BGC Partners (BGCP) Q4 2019 Earnings Call Transcript

BGC Partners (BGCP)
Q4 2019 Earnings Call
Feb 06, 2020, 10:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Welcome to the BGC Partners, Inc. fourth-quarter 2019 earnings call. My name is Carmen, 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. You may begin.

Ujjal Basu Roy -- Vice President, Investor Relations

Good morning. We issued BGC's fourth quarter and full-year 2019 financial results press release and the presentation summarizing these results earlier this morning. You can find these at ir.bgcpartners.com. BGC spun off all 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, spinoff date. Newmark's results are not included in BGC's consolidated results presented after the spinoff. Unless otherwise stated, the results from continuing operations provided on today's call compare only the fourth quarter of 2019 with the year earlier period. 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 stockholder's equity and noncontrolling interest in subsidiaries. Please see today's press release for results on the generally accepted accounting principles or GAAP.

Please also see the relevant section in the back of today's press release for the complete and updated definitions of any non-GAAP items, reconciliations of these items to the corresponding GAAP results and how, when and why management uses these 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 fully electronic businesses 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. Any outlook and targets discussed on this 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 subsequent forms of Form 10-K, Form 10-Q or Form 8-Ks. I'm now happy to turn the call over to Howard Lutnick, chairman of the board and CEO of BGC Partners.

Howard Lutnick -- Chairman of the Board and Chief Executive Officer

Thank you, Ujjal. Good morning, and thank you for joining us for our fourth-quarter 2019 conference call. With me today are BGC's president, Shaun Lynn; our chief operating officer, Sean Windeatt; our chief financial officer, Steven Bisgay; our chief accounting officer, Sean Galvin. I would like to start by welcoming Steven Bisgay to his first BGC conference call as our CFO.

BGC's revenues improved by 8.6% and 4.5% for the full year and fourth quarter of 2019 as compared with last year. We generated top line growth despite generally lower industry volumes. Before our next quarterly conference call, we expect to submit a proposal to BGC's board of directors and relevant committees with respect to converting our partnership into a corporation. Our current target is to be positioned to begin executing the conversion around the end of the third quarter of 2020 and expect to complete the execution around year end.

Any such restructuring would be subject to tax, accounting, regulatory and other considerations and approvals. I am pleased to report that the board has declared a qualified dividend of $0.14 per share, and this translates into a 9.4% dividend yield based on yesterday's closing stock price. With that, I'd like to turn the call over to Shaun Lynn.

Shaun Lynn -- President

Thank you, Howard. Good morning, everyone. Our energy and commodities business improved by 26% for the full-year 2019, led by the acquisitions of Poten and Ginga Petroleum, partially offset by the sale of CSC Commodities. Turning now to Fenics.

Fenics, our fully electronic rates business, increased 14% in 2019 while data, software and post-trade grew by 12%. Fenics net and total revenues improved by 6% and 10%, respectively, for the year. We continue to roll out our next-gen Fenics broking platform across more products and geographies, with a goal of seamlessly integrating voice liquidity with customer electronic orders, either by a graphical user interface or API. As announced in December, we made leadership changes to our global brokerage business with the objective of accelerating the conversion of our voice/hybrid business to fully electronic execution.

In addition, we have continued to invest in our new stand-alone Fenics businesses, including Fenics UST, Fenics GO, Fenics FX, Lucera and Capitalab. Fenics UST increased its market share of central limit order book trading from approximately 2% to 10% and is now the second largest CLOB platform for U.S. Treasuries. Fenics Global Options platform, or Fenics GO, has recently added Citadel Securities, who joins IMC, Maven Securities, and Optiver as electronic liquidity providers.

Fenics GO provides live, real-time and tradeable two-way electronic liquidity for exchange-listed futures and options, such as Eurex EURO STOXX 50 Index Options, NIKKEI 225 and related Delta One strategies. We look forward to the growth of our Fenics GO platform as we continue its rollout. The 2019 net investment cost associated with our newer stand-alone Fenics businesses was more than $55 million, and we expect these businesses to improve to a net investment cost of $40 million in 2020 and to breakeven in 2021. We believe that our new fully electronic businesses have created significant shareholder value.

We plan to host a Fenics analyst day in early April, during which we will provide further information on our fully electronic businesses. Moving to insurance brokerage. Revenues for the fourth quarter and full-year 2019 increased year on year by approximately 186% and 126%, respectively, due mainly to the acquisition of Ed Broking. Because of significant growth in this business, we expect to break out insurance brokerage revenues separately from equities and other asset classes, starting in the next quarter.

