BGC Partners, Inc. (BGCP) on Q1 2021 Results - Earnings Call Transcript
Operator: Welcome to the BGC partners, Inc. First Quarter 2021 Earnings Conference Call. I would now like to hand the conference over to your speaker today. Jason McGruder, Head of Investor Relations. Please go ahead.
Jason McGruder: We issued BGC's Q1 2020 financial results press release and the presentation summarizing the results earlier this morning. You can find these at ir.bgcpartners.com. Please note you can find additional details on our quarterly results in today's press release in the investor presentation, unless otherwise stated the results provided on today's call. They're only the first quarter of 2021. Look a year earlier, period.
Howard Lutnick: Thank you Jason, Good morning, and thank you all for joining us for our Q1 2021 Conference Call. Joining me virtually for today's call are BGC's chief operating officer, Sean Windeatt; and our chief financial officer, Steve Bisgay. EGCS margins improved across nearly all measures driven by record Cenex and corned revenues, excluding the one-off pandemic driven volume and volatility that occurred toward the end of the first quarter. Last year we have to meet our overall revenues would have grown by approximately $8 million as compared to a year ago, beginning this quarter, we will categorize our Fenix businesses as Fenix markets and Cenex growth platforms. Fenix markets includes the fully electronic portions of BGC brokerage business, our data software, and post-trade revenues that are unrelated to Phenix blood type forms as well as then integrated revenance authentics growth platforms include FedEx US treasuries, FedEx go loo Sarah Fenix FX and our other newer standalone platforms. These platforms were designed to build volumes in market share, which we've accomplished over the last two years. We expect to leverage our strong market share gains to drive significant revenue growth from our Fenix growth platforms going forward. Fenix markets and Fenix growth platforms compete with highly valued companies, such as the CME trade web and market access. Fenix overall generated its fourth consecutive record quarter of net revenues, which grew 40% to $105.6 million. Then its markets revenues grew my group 36.5% this quarter to $95.1 million and had a pre-tax profit margin of 30.2%. Revenues from our Fenix growth platforms grew at $10.6 million an increase at 82.1%. As we continue to grow our higher margin businesses, we are well positioned for increased profitability. With that. I'd like to turn the call over to follow it yet. It's not a candidate. I think Sean locks Shawn's line just dropped off. So Steve Ms. Gang, you want to jump in now and and we'll bring Sean, we'll get back on this as you reconnect
Steve Bisgay: Sure, as reported in today's earnings release, BGC recorded second highest ever total revenues of $567.6 million behind the owner of the year ago, period for the COVID-19 pandemic drove market volatility and trading blinds to record levels. Excluding the impact of these pandemic related to dense BGC’s Q1,2021 revenues would have been an estimated $8 million higher than last year. By geography, We saw Europe, Middle East and Africa’s revenues declined by 5.2%., The Americans were down by 6.6% while Asia Pacific revenues declined by 7.3%.
Sean Windeatt: Thank you. And thank you Steve. Good day, everyone. As I've mentioned, both authentics and current businesses generated strong revenue growth and profitability improvement during the quarter profitability across Fenix growth platforms and current businesses improved approximately $15 million from last year, primarily driven by higher revenues, reflecting the operating leverage in these businesses. Fenix reported record net revenues this quarter supported by 40% growth and represented over 20% of our total revenues. Excluding insurance, as had mentioned earlier, we have modified our presentation of Fenix this quarter to more clearly describe and categorize authentics revenues. These total revenues are equal to the combined revenues of our formerly reported Fenix brokerage and data software, and post-trade line items. The businesses in Fenix growth platforms are newer, fully electronic and standalone from other parts of our business. These are the fastest growing parts of our overall business and have the potential for 50%. Pre-tax profit margins at scale revenue generated from data software and post-trade attributable to Phenix growth and platforms have included within their related businesses is growth platform. 82.1% increase in revenues were driven by strong growth in Phenix, US treasuries, Lu, Sara and Fenix go, and it shows treasury achieved record market share across all us treasury platforms growing from 6% to over 9%.
