BGC Partners, Inc.

Welcome to the BGC Partners Second Quarter 2021 Earnings Conference Call. At this time, all participants will be in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Jason Kreisikas, Head of Investor Relations. Thank you, and please go ahead.

Good morning, everyone. Today we issue BGC second quarter 2021 financial results press release and presentation. You can find these at ir.bgcpartners.com. Please note you can find additional details on our quarterly results in today's press release and investor presentation. Unless otherwise stated, the results provided on today's call compare only the second quarter of 2021 with the year earlier period. 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 as well as 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. Please see today's press release for results under 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 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.bgcpartners.com and in our investor presentation. We refer to the company's technology-driven businesses as Fenix. Fenix offerings include Fenix Markets, Fenix Growth Platforms, Fenix Integrated, and market data software and solutions and post-trade services. Businesses are categorized as FinEx integrated if they utilize sufficient levels of technology such that amounts of their transaction can be or are executed without broker intervention and have expected pre-tax adjusted earnings margins of at least 25%. I also remind you that the information regarding our business on today's call that are not historical or forward-looking statements, these include statements on the effects of the COVID-19 pandemic on 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, extraordinary transactions, or meaningful changes to the company's stock price. For 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 update to these disclosures. contained in subsequent reports on Form 10-K, Form 10-Q, or Form 8-K. With that, I'm now happy to turn the call over to Howard Lutnick, Chairman of the Board and CEO of BGC Partners.

Thank you, Jason. Good morning, and thank you for joining us for our second quarter 2021 conference call. Joining me for today's call are BGC's Chief Financial Officer, Steve Biscay, and our Chief Operating Officer, Sean Windyatt. Our profitability improved across all adjusted metrics during the quarter, primarily driven by Fenix, which had net revenue growth of 23.5%. This industry-leading growth reflected strong improvements in rates, FX, and our Fenix platform. We executed a number of our objectives in the second quarter, including entering into an agreement to sell our insurance brokerage business for $500 million in cash. In anticipation of closing this transaction in October, we purchased or redeemed 21.2 million shares and units during the second quarter, while also repurchasing an additional 10 million shares so far in the third quarter. Additionally, I'm happy to report that yesterday BGC's Board of Directors increased our share and unit repurchase authorization to $400 million. Fenix revenue growth was underpinned by strong performance across both Fenix markets and growth platforms, which improved 21 and over 48% respectively as compared to last year. Fenix represented over 21% of BGC's total financial services revenue, its highest ever contribution. We expect Fenix to continue to outpace our overall business and peer electronic trading platforms. With the accelerating conversion of our $1.4 billion voice hybrid business and continued tech innovation, we expect to further expand across the fintech marketplace. With that, I'd like to turn the call over to Steve.

