BGC Partners, Inc.

Hello everyone and thank you for your patience. The call is due to begin in two minutes time. © transcript Emily Beynon Welcome to the BGC Partners Inc fourth quarter and full year 2021 earnings conference call. At this time, all participants are in listen only mode. After the speaker's presentation, there will be a question and answer session. Please be advised that today's conference call is being recorded. I would like to hand over the conference to your speaker today, Jason Crucisus, Head of Investor Relations. Thank you, and please go ahead.

Good morning, everyone. We issued BGC's fourth quarter and full year 2021 financial results, press release, and presentation summarizing these 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 and investor presentation. Unless otherwise stated, the results provided on today's call compare only the fourth quarter of 2021 with the prior year period and compare revenue excluding insurance due to its sale on November 1st, 2021. We will be referring to our results on this call only on an adjusted earnings basis unless otherwise stated. We may also refer to adjusted EBITDA. We may refer to our liquidity, which we define as cash and cash equivalents plus marketable securities that have not been financed, reverse repurchase agreements and securities owned, less 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.btcpartners.com and in our investor presentation. We refer to the company's technology-driven businesses as FENIX, Fenix offerings include Fenix markets and Fenix growth platforms. I also remind you that the information regarding our business on today's call that are not historical are forward-looking statements. These include statements about the effects of COVID-19 pandemic on 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 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 in special note on forward-looking information set forth in these filings, and any updates to such risk factors in special note on forward-looking information contained in the subsequent reports on Form 10-K, Form 10-Q, or Form 8K. 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 fourth quarter and full year 2021 conference call. With me today are BGC's Chief Financial Officers, Steve Diskay, and our Chief Operating Officers, Sean Mendiatt. BGC improved profitability across all metrics in 2021, Additionally, we executed numerous value-unlocking initiatives, including selling our insurance brokerage business for $535 million, reducing our share count by over 10%, and expanding Fenix USP's market share by nearly 600 basis points to over 20%. Leveraging Fenix USP's success, after consulting with our global clients and strategic partners, we are pleased to announce the expansion of the scope of FMX Futures to cover the entire U.S. rates futures complex. U.S. Treasury futures, Euro dollars, and silver futures will launch concurrently in the fourth quarter of 2022. We recently launched a number of crypto products and expect to have a comprehensive offering by the end of this year. Our crypto platform is powered by our multi-billion dollar global infrastructure and state-of-the-art FedEx trading technology. Our futures exchange was amongst the first exchanges permitted to lift crypto derivatives, an advantage we plan to leverage as we scale our cryptocurrency offerings. As you know, we completed the sale of our insurance brokerage business on November 1st, bringing in gross proceeds of $535 million. Since we announced the sale on May 26th, we have repurchased and redeemed 71.5 million shares and units, reducing our fully diluted share count by over 10%. We continue to grow our technology driven higher margin FedEx business at an industry leading pace of 26%, so over $400 million for the full year 2021. For the fourth quarter, FedEx net revenue improved by 20% compared to the prior year, which represents a record 23% of BGC's total revenue, excluding insurance, of course. We expect FedEx to exceed a quarter of BGC's total revenues in 2022. FedEx revenue growth was a key factor in driving front office productivity 10% higher during the quarter, improving post-tax adjusted earnings by 20%, and expanding margins by 370 basis points. I'd like to take a moment to update you on my health. As many of you know, I was diagnosed in the fall with non-Hodgkin's lymphoma. I'm happy to report that I've completed chemotherapy on January 31st, but in mid-December, I had a very positive PET scan where the cancer was 95% resolved, and it made my doctors and me very, very happy. I have my final PET scan scheduled in March, and I look forward to updating you then. If you would like more details, my most recent video update is provided both on our website, on Rumble, or on YouTube. With that, I'd like to turn the call over to Steve Diskay.