Steve Bisgay: Thank you, Sean. As you've heard on today's call, we've made significant progress growing our highly valuable Fenix important assets. It's just helped drive margin expansion as compared to last year, we continue to believe the assets of BGC are demonstrably more valuable and its current market capitalization reflects a Fenix assets, have market leading growth and are capturing significant amounts of market share for much larger market cap competitors. Quite a revenue growth also continues to outpace the overall industry by management team. And I are continually thinking about the most effective ways to express the value of the assets of this company. We are focused on maximizing shareholder value. Did that operator we'd like to open the call for questions. We will now begin
Operator: We will now begin the question and answer session. .The first question comes from Rich Rippetoe with Piper Sandler, please go ahead.
Rich Rippetoe: Yeah, I guess it's good morning still. Howard and Sean and Steve. So how would I, you know, you just said that your, your management team is focused on, I believe monetizing FedEx, I guess the question is, and we've talked prior where you said it was a priority. so, you know, can you give us a status update on, you know, where that stands?
Steve Bisgay: You know, could you possibly review, you know, some different alternatives of what investors could expect it and maybe, I don't know what it's possible to have some sort of, uh, you know, a timeline, is this a near term event or just an event that you know, it's going to take a while. Okay. So let's, let's start with the, the two business. So we, BGC believes that Cenex is the greatest opportunity in front of the company to drive significant, and fundamental value improvement for this company. We, we think our FedEx businesses are wildly undervalued and we are going to be focused on driving that, right? We, so in that conversation, we've had many conversations about our growing insurance business. We think our insurance business continues to grow, continues to improve that. We also think it is a significant value and we are focused on what is the best way to do, to express shareholder value things, take time. That's just the way it works. Things take time, that turning back to Fenix, we tried this quarter to show you the margin of authentics markets business. So by separating and showing you the margin of 30.2%, we are describing clearly our technology driven businesses are driving up our margins. We have seen our margin grow and it is being driven by the fact that we are producing better economic results from authentics market business, which drives the economics of the underlying company. Also, we started to show you the Benex growth platforms and those revenues IDs are the businesses that in 2019, we lost $55 million as we invested in those business and building them. And then, then we inducted $40 million in those businesses, right? And you have just seen the revenues grow 82% this quarter. And we have an expectation as we have discussed with you, that these businesses have built that market share, have built their volumes have built the value across these marketplaces and will start to earn revenue at significant pace. We will continue to invest in them, but as these revenues grow, they're growing on a fixed cost base. And therefore you will start to see those revenues and those profits will continue to grow those assets. For example, you, as treasury business are highly sought after and are highly valued. And our objective is going to be to figure out how to best monetize those things for the shareholders of our company. There are a variety of ways to do that, but I want you to be clear, this is not going to be long-term event we expect. And when I say my management is working on it, that does not mean our management is working on a 20 and 25 business plan. That is not our mob. We are working on it. Now we think these businesses have created tremendous value for the company now, and we expect in 2021 to be having really interesting conversations about what Fenix can achieve in the world out there. So how that works, it'll be what it will be. You know, I don't know, but we are going to have conversations because these assets are extraordinarily valuable and may have nothing to do with the stock price, a BGC that starts with a five. I assure you that in my opinion, I just think these assets are worth far, far more than the current market.
Rich Rippetoe: Okay. How did just to follow up, I got a couple follow-ups, but one is, given that there wasn't any, any se announced a transaction, I think, but there wasn't any share buyback as well. So is that are the two related or, you know, we've talked about you using excess cash, in the past or returning capital in some form to shareholders. It's kind of funny, right?
