Bgc Group Inc

NASDAQ:BGC

Earnings Call Transcript 2017-Q4

[Operator]

Welcome to the BGC Partners, Inc. Fourth Quarter and Full Year 2017 Financial Results Conference Call. My name is Candice, and I'll be your operator for today's call. [Operator Instructions] Please note that this conference is being recorded.

I now turn the conference over to Jason McGruder, Head of Investor Relations. Mr. McGruder, you may begin.

[Jason McGruder, executive]

Good morning. BGC's fourth quarter and full year 2017 financial results press release and the presentation summarizing these results were both issued this morning. These could be found at ir.bgcpartners.com. Details about Newmark Group, Inc.'s separate conference call scheduled for today right after BGC's as well as Newmark's financial results press release and presentation could be found at ir.ngkf.com.

Unless otherwise stated, the results provided on today's call compare only the fourth quarter of 2017 with the year-earlier period. We'll be referring to our consolidated results on this call only on an adjusted earnings basis unless otherwise stated. We may also refer to adjusted EBITDA. Please see today's press release for full year financial results and for results under generally accepted accounting principles or GAAP. Please also see the section of today's press release for the complete definitions of any such non-GAAP terms; reconciliation of these terms to the corresponding GAAP results; and how, when and why management uses them.

For the purpose of today's call, all of the company's fully electronic businesses are referred to as FENICS. These offerings include the Financial Services segment, fully electronic brokerage products as well as the offerings of market data software solutions and post-trade services. Also on today's call, Newmark is synonymous with our Real Estate Services segment unless specifically referred to as Newmark standalone, in which case we refer to results of Newmark Group, Inc.

BGC's financial results have been recast to include the results of Berkeley Point and Lucera for all periods discussed on today's call because these transactions involve entities under common control. Investors and analysts should also note that at the beginning of the first quarter 2018, BGC will recognize receipt of Nasdaq earn-out payments when earned in the third quarter for adjusted earning instead of prorating over the following 4 quarters in its consolidated results, which will be consistent with Newmark's methodology of recognizing income related to receiving Nasdaq payments in the third quarter for its GAAP and non-GAAP results. This methodology will lead to early recognition of the Nasdaq income under adjusted earnings. BGC's adjusted earnings results will be recast to incorporate the change to Nasdaq methodology from 2017 onward in the company's next financial results press release.

I'll also remind you that the 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 forward-looking statements, see BGC's SEC filings, including, but not limited to, the risk factors set forth in the most recent Form 10-K and any updates of such risk factors contained in the subsequent Form 10-Q or 8-K filings.

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

[Howard W. Lutnick, executive]

Thank you, Jason. Good morning, everyone, and thanks for joining us on our fourth quarter and full year 2017 conference call.

With me today are BGC's President, Shaun Lynn; our Chief Operator Officer, Sean Windeatt; and Steve McMurray, our Chief Financial Officer. As Jason mentioned, our subsidiary, Newmark Group, Inc., issued its stand-alone financial results press release this morning, and it will hold a separate conference call following this call.

BGC's consolidated revenues grew by over 18% to $894 million in the fourth quarter while our posttax earnings were up by 27% to $162 million. BGC generated strong revenue growth from both Newmark and Financial Services. Financial Services was up by more than 17%, and Newmark's revenues grew by more than 18%.

Newmark's brokerage revenues were up by 19% for the full year 2017 and more than 27% in the fourth quarter. Newmark's strong performance was led by its average revenue per front office employee improving by 14% for the full year 2017. This productivity growth explains why more than 80% of Newmark's revenue growth for the year was organic. Please join us for Newmark's call beginning at 8:45 for more details on its performance.

I am also pleased to report that our board declared an $0.18 qualified dividend for the fourth quarter, which is up 12.5% compared to last year. At yesterday's closing stock price, this translates into a 5.4% annualized yield.

With that, I'll now turn the call over to Shaun.

[Shaun Lynn, executive]

Thanks, Howard, and good morning, everyone. Our overall financial -- our overall revenues for Financial Services increased by approximately 17% to $422 million for the quarter. Financial Services revenues were up by 12% to $1,712,000,000 to the full year.

Brokerage revenues increased across all asset classes, led by a 14% improvement in overall foreign exchange revenues as well as 28% growth from FENICS fully electronic rates. The strong performance generated by FENICS rates was a result of our continued investment in technology and the ongoing conversion of our businesses to more profitable fully electronic trading. As we continue to invest in our business, we expect our revenues and earnings to outperform those of our peers. Brokerage revenues from equities, insurance and other asset classes more than doubled primarily due to the additions of Sunrise and Besso.