Thank you, Howard, and hello, everyone. BGC generated total revenue of $461.6 million, which included $19.9 million of insurance revenue. Excluding insurance brokerage, our total revenue was $441.7 million, an improvement of 2.7% versus the fourth quarter a year ago. Stronger volumes seen in the first half of the quarter softened as surges in global COVID-19 cases caused market-wide dislocations, particularly across the voice hybrid business in December. Overall, industry-wide secondary trading volumes were mixed during the fourth quarter, with solid activity across race and energy products, while credit and European equity driven volumes were challenged. By geography and excluding insurance, the Americas increased by 6.1%. Europe, Middle East, and Africa revenues increased by 2.2%, while Asia-Pacific revenues decreased by 2.2%. By asset class, Rates increased by 5.8%, while credit, FX, energy and commodities, and equity derivatives and cash equities decreased by 4.2%, 1.5%, and 0.2% effectively. Deeper integration of Fenix technology solutions across the entire business has driven front office productivity 10.4% higher during the fourth quarter. For the full year, average front office productivity increased 8.1%, to $811,000, the second highest ever mark, behind only 2008, when the global financial crisis drove volumes and volatility to record levels. As we continue to automate our business, we expect productivity and profitability to increase. Turning to Fenix quarterly performance. Fenix generated net revenue of $101.4 million, an improvement of 20.2%. Fenix growth platforms recorded revenue of $13.7 million, an improvement of 89.3%, and Fenix markets generated revenue of $87.7 million, an increase of 13.7%, and had a pre-tax adjusted earnings margin of 30.7%. Moving on to expenses, our compensation and employee benefits under GAAP increased in the fourth quarter of 2021 due to the sale of the insurance brokerage business which included one-off compensation charges and sale-related expenses totaling $168.6 million, the majority of which were non-cash. Our non-compensation expenses under GAAP and adjusted earnings decreased by 3.9 percent and 5.4 percent, respectively, primarily due to lower interest expense, professional and consulting fees, and other expenses. These expense reductions were partially offset by the higher selling and promotion charges as COVID-19 restrictions have relaxed across many of the major geographies in which we operate. Moving on to our adjusted earnings. Our pre-tax income was $86.5 million, an increase of 9.2% and represents a 221 basis point margin expansion from last year. We've recorded post-tax adjusted earnings of $87.9 million an increase of 19.5% and a 370 basis point margin expansion. We generated fourth quarter adjusted EBITDA of $230.39 and improvement of 114.4%. Turning to share count. Our weighted average share count decreased 4% sequentially and 8% year over year to 509.2 million. Our fully diluted spot share count as of December 31st, decreased by 19.7 million shares, or 3.8% sequentially, to 497.5 million shares, which reflected 26.3 million Class A common shares repurchased during the quarter. Compared to a year ago, BGC's fully diluted spot share count decreased by 55.7 million shares, or 10.1%, which reflected the repurchase and redemption of 72.9 million shares and units during the year. As of December 31st, our liquidity was $594.8 million, compared with $655.2 million as of year-end 2020. The change in our liquidity reflected $457 million in share and unit repurchases and dividend and distribution payments, as well as a reduction in notes payable and other borrowings of $263.1 million compared to last year. Cash and cash equivalents. were $553.6 million versus $596.3 million as of December 31st, 2020. Notes payable and other borrowings were $1,052.8 million compared with $1,315.9 million, and total capital was $682.1 million compared with $832 million. And with that, I'm happy to turn the call over to Sean.

