BGC Partners (BGCP) Q1 2019 Earnings Call Transcript

BGC Partners (BGCP)
Q1 2019 Earnings Call
May. 07, 2019, 10:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Welcome to the BGC Partners' first-quarter 2019 earnings conference call. My name is Loren, and I will be your operator for today's call. [Operator instructions] Please note that this conference is being recorded. I will now turn the call over to Ujjal Basu Roy, vice president of investor relations.

Sir, you may begin.

Ujjal Basu Roy -- Vice President of Investor Relations

Good morning. We issued BGC's first-quarter 2019 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 Newmark held by BGC to the stockholders of BGC on November 30, 2018.

Because BGC did not own any shares of Newmark as of year-end 2018, Newmark's results are presented as discontinued operations within BGC's consolidated results for all periods through the November 30, 2018, spin-off date. Newmark's results are not included BGC's consolidated results presented after November 30, 2018. Unless otherwise stated, all financial results and the outlook discussed on today's call reflect only the continuing operations of BGC, and therefore, will not match the results and tables in the company's press release for the first quarter of 2018 dated May 3, 2018. Unless otherwise stated, the results provided on today's call compares only the first quarter of 2019 to the year earlier period.

We will be referring to our results on this call only on an adjusted-earnings year over year, 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 stockholder's equity and non-controlling interest in subsidiaries.

All non-GAAP results discussed herein are comparable to and reconciled with the most directly comparable GAAP figures from BGC's continuing operations. Please see today's press release for results under Generally Accepted Accounting Principle, 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 items, the reconciliation of these items to the corresponding GAAP results and how, when and why management uses these terms. All of the company's fully electronic businesses are referred to as Fenics.

These offerings include our fully electronic brokerage products as well as the sale of market data, software solutions and post-trade services. I also remind you that information regarding our business on today's call that are not historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 as amended and Section 21E of the Securities Exchange Act of 1934 as amended. Such statements involve risks and uncertainties. Except as required by law, BGC undertakes no obligation to update any forward-looking statements.

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 statements set forth in our most recent 10-K and updates contained in the subsequent Form 10-Q or Form 8-K filings. I'm happy now to turn the call over to Howard Lutnick, chairman and CEO of BGC Partners.

Howard Lutnick -- Chairman and Chief Executive Officer

Thank you, Ujjal. Good morning, and thank you for joining us for our first-quarter 2019 conference call. With me today are BGC's president, Shaun Lynn; our chief operating officer and interim financial officer, Sean Windeatt; and our chief accounting officer, Sean Galvin. So just be aware, if you ask a question, it's most likely to be answered by somebody named Sean.

Our revenues improved 4% year over year despite challenging market conditions for many of our clients, lower industry volumes and volatility, and the $14 million foreign exchange headwind to our top line related to the strengthening U.S. dollar. I'm pleased to report that the company's board of directors has declared a qualified dividend of $0.14 per share. This translates to a 10.1% dividend yield based on yesterday's closing stock price.

As we continue to invest in growing our fully electronic Fenics business, higher profitably and make accretive acquisitions, we expect to deliver strong returns to our shareholders over time. With that, I'll turn the call over to Shaun Lynn.

Shaun Lynn -- President

Thank you, Howard, and good morning, everyone. Fenics brokerage revenues increased by 10% year on year while revenues from our high margin data, software and post-trade business were up by 19%. Overall, Fenics net revenues improved by 12%, and once again increased as a percentage of BGC's revenues. Fenics represented 14% of BGC's overall revenues in the quarter.

Electronic brokerage generated 17% of that combined brokerage revenues across rates, credit and foreign exchange. This compares with 15% for the first quarter of 2018 and 4% in 2010, which is as far back as we have tracked this metric. We expect Fenics to continue to benefit from the long-term trend toward more electronic trading, increased demand for market data and the need for increased automation and post-trade services by our traditional client base as well as our newer customers. We, therefore, expect Fenics to drive the revenues and earnings of the company as we further invest in the platform.