Thank you, Howard, and hello, everyone. As reported in today's earnings release, BGC recorded total revenue of $512.5 million, 1.3% lower than a year ago. This performance reflected improved trading activity in May and June, following softer industry-wide trading volumes in April, where BGC's financial services revenue was 10.7% lower versus the year-ago period. By geography, we saw Europe, Middle East, and Africa revenue decline by 1.3%. The Americas were down by 2.3%, while Asia-Pacific revenues increased by 0.9%. By asset class, rates, energy commodities, and insurance increased by 2.6%, 4.8%, and 18.6% respectively, while FX and equity derivatives and cash equities were down by 2.1% and 1.5% respectively. Additionally, credit decreased by 24.2%, reflecting significantly lower industry-wide credit trading activity. Beginning last year, we selectively reduced front office headcount with a focus on underperforming or less profitable brokers. As a result, front office headcount was 8% lower this quarter versus a year ago. While this lowered revenue in the short term, it was partially offset by a 6% improvement in average productivity, which drove profitability higher. As we continue to automate more of our overall business, both profitability and productivity are expected to increase. Moving on to Fenix. This quarter, Fenix generated net revenue of $97 million, an improvement of 23.5%. Fenix markets recorded revenue of $86.4 million, an increase of 21%, and had a pre-tax adjusted earnings margin of 29.9% in the second quarter. Fenix growth platforms generated revenue of $10.6 million, an improvement of 48.4%. Insurance brokerage had revenue of $54.3 million, growing by 18.6%, and generated its third quarter, albeit small, quarterly profit. Excluding the results of our insurance brokerage business, BGC's overall pre-tax margin would have been two points higher in the second quarter. Now moving on to expenses. our compensation and employee benefits expense under GAAP and adjusted earnings decreased in the second quarter of 2021 due to lower revenue and cost reduction initiatives previously executed. Equity-based compensation increased 109.5% due to a substantially lower ordinary share price in the second quarter of 2020. However, it's important to note that this increase had no impact on share count. Our non-compensation expenses under adjusted earnings decreased 2.2%, reflecting lower occupancy and equipment and other expenses, partially offset by higher selling and promotion expense as COVID-19 restrictions were relaxed for us many of the major geographies in which we operate. Moving on to adjusted earnings. Our pre-tax income was $98 million, an increase of 6.5% and represents a 140 basis point margin expansion from last quarter. We recorded post-tax adjusted earnings of $86.6 million, an increase of 9.3%, and a 165 basis point margin expansion. We generated adjusted EBITDA of $119.8 million, an improvement of 6.5%, and a 171 basis point margin expansion. Turning to share count. Our fully diluted weighted average share count increased by 1.2% sequentially to $563.9 million, under adjusted earnings in the second quarter of 2021. It is important to note that all our share and unit repurchases or redemptions occurred after the announcement of the sale of our insurance brokerage business on May 26, 2021, and thus had minimal impact on the fully diluted weighted average share count during the quarter. As of June 30, 2021, our spot share count was 539.3 million, a decrease of 3.2% sequentially, which reflected approximately 21.2 million share and unit repurchases or redemptions during the quarter. In addition, during the third quarter, we had repurchased a further 10 million Class A common shares. We continue to expect to use relatively more cash with respect to compensation and acquisitions to minimize dilution. As a result of the agreement to sell our insurance brokerage business, the assets and liabilities associated with this business are presented as held for sale on the balance sheet for the period ending June 30, 2021. As such, balance sheet line items, including cash and cash equivalents, are not fully comparable to prior periods. For example, there is $39 million of insurance-related cash and cash equivalents included in liquidity at December 31, 2020, whereas all insurance-related cash and cash equivalents are excluded from liquidity as of June 30, 2021, and instead presented within the line item assets held for sale. In addition to the $500 million cash proceeds from the sale, we will also receive working capital adjustments related to the cash remaining in the business. With that said, As of June 30, 2021, our liquidity was $469.9 million compared with $652.6 million as of year-end 2020. Cash and cash equivalents were $420.3 million versus $593.6 million as of December 31, 2020. And notes payable and other borrowings were $1,243.2 million compared with $1,315.9 million. We repaid the remaining $255.8 million on our 5.125% senior notes that matured on May 27, 2021, which reduced both our cash and debt balances. Total capital was $808.9 million, compared with $828.9 million. The company continues to explore a possible conversion into a simpler corporate structure. BGC's board and committees have hired advisors and are reviewing the potential structure and details of such conversion. Should the company decide to move forward with a corporate conversion, it will continue to work with regulators, lenders, and rating agencies. And with that, I'm happy to turn the call over to Sean.