Thanks, Steve, and good day, everyone. Fenix, our technology-driven, higher-margin business, continued to grow at a market-leading rate. Fenix's strategy is focused on converting its $1.4 billion voice hybrid revenue base into higher-margin, technology-driven Fenix market revenue, while concurrently scaling its state-of-the-art, fully electronic Fenix growth platforms, including FMX and cryptocurrencies. Looking at Fenix in more detail, Our Fenix growth platform's revenue improved 89.3% from a year ago, driven by growth across Fenix UST, Lucera, Fenix FX, and Fenix Go. Fenix US Treasury revenues increased nearly six-fold, driven by market-leading ADV growth, new product offerings, and more traders using the platform. During the fourth quarter, Fenix UST had ADV growth of over 65%. significantly outperforming the overall market. Fenix UST club market share increased nearly 600 basis points to over 20% in the fourth quarter, with 21% in December. Additionally, Fenix US Treasury saw robust demand for its newer electronic T-bills offering, with a five-fold increase in ADV quarter over quarter and captured an estimated 15% of the electronic US treasury bill market. Lucera, our infrastructure and software business, saw accelerated revenue growth of its highly recurring and compounding subscription revenue base of 72% in the fourth quarter, as it onboarded new institutional and large bank clients, including in Lucera's cryptocurrency infrastructure business, which launched in the third quarter. Lucera is providing connectivity the world's deepest crypto liquidity pools via its world-class infrastructure. Fenix FX, our ultra-low-latency electronic FX trading platform, generated strong double-digit revenue and volume growth during the quarter that outpaced its FX ECN peers and the overall market. Fenix Go, our global options electronic trading platform, saw revenue increase nearly threefold from a year ago driven by the integration of Matchbox, Fenix's equity platform that automates the trading, booking, and lifestyle management of the global equity derivative contracts, creating a comprehensive electronic options solution. Additionally, Fenix Go launched new MSCI index options products in January 2022 and expects to launch new cryptocurrency options later in the year. Looking at Fenix markets, Revenues improved by 13.7%, driven by strong growth across rates, FX, and market data. Fenix MidFX, the leading wholesale FX hedging platform, continued to generate strong volumes across spot FX and Asian NDFs, driving revenue 20% higher versus last year. Fenix Mid technology provides a highly efficient, fully electronic platform for large global banks to hedge risk in a neutral environment. Fenix Market Data signed over 40 new contracts during the fourth quarter and more than doubled the total contracted value versus a year ago. Fenix Market Data has seen continued success in its new regulatory services offering with a robust pipeline leading into 2022. Fenix Market Data, which has a highly recurring and compounding subscription revenue model, continues to grow at a solid double-digit pace. Fenix Direct, our web-delivered multi-dealer FX options platform, saw ADV and revenue both double in the fourth quarter versus the prior year period. Capital House, NDF match business, our advanced web-based matching platform that helps clients reduce foreign exchange exposure, had double-digit volume and revenue growth versus a year ago. Intercompany technology services generated revenue of $14.9 million for the quarter. This represents internal charges to BGC's voice hybrid businesses by Fenix for its technology and is therefore eliminated in the company's consolidated financial results. As we continue to convert our voice hybrid business into Fenix Markets revenue, intercompany technology service revenues will naturally decline. while Fenix Markets revenues will increase at a far superior rate. Going forward, we will no longer report this intercompany charge. Our voice hybrid business generated revenues of $340.3 million, down 1.6% from last year, due to the continued conversion of voice hybrid to Fenix revenue. We continue to focus on automating our $1.4 billion voice hybrid revenue base to our higher margin Fenix business. Our rates businesses grew 5.8% with particular strength across U.S. government bonds, inflation products, listed rates, and emerging markets. This improvement across rates brokerage more than offset declines across other brokerage asset classes, excluding insurance. Expectations of rising interest rates and associated volatility, along with the end of quantitative easing in the U.S., is expected to provide tailwinds to our leading rates business in the latter part of 2022. Now turning to first quarter outlook for 2022. BGC's revenues were approximately 2% lower for the first 28 trading days of the first quarter compared when compared to the same period last year excluding insurance. We expect to generate total revenue of between $490 and $540 million as compared to $515.1 million last year, which excludes $52.4 million of insurance revenue. We anticipate pre-tax adjusted earnings to be in the range of $105 to $125 million versus $113.9 million. And we anticipate our full year 2022 adjusted earnings tax rate to be in the range of 8 to 10% versus 6.4% for full year 2021. And with that, I'd like to turn back to Howard for closing remarks. Thank you, Sean.