BGC's energy and commodities business grew by 16%, led by the recently completed acquisitions of Poten and Ginga Petroleum, partly offset by the sale of CSC Commodities. During the quarter, we also closed the acquisition of Ed Broking. Ed is now part of BGC's growing insurance business. Although Ed was not profitable upon acquisition, we expect this acquisition to be accretive to earnings per share in the first quarter of 2020.

We expect Ed to be similar to some of the previous acquisitions, such as GFI and Grubb & Ellis. Both acquisitions became very profitable as we integrated them into our financial services and realize efficiency. With that, I'm now happy to turn the call over to Sean Windeatt.

Sean Windeatt -- Chief Accounting Officer

Thank you, Shaun, and hello, everyone. BGC generated quarterly revenues of $544.8 million, up 3.8%. Asia Pacific revenues increased by 19%; Europe, Middle East and Africa were up by 3%; while Americas was down 1%. Our overall revenues would have been approximately $14 million higher, but for the relative strengthening of the U.S.

dollar. This currency headwind was approximately $6 million greater than we guided on our last call. We expect the strong dollar to lower our revenues by approximately $7 million in the second quarter of 2019. With respect to expenses, compensation increased by 3.9%, in line with our higher revenues.

Our quarterly compensation ratio remained consistent at 52.7%. BGC's non-compensation expenses increased by 11.6% to $153.8 million. Our overall expenses were up by 6.5% to $441.1 million in the quarter. The increase in total expenses year on year was primarily driven by the impact of higher revenues on variable compensation, the impact of recent hires and acquisitions, interest expense on the $450 million senior notes due 2023 and interest expense related to the $250 million borrowings on the BGC credit facility.

Moving on to our earnings. Our first quarter of last year other income benefited from mark-to-market and other gains, primarily related to the Nasdaq shares that were $8.4 million higher versus the first quarter of this year. BGC transferred the right to receive the remainder of these Nasdaq payments to Newmark during the third-quarter 2017. Our pre-tax earnings before non-controlling interest in subsidiaries and taxes were $106.2 million, compared with $122.1 million.

As we integrate our recent acquisitions and continue to increase revenues from Fenics, we expect our profitability to improve over time. Our tax rate adjusted earnings for the quarter was 11.3%, which was consistent with our previous full-year outlook of between 11% and 12%. As we previously stated, the change in corporate structure with respect to the spin-off of Newmark resulted in BGC's non-controlling interest decreasing with an offsetting increase in its fully diluted share count as of year-end 2018. This had no impact on earnings or earnings per share.

Our post-tax earnings were $93.5 million or $0.18 per share, compared with $107 million or $0.22. Our fully diluted weighted-average share count was 516.1 million for both adjusted earnings and GAAP, compared with 478.9 million a year earlier. As of quarter end, our spot share count was also 516.1 million compared with 482 million year earlier. We have begun to take a number of steps to reduce the growth of our fully diluted share count, including reducing the share issuance 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 spot share count to grow by between 3% and 4% year over year in 2019. Our previous outlook was year-end fully diluted share count growth to increase by between 5% and 6%. Our updated outlook for 2019 assumes no material acquisitions, buybacks or meaningful changes into the company's stock price.

With respect to our balance sheet, as of 31st of March 2019, our liquidity was $392.4 million, compared with $410.9 million as of year-end 2018. Notes payable and other borrowings were $1,008.2 million, compared with $763.5 million. Book value per common share was $2.31 versus $2.28. And total capital was $903.8 million, compared with $887.9 million.

We believe we have a strong balance sheet as our debt, net of liquidity, is 1.2 times trailing 12 months adjusted EBITDA. As Shaun mentioned, we continue to invest in growing our insurance brokerage vertical. While we expect revenues for this business to improve over the course of 2019, we anticipate this investment impacting our margins over the next 18 months. We also continue to invest in automating our voice and hybrid business as well as investing in our relatively new and fast-growing Fenics U.S.

Treasury and spot foreign exchange offerings. We view such investments as critical for the long-term growth of the company. Taken together, we expect our increased investments in insurance brokerage and building new electronic product lines and services within Fenics to constrain our earnings in the near term, but to meaningfully contribute to our earnings in the medium and long term. As such, we anticipate BGC's adjusted earnings per share for the third and fourth quarters of 2019 to be roughly consistent with the year-earlier periods.