Steve Bisgay: If there was, it was something to do that I probably couldn't do stock buy-back. So, you know, the, you know, these things sort of work, you can't, obviously I can't just stock buy backs before I that's my earnings. That's sort of obvious. So I couldn't do something yesterday. That's just inappropriate. So, you know, so once earnings are done, then you know, my counsel tells me what I'm allowed to do and not to We expect as the, this gay said in his remarks that we expect, to use more cash in terms of compensating people to have less shares, more cast to the extent we do an acquisition and we expect to buy back, shares to mitigate the Lucian. We do expect to buy back shares and, and we are willing to wait for when our council tells us it's okay to buy that shares. And we will decide when, and if it is time, you know, when, and if it is time to buy that shares and how much we bought, and we'll tell you how much we bought every quarter. I don't think we have an expectation of sort of defining a, sort of a standardized, simple model of like the X amount per quarter. That kind of thing. I think we expect to buy back a material amount of shares this year. That is the company's expectation, for us to use our free cash flow in material parts to buy that.
Rich Rippetoe: Got it. I guess my last question, and I'll get back into queue, but there's a myriad of things you could potentially do with FedEx. and you didn't reiterate as a stand alone, that the numbers, the revenues that you broke out, but any, you know, the things that to mind from my standpoint, you know, are, say you have a private investment, back transactions and, and, you know, and you do a control to can, or I believe, specs. So all these on the table, like what alternatives are, what, things could investors even, potentially, I'm not saying you're gonna execute it immediately, but what are some of the alternatives that you're looking at? Well, the simplest way to say it is everything is on the table. Okay. If you, if you look back to 2013, when we sold, east bead, no one on our phone calls, no matter how many times I said to value, no one believed that we would sell it and achieve the kind of economic benefit to the shareholders that we did. Because every time I said that the share was not correctly, priced stock would go up or down a penny, you know, and then we sold the, a small division of the company to the market cap of the company. Lee's assets are worth wildly more, in my opinion, in my opinion than the current stock price, I think there was some of the parts is clear. My treasury business, right, went to 9%, over 9% of all trading, all systems, counting, Tradeweb, counting, Bloomberg, counting, market access, counting that adding them all together, went from six to over 9% of all of them in the last year, and went from nine to 18% of just clock counting, broker tech, look at the market share. We've taken off a broker tech for, I start from like 85% market share in the low seventies. Who do you think picked up that market share? And it's going lower because our market share has grown. Our system is winning. Okay. And people are not focused on the value creation of going and creating a fundamentally important competitor to the Chicago mercantile exchange. And so I think these assets are the enormous value and it is our job. And my management team understands it is our job to figure out a way to best express it. And I want it to be clear. There was nothing off the table that there was no one in this market who does not understand how important FedEx USP is. And now they're all starting to learn with Fenix stellar. I mean, it's scale by which Fenix go as blown its front end market share in options is so fundamentally impressive that when you call someone, they look at the numbers, they have polarized by the scale, by how much we have grown them. And we keep rolling out new products, these things matter. Okay. And I know they are of BGC. I think Matt and I think we a bunch of do Berry very well.
Rich Rippetoe: Got it. Thank you, Howard. I'll get back into the queue
Operator: . The next question comes from Patrick O'Shaughnessy with Raymond James, please go ahead.
Patrick O'Shaughnessy: Hey, good morning. hoping you can comment on kind of the broad competitive landscape at this point, because obviously, you know, we hear what you're saying with Fenix UST and the share gains. There are certainly impressive, but, you know, I think we listened to, Tradeweb and, and they talk about success. They're having with dealers suites, in credit and, streaming quotes that they're having in rates, market access talks about some of it's dealer dealer success as well. So hoping that you can comment on the broad competitive landscape?
Steve Bisgay: I think, trade web, and market access, and the Chicago mercantile exchange are world-class, competitors and world-class Plex. Okay. And that was true last year and they are not any dumber and they are not any more sophisticated and capable and the success of sweeps and success of this and success of that. They were all true. What day weren't they true when Fenix USP went from six to nine, over 9% of market share of all of them, right. What part was not true when we went from nine to 18%? So I think they all are really, really good. And they were that endless volume of transactions that still go by voice and still go through dealers and still are done in the old way. That's the endless, and they can all grow. Right. But that will not stop in my opinion, Fenix, UST for making a fundamental dent in the size and scale of this business. We matter, everybody knows we matter. I didn't say they don't matter, right? These are great players, but the fact that we are not valued in the same hemisphere is that I think it is our management job to teach everybody a lesson that that is just not true.