We are proud of what we have accomplished in 2021, including returning over $457 million to shareholders in the way of buybacks, dividends, and distributions. We also lowered our debts by over $260 million, all while growing Fenex to over $400 million in top line revenue and improving BGC's profitability across all metrics. As of yesterday, BGC's 2022 price-to-earnings ratio was 6.4 times, as compared with Fenix's peers, of 38.4 times earnings. This is a fundamental reason why we prioritize buybacks over dividends and distributions. With that, operator, we'd like to open the call for questions.

Thank you. If you would like to ask a question, please press star followed by one on your telephone keypad now. If you change your mind, it is star followed by two. Our first question comes from Rich Rapeto of Pepper Sandler. Your line is open. Please go ahead.

Good morning, Howard and team. And first, we're very happy that everything's going well on the health front, Howard. First question is on the brokerage. You're welcome. The first question on the brokerage business, just taking a look at some of the asset classes. If you looked at energy, you know, energy was the lowest brokerage revenue going back to the fourth quarter of 2018. I'm just trying to see, you know, the benchmarks weren't, you know, were pretty flat to up. The question is, you know, anything special going on in, energy as well as in rates. I know the rates did grow year over year and quarter to quarter, but 4Q seemed pretty, increased volatility was pretty special at the CME and other sort of benchmarks that trade rates. So I think rates and energy, any more color you could give us?

Well, I think if I take energy, start to go on energy, I think nothing special. I mean, if you It has always been a growth area and continues to be a growth area for us in energy and commodities. I think it was flat on the quarter and up fractionally on the overall year. But I mean, nothing specific in terms of energy and commodities, just an area that we continue to build and grow. And also, not just in the US, but both Europe and Asia as well. And from a rates perspective, I think, again, we have our big rates franchise. Rates were up, as we said, 5.8% in the quarter. I think I singled out a couple of key driving factors there in our inflation business, in emerging market rates. And really, for us, the performance of our rates business is driven by the fact that we have both a broad spectrum of products in rates and in geography as well.

Got it. Okay. Next question is on the futures exchange house. You pushed back the launch, and I guess that's so you can launch all the great products at the same time. Could you still make an office in regards to partners? Will we need to wait until the fourth quarter to hear who's in the partnership or who might be investing in the exchange as well?

No. We would expect before the fourth quarter to announce our strategic partners. So that should be coming sooner than our opening for sure. And you're right. What happened is spending time with our strategic partners and clients, they wanted a complete offer. And so we decided to list them all. So we will do Eurodollars, we will do SOFR contracts, and we will do U.S. Treasury futures all on the platform. And I think we have gotten just an incredible amount of, positive feedback from our client base and potential strategic partners that that is the model that they want. And we have the capacity to do it. We have the technology to do it. We have the connectivity to do it. And I think we are really the only game in town to create a competitor to the Chicago Mercantile Exchange.

Got it. And last question is on your comments on crypto and that FMX is approved. And can you give us a little bit more of the background on that? It was, this was an approval from well back or was it more recent that you got the approval? I'm just trying to get to understand what the crypto offering and how you get the approval and you know, what could it lead to, I guess.

Sure. So FMX and you know, it's, its predecessor exchange, and our DCO, our clearer, were approved to do crypto derivatives. And that was a while back. So that was years in the making. The application was years in the making. And that's just an asset that we have that we can extend and scale and compete with the Chicago Mercantile Exchange again on another front. When you have a multi-billion dollar electronic trading system globally connected, with futures infrastructure and regulatory approvals all sort of set up in front of us. And it just creates a powerful competitor to the Chicago Mercantile Exchange. Working with the LCH in the rates franchise has been incredibly exciting, and I think it has really motivated our clients and our potential strategic partners to deeply engage with us. You're watching our treasury business, uh, grow its market share. And that is just a concurrent rates business to your treasury futures and your dollars and so forth. So we really feel excited about it, but it was historical. So if you look, we can compete with the Chicago Mercantile Exchange on those product categories, and then we can extend those product categories, um, across the crypto space if, uh, if our clients and the market. So, uh, you know, it seems exciting to pursue. So we have the infrastructure for it. We have the regulatory framework for it. And I think it's pretty incredibly exciting for us.

