BGC Partners, Inc. (NASDAQ: BGCP) (“BGC Partners,” “BGC,” or “the Company”), a leading global brokerage company servicing the wholesale financial markets, today reported its financial results for the quarter ended March 31, 2011.
Select First Quarter 2011 Results Compared to the Year-Earlier Period
Comments on Financial Results and Outlook
“BGC’s strong performance in the first quarter was driven by our solid top-line growth in Foreign Exchange, Rates, and Equities, as well as in overall fully electronic trading,” said Howard W. Lutnick, Chairman and Chief Executive Officer. “Because of the considerable operating leverage provided by our growing technology platform, growing headcount, and the benefits of our partnership structure, BGC’s profitability has continued to improve.
“I am happy to report that our common dividend per share will be 21.4 percent greater than in the first quarter of 2010. Additionally, at least 50 percent of the dividends paid per share in 2011 are expected to be a nontaxable return of capital to common stockholders.
“We are extremely excited about our planned acquisition of Newmark, one of the fastest growing real estate services companies in the global property markets. This is the beginning of a dramatic new footprint in commercial real estate by BGC. We expect Newmark to be immediately accretive to our earnings per share.
“Since the formation of BGC in 2004, we have added over 1,200 brokers, tripled quarterly revenues, massively invested in our world-class proprietary technology, and increased our distributable earnings margins hundreds of basis points. We will use the same strategies to position Newmark for industry-leading growth. We expect our model will prove to be highly profitable for Newmark’s business as we build scale, and generate the same kind of outstanding earnings as in our other brokerage businesses.”
Mr. Lutnick added: “As BGC continues to hire outstanding brokers, acquire accretively, and expand our global footprint, we expect to grow our revenues, expand margins, and raise our common dividend, further increasing shareholder value.”
Shaun D. Lynn, President of BGC Partners, Inc., said: “The Company’s revenues related to fully electronic trading grew by 24.9 percent year-over-year to $39.1 million or 10.7 percent of distributable earnings revenues. This growth was due principally to the continuing and successful roll-out of fully electronic trading for more than a dozen interest rate derivative products on BGC Trader™. From August 2010 through the end of March, 2011, BGC e-brokered approximately 4,500 transactions with a notional volume of almost $575 billion in fully electronic interest rate derivatives – with the first quarter 2011 average daily notional volumes almost 85 percent higher than in the fourth quarter of 2010.
“For eight quarters in a row, we have grown fully electronic revenues year-over-year significantly faster than our overall business. For the last four quarters, this has been an important factor in driving down our compensation ratio and increasing profits. Given our ongoing investment of approximately $120 million a year in technology, and our proven track record of converting products across many different asset classes and geographies to fully electronic trading, we are confident that our success in e-broking will continue to drive revenue and earnings growth.”
Mr. Lynn concluded: “The Company’s front office grew by almost 11 percent year-over year to 1,718 brokers and salespeople. As we continue to expand our e-broking capabilities and increase brokerage staff, we expect BGC’s strong earnings growth to continue.”
First Quarter Revenues
For the first quarter of 2011, revenues for distributable earnings were $365.5 million, compared with $348.9 million a year earlier. BGC’s GAAP revenues were $365.0 million in the first quarter of 2011, compared with $347.2 million a year earlier.
BGC’s first quarter revenue growth was driven primarily by increased brokerage revenues from the Company’s desks in Foreign Exchange, Rates, Equities and Other Asset Classes.
For the first quarter of 2011, brokerage revenues increased by 5.4 percent to $342.8 million, compared with $325.2 million in the prior-year quarter. Rates revenues were $152.8 million, Credit revenues were $87.2 million, Foreign Exchange revenues were $54.2 million, and Equities and Other Asset Classes revenues were $48.6 million. In comparison, for the first quarter of 2010, Rates revenues were $145.4 million, Credit revenues were $89.7 million, Foreign Exchange revenues were $44.7 million, and Equities and Other Asset Classes revenues were $45.5 million.
Rates revenues increased by 5.1 percent in the first quarter of 2011, compared to the year-earlier period, driven mainly by fully electronic Rates brokerage. Foreign Exchange revenues increased by 21.4 percent versus the year-ago quarter due primarily to continued strong growth in global volumes. Revenues from Equities and Other Asset Classes increased by 6.9 percent year-over-year, driven primarily by the acquisition of certain assets from Mint Partners and growth from the Company’s energy and commodities desks.
