BGC Partners, Inc.

Hello there, ladies and gentlemen, and thank you for your patience. The BGC Partners Incorporated second quarter 2022 earnings conference call will begin momentarily. Thank you. We'll be right back. © transcript Emily Beynon Thank you. Thank you. Welcome to the BGC Partners Incorporated Second Quarter 2022 Earnings Conference Call. At this time, all participants are in 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 the speaker today, Jason Chrysikos, Head of Investor Relations. Thank you, and please go ahead.

Good morning, everyone. we should BGC second quarter 2022 financial results press release and presentation summarizing these results 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 second quarter of 2022 with the prior year period and compare revenue excluded 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 securities loaned and repurchase agreements. We define total capital as redeemable partnership interest, total stockholders' equity, and non-controlling interest in subsidiaries. This quarter, BGC is providing revenue year-over-year comparisons on a constant currency basis. BGC generates a significant amount of its revenue in non-U.S. dollar-denominated currencies, particularly in the euro and pound sterling, in order to present a better comparison of the company's revenues during the period, which exhibited volatile foreign exchange movements. BGC's constant currency movements assume foreign exchange rates used to determine the company's prior period revenues applied to the current period revenues. Please also 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 business as FENIX. Fenix offerings include Fenix markets and Fenix growth platforms. I also remind you that information regarding our business on today's call that are not historical are forward-looking statements. These include statements about the effects of the COVID-19 pandemic on the company's business results, financial position, liquidity, and outlook. Any forward-looking statements about risks and uncertainties can accept as required by law. BGC undertakes no obligation to update 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, and special note on forward-looking information set forth in these filings and any updates to such risk factors, and special note on forward-looking information contained in subsequent reports in Form 10-K, Form 10-Q, or Form 8-K. With that, I'm now happy to turn the call over to Howard Lunick, Chairman of the Board and CEO of BGC Partners.

Thank you, Jason. Good morning, and thank you for joining us for our second quarter 2022 conference call. With me today are BGC's Chief Operating Officer, Sean Windyett, and our new Chief Financial Officer, Jason Hoff. I would like to start by welcoming Jason to BGC and welcoming him to his first BGC conference call as our new CFO. I am pleased to announce that the joint committee of our independent directors of the board, which was constituted to consider the conversion to a corporate structure, has agreed to pursue and move forward with the corporate conversion subject to documentation. This conversion is intended to be effective January 1st, 2023, subject to the regulatory process. We believe this change will improve operational efficiencies and benefit our shareholders and stakeholders by implementing a more simple transparent corporate structure. BGC's adjusted earnings margin continued to improve, representing the seventh consecutive quarter of year-over-year margin expansion. Our sustained margin improvement reflects higher levels of automation and digitization across our overall business. FEMEX registered another quarter of double-digit revenue growth outpacing the industry and our overall business. FedEx now represents over 25% of our overall revenues, its highest mark ever. We continue to make progress developing our comprehensive cryptocurrency offering, which includes the expansion of Lucera's infrastructure across the cryptocurrency ecosystem, as well as the recently announced plans for a cryptocurrency exchange, which we anticipate will be launched late in the fourth quarter or early in the first. Additionally, BGC arranged the first intermediated block trade of CME Bitcoin options in Asia in July. With that, I'll turn the call over to Jason.