Thank you, Steve, and good day, everyone. Our Fenix businesses generated strong net revenue growth of 23.5%. and represented over 21% of our total financial services revenue. Looking at Fenix in more detail, Fenix market's revenue improved by 21%, driven by strong growth across rates, FX, and market data, partially offset by lower industry-wide credit trading activity. Fenix MidFX, which is the leading wholesale FX hedging platform, grew its revenue by approximately 25% versus last year. Building on the platform's long-standing success in SpotFX, we launched Asian Non-Deliverable Forwards, or NDFs, at the beginning of 2021, which has continued to gain traction throughout the year. Phoenix Direct, our web-delivered FX option platform, had a record quarter and more than doubled its volumes and revenues. Fenix Market Data signed a record number of new contracts during the quarter, with total contracted value increasing by nearly 150% compared to last year. Capital Labs' NDF Match Business, our advanced web-based matching platform that helps clients reduce foreign exchange exposure, generated record revenue during the quarter. Since its launch in 2017, NDF Match has grown its market share and has become a leading solution for post-trade risk reduction. Looking at our FedEx growth platforms, revenue improved 48.4% from a year ago as these newer standalone platforms continue to scale, onboard new clients and capture market share. Fenix US Treasury average daily volumes grew by over 71% this quarter, significantly outpacing the overall industry. Fenix US Treasury club market share increased from 10% a year ago to over 17% in the second quarter, another quarterly record. In the second quarter, nearly 65% of all Fenix US Treasury trades were transacted at prices only offered on the platform. as it continued to offer the tightest pricing in the market. Additionally, Fenix UST will be launching US repos on the platform this month, which follows our recent successful launch of UST bills. With the increased issuance in the marketplace, CME broker tech volumes were up 30% in July versus last year, while Fenix UST volumes improved by 113% over the same period. Lucera, BGC's infrastructure and software business, generated strong double-digit revenue growth of 26% versus last year, driven by record revenue within Lucera's Loom markets and Connect businesses. Lucera Connect provides banks and market makers with on-demand connectivity to over 1,000 endpoints across buy-side clients, trading firms, marketplaces, and exchanges. In addition, Lucera Connect has become the leading infrastructure network in foreign exchange and is rapidly expanding in other asset classes. Loom Markets is a low-latency aggregator, providing a single access point across multiple fragmented marketplaces and exchanges. Lucera's revenues are highly recurring and long-term. Fenix Go, BGC's global options electronic trading platform, launched the Korean Cosby Index options in May 2021, which quickly grew to over 12% of estimated block size front month market share in June. Additionally, Phoenix Go has continued to scale Hang Seng HSCEI option volumes, where Go represented over 26% of estimated market share in June 2021, only six months after launch. Following on the success of its recent APAC expansion, Phoenix Go plans to launch US-listed options by the end of 2021. Fenix Portfolio Match, a newly developed session-based credit portfolio trading solution, continued to gain traction during the quarter, with volumes quadrupling versus the first quarter of 2021. Since its fourth quarter 2020 launch, over 30 bank counterparties have uploaded bond portfolios totaling over $650 billion in notional value to the platform. Portfolio Match currently supports U.S. and European investment-grade credit and European high-yield credit. We expect to roll out U.S. high-yield credit sessions in the fourth quarter of 2021. Our voice hybrid business generated revenue of $361.1 million, down 8.5% due to continued conversion of voice hybrid to Phoenix revenue. we saw a favorable rates trading environment during the quarter, particularly across our U.S. government bond, inflation, and interest rate swap businesses. Our environmental business also saw revenue growth of 51% as we support the reduction of global carbon emissions and promote clean and renewable energy through the facilitation of marketplaces for environmental credits and renewables. Now turning to our outlook. Outlook for the third quarter of 2021 is as follows. BGC's revenues were approximately 5% higher for the first 21 trading days of the third quarter of 2021 when compared to the same period in 2020. Therefore, looking forward to the third quarter, We expect to generate total revenue of between $465 and $515 million as compared to $455 million. We anticipate pre-tax adjusted earnings to be in the range of $78 to $98 million versus $69.2 million. We anticipate our full year 2021 adjusted earnings tax rate to be in the range of 10% to 12% versus 11% for full year 2020. And with that, I'd like to hand over to Howard for closing remarks.

Thank you, Sean. During the second quarter, we executed on the number of our previously stated objectives. We delivered value to our shareholders by entering into an agreement to sell our insurance brokerage business. As of yesterday, we've repurchased or redeemed over 31 million shares and units since that sales announcement, all while continuing to grow our FedEx business at a market-leading pace. We are excited about our growth prospects and remain highly confident in our FedEx business. We have built a world-class competitor to the CME in cash U.S. treasuries, and we recently added U.S. T-bills along with plans to launch U.S. repos this month. We continue to build our futures infrastructure to prepare to enter the U.S. REITs futures business next year. Our sizable voice hybrid revenue base leaves us uniquely positioned to convert significant amounts of our revenues to higher margin, technology-driven FedEx revenues and capitalize on accelerating electronic trading trends. With that, operator, we'd like to open the call for questions, please.

We will now begin the question and answer session. To ask a question, you may press star then 1 on your touch-tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble our roster. Our first question will come from Rich Rapeto with Piper Sandler. Please go ahead.

Yeah, good morning, Howard and Steve and Sean. I guess the question I have is first on the update you just gave on the expression of value of Fenex. So, Tom, next question. Did you say interest rate futures or an interest rate product? Could you just give us more detail? I didn't catch all the statement that you made about it, Howard.

Sure. So we are building our futures infrastructure. I'm looking forward to the expectation of launching U.S. interest rate futures next year.

And could you elaborate, you know, like, for example, when you launch it, would you likely have a consortium to support it? And who would be the clearinghouse that would clear the products?

Yeah, so I guess the macro answer is to stay tuned, but your instincts are correct, which is that our expectation is we would like to have a clearer who already has margin in the business. So there are three firms, there are three institutions that have margin. There is the CME. Obviously, they're not going to do it with us. There's the FICC. and there's the LCH, and we would like to do business with those counterparties as central clearers to give cross-margining and one-pie clearing to those who trade on our rates platform. Secondarily, we work, you know, we have been talking to our customers and clients And we think we've gotten a great reception and are very excited about the opportunity to create a competitor to the Chicago Mercantile Exchange's monopoly in rates futures. And so I think we will have broad support from those players in what form and exactly how. I look forward to updating you next quarter.

Okay, so... plans, even though it wouldn't watch until next year, you might have planned, you know, the structure of it outlined as far as who's involved outlined sooner, much sooner.

