Q4 2023 Bgc Group Inc Earnings Call
Participants
Jason Chryssicas; Head of IR; BGC Group, Inc.
Howard Lutnick; Chairman of the Board & CEO; BGC Group, Inc.
Sean Windeatt; COO, Co-Global Head of Brokerage; BGC Group, Inc.
Jason Hauf; Executive VP, CFO; BGC Group, Inc.
Patrick Moley; Analyst; Piper Sandler & Co.
Owen Lau; Analyst; Oppenheimer & Co. Inc.
Presentation
Operator
Greetings and welcome to the BGC Group Fourth Quarter and Full Year 2023 conference call. (Operator Instructions) As a reminder, this conference is being recorded It is now my pleasure to introduce your host, Mr. Jason Chryssicas, Head of Investor Relations. Please begin, sir.
Jason Chryssicas
Thank you, and good morning. We issued BGC's 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 BGCG. dot com. Note you can find additional details on our quarterly results in today's press release and investor presentation. Unless otherwise stated and historical results provided on today's call compare the fourth quarter of 2023 with the prior year period. Certain revenue figures are provided for the current period.
As indicated, 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, reverse repurchase agreements and financial instruments owned at fair value less securities loaned and repurchase agreements.
We define total capital as T-Mobil partnership interest, total stockholder's equity and noncontrolling interest in subsidiaries. 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.
Additional information with respect to our GAAP and non-GAAP results mentioned on today's call is available on our website at ir dot BDZ.com. And in our investor presentation, we refer to the Company's technology-driven businesses. Fenics offerings include Fenics Markets and Fenics Growth Platforms. I also remind you that any information 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. Any forward-looking statements involve risks and uncertainties and except as required by law, BGC undertakes no obligation to update any forward looking statements. And the outlook and targets discussed on this call, assume no material acquisitions, buybacks, extraordinary transactions or meaningful changes in company stock price for 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 Form 10-Q and Form 8-K.
I am now happy to turn the call over to Howard Lutnick, Chairman of the Board and CEO of BGC group.
Howard Lutnick
Thank you, Jason. Good morning and welcome to our fourth quarter and full year 2023 conference call. With me today are our Chief Operating Officer, Sean Windeatt; and our Chief Financial Officer, Jason Hauf, BGC 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. We expect favorable macro trading conditions to continue throughout 2024. With our global breadth and scale, we will continue to capitalize on interest rate and energy market volatility to higher fixed income issuance across both government and corporate bonds.
We are pleased with the CFTC.'s recent unanimous approval for Affymax to operate in exchange for US interest rate futures products, which are the largest and most widely traded futures contracts in the world. We intend to launch the FMX. futures exchange in the summer of 24. And we plan to discuss our strategic partners and further details on or before our first quarter earnings call.
I'd now like to turn the call over to Sean.
Sean Windeatt
Thanks and good day, everyone. Our fourth quarter revenues grew by 18.4% to $516.8 million and represented our highest ever fourth quarter revenue performance. This growth was driven by the Americas and Amea, which improved by 21.9% and 20.5%, respectively, of total brokerage revenues grew by 16.1%, driven by strong growth across energy and commodities rates and foreign exchange.
Revenues from our Energy & Commodities business improved by 42.3%, where we saw strong double-digit growth across our energy complex and environmental products, including our new weather derivatives business rates, revenues increased by 26.1%, reflecting broad-based growth across interest rate products. Foreign exchange revenues improved by 7.5%, driven by higher volumes across G10 and emerging markets currencies.
BGC's credit revenues have decreased by 3.6%, primarily due to a strong comparable period a year ago, partially offset by higher volumes across emerging markets, US and UK credit products. We expect BGC's credit business to grow in line with our overall business in 2024, benefiting from record new issuance and interest rate volatility.
Equities revenues declined by 3.8%, reflecting lower cash equity volumes, partially offset by higher equity derivatives activity. Data Network and post-trade revenues improved by 17.9%, driven by Fenics market data and Lucera our network business.
Turning to Fenics in more detail. In the fourth quarter, Fenics revenues grew by 20.1% to $130.8 million. These high-margin technology-driven businesses accounted for more than 25% of BGC's total revenue during the period.
