BGC Group - Q4 2022

Transcript

Operator (participant)

Welcome to BGC Partners, Inc. Q4 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, Jason Chryssicas, Head of Investor Relations. Thank you. Please go ahead.

Jason Chryssicas (Head of Investor Relations)

Good morning, everyone. We issued BGC's Q4 and full year 2022 financial results press release and the presentation summarizing these results this morning prior to the market open. You can find these at ir.bgcparntners.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 compare only the Q4 of 2022 with the prior year period and compare revenue excluding insurance due to its sale on November 1st, 2021. Certain revenue figures are provided for the first 35 trading days in the Q1 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-U.S. 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 paid revenues apply to the current period revenues. Please see today's press release for 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.bgcg.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, 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 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. With that, I am now happy to turn the call over to Howard Lutnick, Chairman of the Board and CEO of BGC Partners.

Howard Lutnick (Chairman and CEO)

Thank you, Jason. Good morning. Thank you all for joining us for our Q4 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 volumes. 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 decline since 2008. This despite an over 3x 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 12x 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 2.5x 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've been close to $2.5 billion. This 14-year macro environment resulted 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, we now have the macro environment that will drive fundamental growth across all of our businesses. With that, I will turn the call over to Sean.

Sean Windeatt (COO)

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 Q1 of 2023. For the 1st 35 trading days of the Q1, 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 Q1, 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 U.S. Treasuries, Lucera, Fenics GO, and Portfolio Match. With the details I've just described, I'm pleased to provide the following outlook for the Q1 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-$138 million versus $113.1 million. We anticipate our pre-corporate conversion adjusted earning tax rate to be in the range of 8.4%-10.4% versus 7.3% for full year 2022. With that, I'd like to turn the call over to Jason.

Jason Hauf (CFO)

Thank you, Sean. Hello, everyone. Our Q4 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 Q4 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 Q2 of 2021 after we announced the sale of our insurance brokerage business. Our fully diluted share spot count as of December 31st 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 U.S. Treasury and rates platform, FMX, we expect all regulatory filings and submissions will be completed by the end of the Q1. We remain on track for a soft launch of our futures platform. We expect to announce FMX's 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 U.S. 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 Q2 of 2023. We expect to provide additional information with respect to our expected tax rates going forward as soon as practicable. With that, I'd like to turn back to Howard for closing remarks.

Howard Lutnick (Chairman and CEO)

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 go 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. Operator, we're happy to turn the call over for questions.

Operator (participant)

Thank you. If you 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 you would like to remove your question from the queue. For a participant choosing speaker equipment, it may be necessary to pick up your handset before pressing the star key. Our first question is from Gautam Sawant with Credit Suisse. Please proceed.

Gautam Sawant (Analyst)

Good morning, Howard, Sean, and Jason. Thank you for taking my questions. Can we please start with the momentum you're seeing within the voice hybrid business, how the activity could evolve over the course of 2023? In terms of the better broker production and the better outlook, is that being driven by larger notional sizes traded across the platform? Is there a positive mix shift, I guess, amongst the asset classes being traded?

Howard Lutnick (Chairman and CEO)

We'll start at the beginning. The return of the positive correlation between issuance and trading volume, we are feeling it and seeing it across our business. It has only just begun. For example, there was the relationship in credit, where since 2008, credit issuance was up about 2.7x, and credit volume had actually decreased and was 0.5 of what it was in 2008. Imagine issuance up 2.7x and volumes halving, and that's simply because it's just no fun to trade when interest rates are near zero. There's just no spread. There's no reason for the clients to trade. That relationship going from 0.5-0.6, which is nothing, means volumes are going to grow 20%.

