.5 million last year.

Revenue guidance would be approximately $10 million higher on a constant currency basis. We anticipate pre-tax adjusted earnings to be in the range of $118 million to $138 million versus $113.1 million. And we anticipate our pre-corporate conversion adjusted earnings tax rate to be in the range of 8.4% to 10.4% versus 7.3% for full year 2022. And with that, I'd like to turn the call over to Jason.

Jason Hauf: Thank you, Sean and hello, everyone. Our fourth quarter and full year 2022 financial results press release and other investor materials were made available this morning and can be found on our Investor Relations website. With respect to share count, for the fourth quarter of 2022, our fully diluted weighted average share count decreased 0.9% sequentially and 3.3% year-over-year to 492.5 million shares. This also represents a 71 million share or approximately 13% decrease compared to the second quarter of 2021, after we announced the sale of our insurance brokerage business. Our fully diluted share spot count as of December 31 decreased by 1.1 million shares or 0.2% sequentially to 493.6 million shares. Compared to a year ago, BGC's fully diluted spot share count has decreased by 3.9 million shares or 0.8%.

Generally speaking, we expect to make the majority of our share repurchases in the second half of the year. As we invest in our business to accelerate growth, we expect our share count to decline slightly for the year. Turning to our electronic US treasury and rates platform, FMX. We expect all regulatory filings and submissions will be completed by the end of the first quarter. We remain on track for a soft launch of our futures platform, and we expect to announce FMX' strategic investors prior to the launch. The FMX partnership brings together LCH, the largest holder of interest rate collateral, strategic investors, representing the largest users of US interest rate products and Fenics' industry-leading technology and distribution creating enormous value for BGC as it competes in the world's most valuable futures markets.

With respect to the corporate conversion, we expect to file a Form S-4 Registration Statement in the second quarter of 2023. We also expect to provide additional information with respect to our expected tax rate going forward as soon as practicable. With that, I'd like to turn back to Howard for closing remarks.

Howard Lutnick: Thank you, Jason. We are at the beginning of BGC's growth trajectory, driven by a return of meaningful interest rates, which means, we don't really worry about whether they're up or down, just that we have meaningful interest rates, and the reemergence of the strong positive correlation to an issuance and increasing trading volumes. We believe these improving trading volumes will benefit those with strong technological capabilities and scale across the capital markets. Understanding the importance of technology, we made the investment in Fenics, which coupled with our global scale will deliver strong growth, earnings and cash flow. Given our highly attractive trading multiple, our growth outlook and our highly valuable Fenics assets, we believe BGC offers the best value proposition in the industry. With that, operator, we're happy to turn the call over for questions.

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