Bgc Group Inc (BGC) 2016 Q3 法說會逐字稿

Welcome to the BGC Partners, Inc. Q3 2016 earnings call. My name is Chris and I will be your operator for today's call. (Operator Instructions). Please note that this conference is being recorded. I will now turn the call over to Jason McGruder, Head of Investor Relations. Jason, you may begin.

Good morning. Our third-quarter 2016 financial results press release and a presentation summarizing our results were issued this morning. These can be found at IR.BGCPartners.com. Throughout today's call, we will be referring to our results only on a distributable earnings basis unless otherwise stated. Please see today's press release for results under generally accepted accounting principles or GAAP.

Please also see the section in today's press release, including distributable earnings defined, differences between consolidated results for distributable earnings and GAAP, reconciliation of GAAP income loss, distributable earnings for the complete and revised definition of these non-GAAP terms and how, when and why management uses them, as well as for the difference between results under GAAP and distributable earnings for the period discussed on this call and in that document. Unless otherwise stated, the results presented on this call compare to the third quarter of 2016 with the year-earlier period.

We may also refer to the non-GAAP item adjusted EBITDA. See the sections of today's press release titled adjusted EBITDA defined and reconciliation of GAAP income or loss to adjusted EBITDA for more on this topic.

For the purpose of today's call, all the Company's fully electronic businesses are referred to as FENICS. These offerings include financial services segment fully electronic brokerage products, as well as the offerings of market data, software solutions and post-trade services across both BGC and GFI. FENICS results do not include the results of Trayport, which are broken out separately in today's press release and presentation.

They also do not include the results of eSpeed, which is due to Trayport sales to Intercontinental Exchange or ICE in December of 2015 and eSpeed's sale to NASDAQ in June 2013. Also Newmark Grubb Knight Frank is synonymous with NGKF or our real estate services segment.

I also remind you that, on this call, information on this call regarding our business that are not historical facts 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 release any revisions to forward-looking statements.

For a discussion of additional risks and uncertainties that could cause actual results to differ from those contained in the forward-looking statements, see BGC's Securities and Exchange Commission filings, including, but not limited to, the risk factors set forth in our public filings, including our most recent Form 10-K and any updates to such risk factors contained in subsequent Form 10-Q or Form 8-K filings. I am happy to turn the call over to our host Howard Lutnick, Chairman and CEO of BGC Partners.

Thank you, Jason. Good morning and thank you all for joining us for our third-quarter 2016 conference call. With me today are BGC's President, Shaun Lynn; our Chief Operating Officer, Sean Windeatt and our Chief Financial Officer, Steve McMurray.

BGC's post-tax earnings increased by 13% to $90 million and this is our seventh consecutive quarter of year-on-year improvement in post-tax earnings. This continued profitability growth was driven by our real estate services business, Newmark Grubb Knight Frank, our ongoing integration synergies and the 8% year-on-year pretax profit growth of our high-margin fully electronic FENICS business.

We expect our overall top and bottom line to grow as we continue to invest our $841 million of liquidity and as our recent acquisitions and front-office hires ramp up to their full productivity levels. I'm happy to report that our Board declared a $0.16 qualified dividend for the quarter, which is unchanged sequentially, but represents an increase of 14.3% year-on-year. At yesterday's closing stock price, this translates into a 7.1% annualized yield.

We continue to believe that BGC's assets and businesses are worth considerably more than what is represented by our current share price, which neither reflects the expected receipt of more than $705 million in additional NASDAQ shares, nor the full value of NGKF or FENICS. Accordingly, we are actively working on ways to unlock this substantial shareholder value. With that, I'm going to turn the call over to Shaun.

Thanks, Howard and good day to everyone. Our financial services segment increased its pretax earnings by 2.3% to $84.9 million while pretax margin expanded by approximately 350 basis points to 24.1%. Financial services profitability continued to improve largely because of the realization of integration synergies and the ongoing strength of our high-margin FENICS platform.

FENICS increased its quarterly pretax earnings by 7.8% to $28.3 million while pretax margins expanded by approximately 390 basis points to 47.1%. FENICS generated 15.9% year-on-year revenue growth from our high-margin market data, software and post-trade businesses. This was driven by the combination of BGC and GFI's market data, as well as by the continued strength of our Capitalab post-trade business. We also generated double-digit percentage top-line growth from our fully electronic credit business.