Patrick O'Shaughnessy: All right. and yeah, digging into Fenix, UST, how would you frame the competitive advantage of that platform and how sustainable that is?
Steve Bisgay: So here, here's an interesting example. So in the, in the CMS system, everyone can trade with everybody. So, so I'm sort of hoping to see, okay. And what you have is a substantial percentage of their business is high-frequency trading firms trading with each other, these sophisticated, electronic market makers who make prices sort of in the hundreds of seconds and they trade against each other. And they have a bad experience because the sophisticated players don't want to trade against each other because they sit there and pick off each other. And it's very unfortunate. What these firms want to trade with is when someone is pricing a five-year corporate bond and wants to hedge it, they want to provide that liquidity and that scape. So what we do is our system allows these companies to not trade with each other. They can touch the heirs and curate and select who the counter parties are. So they get a better experience. What happens when they get a better experience, it comes so natural. They double the size they're willing to do because they're not afraid of getting picked off. And so what happens is the average size on our system relentlessly grows because it's a safer place to do your business granted. So think of that, we've grown from nine to 18% market share, not allowing was probably 40 to 50% of the ceilings volume to occur, which means you won't let the big high frequency firms trade with each other. We've actually foreclosed that volume on our system. But what that's done is it's created a better value for everybody trading on the platform. So do I think that's sustainable? I absolutely think it's sustainable. And I think it's just a different business model. The other business model is a great business model for the CME and ours is a great business model for us.
Patrick O'Shaughnessy: Got it. Thank you. and then switching gears to the insurance brokerage business, current, how aggressively are you hiring into this business at this point then? I guess maybe drilling down into your second quarter outlook. what would your expectations in terms of, insurance, brokerage revenue be for the second quarter?
Steve Bisgay: Okay. So the insurance marketplace, is described as a hardening marketplace, which means that the, the price is going up, right? So the price of insurance is going up. insurance brokers get a percentage of the premium written. Some of the premium goes up, commissions go. So it's just mathematically good to be in a business where the commissions arriving. It allows her to be at default. They all right. And the reason they arising is because there was a tsunami of bad things that happened, in the pandemic, right. There were, there were vast numbers of insurance companies that more often a huge amount of money in insurance. I mean, just imagine the people who insured like the Tokyo Olympics. I mean, it's, it's really just a polarizing thought to think about the, you know, the insurance companies who, who had that. So those insurance companies have gotten crushed with those economics and that you put that on top of their investment experience through the whole thing, right. And credit and all these other things, they, they just took the balance sheet to the head and their insurance took a hit. And when the whole industry takes a hit, the whole industry can act in one particular way, which is overtime. They're gonna make their money back and the way they make their money back, if they raised their rates. So you've seen them raise their rates everywhere. So our business insurance has great baseline, raw material, fundamental economics, sorta like the rates business of fixed income. Right? Yeah. You know, when the put the United States gets up and starts talking about trillions of dollars of new bond issuance, you know, I can't see past the joy of what he's saying. You know, there are bond deals, you know, I just like bond deals. And when someone says they're gonna borrow $1.9 trillion, that's just a lot of bonds that are going to be issued and who else is going to issue them? Every major country in the world is going to do the same thing. And this is like the greatest moral material bonds, insurance has weights going up and bonds have issuance sort of flying out the door. It's these are good ones, material underlying factors for our business. Now the, the constraining thing in insurance is you make money on everybody. You hired last year, because the way insurance works is the first year that you hire someone, they continue to, you know, the client stays at the old firm and they do not move the client over to the new firm for a year. That is sort of the, the, the law of the land or the, the effect of the way it works in the insurance business. So those you've hired a year ago, you went on today and those who hire today, you build your business for next year. So are we continuing to hire? Of course we are. But what you are going to see is that the big, big hiring spree that we robbed last year, right? before the pandemic began, obviously those people were going to start harvesting those numbers. So you are going to continue to see good numbers from our insurance business. You're going to continue to see good growth on insurance business. So there is no action we can take, you know, today if we hired like the world's greatest team today, what you'd see is we spent a significant amount of money to hire them. And the next year would be a drag, which you saw last year, right? You sorta explained twice was like drag, drag drag. And we were happy on his calls because we knew we were building our business. You know, the 2021, the 2020 a year ago, we lost money. We only lost money because we hired lots of great people, paid them, amortize the costs. And if business didn't come with them until now. And so the good part is we've turned profitable. We expect to remain profitable, and we expect to build those profits over time. And as we hire more brokers that will constrain it. But as I said, I think we have built substantial asset value significantly in excess of what we've invested. And we are confident that with the scale of our business, eventually, we will find a transaction, whether that's a public transaction, a private transaction, or otherwise that expresses the value that we've created in court.