You just have so much pent-up volume coming that you're going to see our numbers improve relentlessly over the course of the year and for years to come. You're going to see banks' trading arms improve and dramatically deliver better results because these things are just good for our clients and good for us. The industry is going to do better, and you're going to see it across the platforms. Are you going to see it in larger volume? You will. Are you gonna see it in smaller volumes? You will. In fact, you're gonna see it across broker productivity, volumes big and small across our platform. These are just fundamental returns to core mathematical relationships that were broken because interest rates were driven to zero by incredibly aggressive actions by governments in buying their own debt, quantitative easing, and driving interest rates to zero or near zero.

That is gone. My expectation is that is gone for the balance of my lifetime. I think interest rates are here, they're here to stay, and I think the results for BGC will relentlessly improve as those relationships take hold, and they will do so relentlessly over quarter and quarter going forward, in our opinion.

Gautam Sawant (Analyst)

Got it. Just switching gears to the Fenics Growth Platforms. Given the 22% year-over-year revenue growth to $53 million, can you give us a sense of the revenue mix? I'm looking at, like, Lucera's 30% year-over-year growth and just trying to determine, like, how that kinda breaks out relative to UST and maybe the other platforms.

Sean Windeatt (COO)

Yeah, look, I think that what I did is I highlighted four or five of them. You're correct to say, the growth levels in Lucera, up around those levels. Remember it's 35 days in, which is why I gave 22% across the board. I would say, you're seeing double-digit growth in every single one of them, in U.S. Treasuries, in Lucera, Fenics GO, and obviously Portfolio Match, because that's credit related. At this early point, I'd say strong double digits in the five main areas of our Fenics Growth Platforms.

Howard Lutnick (Chairman and CEO)

You can imagine with, you know, our position in U.S. Treasuries and Fenics UST, you have issuance at 5x what it historically was and volumes basically equal to what it was in the past. If you, if you think about that for a second, you'd say, "How can issuance be up 5x?" Anyone who says it's structural, just go visit any bank. Go visit any trading firm, you would see it has nothing to do with structure. It had to do with if Treasury bills were zero and two-year notes were zero, there wasn't much to trade. With all those rates, 4%, 5%, maybe they'll be lower, maybe they'll be higher.

This is great for U.S. Treasury volumes. You should expect volume on that platform to grow and volume across our Fenics Growth Platforms to relentlessly grow as these relationships return. Our business is back to where it should have always been, which is volume and issuance are directly and highly correlated. Those issuance volumes are gigantic. The volumes in our business will grow. You will see these numbers continuously grow. We are very excited about where things are going because they are just going back to where they always should have been. This is not a new path we're cutting. It's just shocking that we were off the path for 14 years. Made no sense. Again, if I told you 14 years ago that governments were going to buy all their debt and print it with their own money, you would have laughed at me.

Gautam Sawant (Analyst)

Thanks. Just last question here for me on the capital deployment priorities. Can you expand on the Trident acquisition and, I guess, decision-making around repurchases in the Q4 of 2022 and how we should think about, I guess, the level of repurchases in the second half of 2023.

Howard Lutnick (Chairman and CEO)

Basically speaking, we make more money in the first half of the year, but we collect it in the second half of the year. Generally speaking, as Jason said, we'll be more aggressive in buying back shares in the second half of the year because our cash flow is just better 'cause we collect the bigger numbers in the second half of the year. You are correct. We just bought a commodities brokerage company called Trident, and we're going to continuously invest in the business. Obviously, we view our growth path as very, very attractive now. We're going to buy other companies and buy assets that we think are going to grow more quickly.

We did say that we feel that our stock is very attractive at these multiples, and you should expect us to buy more shares. I think we're going to continuously balance that as we go forward through the year. We have great opportunity to grow now, which we just didn't have in the past, right? We were a catalyst company 'cause that's all we could do, is just buy and sell companies and build businesses because our core business really wasn't growing. Our core business is growing across the board, and our opportunity to invest across our business is just much more exciting. We have to balance that. That is different than the past. I know many of our shareholders in the past would say, you know, when are you buying back shares?