We believe our insurance brokerage business is worth materially more than our investment and are actively considering ways to better express its value for the benefit of our stakeholders. With that, I now have to turn the call over to Steven Bisgay.

Steven Bisgay -- Chief Financial Officer

Thank you, Shaun, and hello, everyone. BGC's quarterly revenues increased by 4.5%. Europe, Middle East and Africa revenues improved by 4.6%. The Americas were up by 3.9%, while Asia Pacific revenues grew by 5%.

With respect to quarterly expenses, compensation increased by 9.3% due to the impact of acquisitions. Excluding acquisitions, compensation expenses would have represented 51.3% of revenues in the fourth quarter. Our total technology head count increased by 8.5% year on year to 691, related primarily to our stand-alone fully electronic offerings, some of which Shaun discussed earlier. BGC's noncompensation expenses increased by 10.9% to $158.7 million, driven by the acquisition of Ed Broking as well as interest expense and our increased investment in technology.

Excluding acquisitions, noncompensation expenses would have represented 31.7% of revenues for the quarter. Moving on to earnings. Our pre-tax earnings were $73.2 million compared with $86.3 million. BGC's pre-tax earnings would have been at least $20 million higher in the fourth quarter of 2019, excluding the net investment cost for the period associated with our newer stand-alone Fenics businesses.

As these businesses grow, we expect their net investment cost to narrow to approximately $40 million for full-year 2020 and breakeven in 2021. My team and I are going to examine how best to operate our business with the goal of reducing expenses going forward. Moving on to post-tax results. Our post-tax earnings were $61.4 million or $0.12 per share compared with $71.1 million or $0.14.

Our fully diluted weighted average share count was $351.4 million under GAAP and $532 million for adjusted earnings in the fourth quarter of 2019. A year earlier, these figures were $331.4 million under GAAP and $498.5 million for adjusted earnings. Increase in weighted average share count reflected the issuance of 29.8 million share equivalents related to the Newmark spinoff. This reduced noncontrolling interest but had no dilutive impact nor effect on earnings per share.

As of quarter end, our spot share count was $530.4 million. This represented a 2.2% year-on-year increase, which was better than our previous guidance. With respect to our balance sheet. As of December 31, 2019, our liquidity was $473.2 million compared with $410.9 million as of year-end 2018.

Notes payable and other borrowings were $1,142.7 million compared with $763.5 million. Book value per common share was $1.94 versus $2.28 and total capital was $769 million compared with $887.9 million. With that, I'm happy to turn the call back over to Shaun Lynn.

Shaun Lynn -- President

Thank You, Steve. Turning to our outlook for the first quarter of 2020 compared with last year. Global industry volumes have been mixed thus far in the first quarter. Our guidance assumes volumes remain around these levels for the balance of the quarter.

We expect to generate revenues between $540 million and $580 million compared with $544.8 million. We anticipate pre-tax adjusted earnings to be in the range of $90 million to $106 million versus $106.2 million. We anticipate our adjusted earnings tax rate to be in the range of 10% to 12% versus 11.4%. We expect to update our outlook toward the end of March.

With that, operator, I'd now like to turn the call over to questions.

Questions & Answers:

Operator

Thank you. [Operator instructions] And our first question is from Rich Repetto with Piper Sandler.

Rich Repetto -- Piper Sandler -- Analyst

Good morning, Howard and Sean. And welcome, Steve. Good to have you on again. So I guess, the first question, Howard, has to do with the C-corp.

And I know you've studied it, and you've outlined sort of the time line, I guess, any more updates in regards to tax rate, potential changes in dividend. Can you give us any sort of other color around how things will work in this conversion to a C-corp which is expected later in the year, I guess?

Steven Bisgay -- Chief Financial Officer

Rich, it's Steve. We're still studying the post transaction, and there's lots of moving parts, lots of complexity, as you can imagine. But overall, we believe the company will be better off in the long term.

Rich Repetto -- Piper Sandler -- Analyst

OK. So no comments on dividend or anything like that?

Howard Lutnick -- Chairman of the Board and Chief Executive Officer

Yes. As we sit here today, we're not expecting a modification of the dividend, having to do with the change to a C-corp. Our businesses, I mean, obviously are that notwithstanding. We don't think the C-corp move will impact our view of dividend.