Financial Services pretax earnings for the fourth quarter were up by 9% to $77 million excluding the Nasdaq payment from the prior year period. Full year pretax earnings excluding the Nasdaq payment were up by 22% to $356 million. A key driver of that profitability is average productivity per broker or salesperson. Front-office revenue per producer in our Financial Services business improved by 12% to $168,000 and by 7% to $676,000, respectively, for the quarter and year ended December 31, 2017. Our Financial Services revenue per producer improved year-on-year in each of the 4 quarters of the year.

With respect to the first quarter 2018, Financial Services revenues were off to an excellent start, showing double-digit percentage growth for the first 25 trading days of the year compared with last year. Market volatility is a friend of the company, and the current macro trends bode well for the performance of our business.

With respect to our results for Real Estate Services, revenues for Newmark as a stand-alone company increased by 19% year-on-year in the quarter to $461 million while pretax adjusted earnings increased by 23% to $85 million. These stand-alone Newmark results would have been higher if presented consistently with BGC's segment reporting methodology. Please see BGC's and Newmark's press releases for more details.

With that, I'm happy to turn the call over to Steve.

[Steve McMurray, executive]

Thank you, Shaun, and hello, everyone. BGC generated consolidated quarterly revenues of $894 million, up 18.3%. Our revenues from the Americas grew by approximately 20.6%. Revenues from Europe, Middle East and Africa were up by 13% while Asia Pacific revenues increased by 17.3%.

With respect to expenses, compensation increased by 21.2% while compensation ratio increased by 130 basis points to 57.3% due to the mix of revenues by product. For the full year, the ratio declined by around 120 basis points. Our non-compensation expenses were $217.7 million compared to $169.1 million a year ago. As a percentage of revenue, our non-compensation expenses were 24.3% versus 22.4% in the year-ago period, which largely reflects the impact of increased interest expense associated with the Berkeley Point acquisition. For the full year, our non-compensation expense ratio remained unchanged at 23.6%. Our overall expenses were $730.2 million in the fourth quarter of 2017 compared to $592.2 million.

Our fourth quarter pretax earnings before noncontrolling interests in subsidiaries and taxes were up by 10.7% to $165.1 million. For the full year, pretax earnings were up by 26.5% to $613.7 million. Our full year adjusted earnings tax rate was 10.6%, which is below our previous full year estimate.

As part of our ongoing efforts to retain key partners across both Financial Services and Real Estate Services, we extended many contracts in both segments. Accordingly, our fourth quarter GAAP compensation expenses included increased noncash, non-dilutive charges for grants of exchangeability. These noncash exchangeability charges are tax deductible.

BGC's posttax earnings were up by 26.7% to $162.2 million. Our posttax earnings per share were up by 17% to $0.35. BGC's fully diluted weighted average share count was 462.9 million for adjusted earnings. The GAAP weighted average share count was lower in the fourth quarter 2017 because it excluded certain share equivalents in order to avoid antidilution. After the end of the fourth quarter 2017, our spot fully diluted share count was 467.4 million.

Moving on to the balance sheet. A number of balance sheet-related items, including total capital and book value per share, were impacted by the recast of our results with respect to the Berkeley Point acquisition. The recast had the effect of increasing our total capital by approximately $480 million and book value per share by $1.22 for the year-end 2016. Because the Berkeley Point acquisition involves entities under common control, the company did not record goodwill or intangible assets that it would have otherwise with respect to this acquisition. Upon closing the transaction, the previous increase in total capital is reversed and that which would have otherwise been net goodwill reduced our capital by approximately $274 million.

As of quarter end, our liquidity was $673.2 million. Long-term debt and collateralized borrowings were $1,650,500,000. Book value per common share were $2.17, and total capital was $1,186,200,000.

In order to finance Newmark's Berkeley Point acquisition, we entered into a $400 million 2-year unsecured senior revolving credit facility and a $575 million unsecured 2-year senior term loan. In connection with the separation and IPO, Newmark assumed these loans from BGC as accrued and unpaid interest thereon. The proceeds of the Newmark IPO repaid $304.3 million of the term loan.