Total FENICS revenues decreased by 1.1% to $60 million in the quarter. As we continue to convert hybrid and voice desks onto our highly profitable FENICS platform, we generated over 13% of overall financial services revenue from fully electronic products, which is more than 4 times the 3% figure for the full year of 2010 when this was a new business.

We are also making progress expanding our FENICS customer base beyond our traditional large bank clients. As the number of new customers grows, we expect to further increase the profits of FENICS. Our overall financial services revenues were down by 12.7% to $353.1 million. Excluding Trayport, the segment was down by 8.4%.

Aside from lower global volumes across foreign exchange and equity-related products, there are two additional factors. The first, an anomaly, which was the implementation of initial uncleared derivative margin requirements in the United States, which caused a $14 million year-on-year decline in revenues during the last eight business days of August. Secondly, the Company reduced the number of less productive brokers and salespeople in the financial services by over 140 compared to last year. Reducing revenues, but increasing profitability.

Turning now to our results for real estate services, NGKF's overall revenues grew by 3.7% to $284 million. This improvement led by an almost totally organic 16.6% increase in revenues from real estate capital markets brokerage. According to NGKF research, quarterly industrywide US leasing activity was down by over 5% year-on-year and US investment sales declined by 2%. We, therefore, continued to grow faster than the overall market. As we make accretive acquisitions and profitable hires, we expect to sustain our out-performance.

Historically, newly hired commercial real estate brokers tend to achieve dramatically higher productivity in their second and third years with the Company, although we incur related expenses almost immediately. Therefore, our year-on-year gross increase of over 200 real estate brokers raised our near-term expenses, but significantly improves our forward outlook. This investment in revenue growth is primarily why our pretax earnings for NGKF were down by 10.7% to $38.3 million. As our recently hired brokers get up to full speed, we expect NGKF's results to show strong improvement in the fourth quarter of 2016 and the full year 2017, all else equal. With that, I now turn the call over to (technical difficulty).

Thank you, Shaun and hello, everyone. BGC generated consolidated revenues of $643.5 million, down 6.1%, while revenues from the Americas were down by approximately 2%, while revenues from Europe, Middle East and Africa were down by 13%, but would have been down 4% excluding Trayport. Asia-Pacific revenues decreased by 12%. Non-US revenues declined in part due to the strengthening of the dollar related to other major currencies.

With respect to expenses, compensation declined by 7.6% and the ratio ticked down to 61.9% versus 62.9% a year earlier with the improvement led by the financial services segment. Our overall non-compensation expenses decreased by 7.4% while the non-compensation expense ratio declined by approximately 40 basis points to 24.4%.

As Shaun pointed out, comp and non-comp ratios can temporarily rise as we increase hiring as we have for NGKF. Our overall expenses decreased by 7.6% to $555.1 million. Our pretax earnings before noncontrolling interest in subsidiaries and taxes were up 7.9% to $106.8 million. Our pretax margin expanded by over 215 basis points to 16.6%. BGC's post-tax earnings were up by 13.3% to $89.8 million. Our post-tax earnings margin was 14%, an expansion of approximately 240 basis points. Our post-tax earnings per share were unchanged at $0.21.

We expect our overall margin to continue to improve as our recently hired real estate brokers increased their production and we generate a greater percentage of financial services revenues from the higher margin FENICS platform.

BGC had a fully diluted weighted average share count of 429.8 million for both distributable earnings and GAAP versus 394 million a year earlier. The share count increased primarily due to the 23.5 million shares issued related to the GFI back-end merger, as well as the shares issued with respect to various other acquisitions, front-office hires and employee equity-based compensation. This is partially offset by the repayment of BGC's 4.5% convertible senior notes for approximately $160 million, which reduced the fully diluted share count by 16.3 million as of July 15, 2016.

Additionally, BGC redeemed and/or repurchased 10 million shares or units net at a cost to BGC of $87.8 million or $8.76 per share or unit during the first nine months of 2016. As of September 30, 2016, our fully diluted share count was 429.3 million.

Moving on to the balance sheet, as of quarter-end, the Company's liquidity, which we define as cash and cash equivalents, marketable securities, securities owned held for liquidity purposes less securities loaned was $840.5 million. Notes payable and collateralized borrowings were $969.1 million. Book value per common share was $3.20 and total capital, which we define as a redeemable partnership interest, noncontrolling interest in subsidiaries and total stockholders' equity was $1.243 billion.

