Earnings Call Transcript - BGC Q4 2023

Jason Chryssicas, Head of Investor Relations

Thank you, and good morning. We issued BGC's fourth quarter and full year 2023 financial results press release and the presentation summarizing these results this morning. You can find these at ir.bgcg.com. Please note you can find additional details on our quarterly results in today's press release and investor presentation. Unless otherwise stated, any historical results provided on today's call compare only to the fourth quarter of 2023 with the prior year period. Certain revenue figures are provided for the current period as indicated. 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, reverse repurchase agreements and financial instruments owned at fair value less securities loaned and repurchase agreements. We define total capital as redeemable partnership interest, total stockholders' equity and non-controlling interest in subsidiaries. Please see today's press release for 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, when and why management uses such terms. Additional information with respect to our GAAP and non-GAAP results mentioned on today's call is available on our website at ir.bgcg.com and in our investor presentation. We refer to the company's technology-driven businesses Fenics. Fenics' offerings include Fenics Markets and Fenics Growth platforms. I'd also remind you that any information on today's call that is not historical are forward-looking statements. These include statements about the company's business results, financial position, liquidity and outlook. 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 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 reports on Form 10-K, Form 10-Q and Form 8-K. I'm now happy to turn the call over to Howard Lutnick, Chairman of the Board and CEO of BGC Group.

Howard Lutnick, Chairman and CEO

Thank you, Jason. Good morning, and welcome to our fourth quarter and full year 2023 conference call. With me today are our Chief Operating Officer, Sean Windeatt; and our Chief Financial Officer, Jason Hauf. BGC had its best fourth quarter with record revenues and adjusted earnings. Our revenues improved over 18%, ending a strong year where we delivered accelerating year-over-year revenue growth each quarter. We expect favorable macro trading conditions to continue throughout 2024. With our global presence and scale, we will continue to capitalize on interest rate and energy market volatility to higher fixed income issuance across both government and corporate bonds. We are pleased with the CFTC's recent unanimous approval for FMX to operate in exchange for U.S. interest rate futures products, which are the largest and most widely traded futures contracts in the world. We intend to launch the FMX Futures Exchange in the summer of '24, and we plan to discuss our strategic partners and further details on or before our first quarter earnings call.