We remind you that our consolidated balance sheet does not reflect the expected receipts of approximately $746 million worth of additional Nasdaq stock over the next 10 years as these shares are contingent upon Nasdaq generating at least $25 million in gross revenues annually. If Nasdaq undergoes a change of control, we would get paid all at once. To put the $25 million contingency in context, Nasdaq generated gross revenues of approximately $4 billion in 2017.

With that, I am happy to turn the call back over to Howard.

[Howard W. Lutnick, executive]

Thank you, Steve. Our outlook for the first quarter of 2018 compared with last year is as follows. We expect to generate revenues of between $870 million and $920 million. That's up between 11% and 17% compared with $783 million last year.

We anticipate pretax earnings to be in the range of $140 million and $160 million, up 18% to 34% as compared with $119 million, which excludes the Nasdaq earn-out. We anticipate our consolidated adjusted earnings tax rate to be in the range of approximately 10% to 11%. Newmark's stand-alone tax rate is expected to be approximately 12% to 14%. We expect to update our consolidated first quarter company guidance toward the end of March.

As we have said, Newmark's call begins at 8:45. As such, we would appreciate it if you would hold your detailed questions regarding our Real Estate Services results until then since Newmark's executives will be on that call.

With that, operator, we're happy to turn the call over to questions.

[Operator]

[Operator Instructions] And our first question comes from Rich Repetto of Sandler O'Neill.

[Richard Repetto, analyst]

And if this question pertains to real estate too much, you could certainly put me off, I guess. But I guess the question is, overall, Howard on just revenue guidance. You came out with the range initially. Then you came out that it was at the high end or towards the high end, and then it was going to be well above. And I guess, I'm just trying to -- maybe you mentioned this on the call, I had to jump on late, but just trying to understand what changed in the quarter. What was the driver of the positive sort of news here on the top line?

[Howard W. Lutnick, executive]

Both businesses performed better through the rest of the quarter. I mean, they just -- just the numbers were better all the way through, and it was across both businesses.

[Richard Repetto, analyst]

Well, on the Financial Services side, could you highlight like what areas that -- I see you did well, I believe, within equities. And I can see the segments, but could you say what uplifted? And is that going to continue in -- or is that continuing in the first quarter?

[Shaun Lynn, executive]

Rich, it's Shaun. The volatility we saw towards the end of last year and just continued throughout this year was maybe in rates. Equities, we've seen that's been the big driver of the financial revenue for us. And...

[Howard W. Lutnick, executive]

Well, of course, in the Real Estate business, seasonality is always strong in the fourth quarter, and that was an advantage. Towards the end of the year, that kicked in, in a very positive way.

[Richard Repetto, analyst]

Got it, okay. And then, I guess, this will be my last question. When you look at FENICS, we appreciate the detail on sort of the transaction detail, but margins have stayed above your overall margins but not back up to the 50%. And it's sort of like flat year-over-year. And just trying to understand -- will we see more margin expansion? Because that was sort of one of the, I guess, promises of the acquisition over time, that you would get higher margins in electronic business. And then from the transaction sort of summary you put in the earnings release, it looks like -- I think interest rates are [ growing ], but it looks like the others are flat to slightly down as far as activity. So could you comment on, I guess, some insight into FENICS?

[Howard W. Lutnick, executive]

Sure. So to start with, we are investing broadly in FENICS. I think we've discussed the fact that we have our foreign exchange and rates products coming out, and we are investing in that. So that is holding the margin down than it otherwise would be because we're building those businesses and making those investments. But as -- we expect both of those businesses to be out and about during the year 2017 so -- 2018, sorry, and so I think things will just improve. But then, again, I'm sure we'll find other investments to make, yes. And Shaun?

[Shaun Lynn, executive]

And Rich, also, you've probably seen recently we've made a few announcements around our compression services around Capitalab and Swaptioniser, where we've continued to come out with new product. That's now gaining traction. That's going to take some time once again. But it'd be -- the incubation of these products takes a lot of time. We've worked on this for many, many, many months in the formation of these new products, which is now going to market. So as Howard said, we continue to invest in FENICS in a dramatic way across many different execution aspects as well as compression.

[Richard Repetto, analyst]

Okay. And then my very last one, and I don't know whether you can help me with this. But if you look at the stock price and it incorporates, by our math, somewhere -- 45% to 50% of the market cap comes from the ownership of the Newmark shares that BGCP shareholders own. It won't be locked -- released for, whatever, another 5 months or so. So I guess the question is, with Newmark flat year-to-date, Howard but -- and BGCP stock down, I'm just trying to understand -- and other comps in a deal -- or the other comp, say, flat year-to-date as well, so I'm trying to understand, given the positive fundamental, what do you think is happening with the stock here?