When you saw when we sold our insurance business, we bought back huge amount of shares, as Jason said, 71 million shares. The opportunity of this company has changed. The growth is there, and our ability to grow our business and get great returns for our shareholders, I think is in front of us, and we're going to balance buying our shares back, which we find very attractive, but also investing in our business, which we now also find very attractive. That may be different from what it was five years ago and seven years ago, but it is a really, really good place now, and it is a lot of fun to debate which is better because they're both great choices.

Gautam Sawant (Analyst)

Understood. Thank you very much.

Operator (participant)

As a reminder, just star one on your telephone keypad if you would like to ask a question. Our next question is from Rich Repetto with Piper Sandler. Please proceed.

Rich Repetto (Managing Director)

Good morning, Howard. Good to speak with you. The first question is more of a nuanced question. I believe rates help you as well, but just trying to understand. I just looked at, you know, the brokerage revenue in rates and in credit. They're actually down a little bit, 2022 versus 2021. I know that could be FX, but when you look at the CME's interest rate, you know, revenue and volume, it was up 18%. Can you talk about like the nuances of why, I guess the banks, and your customers, will better...

You know, there'll be more activity with the banks this coming year rather than last year when, you know, the CME. The CME is also up 23% year-to-date so far in volume and, excuse me, in rates. Can you talk about, you know, why the lag effect with your platform?

Sean Windeatt (COO)

Well, Rich, maybe I'll start that Rich, it's Sean. You're right to say so. For last year, last year rates for us was up in constant currency, 4.3%. As we said last year, last year, as you're going into the rising interest rate environment, you know, you get a bit of you know, choppiness and lumpiness in terms of, in some of the businesses. If you remember, we pointed out in Q3 and Q4 who would have thought that inflation business would actually be have lower volumes during Q3 and Q4 of 2022 at a time when rates were rising. That piece is behind us now, and hence the fact I spent all of my prepared remarks talking about.

What's happened in Q1. In Q1, you've noticed that all of the asset classes are performing, are increasing. Now, yes, up 8% overall, 10% on constant currency, but that's actually across the board. Albeit it started in December, and it's continued favorably into Jan and Feb. As Howard pointed out before, what it takes the lag between going into the interest rate, a rising interest rate environment, now we are there, and that's why trading volumes are increasing for us, starting in December and continued strongly into Q1.

Howard Lutnick (Chairman and CEO)

The CME had, is very pure in short-term rates. You saw last year they had volume growth in short-term rates. They had less volume growth in long-term rates. You are going to watch the volume just smoothly go out across the curve, across products, across our entire product mix. I don't think it matters which product it is. It's not going to be. Smooth was the wrong word. It's going to be. Relentless would be the right word. I think volumes will go to the long end. I think volumes will go again up in the short end, where the Fed is moving things, where market, perception is will change volumes up or down.

The answer is going to be the vast issuance of treasuries, the vast issuance of credit, the vast issuance that's coming will not be met with the government buying it. It will be met by trading volume happening. That velocity will go through the business as we return to the traditional volumes. I would think you're going to see it now. You know, I told you this in the, right? In the middle of the year, I said, "We're going to be choppy. There are gonna be many of our businesses that are gonna be up big, and some will be down illogically, but that will end by beginning of this year." It ended by December. The answer is, we are a growth business now, and you're going to see it across our businesses, some stronger than others, right? In one quarter or another, but you are going to feel the path relentlessly move forward in a positive way as these relationships return.

Rich Repetto (Managing Director)

Got it. It's, it's gonna be fun to watch, Howard. My follow-up question would be on FMX. You know, in the pre earnings release, you talk about it being on track, but you didn't mention that the launch date, or the soft launch date to be reaffirmed into the Q2. Could you talk about what on track means for FMX?