First quarter 2011 Credit revenues were down 2.8 percent year-on-year, reflecting generally lower volumes industry-wide. This was partially offset by a double-digit percentage increase in BGC’s Credit e-broking revenues.
In the first quarter of 2011, Rates represented 41.8 percent of total distributable earnings revenues, Credit 23.9 percent, Foreign Exchange 14.8 percent, and Equities and Other Asset Classes 13.3 percent. In comparison, for the first quarter of 2010, Rates represented 41.7 percent of total distributable earnings revenues, Credit 25.7 percent, Equities and Other Asset Classes 13.0 percent, and Foreign Exchange 12.8 percent.
Revenues related to fully electronic trading increased by 24.9 percent to $39.1 million in the first quarter of 2011. This represented 10.7 percent of total distributable earnings revenues. In comparison, revenues related to fully electronic trading were $31.3 million or 9.0 percent of total distributable earnings revenues in the prior-year period. This improvement was driven primarily by growth in the fully electronic trading of interest rate derivatives, as well as double-digit percentage increases in e-broking revenues from U.S. Treasuries, Credit e-broking, and spot foreign exchange.
First Quarter Expenses
Total expenses on a distributable earnings basis were $301.2 million in the first quarter of 2011, compared with $304.1 million a year earlier. Total GAAP expenses were $340.5 million in the first quarter of 2011, compared with $361.1 million in the prior-year period.
On a distributable earnings basis, the Company’s compensation and employee benefits were $197.7 million, a decrease of 7.9 percent from $214.7 million in the year-earlier period. This represented 54.1 percent of distributable earnings revenues in the first quarter of 2011, compared with 61.5 percent a year earlier. On a GAAP basis, compensation and employee benefits decreased by 23.1 percent to $209.0 million, compared with $271.7 million a year earlier. This represented 57.2 percent of GAAP revenues in the first quarter of 2011 and 78.3 percent a year earlier.
For the first quarter of 2011, non-compensation expenses were $103.5 million or 28.3 percent of revenues on a distributable earnings basis and $122.3 million or 33.5 percent of revenues under GAAP. In comparison, first quarter 2010 non-compensation expenses were $89.4 million for both distributable earnings and GAAP, or 25.6 percent and 25.8 percent of revenues, respectively.
First Quarter Income
In the first quarter of 2011, BGC Partners’ pre-tax distributable earnings before noncontrolling interest in subsidiaries and taxes were $64.3 million or $0.26 per fully diluted share, compared with $44.8 million or $0.20 per fully diluted share in the first quarter of 2010. The Company’s pre-tax distributable earnings margin was 17.6 percent in the first quarter of 2011 versus 12.8 percent in the prior-year period.
BGC Partners recorded post-tax distributable earnings of $54.8 million or $0.22 per fully diluted share in the first quarter of 2011, compared with $38.1 million or $0.17 per fully diluted share in the first quarter of 2010. The Company’s post-tax distributable earnings margin was 15.0 percent in the first quarter of 2011 versus 10.9 percent in the prior-year period.
The Company recorded GAAP net income from operations before income taxes of $24.5 million, GAAP net income for fully diluted shares of $20.8 million, and GAAP net income per fully diluted share of $0.09 in the first quarter of 2011. This compares to GAAP loss from operations before income taxes of $13.9 million, GAAP net loss for fully diluted shares of $4.2 million, and GAAP net loss per fully diluted share of $0.05 in the first quarter of 2010.
In the first quarter of 2011, the effective tax rate for distributable earnings was 15.0 percent, compared with 14.9 percent a year earlier.
The Company had a fully diluted weighted-average share count of 258.9 million for the first quarter of 2011 for distributable earnings and 237.1 million under GAAP. This compares with 222.6 million in the year-earlier period for distributable earnings and 82.9 million under GAAP. As of March 31, 2011, the Company’s fully diluted share count was 263.0 million, assuming conversion of the Convertible Senior Notes.
Front Office Statistics
BGC Partners had 1,718 brokers and salespeople as of March 31, 2011, up 10.8 percent compared to 1,551 year-over-year and up 0.8 percent versus 1,705 sequentially. Average revenue generated per front office employee for the first quarter of 2011 was approximately $211,000, compared with approximately $220,000 in the first quarter of 2010 and $180,000 in the fourth quarter of 2010.