Thank you, Howard, and hello, everyone. It is a pleasure to speak here today and join BGC at such an interesting time in the company's journey of digitizing the wholesale capital markets. BGC generated total revenue of $435.8 million, a decline of 4.9 percent as compared to last year. But on a constant currency basis, we were virtually flat, excluding insurance. Total revenue would have been $19.9 million higher and in line with the year-ago period, but for the strengthening of the U.S. dollar. By asset class, FX and rates increased by 2.1 percent and 0.5 percent, respectively. Equities, energy and commodities, and credit decreased by 4.2, 10.8, and 15.6% respectively. On a constant currency basis, rates, FX, and equities increased by 7.3, 3.4, and 1.4% respectively. By geography and excluding insurance, America's revenue increased by 4.5%, while Europe, Middle East and Africa, and Asia Pacific revenues both decreased by 8.9 and 9.8%, respectively compared to last year. The company continues to make progress in automating its overall business. BGC's higher margin technology-driven business now represents for the first time over 25% of BGC's total revenue and grew at a strong pace of 13%, or 18.1% on a constant currency basis. The company remains focused on converting its large voice hybrid revenue base to FedEx revenue, driving margins higher. Adjusted earnings margins and average front office productivity both improved year over year for the seventh consecutive quarter. Fenix generated record second quarter revenue of $109.6 million, an improvement of 13% or 18.1% on a constant currency basis. Fenix growth platforms recorded revenue of $12.4 million, an improvement of 16.9% or 18.6% on a constant currency basis. Fenix markets generated revenue of $97.2 million, an increase of 12.5%, or 18 percent on a constant currency basis, and had a pre-tax adjusted earnings margin of 32.2 percent, an improvement of 243 basis points. Moving on to expenses. Our compensation and employees' benefits under both GAAP and adjusted earnings decreased in the second quarter of 2022 due to increased automation, the sale of the insurance brokerage business, lower commissionable revenues, and the FX impact on the company's UK and European operations. Our adjusted earnings compensation as a percentage of total revenue was 48.4%, which was over 400 basis points lower versus a year ago. Our non-compensation expenses under GAAP and adjusted earnings decreased by 10.1% and 10.4% respectively, driven by lower occupancy and equipment expense due to the sale of our insurance-brokered business as well as lower professional and consulting fees, interest, and communication expenses. These expense reductions were partially offset by 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 $90.2 million. with a 168-point margin expansion up to 20.7 percent. We recorded post-tax adjusted earnings of $84.7 million, and it generated a second-quarter adjusted EBITDA of $113.9 million. Turning to share count, our weighted average share count increased 0.8 percent sequentially to 507 million, down 10.1 percent year over year. Our fully diluted spot share count as of June 30th decreased 0.4% sequentially to 500.7 million. Compared to a year ago, BDC's fully diluted spot share count has decreased by 38.6 million shares or by 7.2%. During the second quarter, we repurchased and redeemed 9.7 million Class A common shares and units. The majority of this activity occurred in the latter part of the period and thus is not fully reflected in the fully diluted weighted average share count under both GAAP and adjusted earnings. Share and unit issuance has typically been the greatest in the second quarter due to the timing of year end bonus awards. As of June 30th, our liquidity was $535 million compared with $594.8 million as of year end 2021. The change in our liquidity reflects payments for year-end bonuses, tax payments, acquisitions, new hires, and share and unit repurchases and redemptions. Cash and cash equivalents for $496.5 million versus $553.6 million as of December 31st, 2021. Notes payable and other borrowings were $1,051,000,000 compared with $1,052,800,000 at year-end. Total capital was $747.1 million, compared with $682.1 million as of year end 2021. In addition, we currently expect to provide more information on estimated tax rate, synergies, and other efficiencies related to our intended corporate conversion on our next earnings call. With that, I am happy to turn the call over to Sean.

Thanks, Jason, and good day, everyone. FENIC, our technology-driven, higher-margin business continue to grow strongly. Our Fenix strategy remains focused on converting the company's $1.4 billion voice hybrid revenue base into higher-margin, technology-driven Fenix Markets revenues, while concurrently scaling its state-of-the-art, fully electronic Fenix growth platforms, including FMX and electronic cryptocurrency offerings. Looking at Fenix in more detail, Our Fenix growth platform's revenue improved 16.9%, or 18.6%, on a constant currency basis from a year ago, driven by growth across Fenix US Treasuries, Lucera, Fenix FX, Fenix Go, and Portfolio Match. Fenix UST revenues increased over 30%, driven by ADV growth of 22%, new product offerings, and more traders using the platform. Fenix US Treasury Club market share increased 162 basis points year-over-year to 19% in the second quarter. Fenix UST's newer T-bill offerings gained traction during the quarter, with ADV exceeding $1 billion for the month of June and reaching $3 billion on certain days. Lucera, our infrastructure and software business, once again generated strong double-digit revenue growth, with its revenue improving 25% year over year. This growth was driven by new clients, the expansion of existing relationships, and adding new cryptocurrency clients. Lucera is providing connectivity to 30 of the world's deepest crypto liquidity pools via its world-class infrastructure, with a growing pipeline. Fenix FX, our ultra-low latency electronic FX trading platform, had another record quarter, generating strong volume growth of 47%, outpacing other FX platforms and the overall market. Fenix FX has developed leading transaction cost, liquidity, and market impact tools, providing clients with critical information unique to the platform.

These trading tools Ladies and gentlemen, we apologize for the delay. We'll be with you in just one moment.

Apologies, just go from Fenix FX, our ultra-low latency electronic FX trading platform had another record quarter, generating the strong volume growth of 47%, outpacing other FX platforms and the overall market. Fenix FX has developed leading transaction cost, liquidity, and market impact tools, providing clients with critical information unique to the platform these trading tools along with its leading lucera supported technology has excelled