In comparison as of December 31, 2015, the Company's liquidity was $1.0261 billion. Notes payable and collateralized borrowings and notes payable to (inaudible) parties were $840.9 million. Book value per common share was $2.56 and total capital was $1.2997 billion. The use of BGC's liquidity since year-end primarily relates to the $160 million used to retire BGC's 4.5% convertible senior notes, the $111.2 million paid with respect to the GFI back-end merger and related transactions, cash used for the previously mentioned redemption and/or repurchase of shares or units, and significant amounts invested with regards to new front-office hires and real estate services. These items were partially offset by net proceeds from our $300 million senior notes offering.

It is important to note that our balance sheet does not reflect the expected receipt of over $705 million worth of additional NASDAQ stock over the next 11 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 has recorded more than $1.5 billion in gross revenues for each of the last 10 years and generated gross revenues of approximately $3.5 billion in 2015. With that, I am happy to turn the call back over (technical difficulty).

Thank you, Steve. Our outlook for the fourth quarter 2016 compared with last year is as follows. We expect to generate revenues of between $630 million and $675 million, which compares with $673.4 million last year, which also last year included $16 million related to Trayport.

We anticipate generating pretax earnings of between $107 million and $125 million as compared to $103.6 million last year and $8 million of that last year had come also from Trayport. We expect our provision for taxes on distributable earnings to be in the range of approximately $15 million to $20 million and we anticipate updating our outlook towards the end of December. So operator, we'd now like to open the call for questions.

(Operator Instructions). Rich Repetto, Sandler O'Neill.

Good morning, Howard. In your prepared remarks, I think you touched on the topic of much interest and that's about unlocking value. And I think you referred to it as you said you were working on it. Could you give us more detail, more color, perhaps a timeline of perhaps what you are thinking about in that area?

Well, the words we said were we were actively working on it and I, unfortunately, can't give you more detail than that on the phone today, but we are focused on it and we are actively working on it. Or another way to say it is we are on the topic, we are on it.

Patrick O'Shaughnessy, Raymond James.

Hey, good morning, guys. So first, I have a question about your revenue outlook for the fourth quarter. If you can maybe break that down a little bit, maybe not too specifically, but just what sort of expectations you have by financial services versus commercial real estate.

I don't think we've done that in the past, so I think we're more comfortable now, but I will consider that under advisement and we will study whether we want to do that going forward. But we hadn't considered doing that right now, but I will take that under advisement and we may welcome back and do that in the future.

Got you. And I don't think we need too much specificity, but just in terms of do you still expect seasonal slowness in financial services? Do you expect seasonal strength in commercial real estate -- typical -- or given historical patterns that we've usually seen?

Yes and yes.

Okay, got you. FENICS, so the brokerage revenue was down pretty substantially quarter-over-quarter. Was that also impacted by these capital rules in late August or is that just pockets of weakness in specific products?

It was affected, as I said in my premade remarks, but basically it was affected roundabout $14 million over roughly around an eight-day period and also it was affected by -- effectively we continue to review and go over our brokerage staff. And to put a point on it, upgrade over time and we've done that throughout the year and that's negatively affected the revenue, but substantially increased our bottom-line profit and our profitability going forward. So those are two of the main drivers.

Did that impact just your voice brokerage revenue or did that impact FENICS revenue as well?

It impacted both. It impacted FENICS revenue and voice brokerage revenue to pretty much to the same level -- same sort of percentage.

It was sort of an across-the-board short-term eight-day event. Once September came and went, it literally went away, but it infected the market across the board until it was resolved first of September.

Got you. In your release, you talked about -- I think there was a gain on sale. You sold a small business within FENICS. Am I remembering that correctly and if so, can you provide a little bit of color on that?

Yes, we had a stake in a business and we had a minority stake, but it was an investment that we had and it wasn't core to us, so we sold it and made some money. We are creating these things and investing in them and we think we are good at it. So every once in a while, we will make some money from it. If we don't see it as really fitting into our core, we sell it.

Got you. Okay. Another thing I noticed in your release is there was a $15.1 million charge related to an additional reserve on employee loans. What was that related to?