Historically, BGC Partners’ average revenue per front office employee has declined year-over-year for the periods following significant headcount increases, as new brokers and salespeople generally achieve significantly higher productivity levels in their second year with the Company.
Balance Sheet
As of March 31, 2011, the Company’s cash position, which it defines as cash and cash equivalents and cash segregated under regulatory requirements, was $403.7 million; notes payable and collateralized borrowings were $185.6 million; book value per common share was $2.58; and total capital, which BGC Partners defines as “redeemable partnership interest”, Cantor’s “noncontrolling interest in subsidiaries”, and “total stockholders' equity”, was $444.3 million. In comparison, as of December 31, 2010, the Company’s cash position was $366.5 million; notes payable and collateralized borrowings were $189.3 million; book value per common share was $2.47; and total capital was $425.0 million.
The increase in cash from year-end 2010 was due primarily to the securities clearance process, an option exercise by Mr. Lutnick for cash, and proceeds from the issuance of Class A common stock as part of BGC’s controlled equity offering. This was partially offset by cash used in the net settlement of receivables and payables and for the redemption of units.
Second Quarter 2011 Outlook Compared with Results for the Second Quarter of 2010
This outlook assumes that the Newmark acquisition closes after the second quarter of 2011.
Dividends
On May 3, 2011, the Company’s Board of Directors declared a quarterly cash dividend of $0.17 payable on May 26, 2011 to Class A and Class B common stockholders of record as of May 16, 2011. The ex-dividend date will be May 12, 2011. The Company estimates that no less than 50 percent of dividends paid per share of common stock for each of the quarters of 2011 will be a nontaxable return of capital to common stockholders. Based upon an annualized dividend of $0.68 per share and yesterday’s closing stock price of $9.16, BGC’s pre-tax dividend yield is 7.4 percent. For a New York City resident in the 35 percent Federal tax bracket and the 12.85 percent state and local tax bracket, the taxable equivalent yield would be 11.6 percent when compared to a distribution, dividend, or interest payment that is fully taxable at ordinary rates and 8.6 percent when compared to a fully taxable qualified dividend.
Unit Redemptions, Exchangeability, and Share Repurchases
During the first quarter of 2011, BGC Partners agreed to grant exchangeability to 1,133,425 PSUs and PSIs. Under GAAP, the Company was required to take a non-cash charge of $11.0 million relating to these grants of exchangeability and/or redemption of limited partnership units.
BGC Partners’ share repurchases and unit redemptions from January 1, 2011 through April 30, 2011 are detailed in the following table:
Period |
Number of shares purchased |
Effective average price per share |
January |
3,227 |
$8.26 |
February |
3,227 |
$8.75 |
March |
- |
- |
April |
7,991 |
$8.94 |
Total Repurchases |
14,445 |
$8.74 |
|
|
|
Period |
Number of units redeemed |
Average price per unit |
January |
- |
- |
February |
- |
- |
March |
195,904 |
$9.11 |
April |
21,950 |
$8.99 |
Total Redemptions |
217,854 |
$9.10 |
Total Repurchases and Redemptions |
232,299 |
$9.08 |
The Company sold approximately 1.3 million shares through its controlled equity offering from January 1, 2011 through April 30, 2011 for net proceeds of approximately $11.8 million or $9.12 per share to offset redemptions.
As of March 31, 2011, the Company had approximately $66.0 million remaining from its $100 million share repurchase and unit redemption authorization.
Distributable Earnings
BGC Partners uses non-GAAP financial measures including "Revenues for distributable earnings," "pre-tax distributable earnings" and "post-tax distributable earnings," which are supplemental measures of operating performance that are used by management to evaluate the financial performance of the Company and its subsidiaries. BGC Partners believes that distributable earnings best reflects the operating earnings generated by the Company on a consolidated basis and are the earnings which management considers available for distribution to BGC Partners, Inc. and its common stockholders, as well as to holders of BGC Holdings partnership units during any period.
As compared with "income (loss) from operations before income taxes," "net income (loss) for fully diluted shares," and "fully diluted earnings (loss) per share," all prepared in accordance with GAAP, distributable earnings calculations primarily exclude certain non-cash compensation and other expenses which generally do not involve the receipt or outlay of cash by the Company, which do not dilute existing stockholders, and which do not have economic consequences, as described below. In addition, distributable earnings calculations exclude certain gains and charges that management believes do not best reflect the ordinary operating results of BGC.