Howard Lutnick (Chairman and CEO)

It means nothing's really changed. I'm sorry. I mean, our perceptions are that we are, you know, we finished, we will finish this quarter, the regulatory answers to their questions. We will get approval soon after when the government chooses to give us those approvals. We will announce our soft launch date, and we will begin. These processes are just, we're moving forward. We're excited about it. Imagine being able to open a U.S. rates futures platform competing with the $67 billion Chicago Mercantile Exchange into the greatest reemergence of rates and volumes in more than a decade.

I mean, timing is, you know... You can't be more excited around this firm these days. It is so exciting. It is so exciting by the clients. They're ready for it. They want it, and this is the greatest timing for it. Volumes are here. Volumes are going to grow. $67 billion monopoly ready for a little competition. This is going to be fun.

Rich Repetto (Managing Director)

I'm still expecting a TQ soft launch no matter what your legal counsel probably wants me to tell you or say, Howard. Last question is around the corporate conversion. I've gotten a couple questions. Could you just review, you know, what are the reasons for doing, you know, the benefits to you? The issue of the tax rate versus the savings, and when will we expect to see sort of the quantification of that?

Howard Lutnick (Chairman and CEO)

As Jason mentioned, we expected. Why don't you repeat what you said before, Jason?

Jason Hauf (CFO)

We expect to provide additional information with respect to our expected tax rates going forward as soon as practicable.

Howard Lutnick (Chairman and CEO)

No, no, what's the date we're doing it? You said we'll do it.

Jason Hauf (CFO)

We expect to file Form S-4 registration statement in the Q2 of 2023.

Howard Lutnick (Chairman and CEO)

Right. That's what I wrote. In the Q2, we'll file our Form S-4. That then puts the legal documents to the SEC. When they approve it, then we close. That's pretty much how it works. There's nothing much in between. You just close as soon as practical thereafter. You know, that's where we are. We'll file it in the Q2. We will come out and we'll have a good understanding of tax rates, and we'll try to talk to everybody and go through the details. Simplicity, right? We have met with many shareholders over time, who found the structure, the Up-C structure complex, and they would prefer to have a simple C corp structure in order to buy our stock. We will put that in place.

It will be a simple C corp structure. We'll put that in place. Timing couldn't be better. You have the growth rate of the company coming hard, you've got a simpler structure. I think that will be helpful. There will be some tax leakage. We know our rate will be higher, we will have a much simpler structure. We should be able to save money and save expense. As an example, we bought GFI. It had corporate broker-dealers. We had BGC. We'd had partnership broker-dealers. We're doing all of this work that can now be simplified. They can all be merged together. It can be just simpler, more capital efficient, less work to do, we think that will mitigate some of the tax costs.

Won't be perfect, so our tax rate will be higher, and we've said that all along. However, we should be able to mitigate it to a reasonable degree, and I think simplicity will just make the company better. It will be more transparent. It'll be easier to understand. We'll get more shareholders to be able to buy the company, and I think it'll work. Q2 we file, should be able to close in the Q3.

Rich Repetto (Managing Director)

Thanks for the review, Howard. That's helpful. Thank you.

Operator (participant)

We have reached the end of our question and answer session. I would like to turn the conference back over to Mr. Lutnick for closing comments.

Howard Lutnick (Chairman and CEO)

Well, thank you all. Our future is clearly bright. We feel that the volume, trading volumes are going to be excellent for the industry. Banks will do very, very well. Trading firms will do well. We feel that our technology, our global scale, and the incredibly attractive position that we're in from a comparative valuation perspective makes BGC a very, very, very attractive alternative in a marketplace where lots of people are going to win. We feel BGC is just best positioned to have an extraordinary return for our investors. We look forward to talking to you again. We are delighted to call ourselves again a growth company. We look forward to reporting going forward with higher volumes and interest rates to stick with us for the long future. Thank you all. I look forward to speaking to you again next quarter.

Operator (participant)

Thank you. This does conclude today's conference. You may disconnect your lines at this time, and thank you for your participation.