Every quarter, we do a mathematical analysis of the collection process. Our employees agree that many of the -- much of the equity that they have will repay their forgivable loans and we do a mathematical calculation every quarter and that changes with interest rates and a whole variety of mathematical models that are appropriate for GAAP accounting and when they change quarterly, we do a review of them all and we book it.

Okay. Got it. Then one last one --.

It was a non-cash, but it's a non-cash charge. It's just a reserve for mathematics.

Got you. It was cash when you initially made the loan and now you are assuming you are not going to get that $15.1 million back at some point?

It just goes through the GAAP -- it just literally goes through the cash flow and the GAAP accounting anyway. It's like a forgivable loan. They still owe us the money; it's doing the mathematical calculation how quickly you get paid back that's really the issue.

Okay. So kind of like the NPV on that. And last question for me, so NGKF did a deal to expand its presence into Mexico I think in October. I believe your agreement with Knight Frank precludes you from moving into Europe, if I remember correctly, but can you speak to NGKF's global expansion plans? Is this the first of multiple steps to broaden its geographical presence?

We have a partnership with Knight Frank. We are masters of our own destiny alone in Canada, the United States and South America and Mexico and if you go back, you've seen us grow throughout South America and now growing in Mexico. So we've had a number of hires and acquisitions and we will continue to do that and you will see those flowing through. And then we have a relationship with Knight Frank around the rest of the world and that will either grow either through stronger business lines with them through acquisition or partnerships with them or acquisitions or partnerships with other companies around the world. It is simply only a matter of time before our business is international in its ownership.

Got it. Thank you very much.

Rich Repetto, Sandler O'Neill.

Howard, I got cut off.

I was shocked. I couldn't imagine that you didn't have anything else to say, but I promise it wasn't us.

So am I supposed to infer that I can't ask anything more about the unlocking of value?

No, no. We are certain we are going to be discussing it until we do it.

Okay. I guess -- well, first, let me get to the other question in case I get cut off again. On the uncleared swaps, that rule was supposed to come into effect on September 1. It didn't. It got extended. But from what I understand, it did come into effect in early October. So do I have that correct and the mandatory margin on uncleared swaps? Was there any impact or has there been any other impact since that period in August?

So the preparation work was done for September 1; hence, it affected the last days of August, the last eight days of August. We have seen no effect at the end of September or the beginning of October. So I think as Shaun said in his prepared notes, it was just those eight days that we saw the effect.

Got it. Okay. And then another on expenses, it seems like you had a nice continued good reduction in expenses. And I think, last quarter, you talked about you had gotten the Trayport synergies, but you could even get -- potentially get more. Is that what we are seeing going on in the expenses, sort of the quarterly decline? I know it was a soft revenue quarter as well, but could you talk a little bit more about expenses and expenses going forward?

The short answer is yes. Within the expenses, there's a $15 million reduction on GAAP, $12 million for the (inaudible). It is a combination of things all related to the GFI integration.

And I think also, Rich, as we highlighted in the prepared notes, in both the compensation and non-compensation lines, last quarter, we upped our target for reductions as part of the integration plan and what you are seeing is us continuing to execute those reductions across all of the expense lines.

Okay. And then my last question, so you can -- I can get cut off after this one if you want. If you talk about this work to unlock value, and I suspect it's got to do with auditing and financial statements, could you describe what is some of the work? I think it's fair to talk about that versus what your actual alternatives are and if something didn't occur by say midyear or next year, would you be disappointed?

I was just looking around to see if anyone had any comments on what I can and can't talk about. We are actively pursuing it. We don't speak about things that we don't expect to do. We just don't do it. You've seen us do it on multiple occasions. We've done what we said we would do. So we do, as a management team, plan to execute on unlocking shareholder value and we are going to -- well, I guess the best thing I can say is we are actively working on it and unfortunately, I can't really say more than that.

Got it. Thanks, Howard. Thanks, Shaun.

Operator, we're done?

Thank you. We have no further questions at this time. I will now turn the call over to Howard Lutnick for closing remarks.

Well, thank you all for joining us today and we look forward to updating you at the end of the quarter and speaking to you about three months from now. We look forward to speaking to you then. Have a great day today, everybody.

Thank you. Ladies and gentlemen, this concludes today's conference. Thank you for participating and you may now disconnect.