For the full year 2023, Fenics generated $521.7 million, an improvement of 16.1% Fenics fourth quarter and full year revenue growth was led by our electronic rates, credit and our data network and post-trade businesses. This record performance drove Fenics revenue above $500 million for the first time at this scale. Fenics is now one of the largest electronic platforms across the capital market. Our Fenics Markets businesses generated revenue of $109.6 million in the fourth quarter, an increase of 16.5%.
Growth was driven by higher electronic rates, credit and foreign exchange volumes, along with stronger Fenics market data subscription revenues. Fenics market data signed a new customer contract in the fourth quarter with an aggregate contract value, 30% higher compared to the same period last year. I'd like to highlight, Fenics market data's continued success in its regulatory solutions business, which we expect to enhance our growth. Our Fenics Growth Platforms generated fourth-quarter revenues of $21.2 million, up 43.3%, primarily driven by Fenics UST portfolio match and capital. Fenics UST revenue increased by over 70% on a 38% improvement in average daily volume. His team grew its market share to 26% in the fourth quarter, up from 25% in the third quarter of 2023 and 20% a year ago.
This momentum has carried forward into January, achieving new record ADV. It was 44% higher than January last year for Foleo matches US credit volumes improved more than threefold, driven by new accounts and deepening relationships in this fast-growing segment of the market. We're 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 capital lab.
Our post-trade business generated revenue growth of nearly 90%, driven by higher interest rate compression and foreign exchange matching volumes. We expect demand for our capital, our post-trade products to grow as global banks optimize their balance sheets in an ever-evolving regulatory regime Lucera. Our network infrastructure business saw double digit revenue growth, led by new client contracts and broadening product coverage with existing clients. Lucera continues to see strong demand for its new markets offering a multi-asset trading system used by many of the world's largest banks.
Turning to our outlook, and please provide the following guidance for the first quarter of 2024. We expect to generate total revenue of between $560 million and $610 million as compared to $532.9 million in the first quarter of 2023, we anticipate pre-tax adjusted earnings to be in the range of $126 million to $144 million versus $124.6 million last year.
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 also recently reentered the Japanese interest rate market. After 20 years of ultra low and even negative interest rates, we expect positive interest rates and related transaction volumes to return to Japanese rates market. Additionally, we continue to invest in our SMX futures exchange in preparation for summer launch. These investments will increase our revenues and expand our margins in the near term.
With that, I'd like to turn the call over to Jason.
Jason Hauf
Thank you, Sean, and hello, everyone. Bgc generated total fourth quarter revenue of $516.8 million, an increase of 18.4% as compared to last year. By geography, Americas revenues increased by 21.9%, Europe, Middle East and Africa revenue increased by 20.5% and Asia-Pacific revenues increased by 2.8%.
Turning to expenses, our compensation and employee benefits under adjusted earnings increased by 21.8%. This increase was primarily driven by higher revenues as well as an increase in newly hired brokers and new business lines with change. New brokers are typically less productive in their 1st year, which can temporarily contribute to a higher compensation ratio, all else equal.
Non-compensation expenses under adjusted earnings increased by 9.7%, primarily driven by higher expense of $6 million.
Moving on to earnings, we generated strong double digit growth across all metrics. Our pretax adjusted earnings were $110.8 million, a 27.3% improvement with a 149 basis point margin expansion to 21.4%. This was our 13th consecutive quarter of year-over-year margin expansion, which reflects the gearing potential of our business.
Our post-tax adjusted earnings increased by 29.2% to $101.3 million or $0.21 per share, a 31.3% improvement. Our adjusted EBITDA was $151.6 million, a 22.3% improvement.
Turning to share count, our fully diluted weighted average share count increased by 0.1% sequentially to 490.7 million shares. As of December 31, our liquidity was $701.2 million compared to $524.3 million as of year-end 2022.
With that, I'd like to turn to Howard for closing remarks.
Howard Lutnick
Thank you, Jason. In 2023, we are proud we achieved record revenues and earnings and completed our corporate conversion to BGC group with the historical manufactured zero interest rate environment behind us BGC will continue to demonstrate strength of our business and deliver growth far superior than our current trading multiple reflects that.
Operator, we're ready to take the call for questions.
Question and Answer Session
Operator
(Operator Instructions) Patrick Moley, Piper Sandler.
Patrick Moley
Yes, good morning. Thanks for my question. Was hoping that we could just start off with FMX. and where we sit today the CFTC approval is obviously a big hurdle. But in terms of the strategic partner announcement, it seems like things might be taking a little bit longer than expected.