With that, I'm happy to turn the call back over to Shaun Lynn.

Shaun Lynn -- President

Thank you, Sean. Turning to our outlook for the second quarter compared with last year. We expect to generate revenues of between $515 million and $555 million, compared with $491 million. We anticipate pre-tax adjusted earnings to be in the range of $89 million to $105 million versus $101.5 million.

We anticipate our adjusted earnings tax rate to be in the range of 11% to 12% for the full-year 2019 as compared to 11.7% for the full-year 2018. We expect to update our guidance toward the end of June. And with that, operator, we'd like to turn the call over for questions.

Questions & Answers:

Operator

[Operator instructions] Rich Repetto with Sandler O'Neill is on the line with a question.

Rich Repetto -- Sandler O'Neill -- Analyst

Good morning, Howard and team of [Inaudible] I guess, my question first is about the spending going out later in 2019. Could you give us more like an incremental dollar amount that you've decided to spend or any guidance on margins going forward given this increased level of investment?

Howard Lutnick -- Chairman and Chief Executive Officer

Well, I think the new -- each of the new offerings generally comes with very constrained revenues as we build the math. So we feel we have a unique opportunity to rollout new offerings, extending our U.S. Treasury lines, extending new products and categories which we are working with clients now to rollout and that's just investment that will add, we think, significant incremental value to the company going forward. The best part of the opportunity that's facing us is we want to create electronic marketplaces and opportunities that our clients are deeply engaged with us in doing so.

You want to -- Shaun, maybe you'll go over a couple of examples?

Shaun Lynn -- President

Yeah, Rich. Where we've continued to invest in, I think, what we mentioned, spot FX U.S. treasuries, the things such as non-deliverable forwards, the compression side of that business, initial margin, market data sales, we've continued to broaden our offering and invest deeply into it. We've obviously expanded into FX -- sorry, into equity options also, which -- that will be released hopefully coming into the summertime.

So I mean, really just to broaden the Fenics horizon and broaden the breadths of these offerings, basically.

Rich Repetto -- Sandler O'Neill -- Analyst

I understand. I was just trying to get some quantification of that, if possible, but anyway I'll move on here. But staying on the Fenics topic, I guess, a couple of questions on that. The inter-company what you call data software and post-trade revenues declined year over year.

I was just trying to understand why that would occur? And then the other question, and you specifically said in the -- Shaun, in the prepared remarks about the high margins of high margin data software and post-trade businesses. How do we quantify that? What do you mean by -- is that higher than the rest of the business, is it higher than the trading, the brokerage revenues -- electronic brokerage revenues in Fenics. And of course, the long run -- the farther out question is, how do we stand with the overall reporting of margins for Fenics?

Shaun Lynn -- President

So if I take the first question first. So with regard to market data, yes, usually, I mean, more profitable to the bottom line for market data. What we've recognized and we've mentioned before is that our offering isn't as broadened and as wide as we need it to be. So we've continued to invest in the -- in mining that data from within that group and within the marketplace today and have a better offering to the marketplace to sell, which we've been successful in so far, and we continue to do so.

That, of course, comes with investments, but also there is revenue generation. But it's the long-term reoccurring revenue generation, which is what we're trying to achieve.

Howard Lutnick -- Chairman and Chief Executive Officer

And in terms of the inter-company line, Rich, so two things. The line is down -- there are -- Fenics provides services to -- electronic services to certain parts of our business, to our more traditional foreign exchange rates, trade business. And of course -- and then when it becomes fully electronic, you see it move from that line into the top line of fully electronic revenues, which you've seen grow by 10% this quarter. So it's really -- we think about this as the top line being -- is either electronically processed or hybrid business in the inter-company line and electronic, fully electronic, in that top line.

Rich Repetto -- Sandler O'Neill -- Analyst

I get it. So the growth -- the negative growth of that line contributed to the double-digit growth on the top line -- from the other top line?

Shaun Lynn -- President

Correct, exactly right.

Rich Repetto -- Sandler O'Neill -- Analyst

Yeah. And then any update on the overall, I don't know what you want to call it, project to get more transparency in the Fenics on the margins?