Sean Windeatt, Chief Operating Officer

Thanks, and good day, everyone. Our fourth quarter revenues increased by 18.4% to $516.8 million, marking our highest fourth quarter revenue performance ever. This increase was driven by strong growth in the Americas and EMEA, which saw improvements of 21.9% and 20.5%, respectively. Total brokerage revenues rose by 16.1%, fueled by robust growth across Energy & Commodities, rates, and foreign exchange. Revenues from our Energy & Commodities sector surged by 42.3%, showcasing strong double-digit growth in our energy complex and environmental products, including our new weather derivatives business. Rates revenues climbed by 26.1%, reflecting widespread growth in interest rate products. Foreign exchange revenues grew by 7.5%, driven by increased volumes across G10 and emerging markets currencies. BGC's credit revenues fell by 3.6%, mainly due to a strong comparable period a year ago, though this was partially offset by higher volumes in emerging markets, U.S., and U.K. credit products. We expect BGC's credit business to expand alongside our overall business in 2024, benefitting from record new issuance and interest rate volatility. Equities revenues decreased by 3.8%, impacted by lower cash equity volumes, while higher equity derivatives activity provided some offset. Data, network, and post-trade revenues rose by 17.9%, propelled by Fenics Market Data and our network business, Lucera. Diving deeper into Fenics, in the fourth quarter, Fenics revenues increased by 20.1% to $130.8 million. These higher-margin, technology-driven operations accounted for more than 25% of BGC's total revenue during the period. For the full year of 2023, Fenics generated $521.7 million, a 16.1% improvement. The revenue growth for Fenics in both the fourth quarter and full year was primarily led by our electronic rates, credit, and data network as well as post-trade businesses. This remarkable performance pushed Fenics' revenue above $500 million for the first time. At this level, Fenics is now one of the largest electronic platforms in the capital market. Our Fenics Markets generated $109.6 million in revenue during the fourth quarter, an increase of 16.5%. This growth stemmed from higher electronic rates, credit and foreign exchange volumes, along with stronger subscription revenues from Fenics Market Data. Fenics Market Data secured a new customer contract in the fourth quarter with an aggregate contract value 30% higher compared to the same period last year. I would like to emphasize Fenics Market Data's ongoing success in its regulatory solutions business, which we believe will further boost our growth. Our Fenics growth platforms produced fourth quarter revenues of $21.2 million, up 43.3%, mainly driven by Fenics UST, PortfolioMatch, and Capitalab. Fenics UST revenue surged by over 70% thanks to a 38% boost in average daily volume. Fenics increased its market share to 26% in the fourth quarter, up from 25% in the previous quarter and 20% a year ago. This momentum has continued into January, achieving new record average daily volumes that were 44% higher than January of last year. PortfolioMatch's U.S. credit volumes increased more than threefold, driven by new accounts and the strengthening of relationships in this rapidly growing market segment. We are pleased with the platform's success, which has captured significant market share in just two years in an area historically dominated by a single incumbent. Capitalab, our post-trade business, achieved revenue growth of nearly 90% driven by increased interest rate compression and foreign exchange matching volumes. We anticipate demand for our Capitalab post-trade products to increase as global banks optimize their balance sheets in a constantly changing regulatory environment. Lucera, our network infrastructure business, experienced double-digit revenue growth, led by new client contracts and an expansion of product offerings with existing clients. Lucera continues to see strong interest in its new markets offering, a multi-asset trading system utilized by many of the largest banks globally. Regarding our outlook, I'm happy to provide the following guidance for the first quarter of 2024. We expect to generate total revenue between $560 million and $610 million, compared to $532.9 million in the first quarter of 2023. We anticipate pretax adjusted earnings to be in the range of $126 million to $144 million, compared with $124.6 million last year. Our business is continuing to grow, and our guidance incorporates investments in several growth areas. For instance, we have made a significant investment in our global interest rate derivative product suite. We also recently reentered the Japanese interest rate market. After two decades of ultra-low and even negative interest rates, we expect positive interest rates and the associated transaction volumes to return in the Japanese rates market. Moreover, we are still investing in our FMX futures exchange in preparation for its launch this summer. These investments will enhance our revenues and improve our margins in the near term.

Jason Hauf, Chief Financial Officer

Thank you, Sean, and hello, everyone. BGC generated total fourth quarter revenue of $516.8 million, an increase of 18.4% as compared to last year. By geography, Americas revenues increased by 21.9%; Europe, Middle East and Africa revenues increased by 20.5%; and Asia Pacific revenues increased by 2.8%. Turning to expenses. Our compensation and employee benefits under adjusted earnings increased by 21.8%. This increase was primarily driven by higher revenues as well as an increase in newly hired brokers and new business lines, which Sean just highlighted. New brokers are typically less productive in their first year, which can temporarily contribute to a higher compensation ratio, all else equal. Non-compensation expenses under adjusted earnings increased by 9.7%, primarily driven by higher interest expense of $6 million. Moving on to earnings. We generated strong, double-digit growth across all metrics. Our pretax adjusted earnings were $110.8 million, a 27.3% improvement with a 149 basis point margin expansion to 21.4%. This was our 13th consecutive quarter of year-over-year margin expansion, which reflects the gearing potential of our business. Our post-tax adjusted earnings increased by 29.2% to $101.3 million or $0.21 per share, a 31.3% improvement. Our adjusted EBITDA was $151.6 million, a 22.3% improvement. Turning to share count. Our fully diluted weighted average share count increased by 0.1% sequentially to 490.7 million shares. As of December 31, our liquidity was $701.4 million compared to $524.3 million as of year-end 2022. With that, I'd like to turn to Howard for closing remarks.

Howard Lutnick, Chairman and CEO

Thank you, Jason. In 2023, we are proud we achieved record revenues and earnings and completed our corporate conversion to BGC Group. With the historical manufactured zero interest rate environment behind us, BGC will continue to demonstrate the strength of our business and deliver growth far superior to what our current trading multiple reflects. With that, operator, we're ready to take the call to questions.