So I was just hoping you could maybe provide some color on how those conversations have evolved since the last earnings call where they sit today and I guess your confidence level, Howard, in your ability to kind of get this get this announcement made before the first quarter call thanks.
Howard Lutnick
My confidence level remains off the charts. I am positive excited and looking forward to the opening in this summer. I know that everyone would like me to announce everything today that have nothing to say tomorrow the next day, the next day, the next day.
So think about it this way. We get CFTC approval in January, we're going to open in the summer. So I just think it would be more fun to talk about the partners in the middle kind of like we've just finished the Super Bowl kind of between the two growth. So we are excited. We are happy. There are, of course, I's dotted and t's to cross and we will be delivering when we announced that our objective would be to deliver not only just the list of the names, but actually the full details of the transaction and how everybody owns and how it's going to work at all those details.
So instead of expecting just a simple call from us, some of the names, I think you should now start to expect we will be very transparent, very detailed and very explicit.
Patrick Moley
Thanks for that and then just a follow up on revenue growth, continuing to accelerate in the fourth quarter. First quarter guide implies a little bit of a slowdown, but still, I think is implying 10% growth. And you said that in 2024 you expect top line growth to be around 10%.
So I guess, do you still think that that's achievable this year? And then maybe as we look at the overall growth algorithm for the business that we consider some of the investments that Sean mentioned that you're making, do you still think that that kind of 10% revenue growth seeing mid-10s earnings growth is kind of a good way to think about things going forward. And I guess overall, like would you think that's sustainable in this the higher rate environment?
Howard Lutnick
We do. So I think you've got it just right, which is, you know, we guide what we see and we have the numbers and that's what we've guided. But last quarter, if you look, we started at a certain percentage, we guided around 9% right now and we ended up delivering 18% because the business kept accelerating through the balance of the quarter.
So when we guide tenants because we're a month into the quarter were about 10%, not that exciting words sort of up 10%. My expectation for the year was 10%. I'd like the market, the way it is right number, we don't really worry about whether rates are 5%and a quarter 4% and 3% quarter of 5% and 3% quarters as long as they're not 1% or a quarter of 1% or some other manufactured rate is this interest rate, global interest rate environment is very attractive and the only place really where it's not yet attractive is Japan, but we feel Japan is coming.
And so we've made those investments. So when the Bank of Japan 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've made.
These are not long term kind of things. These are going to give us returns this year. So we are comfortable with the 10%. We are comfortable with mid 10s earnings growth with that gearing, and we are excited about the world that we're in and where we see it going forward. Bgc is in a great place. As we've said for a long time, we have a really, really big sales guy and for a lot of years. It just wasn't windy.
Okay. It is now windy and you are all going to see 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 staff, we are very comfortable.
Patrick Moley
I've heard your successes maybe attracted some new suitors. So I'm going to hop back in the queue and let somebody else asked a question. Thanks.
Operator
(Operator Instructions) Owen Lau with Oppenheimer.
Owen Lau
Hi, good morning. Thank you for taking my question. So going back to MMX, for sure how much you want to talk about it, but I would fly. And so your launch of the exchange in the summer, could you please talk about some of the key milestones before your launch and then on the pricing front, not exactly like going into the number, but how competitive you expect to be centralized?
Howard Lutnick
Okay. So we expect to launch in the summer of 2024 with CFTC. approval behind us, there is really we do not see barriers to the launch ahead. These are just we would call them plumbing, meaning we have to connect to all the FCMs. It's really just a process now signing up clients. So we would expect after we launch that the 1st year is really the execution of connecting the world's trading firms to us.
Now we have a huge advantage because in the rates business, we're already connected to virtually all of the trading firms of the world. So our network is already connected. The system is already connected so that there I don't know that there's ever been a firm with a better advantage in that regard of speed.
Now the FCM. is the 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 of the world who are our clients also own the biggest FCMs in the world, saw the banks already connected to us. Fortunately for us also on the biggest FCMs.
So the technical connection is actually quite simple, but process is process. So our view is that the 1st year will be one of robust connectivity. 2nd year will be transactions, meaning making sure everybody is on everybody's playing everybody's in the game. And then we view the 3rd year as fundamental competition to the Chicago Mercantile Exchange. So step one is a connecting step to make sure the water is flowing nicely and step three is brilliant.
