Earnings Call Transcript - BGC Q4 2022

Operator, Operator

Welcome to BGC Partners Incorporated Fourth Quarter 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 fourth quarter and full year 2022 financial results press release and the presentation summarizing these results this morning prior to the market open. You can find it at ir.bgcpartners.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 the fourth quarter of '22 with the prior year period and compare revenues, excluding insurance due to the sale on November 1, 2021. Certain revenue figures are provided for the first 35 trading days in the first quarter 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-US 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 period revenues applied 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.bgcpartners.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, and 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 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 the subsequent reports on Form 10-K, Form 10-Q, and Form 8-K. And with that, I'm 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 fourth quarter 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 volume. 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 is despite an over 3 times increase in global issuance. The trading environment has been overshadowed by manufactured zero interest rates, which created a 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 12 times 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 were that BGC shareholders have earned a total return of over 2.5 times 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 have 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 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, but we now have the macro environment that will drive fundamental growth across all of our businesses. And with that, I will turn the call over to Sean.

Sean Windeatt, Chief Operating Officer

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

Jason Hauf, Chief Financial Officer

Thank you, Sean and hello, everyone. Our fourth quarter 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 fourth quarter 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 second quarter of 2021 after we announced the sale of our insurance brokerage business. Our fully diluted share spot count as of December 31 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 US Treasury and rates platform, FMX. We expect all regulatory filings and submissions will be completed by the end of the first quarter. We remain on track for a soft launch of our futures platform, and 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 US 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 second quarter of 2023. We also expect to provide additional information with respect to our expected tax rate 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're 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. With that, operator, we're happy to turn the call over for questions.

Operator, Operator

Thank you. 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? And in terms of the better broker production and the better outlook, is that being driven by larger notional sizes traded across the platform? And is there a positive mix shift, I guess, amongst the asset classes being traded?

Howard Lutnick, Chairman and CEO

So 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. Now it has only just begun. So, for example, there was the relationship in credit, where since 2008, credit issuance was up about 2.7 times and credit volume had actually decreased and was 0.5 of what it was in 2008. Imagine, issuance of 2.7 times and volumes having decreased. That's simply because it's 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 to 0.6, which is nothing, means, volumes are going to grow 20%. So 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. So 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 going to see it in smaller volumes? You will. In fact, you're going to 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 has gone for the balance of my lifetime. So 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. And then just switching gears to 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 Lucera's 30% year-over-year growth. I'm just trying to determine how that kind of breaks out relative to UST and maybe the other platforms?

Sean Windeatt, Chief Operating Officer

I noted several key areas of growth, and you're right that Lucera is showing significant growth at around those levels. It's important to remember that we're only 35 days in, which is why I mentioned 22% as an average. However, I can say that we're experiencing double-digit growth across the board in U.S. Treasuries, Lucera, Fenics GO, and obviously, Portfolio Match, given its connection to credit. At this early stage, I would estimate strong double-digit growth in the five main areas of our Fenics growth platforms.

Howard Lutnick, Chairman and CEO

Yeah. And you can imagine with our position in US Treasuries and Fenics UST, you have issuance at 5 times what it historically was and volumes basically equal to what it was in the past. And if you think about that, how can issuance be up 5 times? And 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 at 4%, 5%, maybe they'll be lower or maybe they'll be higher, this is great for US Treasury volumes, and you should expect volume on that platform to grow and volume across our growth platforms to relentlessly grow as these relationships return. Our business is back to where it should have always been, which is that volume and issuance are directly and highly correlated. Those issuance volumes are gigantic, and the volumes in our business will grow, and you will see these numbers continuously grow. And 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. But then again, if I told you, 14 years ago, the governments were going to buy all their debt and printed with their own money, you would have laughed at me.

Gautam Sawant, Analyst

Thanks. And just the 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 fourth quarter of 2022? And how we should think about the level of repurchases in the second half of 2023?

Howard Lutnick, Chairman and CEO

So basically speaking, we make more money in the first half of the year, but we collect it in the second half of the year. So 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, because 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. So we're going to buy other companies and buy assets that we think are going to grow more quickly. However, we did say that we feel that our stock is very attractive at these multiples, and you should expect us to buy more shares. So I think we're going to continuously balance that as we go forward through the year, but we have great opportunity to grow now that we just didn't have in the past, right? We were a catalyst company because that's all we could do was just buy and sell companies and build businesses because our core business really wasn't growing. Now our core business is growing across the board, and our opportunity to invest across our business is just much more exciting. So we have to balance that. That is different than in the past. I know many of our shareholders in the past would say, when are you buying back shares? And when you saw when we sold our insurance business, we bought back a huge amount of shares. As Jason said, 71 million shares. But 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 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.

Operator, Operator

Our next question is from Rich Repetto with Piper Sandler. Please proceed.