[Howard W. Lutnick, executive]

I mean, the -- yesterday was exciting. I don't know what else to say. That -- when you're executives of a company, our objective is to keep our head down and earn more money. And if you earn more money and you build your business, eventually your investors and the stock market follows. BGC's had excellent performance over many years by doing exactly that, improving its performance, and this quarter is as good an example as you could have. The company is firing well, in the fourth quarter, in all its cylinders. And so far, obviously, in the new year, as Shaun mentioned, with the volatility where it is today, I mean, this bodes really, really well for the company. If volatility is back, this is wonderful for Financial Services. So look, the company is doing superbly. Revenue is up 17% and 18% in both its segments. We're just going to keep our heads down. We're just going to keep earning more money for this company. And within a reasonable period of time, I think people will compare Newmark to its peers and realize we're growing faster than our peers and give us a reasonable multiple against that. But that just comes with time, proving our point. And for BGC financial, we're just going to keep making more money, growing our business, and we would expect our shareholders to applaud. And eventually, the market will give us credit for it.

[Operator]

[Operator Instructions] And our next question comes from Patrick O'Shaughnessy of Raymond James.

[Patrick O'Shaughnessy, analyst]

A question about your M&A aspirations going forward for the Financial Services business. Obviously, you kind of gifted, or however you want to term it, the eSpeed earn-out to the Newmark subsidiary. So in terms of growing the Financial Services business through acquisitions going forward, what are your thoughts in terms of financing that growth?

[Howard W. Lutnick, executive]

Well, we saw with the GFI acquisition the opportunity to take out expense. And our space was -- our executives did an excellent job to that effect. So I think there are plenty of opportunities out there for us to buy. We generate substantial cash flow at the company, and I think we -- I think we're in good shape to acquire the companies that we have in our vision and finance it appropriately within the finances of the company. So we don't feel constrained at the company at all.

[Patrick O'Shaughnessy, analyst]

Got it. And then maybe a related question. You bought Besso, it was a while ago now. Any update on your plans in the insurance brokerage space?

[Shaun Lynn, executive]

Patrick, it's Shaun. We, I think, closed the deal in February...

[Howard W. Lutnick, executive]

Into February.

[Shaun Lynn, executive]

Into Feb. And we continued to organically grow the business. Of course, we're going to look at opportunities that are going to come our way, but wants to get always in line with what we've always said is an accretive acquisition. Insurance is a reasonably hot space at the moment, but there are opportunities potentially on the horizon. As with any M&A, you've got to make sure you do your due diligence well, and you make sure that it's the right fit to the company. And it's about -- the way we do our transactions, good earn-out, profitability and a good strategic fit.

[Howard W. Lutnick, executive]

Besso has performed very well, and our ability to help them grow their business by hiring and acquiring will continue to propel them forward. So excellent numbers in the first year, really superb, above all of our expectations. And I think that has put us in yet another vertical where our view of the brokerage business will be understanding how to integrate companies and how to hire superb producers and how to manage those kind of businesses. We became experts in the Financial Services. We proved our bona fides with Newmark. And as we grow and build in the insurance business, we feel very, very good with our first year under our belt. We feel very good about our view and our ability to execute on the insurance business first year in, very good.

[Patrick O'Shaughnessy, analyst]

Got it. I appreciate that. And then turning to the legacy interdealer brokerage business. Obviously, nice start to volatility to 2018. But can you maybe just take a step back and give your thoughts on what the competitive landscape looks like at this point?

[Howard W. Lutnick, executive]

Sure. There are 2 big players, and the 2 big players have the capacity to provide just more data, just more technology, just more information, broader service, better capacity than the regional and smaller competitors. So the 2 big players are going to be sitting down with the big clients and being able to just provide them more service and just do a better job for that. And so I think the competitive landscape is just one that we can invest more in our business and deliver more value to our clients. And I think that puts us in a good position. And there are lots of little players, lots and lots of little players in the world. It's very big, and so there's great opportunity for us to grow and build across all these small regional players around the world.

[Patrick O'Shaughnessy, analyst]

Got it. A question about the Newmark planned spin-off. Is -- any update to your thoughts in terms of the timing and process for that to be concluded?