Rich Repetto -- Piper Sandler -- Analyst

OK. Next question, Howard, Steve and Shaun, would be like on the Fenics growth. I know the intercompany revenue grew substantially. But just looking at the year-over-year growth in the fully electronic was down slightly.

I'm just trying to get more color on what's going on there in these businesses.

Shaun Lynn -- President

Rich, this is Shaun. Across the exchanges in the marketplaces that we track, overall volumes were down in the fourth quarter. While we were down a little bit, we did outperform the marketplace in general. We have a substantial business across a wide range of asset classes, as you know, we've spoken about it before, but we are sharply focused on these new areas.

Automation of our business is absolutely paramount for us. When we think about the offerings that we've got to give, we will not rest until we've given out everything that we have to deliver fully electronic offerings to our clients. And we're hard at work in it.

Rich Repetto -- Piper Sandler -- Analyst

Got it. And last question is sort of on the first quarter guidance. You are seeing a nice uptick quarter over quarter and also year over year, but it's not quite the increase you've seen in the past. And I'm just trying to see, it seems like volumes are up pretty robustly.

And just trying to sort of fill in the gaps here on where the numbers are, the estimates versus the guidance.

Sean Windeatt -- Chief Operating Officer

Well, I think, Rich, Sean here. I think, as always, we guide what we see. Shaun said in his prepared remarks that the start of the quarter, we've see volumes mixed across the board. And our guidance assumes that they remain at these levels.

You also noticed, as you quite rightly say, there's a significant uptick in both revenues and, of course, in profitability from Q4. Also remember, we've made a significant amount of hirings in a number of our businesses across, for example, in our insurance business, as we stated. And of course, what happens with those businesses is revenue generation comes toward the end of the first year, beginning of the second year of those businesses. So I think also, as we've said, I think we're already creating significant value, significant shareholder value of well in excess of what we paid for those businesses.

Rich Repetto -- Piper Sandler -- Analyst

OK. I'm going to hop back in the queue.

Operator

Thank you. Our next question comes from Patrick O'Shaughnessy with Raymond James.

Patrick O'Shaughnessy -- Raymond James -- Analyst

Hey. Good morning, guys. I want to start with Fenics. Are there any specific areas within the Fenics new investments that you can call out that are going to drive that incremental $15 million of EBITDA or earnings in 2020 relative to 2019?

Steven Bisgay -- Chief Financial Officer

Sure. So I mean, we can step down on the Fenics GO, as an example. It was in full build mode in 2019, including when you launch a new business, our sales, distribution agents or connectivity, there's all sorts of expense that comes with the launch without revenues. Now that it's launched, you're going to see a material improvement in the bottom line economics of Fenics GO to the company because it's launched, it's out and it's making money, and that's a big business.

The global equity options business is a big business, which we'll go through in much more detail at Analyst Day, but that's a good step. U.S. Treasuries, the cost of going from 2% to 10% is material. The costs of going from 10% to 20% is just much less.

It's just less because you have more people paying, market data is more valuable. All of the pieces of the puzzle are better convincing someone you matter when you start at 2% is one thing, becoming the No. 2 CLOB as you pound forward is quite another. And I'm happy to say that the month of January continued that positive momentum of the business.

So we continue to have positive momentum and that will drive the economics. And then you have the cast of other businesses, Lucera, which is a connectivity. It provides technology connection between banks and their clients, and banks to each other, banks to market makers, it's infrastructure, software-as-a-service and that business has continued to gain legs. So each of these businesses, which were launched in 2018, you have Fenics FX, which continues to improve, adding market makers, adding clients, adding traders, adding players, Capitalab doing a little better all the time.

So you launched them in 2018, you build them in 2019 to that's sort of our peak investment expense, and then you start to see that dropping. You saw that in the fourth quarter, we spent, it would have been $20 million. So just that for the quarter. And we expect, so we spent $20 million of the north of $55 million in the fourth quarter, right? And our expectation is $40 million the full year of 2020.

So what you're seeing is, obviously, a dramatic improvement in these businesses going forward. And so you have sort of a $20 million per quarter run rate dropping to $40 million dropping to 0, but that makes sense because once you're at a $20 million run rate, if you're driving that down, right, you can get to breakeven in 2021. So we really feel good about it. You're going to see it improve all year long, right? But the net result is going to be $40 million.