Patrick Moley, Analyst

Yes. I was hoping that we could just start off with FMX and where we sit today. CFTC approval is obviously a big hurdle. But in terms of the strategic partner announcement, it seems like things might be taking a little bit longer than expected. So I was just hoping you could maybe provide some color on how those conversations have maybe evolved since the last earnings call where they sit today. And I guess, your confidence level, Howard, in your ability to kind of get this announcement made before the first quarter call.

Howard Lutnick, Chairman and CEO

My confidence level remains off the charts. I am positive, excited and looking forward to the opening in the summer. I know that everyone would like me to announce everything today, we have nothing to say tomorrow, the next day, the next day, the next day. We'll think about it this way. We got CFTC approval in January. We're going to open in the summer. Don't you think it would be more fun to talk about the partners in the middle, kind of like we just finished the Super Bowl, kind of between the two goal posts? So we are excited, we are happy. There are, of course, I's to dot, and T's to cross, and we will be delivering when we announced that our objective would be to deliver not only just the list of the names, but actually the full details of the transaction and how everybody owns it and how it's going to work and all those details. So instead of expecting just a simple call from us, of the names, I think you should now start to expect we will be very transparent, very detailed, and very explanatory.

Patrick Moley, Analyst

Could you provide an update on the revenue growth as we move into the fourth quarter? The guidance for the first quarter suggests a slight slowdown, but it still indicates around 10% growth. You mentioned expecting about 10% growth for the top line in 2024. Do you believe that goal is still attainable this year? Additionally, considering the overall growth strategy for the business and the investments Sean highlighted, do you continue to see 10% revenue growth and mid-teens earnings growth as realistic targets moving forward? Lastly, do you think this level of growth is sustainable in the current high-interest-rate environment?

Howard Lutnick, Chairman and CEO

We do. I believe you're right about our guidance reflecting what we observe. We have the numbers to support this. Last quarter, we began with a certain percentage, guided around 9%, and ended up delivering 18% as the business continued to accelerate throughout the quarter. So when we guide 10%, it's based on our performance a month into the quarter, which shows a modest increase. My expectation for the year was set at 10%, and I appreciate the current market conditions. We are not overly concerned about whether interest rates are at 5.25%, 4.75%, or 5.75%, as long as they are not at 1% or 0.25%. The global interest rate environment is quite favorable, with Japan being the only area where it’s not yet appealing, but we believe that Japan will improve. We've made investments in anticipation of that. When the Bank of Japan adjusts their rates, BGC will be prepared to capitalize on the opportunities. There is potential to earn money now, and we expect to see returns from our investments by the end of this year. These aren't long-term investments; they will yield returns this year. We are confident in our 10% guidance and mid-teens earnings growth. We are excited about our current situation and outlook for the future. BGC is well-positioned, and as we've stated for some time, we have substantial sales capabilities. For many years, conditions were not favorable, but now they are improving. You will see the success of BGC Group, which is a strong business poised to generate earnings for the long term. Your observations are accurate; we feel very confident about this.

Owen Lau, Analyst

So going back to FMX, I'm not sure how much you want to talk about it, but I would like to. So you launched the exchange in the summer. Could you please talk about some of the key milestones before your launch? And then on the pricing front, not exactly like going into the number, but how competitive you expect to be?

Howard Lutnick, Chairman and CEO

We plan to launch in the summer of 2024 once we have CFTC approval. We do not foresee any obstacles to the launch. The main tasks involve connecting with all the futures commission merchants and signing up clients. After the launch, our focus will be on integrating trading firms globally. We have a significant advantage in the rates business since we are already connected to nearly all major trading firms. The systems are established, and we believe we have a unique edge in terms of speed. Connecting to the futures commission merchants, which clear for clients, is a newer aspect for us. Fortunately, many of our largest clients also own the biggest futures commission merchants, which simplifies the technical connection. However, it remains a process. We anticipate that the first year will focus on robust connectivity, the second year will involve transactions to ensure all parties are engaged, and the third year will involve competing directly with the Chicago Mercantile Exchange. Therefore, the first step is making connections, the second step is ensuring smooth operation, and the third step is fostering competition.

Owen Lau, Analyst

And then on the savings side, your competitors just indicated that they have achieved 75% to 80% savings for the initial clearing members. And I remember how a couple of quarters ago, you mentioned the margin offsets could be 95% to 97% for FMX. Could you please expand on that point a little bit, how can you achieve that 95% to 97% offset? And does it still hold true for FMX?