Howard Lutnick -- Chairman and Chief Executive Officer

Richard, as we've said before, yes, our intention is to present Fenics in the best way we possibly can, continue to invest in Fenics. We haven't exactly found a way of looking to try announce that. And I understand your question and recognize that it's a burning question of yours to try to understand what the bottom line is of the business, but we need to present to you in the correct way. And because we -- not one shot, but we get -- we want to look at best when we come out effectively and as we continue to invest in Fenics.

As I've just said, with regards to market data and the external, the various different ongoing initiatives we have inside the group, we've continued to invest and broaden and build with new client base, new customers and continue to get great support with that clients because they're working with us. And we need to make sure that we present at the right time. So nothing to say on this call today, but we listen to what you're saying.

Rich Repetto -- Sandler O'Neill -- Analyst

Got it. Thank you.

Operator

[Operator instructions] Patrick O'Shaughnessy with Raymond James is on the line with a question.

Patrick O'Shaughnessy -- Raymond James -- Analyst

Hey. Good morning, guys. So maybe first, given your second half earnings outlook, Howard, how do you feel about the sustainability of your dividend knowing that the year-over-year comparison, if you do similar to second half of 2018, I think that's $0.15 and $0.14 in the third and fourth quarters of those years, do you feel pretty comfortable with your dividend level as it currently stands?

Howard Lutnick -- Chairman and Chief Executive Officer

We do. The insurance business and our investments in that insurance business, we bought Ed and when we bought it, it was not a profit-making business, but our expectation is it'll be accretive to earnings in the first quarter of 2020. So that's a significant turn of something that is not profit making going to be fully accretive to its purchase price. And so we are growing our insurance business side.

We think that will materially improve its contribution to our profits and that -- plus the growth of a variety of our Fenics initiatives this year plus new hires we've made this year will contribute to our earnings going forward. So we remain comfortable in our dividend for next year.

Patrick O'Shaughnessy -- Raymond James -- Analyst

Got it. And then speaking of Ed, are you able to quantify the profitability drag that it presented in this quarter or that you expect it to present in the next few quarters? And I guess, even if you can't quantify that, how do you expect to bring it from unprofitable now to profitability next year?

Howard Lutnick -- Chairman and Chief Executive Officer

Well, I don't think we'd like to discuss the exact financials of it, but we have two ways of doing it. We can -- we have Besso and there are some synergies that we can bring together, but those synergies are also going to be lessened somewhat by the scale of growth that we expect to put on to the business. So these businesses need to be bigger because we are hiring aggressively into this business. Insurance brokers tend to be more consistent to real estate brokers in terms of their delivery of revenues and profits to the company and to financial service people, meaning that the first couple of quarters, if not first year, they tend to perform for their prior firm before the business moves over to the current one.

And so there's that lag. But that lag will rectify itself by time. So we expect that Ed, which did substantially hiring and therefore had the drag of those new hires on its financials, while it looks unattractive, it is, in fact, very attractive because they have those new producers in the house and we have the expectations that they will perform and that is our business, right? Our businesses is underwriting and determining what we think top producers will perform on our platform, bringing them in and having them perform consistent to our, what we call, our underwriting and our, what we say, would be our expectations. So Ed has attractive people on its books today that we think will perform admirably starting at the end of this year going into 2020 and those numbers will turn into a profit.

So it's more in synergies than we would otherwise expect because we expect significant growth, right, so we are not going to just cut as we did with GFI where we had the expenses we can just take out. Here, we're going to make sure we have a large platform we may take out some synergies, but we'll just invest elsewhere to the platform, but the hiring of performing talent will substantially improve the bottom line of our insurance business into 2020.

Patrick O'Shaughnessy -- Raymond James -- Analyst

Got it. OK. Thanks. And then maybe a high-level question for you, Howard.

You probably saw the headlines that Blackstone announced that it's going to be converting to full C-corp status. Given where tax rates are now, would kind of getting rid of your partnership structure be something that you would be willing to contemplate at this point?

Howard Lutnick -- Chairman and Chief Executive Officer

Well, we just finished the spin, which took a significant amount of corporate focus. We are now in the early process of examining that question, and we are on it. We are thinking about it. We are talking about it and trying to figure out what the right answer is, but it is on the table for sure.