Rich Repetto, Analyst

Good morning, Howard. It's a pleasure to talk with you. My first question is a bit nuanced. I think rates have been beneficial for you, but I'm trying to understand the situation better. I've noticed that brokerage revenue in rates and in credit has actually decreased slightly from 2022 compared to 2021. I realize that this might be influenced by foreign exchange factors. However, when I examine CME's interest rate revenue and volume, it has increased by 18%. Could you explain the reasons behind why banks and your customers may be more active with the banks this coming year compared to last year, especially given that CME's volume in rates has also risen 23% year-to-date? Could you elaborate on the lag effect with your platform?

Sean Windeatt, Chief Operating Officer

Well, Rich, maybe I'll start that, Rich, it's Sean. You're right to say, so last year, last year rates for us was up in constant currency, 4.3%. As we said last year, going into the rising interest rate environment, you get a bit of choppiness and lumpiness in terms of some of the businesses. You can remember, we pointed out in Q3 and Q4, who would have thought that inflation business would actually have lower volumes during Q3 and Q4 of '22 at a time when rates were rising. That piece is behind us now. And hence, the fact that I spent all of my prepared remarks talking about what's happened in Q1. In Q1, you noticed that all of the asset classes are performing and are increasing. Yes, up 8% overall, 10% on constant currency, but that's actually across the board. And albeit that at the start of it started in December and its continued favorably into Jan and Feb. And I think as Howard pointed out before, it takes the lag between going into the interest rate, rising interest rate environment, and 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 has a strong focus on short-term rates, and last year, they experienced growth in short-term volumes while long-term rates saw less growth. You can expect the volume to progress across the curve and across our entire range of products. It's not going to be smooth; it will be consistent. I believe volumes will shift towards the long end, and volumes will also increase at the short end, influenced by the Fed's actions and market perceptions. However, the significant issuance of treasuries and credit won't be absorbed by government purchases; instead, trading volume will increase. This activity will enhance our business as we revert to traditional volume levels. As I mentioned earlier this year, we were entering a fluctuating period with some businesses performing well and others not. But that phase has concluded, and we are now in a growth trajectory, where you'll observe varying levels of strength across our businesses from quarter to quarter. Nonetheless, the overall trend will consistently move in a positive direction as these relationships strengthen.

Rich Repetto, Analyst

Got it. It's going to be fun to watch, Howard. My follow-up question would be on FMX. In the earnings release, you mentioned it being on track, but you didn't specify the launch date or the soft launch date to be reaffirmed in the second quarter. Could you explain what the contract means for FMX?

Howard Lutnick, Chairman and CEO

Nothing has really changed. Our expectation is that we will complete this quarter and receive the necessary regulatory approvals. Once the government provides those approvals, we will announce our soft launch date and begin operations. We are making steady progress and are excited about this opportunity. Imagine launching a US rates futures platform that competes with the $67 billion Chicago Mercantile Exchange during a significant increase in rates volume not seen in over a decade. The timing couldn't be better for our firm. We are thrilled, and our clients are eager for this. The market is primed for growth, and we see this as a great opportunity for competition in the $67 billion market. Everything is looking positive.

Rich Repetto, Analyst

Okay. So I'm still expecting a 2Q soft launch, no matter what your legal counsel probably wants you to tell you. Anyway, last question is around the corporate conversion. I've gotten a couple of questions. So could you just review, Howard, what are the reasons for doing the benefits to you? And then 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

Okay. So as Jason mentioned, can you repeat what you said earlier, Jason?

Jason Hauf, Chief Financial Officer

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

Howard Lutnick, Chairman and CEO

Right. That's all I want. So in the second quarter, we'll file our S-4. That then puts the legal documents to the SEC. When they approve it, then we close. So that's pretty much how it works. There's nothing much in between. You just close as soon as practical thereafter. And so, that's where we are. We'll file it in the second quarter. Then 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. So 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. We have the growth rate of the company coming hard, and 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, but we will have a much simpler structure. We should be able to save money and save expense. We should be able to, as an example, we bought GFI. It had corporate broker dealers. We had BGC. We had partner broker dealers. So we're doing all of this work that can now be simplified. They can all be merged together. It could be just simpler, more capital efficient, less work to do. And so, we think that will mitigate some of the tax cost; it 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 will be easier to understand. We'll get more shareholders to be able to buy the company. And I think it'll work. So second quarter, we file. Should be able to close in the third.

Rich Repetto, Analyst

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

Operator, Operator

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

Thank you all. Our future looks very promising. We believe trading volumes will be strong for the industry, benefiting banks and trading firms alike. Our technology, global scale, and strong comparative valuation position BGC as a highly attractive option in a marketplace where many will succeed. We believe BGC is best positioned to deliver exceptional returns for our investors. We look forward to connecting with you again. We are proud to identify as a growth company and anticipate reporting increased volumes and interest rates in the future. We appreciate your support and look forward to speaking with you again next quarter.

Operator, Operator

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