[Howard W. Lutnick, executive]

Nothing new to report. We have agreed within the IPO process that we would not visit this for at least 6 months. That's sort of ordinary and standard, and the board will make its decision when it thinks it's best for itself, but I have nothing new to say today.

[Patrick O'Shaughnessy, analyst]

Got it. And then maybe one last one. Any initial preliminary thoughts on what BGC's dividend policy is going to look like post that Newmark spin? And obviously, the implications are probably that the absolute amount of the dividend is probably going to have to be reduced. Is that a fair assumption?

[Howard W. Lutnick, executive]

I think when the time comes, BGC will examine its policy and base that on its earnings. Right now, BGC is growing really nicely, and I wouldn't want to constrain or limit whatever the board chooses to do at that time. But at the time, we'll take a look, but BGC continues to grow and produce substantial amounts of cash and is growing. So again, we feel really good about it, and we surely feel really good about the beginning of this year. And you can only discuss that volatility is a friend of company when there is no volatility for so long. And people sort of get -- they forgot what volatility is like. And now all of a sudden, the last week or so, people are sort of shocked into remembering what volatility is like, and you start having volumes, which are in the top 10 of ever. And this is just good, okay? It's just good.

[Patrick O'Shaughnessy, analyst]

Maybe another question along that point. Do you think that a lot of these short vol strategies that have really come into being over the last several years have kind of artificially suppressed volatility and maybe some unwind of those short vol strategies is going to lead to more sustainably higher volatility going forward?

[Howard W. Lutnick, executive]

Well, I think that's a big question for our earnings call for the moment, but I would say that quantitative easing was a primary and proximate cause of volatility decline in my view. That -- the fact that the government was a gigantic -- and the governments around the world were gigantic acquirers of assets without the ordinary hedging that would come with it, that would add to that volatility and that spread across and velocity spread across the markets. But there are strategies in how they rise and fall and press and move a particular market. I don't have the answer for you. But I would simply say that if you take quantitative easing out of the mix, and last I checked, you have the same world we had before that, and I would expect that volatility would return, albeit at a bigger world, more assets under management with higher markets and higher movements and, therefore, ordinary volatility. So I think, if you look at back at history, before quantitative easing would be a better guide to where were going, and that bodes very, very well for our business.

[Operator]

And our final question comes from the line of Keith Rosenbloom of Cruiser Capital.

[Keith Rosenbloom, analyst]

Howard, actually, I think you addressed these -- the questions I had. I think you've alluded it -- alluded to it both in your response to Rich and to Patrick. But I think top 10 volumes ever is a great quote, Howard. I'm going to put that up on the board here. But actually, maybe you could take this time. I think there are probably new investors on the line because of the Newmark spin. Would you mind detailing a little bit as to why volatility helps you so much and what you're seeing in the fixed income markets right now, what you're seeing trading in U.S. bonds and global bonds?

[Howard W. Lutnick, executive]

Sure. For those who've been with us for a long time, know my -- our analogy used to say that we have the largest -- as a sailboat, we have the largest sails in fixed income world and it's just not particularly windy. Volatility is the breeze. It's the wind. And I used to always say just give us a little breeze and you are going to be able to see what this company is about. This company did -- before the quantitative easing and before the volatility change, the revenues of this company were more than 20% higher. They were -- I think they were near 30% -- I think 30% higher, not having anything to do with other than volatility. So if there's no volatility, that means people just aren't trading. They're just -- there's nothing that forces them to make a choice, whereas the markets yesterday proved, if you own equities, you weren't just going to sit around. You had to think about, "What do I want to do if they go down? Am I supposed to buy? Am I supposed to sell?" But as that enters your mind, what's happening is, it enters your mind that there's a transaction to do. Maybe I should hedge myself. Maybe I should do this or that. That increase in volatility literally means it increases volumes. And when you are in the marketplace business, where we make no money when the markets go up and we make no -- and we lose no money when they go down, we only participate and help our clients buy and sell. The more they buy and sell, the more the money we earn. And so yesterday and the day before and the day before are excellent for the company because it is just so busy, and that's when we make our money. We just don't like Fridays in August when it's boring, but we surely like yesterday.

[Operator]

And that concludes our question-and-answer session. I'd like to turn the conference back over to Howard Lutnick for any closing remarks.

[Howard W. Lutnick, executive]

Thanks very much for joining us. It seems that it's going to be a busy day again today, so got to get back to work. And we look forward to speaking to you next quarter. Thanks, everyone.

[Operator]

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may all disconnect. Everyone, have a great day.