Patrick O'Shaughnessy: Great. That's all from me. Thank you.
Operator: And we have a follow-up from Richard pedo with Piper Sandler. Please go ahead.
Rich Rippetoe: How would I first question on the insurance business? I believe that broke even, in Q4, you talked about the margins? Maybe I'm missing it somewhere, but the margins in the insurance business in the first quarter?
Steve Bisgay: They're this small, right. We just remember we started, we got to break even now and now we're in a small house, right? They're not there, they're in the black, it's small. And, you know, it just will continue to grow over time. As, as more of our brokers are past their first year, as more of our brokers can bring on their accounts, which don't come on like Monday, you know, you know, it just takes time. And so they're going to continue to grow over the course of the year. And we, we said that we thought over a number of years, we would get to the industry standard 15% margin. So those, those businesses grow to 15% margins. And we, and we expected, I think we put out, Sean, do you remember the day? Yeah, it was. But when we, we said we would double from the point in time when we would have approximately $150 million. So we were inerence was doubling from 150 to getting to a industry margin of around 15%. So we expected when our revenue hit the $300 million, we would expect to have a 15% margin of $48 million, $45 million, $9 million. And then I believe if I'm just verifying some numbers, but I believe, Steve said that the Boyce hybrid was 122, or at the point in $22 million in revenue and 23%, tomorrow $402 million in revenue and 22% margin.
Rich Rippetoe: Is that correct?
Steve Bisgay: Yeah, he said, he said 409 and 22%. Right. That was close.
Rich Rippetoe: Okay. next question is on the margin of Fenix, the Fenix, we call it markets. So it's 30.2 now. And, but I thought you, how would said that, that has the potential to go to 50 or margins that Fenix overall has the potential to go like a lot of other electronic firms to 50% of that scale.
Steve Bisgay: Let me, let me make sure you got the right. So the Fenix growth platforms can meet or exceed whatever other systems that anybody else has. Okay. Meaning they are standalone fully electronic platforms. so I, we said on the call that they could get the 50% margins, but have other people on scale, get to 62.8 is nothing that constrains us from getting to 62.8, meaning these are fully electronic system, with the, with the scale possibility to get to, whatever those kinds of margins can get to. But we, we have as our, as our first goal, let's get the 50% mark. Okay. That's on the growth platform markets, which is the, which is the electronification of our brokerage business, right? The technologically driven brokerage business. I don't think they will get to 50%. I said, we think they will get to in the range of the 35, you know, maybe with scale up to 40% range because we are going to have substantially more expensive salespeople, right? We are going to continue to employ our greatest brokers who have the greatest relationships and have the greatest knowledge in this business. And therefore they will remain on our payroll. And so I think the difference is Fenix markets will have an upside of 35 to 40% margins. Whereas Sarah festival, all those businesses can, can, you know, the sky's the limit as consistent to the other best players in the world.