My objective, and again, I don't control all things, but the objective of myself and my company is to have a an update for you with some level of precision next quarter on this call.

Great. Great. Okay. I'll stay tuned, as you put it, Howard. Next question is for Steve. On the fees, well, on the interest and dividends, they went up substantially quarter to quarter. And I'm just trying to see, you might have mentioned this in prepared remarks I might have missed, but I think I know, but can you just tell us what the increase was driven by?

Yeah, you're talking about specifically the line, which is the combination of fees from related parties and interest in dividends. It specifically relates the real change embedded within that quarter of a quarter is driven by dividend income from the specific investments. That's what's driving that.

And would that be by any chance a NASDAQ private market sale or? I'm not in a position to answer to that, answer the question. Pretty good guesser, I think. Anyway, Lastly, on the buyback, what I thought that the buyback, the level that you had this quarter, was only for one month. I understood it right from when you talk about the proceeds from the insurance sale. Is that the way it should be interpreted?

That's correct. The buyback is heavily weighted towards the end of the quarter. I'm sorry. Okay.

So last quarter, obviously, we didn't start buying back shares until after we announced the insurance sale, which was at the end of May. And so we did buy back 21 million shares, but right at the end of the quarter. And then in July, we had purchased 10 million Class A shares in the month of July. And we'll see what happens in August and September.

So if you were to get proceeds from besides insurance, well, let me just ask a question. The NASDAQ private markets, I'm just trying to understand, would that sale generate more cash proceeds that could be potentially used in a share purchase?

I don't think we have another event that is producing cash to do a share repurchase, other than the fact that, as you recall, the company is currently paying a one-cent dividend and is a strong cash flow generator. So I think our ability to buy back shares going forward is strengthened both by our insurance sale and the cash flow generation of the company.

Okay, and now I think I'm remembering that the NASDAQ stock, that's not with BGCP payments, any addition that would go to the real estate company, right? That's right.

If you'd like to hear all about the NASDAQ transaction, you have to tune in to Newmark's earnings on Friday.

Understood, understood. Okay, that's all I have. Thank you.

Again, if you have a question, please press star then 1. Our next question will come from Patrick O'Shaughnessy with Raymond James. Please go ahead.

Hey, good morning. In the credit space, TradeWeb seems to be having a lot of success with its dealer sweep solution. You guys today mentioned Fenix Portfolio Match. Is that essentially a competitive response to dealer sweeps? Yes. Okay. And how would you differentiate it relative to dealers?

Come on, come on, Patrick. You've never heard me answer so short. It is in the same genre. as DealerSleeps, and it is broad-based, and we have connectivity to a broad range of market participants. But it is intellectually in the same genre, obviously, with a multiple nuance difference, because we built it more recently, and therefore, I think it has much more nuance, and it's much more effective for the clients, but in the same genre, for sure. Okay.

I appreciate that. Any update on your plans to do full segment reporting, breaking out Fenix from the rest of the business?

I guess the simple answer is no update on that. I did say before when I was answering the prior question that we do expect to have a more detailed conversation with respect to our futures business and who will participate with us and exactly how we plan to be clearing that and all of those pieces next quarter. So I think that will go a long way towards defining our first step in that process.

Okay. And then speaking of longer duration processes, any update on the potential conversion away from the partnership structure, or is that still kind of where it's been?

The prepared remarks that Steve gave were to show you that they are, the board and its advisors are hard at work trying to execute on that and to be in a position to make the decision to whether they'd like to go forward. But they are hard at work on it. They're examining it and moving forward. It is something we want to deeply consider and we are getting in a position to be able to make such a decision hopefully by the end of the year.

Got it. Appreciate that. Steve, balance sheet question for you. There was a relatively large drop in your segregated cash quarter over quarter. Is that just a function of moving the insurance brokerage assets into asset helper sale?

Entirely. Entirely that.

Okay. Appreciate that. In your gap to non-gap reconciliation in the non-compensation expenses, there was a $9.3 million gap. add back this quarter? I think in the press release, it just kind of said, you know, just a non-recurring item. Can you provide any additional color on what that charge was?

Those are, as we've had in the past from time to time, those could be things such as litigation settlements or corresponding fees, reserves, and the like.

Okay. Thank you very much.

As there are no more questions, this concludes our question and answer session. I would like to turn the conference back over to Mr. Letnick for any closing remarks.

Thank you all for joining us, and we look forward to coming together with you next quarter. We are excited that we have been able to execute on a number of funds that we discussed, and we look forward to continuing that process and updating you next quarter on both FedEx, our share repurchases, and the success of the company. Thank you all for spending time with us this morning, and we look forward to speaking to you again shortly.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.