Owen Lau
Got it. That's super helpful. And then on the savings side, your competitor just indicated that they have achieved 75% to 80% saving 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% lower than FMX. Could you please expand on that point a little bit? How can you achieve that 95% to 97% offset and it still holds true for FMX. Thanks a lot.
Howard Lutnick
It does still hold true. So the concept is one where it's best to understand it by the name of one with the CME does it's called to pay. And what we will be doing with the LCH is called one up clearing. So two-part clearing in one part, clearly see with two pipe clearing. The CME holds lots of margin and the DTCC. holds lots of March and they have a nice working relationship with each other and they trust each other and they compare things to each other and they give each other a discount because the offsetting position is in your friend over.
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 you're short futures. I mean, you only have basis risk and that's 3% risk. It's not 75% off. It's 97% off, but you can't go past 75% off when you don't hold both pieces of the puzzle.
And so the CME and the DTCC. have worked nicely together 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 the LCH that we are able to get beyond that level. And basically, what's the right answer to think about that is this will be the proper first time, the CME has ever actually had 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 mathematically will be superior. But the fact is it's pure on competition, yes.
Is it better?
97% is better than 75%, but I think you just put us toe-to-toe in the ring and we're on and as you can see what Aframaxes do as treasury business Wright has grown its market share one or two market share points sequentially and every single quarter for years, they're going up to 26% last quarter, 25%, the quarter before that was 23% in the quarter before that was 21% major points being taken off the Chicago Mercantile Exchange.
So the big heavyweight champ can be here watching happen next to it. And we are content to futures launch Unisom Tanya.
Owen Lau
Got it. Thanks a lot.
Operator
(Operator Instructions) Patrick Moley, Piper Sandler.
Patrick Moley
Yes, Howard, I was just wondering if you could update us on your capital return plans. I know last quarter you had sort of mentioned that you might look to sell some of those easily separable electronic asset yields into possibly selling them using the proceeds to buy back shares. So can you kind of just update us on your thinking there? thanks.
And we agree that adds roughly nine times earnings with mid-teens growth. The best use of our capital return policy is to buy back shares. And I have had for those who are on the call who were available a variety of shareholders and have come to us and said, you have several both technology and provisions that you have to sell at prices wildly higher on the multiple you're nine times earnings when that the scrap no transaction for our shareholders.
And those who have heard me Lucent Joe's questions just watching not seem that that is a that is a thoughtful and reasonable way to think about things you followed the Company for a while. And I remember that there was lots of people asking me when I was going to sell my insurance business for what I said was things take time for, we want to get the right price.
And we took time longer than some of our shareholders wished it was, but we at the right price and we bought back a shed load of our shares. So and like your question, I like that thinking and you have to find the right buyers and the right timing and the right products it is not a key part of our future, but we have assets that are not a key part of our future.
We have assets that lots of people would like to buy. But I think that is a reasonable thing for us to work on in the year 2024 time may actually end up with because it's not up to me but I think that's a good question. It's a good set of Boss the company and continues with that thought. And if we can find the right transaction we executed, we will buy back more shares because I think it's in the best interest of our shareholders to do exactly that. So I'd like to invite when you guys gave it. I want to be clear, but I haven't.
Okay, great. And then just another one on the energy brokerage business been really impressive with the growth there. I think revenues were up 42% in the fourth quarter. So just as we look forward, I know that last year you acquired tried it in the first quarter, but how should we think about growth in that business going forward, given that we might be lapping some impact from some acquisitions? And then just pointed McKinsey in there, if you could dig into that a little bit?
Howard Lutnick
What are the biggest drivers where you see the biggest opportunities, but also on Japan, we still remain also growing significantly. We still remain slightly undersized in that business. If you strip out our acquisition for Q4 will be up 25%.
So excluding the Trident acquisition, up 25%, and we're still seeing them. We're seeing strong growth 25% in key four or five in March last year. But so still opportunities both in the UK and indeed still in the US with growth that you've seen has been primarily on the oil side, you've got good growth in our environmental business and also in our power business, they were still strong double-digit growth and opportunities in commodities.
Operator
At this time, I would like to turn the floor back over to Mr. Howard for closing comments.
Howard Lutnick
Well, thank you for joining us today. You see had an excellent year in 2023, and we look forward to a strong performance going forward. So thanks for spending again. Good morning, and I look forward to speaking with you next quarter. Thanks, everyone.