Rich Rippetoe: Got it. That makes sense. I get it.
Steve Bisgay: Now it just goes back to one question is the standalone capability of, like the salesmen are selling me electronic product, this and not just converting voice hybrid to electronics or not. Well, I'll give you an example. Our, you know, we have extraordinary market share and gifts, right? British government bonds. And that business is virtually entirely alone. Of, like the salesmen are selling me electronic product from this and not just converting voice hybrid to electronics or not. Well, I'll give you an example. Our, you know, we have extraordinary market share and gifts, right? British government bonds. And that business is virtually entirely electronic, but it is not perfectly electronic, but is virtually entirely electric. Cause he was a, a move from a voice business where we had excellent markets here into an electronic business. And he is the majority of the vast majority of that business type and executed electronically by its clients. It is right. But our brokers manage it and make it work. And that is a great asset of Fenix markets.
Rich Rippetoe: So is that separable? Is it saleable? Is that monetized bubble?
Steve Bisgay: Of course. Right. But it came from Fenix markets, right? It is a perfect example of what can happen when our brokers have the right tools and have the right incentive and drive and build it. And that's part of clinics markets. Right? And then now you have the concept of let's go build the market data because that market data is of tremendous value. And we're going to put that instead it's markets as well. So do we make substantial amounts of money on, on guilt data yet? We don't we'll we, we will. Right. But that's, this is part of the growth of our business. So we're keeps showing you the, the market data numbers so that I don't want to take something away from you and sort of mix it. But I want you to understand that, that the market data and the brokerage business and the electronic fuel one, as far as we're concerned, we're going to try to maximize the value of that, that Left last week for me, but the inter company, the technology services at 21 minutes, 2020 $7 billion, could you walk through what those revenues and I know you haven't been referred, they're not included in Phenix markets or Phenix and grow. but could you just talk about that, that $20.7 million in the first quarter?
Rich Rippetoe: Sure. So, Sean, do you want to start, go ahead. Okay, sure.
Steve Bisgay: Sean will say, so remember that business is the technology, it is the technology that is provided by the company, by BGC to, to our brokers, to the businesses, that technology that is if you like, that is the fee that is paid by those businesses for that technology. And as we mentioned in previous courses, rich, what you would expect and what we hope is that as the business moves into Fenix markets and therefore as high margin, but because you're paying a lower brokerage than we'd expect that business to move into the Phoenix market business, as it becomes more technology dependent. And then, there'll be an offsetting, a smaller offset in decline in, within our intercompany business. And you've seen that as, as our Fenix markets has grown over the last two to three courses, you've seen the in to company come down. What you've also seen is the, is the, the expansion of the margin increase.
Rich Rippetoe: Would it be proper to view that revenue to 20.7 as sort of a pipeline for the Fenix markets and Fenix growth on it?
Steve Bisgay: I think, I mean, that's a really good way of thinking about it, actually. That's a very good way to think about it, but remember not a nine is in $20 million of revenue to go, but actually, but because it's, it's just the potential of the technology piece. so you would expect that as that guys add that number, guys, that is an exponential growth in the revenue that moves into, into Phenix markets.
Rich Rippetoe: Understood, understood, very helpful.
Operator: That's all I have. Thanks. This concludes our question and answer session. I would like to turn the conference back over to Howard Lutnick for any closing remarks.
Howard Lutnick: I appreciate you all spending the time with us today. the company, as I said, is focused on maximizing shareholder value and, and I hope we helped you understand, those details. We tried to separate the margins, Lennox markets. We tried to show you the revenues and we will separate and show you the revenues of our growth platform going forward, which we obviously expect will grow materially. And we will continue to try to make our company more transparent and make it clear how well we are doing and building our asset value. But our clear purpose, right, is to understand that we have these assets, we have these value and we need to express them to you to gain, value for our shareholders, which we are focused on. So I appreciate your time today and I look forward to updating you next time.
Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