Got it. Thank you. And look forward to getting together soon, Howard. Take care.

As a reminder, if you would like to ask a question, please press star followed by one on your telephone keypad now. Our next question comes from Gautam Swant of Credit Suisse. Your line is open. Please go ahead.

Good morning. This is Gautam Swant with Credit Suisse. And Howard, glad to hear the update on your health. Thanks so much. Can you please cite some of the potential revenue opportunities in 2022, specifically on how much revenue growth will come from the holiday expiries if it will be a step up in 1Q 2022 or roll out throughout the year? And how does the overall revenue mix of FENIX at 25% of the revenues impact the overall margin profile?

So with respect to our treasury business, the free holidays are expiring and those roll off over the next two quarters. So you should expect over the next two quarters, uh, our, our revenue opportunity across the treasury business, um, will improve. Uh, additionally, we are talking to our, uh, strategic partners and clients now about their rate cards and features and how that will, uh, how that will work. You know, if we had, we had launched this, uh, futures, uh, in 2018, um, people would not have been so confident that we could go from a beginning to over 20% market share in three years. And I think they've all naysayers, positive sayers. The whole market has watched us without strategic partners. Pound forward to, as you saw, December, we had 21% market share and a relentless move upward. I mean, imagine we launch treasury bills and we gained 15 percent market share in sequential quarters i mean so i think the excitement for us to go into the futures space uh is palpable and i think um i just don't think the time we will have of um what we would say these three holidays will be as long as they needed to be in u.s treasuries when we get to futures i just think that they're a path to revenues and material improvements will be swifter.

Thanks. And just as my follow-up here, can you expand on how you're growing, you know, with this large market data opportunity? You know, you signed 42 new contracts in 4-2021. How will that um, translating to revenue growth, is that a large step up in the first quarter?

So what happens is you sign, um, you sign, uh, long-term contracts and, uh, and then those contracts, uh, pay, let's say it's a four year contract. It'd be 25% a year for four years. Um, so we've just begun to sell our treasury data. Um, you know, features data isn't often, but people are discussing with us now to include that in their package. And so I think what you'll see is an accelerating growth rate. That's the key to the compounding subscription model. You see just an accelerating growth rate because as you get these compounding revenues, they just keep growing and growing and growing. Every new contract adds three or four years of revenue on top of your existing revenue base. So I think what you'll see is an accelerating growth rate. You know, we had growth, let's say, in the 20s. You'll see growth exceed the 30s. Then you'll see growth exceed the 40s percents. And so I think over the next couple of years, you're going to see an accelerating growth rate in market data. And it will get larger and larger. You know, I think that is one of the biggest opportunities we have. And I think it could be multiples larger. You know, our expectation is we could have our market data line could be three times the size of what it is now. And therefore, I don't think there's much in the way of our accelerating growth rate over the next two years.

Thank you.

The next question comes from Patrick O'Shaughnessy of Raymond James. Your line is open. Please go ahead.

Patrick, your line is open. Please ensure you're not muted locally.

Unfortunately, we're not getting any connection from Patrick's line, so I'll hand back over to the team to conclude.

Thank you all for joining us today. I'm very proud of what BGC accomplished. What we showed was that the drive of FedEx will drive all of our metrics better. And the conversion of our voice in hybrid business to FedEx markets will continue to drive margin. Our growth platforms will continue to grow. And the new inclusion of us building both futures and then a broad spectrum across the rates complex and cryptocurrency 2.5 trillion of outstanding um instruments to trade uh is really just an incredible opportunity for someone at the scale of bgc so we are very excited about our future uh as we said we're going to prioritize um buybacks over dividends and distributions and we look forward to talking to you all next quarter Thanks for your time and thanks for your good wishes. And I look forward to giving you a very, very positive cancer-free update in a couple of weeks. But my doctors are supremely confident. They've made me very happy and confident. My family can't wait for the scan. So I look forward to telling you all in a couple of weeks. And have a great day today.

This concludes today's call. Thank you for joining. You may now disconnect your lines.