Howard Lutnick, Chairman and CEO

It does still hold true. So the concept is one where it's best to understand it by the name of that one, what the CME does is called 2-part and what we will be doing with the LCH is called 1-part clearing. So 2-part clearing and 1-part clearing. With 2-part clearing, the CME holds lots of margin and the DTCC holds a lot of margin. And they have a nice working relationship with each other, and they trust each other, and they compare things to each other and they give each other a discount because the offsetting position is in your friends over there, held by them, and you can only go so far. Whereas if you held both parts, you would literally net them, and you would say, okay, if you're long cash and you're short futures, I mean you only have basis risk, and that's 3% risk. It's not 75% off. It's 97% off. But you can't go past 75% off when you don't hold both pieces of the puzzle. And so the CME and the DTCC have worked nicely together to create efficiency, but they're claimed at the edge of their efficiency, and it's difficult to actually get to that 75% range. Most of our clients tend to be in the 50% to 60% range. But now you're going to see with the LCH that we are able to get beyond that level. And basically, what the right answer to think about that is, this will be the proper first time the CME has ever actually had a real competitor who can provide margin offsets and that type of capital efficiency that they have done. So we will be as good, but obviously, we mathematically will be superior, but the fact is it's pure competition. Yes, is it better? 97% is better than 75%. But I think you just put us toe-to-toe in the ring and we're on. And as you can see, what FMX's U.S. Treasury business has grown its market share 1 or 2 market share points sequentially every single quarter for a year now, going up to 26%; last quarter was 25%, the quarter before that was 23%, the quarter before that was 21%. And these are points being taken off the Chicago Mercantile Exchange. So the big heavyweight champ can be hit. You're watching FMX to hit, and we are coming with futures launching this summer.

Patrick Moley, Analyst

Yes, Howard, I was just wondering if you could update us on your capital return plans. I know last quarter, you mentioned that you might consider selling some of those easily separable electronic assets or that you would be open to possibly selling them and using the proceeds to buy back shares. Could you provide an update on your thoughts regarding this?

Howard Lutnick, Chairman and CEO

We agree that at roughly 9 times our earnings with mid-teens growth, the best use of our capital return policy is to buy back shares. I have had for those who on the call who don't know, a variety of shareholders have come to us and said, if you have separable technology divisions, then you can sell at prices wildly higher on a multiple than your 9x earnings, wouldn't that be an attractive transaction for our shareholders. And for those who have heard me, listened to those questions, they just watch me nod in agreement. That is a thoughtful and reasonable way to think about things. If you have followed the company for a while, you would remember that a lot of people asked me when I was going to sell my insurance business. But what I said was, things take time when you want to get the right price. And it took time longer than some of our shareholders wished it would. But we got the right price, and we bought back a significant amount of our shares. So I like your question. I like that thinking; you have to find the right buyers and the right timing and the right products that are not a key part of our future, but we have assets that are not a key part of our future. We have assets that lots of people would like to buy. And I think that is a reasonable thing for us to work on in the year 2024. Timing, I can't help you with because it's not up to me, but I think that's a good question. It's a good set of thoughts. The company agrees with that thought. And if we can find the right transaction, we will execute it. We'll buy back more shares because I think it's in the best interest of our shareholders to do exactly that. So I like the advice you guys gave, and I want to be clear that I haven't.

Sean Windeatt, Chief Operating Officer

So Patrick, we still remain, whilst we've grown significantly, we still remain slightly undersized in that business. If you strip out our acquisition for Q4, we'd be up 25%. So excluding the Trident acquisition, up 25%, and we're still seeing strong growth of 25% in Q4. We bought Trident in March last year, but still opportunities both in the U.K. and indeed still in the U.S. with growth that you've seen has been primarily on the oil side, but you've also got good growth in environmental business and also in our power business. So still strong double-digit growth and opportunities in commodities.

Howard Lutnick, Chairman and CEO

Well, thank you for joining us today. BGC had an excellent year in 2023, and we look forward to strong performance going forward. So thanks for spending the morning with us, and we look forward to speaking to you next quarter. Thanks, everyone.

Operator, Operator

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a great day.