Patrick O'Shaughnessy -- Raymond James -- Analyst

OK. And speaking of corporate resources, can you give us an update on your search for a permanent CFO?

Sean Windeatt -- Chief Accounting Officer

Well, I think when I took the role as interim CFO, at the same time we mentioned that we strengthened our finance department, including the hire of Sean Galvin as our chief accounting officer who is on the call today, and so we continue to consider both internal and external options for the role on a permanent basis.

Patrick O'Shaughnessy -- Raymond James -- Analyst

OK. Great. And then maybe the last one for me, I appreciate you bearing with me.

Sean Windeatt -- Chief Accounting Officer

But to be clear, it won't be me. Hence, my conflict of interest.

Patrick O'Shaughnessy -- Raymond James -- Analyst

Fair enough, Sean. And then last one for me. What changed in terms of your share count dilution between your initial guidance of 5% to 6% dilution and then the updated guidance of 3% to 4%? What did you guys do differently during the first quarter that maybe you hadn't anticipated doing?

Shaun Lynn -- President

Well, I think, firstly, in our prepared remarks, we said that we won't use -- we wouldn't use as much for acquisitions -- as much share issuance for acquisitions, for hiring and retention. So we did -- we listened to what you said. We did those three things. Hence, the fact that we've -- in the last call we said we'd reduce it to 5% to 6%.

We now feel very confident 3% to 4% this time, and we continue to try and reduce that share count issuance.

Howard Lutnick -- Chairman and Chief Executive Officer

Yeah, and I guess the proof of that is our spot share count at the end of the calendar year is effectively the same as the spot share count as of the end of the quarter. So we really effectively issued no equity for the quarter because we are focused on that and we are going to use the tools that are available to us to reduce our issuance.

Patrick O'Shaughnessy -- Raymond James -- Analyst

All right. Great. Thank you very much.

Operator

Thank you. And Rich Repetto with Sandler O'Neill is on the line with a follow-up.

Rich Repetto -- Sandler O'Neill -- Analyst

Just any guidance on the contribution from the newest acquisition, I believe, it's not been -- if I'm pronouncing it right, Ginga or Ginga Petroleum as far as revenue and expenses?

Shaun Lynn -- President

Ginga is a smaller acquisition, a complementary acquisition to our oil business linking in primarily with our GFI brand. So no, it's not a consequence, not large.

Rich Repetto -- Sandler O'Neill -- Analyst

OK. And then you did talk about Ed Broking and sort of a path to accretion. And you've also said that your comp ratio was flat year over year and it was. But all throughout last year declining sort of -- with normal seasonality declining revenues, the comp ratio went more or less down.

So quarter over quarter, the comp ratio was up. And just trying to understand when you look at the bigger acquisitions like Ed Broking and the -- I think it's Poten, what type -- when you bring that stuff on, what's the comp ratio that -- the incremental comp ratio on acquisitions like that?

Shaun Lynn -- President

In the early stages, the incremental comp ratio could be fractionally higher. I think -- so you should expect to see that. Of course, what we'd like to think is that we offset that with -- partially offset that with increased compensation from our electronic, more mature electronic platforms, which have a lower comp ratio. So I think in the near term, it'll be higher.

Yes, I think that's why we feel comfortable today.

Rich Repetto -- Sandler O'Neill -- Analyst

OK. Thank you.

Operator

Thank you. And this does conclude our question-and-answer session. I would now like to turn the call back to Shaun Lynn, president of BGC Partners, for any closing remarks.

Shaun Lynn -- President

Thank you very much, everybody. And we look forward to speaking to you, again, next quarter.

Howard Lutnick -- Chairman and Chief Executive Officer

Thanks, everyone.

Operator

[Operator signoff]

Duration: 29 minutes

Call participants:

Ujjal Basu Roy -- Vice President of Investor Relations

Howard Lutnick -- Chairman and Chief Executive Officer

Shaun Lynn -- President

Sean Windeatt -- Chief Accounting Officer

Rich Repetto -- Sandler O'Neill -- Analyst

Patrick O'Shaughnessy -- Raymond James -- Analyst

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