Our expectation is $40 million or better for this year and then breakeven or better for next. And these businesses are growing, and we'll be reporting on them. But the treasury business, as an example, Greenwich Associates comments on it, puts it out, everybody watches it. And you've seen our rise, which has been relentless and continuous.

Patrick O'Shaughnessy -- Raymond James -- Analyst

Gotcha. And then if you can remind me, that $15 million year-over-year improvement, that's mostly coming from expected revenue growth rather than a step down expenses, is that correct?

Steven Bisgay -- Chief Financial Officer

Yes. We are heavy investors in this business. When you get the tiger by the tail, you invest in it. And so we think these businesses are just going to grow.

Patrick O'Shaughnessy -- Raymond James -- Analyst

Got it. Thank you for that. Maybe a follow-up on an earlier question, but maybe asked a different way. So setting aside the C-corp conversion, how comfortable are you that you'll be able to support and maintain your current dividend throughout 2020 given the current earnings run rate of the company?

Howard Lutnick -- Chairman of the Board and Chief Executive Officer

Well, as I said, the peak investment period for our new businesses was 2019, OK? And then going into 2020, we expect our net investment cost to decline, which will improve our EBITDA and if the markets remain where they are, we should be able to earn and cover our dividend. We are deeply examining our insurance business, how best to express that value to you all, but we understand that we have competing computing issues, which is we have a strong dividend. We have strong investments in our new businesses, and we want to grow our business and convert it to electronics. So those are different businesses.

We feel that through this year that might be the area that you're looking to invest, but last year was this top area of net investment cost, and everything going forward now starts to improve. And you will see dramatic numbers, obviously, with these businesses breaking even and growing in 2021. Obviously, that's what we expect. We will get through.

We know our investors care about the dividend. Board, obviously, takes that under advisement every quarter. But we feel, as we are right now that we see the path forward, which will allow us to grow our business to dramatically add shareholder value we hope to maintain the dividend, and we hope to deliver material economic value to all of our stakeholders as we enter 2021.

Patrick O'Shaughnessy -- Raymond James -- Analyst

Got it. And you touched on the insurance brokerage business in your response to that question. Can you talk about where you are in the process of examining your options for that business? And then as you kind of are in the middle of that process, does that pose any challenges in terms of attracting or retaining talent to that business?

Howard Lutnick -- Chairman of the Board and Chief Executive Officer

Well, look, we are great stands of the management of our insurance business. I think we have really world-class talent. And in trying to express value to our shareholders, we are working hand in glove with them. We are in no ways trying to work contrary to the management who joined us, who we think the world of.

So because we're working together and doing things in a very positive way, I think it's having no negative impact. In fact, it's probably having a positive impact because they know the plan, they're thinking about the plan. We're making enormous numbers of hires now. And so we feel good about things.

But you should understand what's working together. There's no daylight between us. So therefore, it's not reducing our hiring. In fact, it's hard to imagine that it can go any faster.

Patrick O'Shaughnessy -- Raymond James -- Analyst

Gotcha. And then maybe I'll finish with just a quick numbers question. So obviously, the share count dilution was much, much lower in 2019 than it was in the past. It came in below your guidance.

What is your initial expectation in terms of share count dilution for 2020?

Steven Bisgay -- Chief Financial Officer

Yes. I think, Patrick, you said it correctly. It was much lower in 2019, as we said. It was an area of focus for us.

I think as we look perhaps to the year end, I would expect the spot count at the end of the year to around the $550 million mark, taking into account the hiring, a lot of hirings that we've spoken about, for example, insurance, any of the earnouts of the previous acquisitions and our general equity-based compensation. So I think a good model is around $550 million for the spot for the end of the year.

Patrick O'Shaughnessy -- Raymond James -- Analyst

All right. Thank you very much.

Operator

Thank you. [Operator instructions] OK. We have no further questions at this time. I would like to turn the call back to Shaun Lynn for any final remarks.

Shaun Lynn -- President

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

Operator

[Operator signoff]

Duration: 26 minutes

Call participants:

Ujjal Basu Roy -- Vice President, Investor Relations

Howard Lutnick -- Chairman of the Board and Chief Executive Officer

Shaun Lynn -- President

Steven Bisgay -- Chief Financial Officer

Rich Repetto -- Piper Sandler -- Analyst

Sean Windeatt -- Chief Operating Officer

Patrick O'Shaughnessy -- Raymond James -- Analyst

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