Revenues for distributable earnings are defined as GAAP revenues excluding the impact of BGC Partners, Inc.'s non-cash earnings or losses related to its equity investments, such as in Aqua Securities, L.P. and ELX Futures, L.P., and its holding company general partner, ELX Futures Holdings LLC.
Pre-tax distributable earnings are defined as GAAP income (loss) from operations before income taxes excluding items that are primarily non-cash, non-dilutive, and non-economic items, such as:
- Non-cash stock-based equity compensation charges for REUs granted or issued prior to the merger of BGC Partners, Inc. with and into eSpeed, as well as post-merger non-cash, non-dilutive equity-based compensation related to partnership unit exchange or conversion.
- Allocations of net income to founding/working partner and other units, including REUs, RPUs, PSUs and PSIs.
- Non-cash asset impairment charges, if any.
Distributable earnings calculations also exclude charges related to purchases, cancellations or redemptions of partnership interests and certain one-time or non-recurring items, if any.
Beginning with the first quarter of 2011, BGC’s definition of distributable earnings has been revised to exclude certain gains and charges with respect to acquisitions, dispositions, and resolutions of litigation. This change in the definition of distributable earnings is not reflected in, nor does it affect the Company’s presentation of prior periods. Management believes that excluding these gains and charges best reflects the operating performance of BGC.
Since distributable earnings are calculated on a pre-tax basis, management intends to also report "post-tax distributable earnings" and "post-tax distributable earnings per fully diluted share":
- "Post-tax distributable earnings" are defined as pre-tax distributable earnings adjusted to assume that all pre-tax distributable earnings were taxed at the same effective rate.
- "Post-tax distributable earnings per fully diluted share" are defined as post-tax distributable earnings divided by the weighted-average number of fully diluted shares for the period.
- In the event that there is a GAAP loss but positive distributable earnings, the distributable earnings per share calculation will include all fully diluted shares that would be excluded under GAAP to avoid anti-dilution, but will exclude quarterly interest expense, net of tax, associated with the Senior Convertible Notes.
Each quarter, the dividend to common stockholders is expected to be determined by the Company’s Board of Directors with reference to post-tax distributable earnings per share. In addition to the Company’s quarterly dividend to common stockholders, BGC Partners expects to pay a pro-rata distribution of net income to BGC Holdings founding/working partner and other units, including REUs, RPUs, PSUs and PSIs, and to Cantor for its noncontrolling interest. The amount of all of these payments is expected to be determined using the above definition of pre-tax distributable earnings per share.
Certain employees who are holders of RSUs are granted pro-rata payments equivalent to the amount of dividends paid to common stockholders. Under GAAP, a portion of the dividend equivalents on RSUs is required to be taken as a compensation charge in the period paid. However, to the extent that they represent cash payments made from the prior period's distributable earnings, they do not dilute existing stockholders and are therefore excluded from the calculation of distributable earnings.
Distributable earnings is not meant to be an exact measure of cash generated by operations and available for distribution, nor should it be considered in isolation or as an alternative to cash flow from operations or income (loss) for fully diluted shares. The Company views distributable earnings as a metric that is not necessarily indicative of liquidity or the cash available to fund its operations.
Pre- and post-tax distributable earnings are not intended to replace the Company’s presentation of GAAP financial results. However, management believes that they help provide investors with a clearer understanding of BGC Partners’ financial performance and offer useful information to both management and investors regarding certain financial and business trends related to the Company’s financial condition and results of operations. Management believes that distributable earnings and the GAAP measures of financial performance should be considered together.
Management does not anticipate providing an outlook for GAAP “revenues”, “income (loss) from operations before income taxes”, “net income (loss) for fully diluted shares,” and “fully diluted earnings (loss) per share”, because the items previously identified as excluded from pre-tax distributable earnings and post-tax distributable earnings are difficult to forecast. Management will instead provide its outlook only as it relates to revenues for distributable earnings, pre-tax distributable earnings and post-tax distributable earnings.
For more information on this topic, please see the table in this release entitled “Reconciliation of GAAP Income to Non-GAAP Distributable Earnings”, which provides a summary reconciliation between pre- and post-tax distributable earnings and the corresponding GAAP measures for the Company in the periods discussed in this release.
Distributable Earnings Results Compared with GAAP Results
First quarter 2011 GAAP revenues were reduced by $0.5 million due to BGC’s losses related to its equity investments, compared to a reduction of $1.7 million a year earlier. These non-cash items were not included in revenues for distributable earnings.
The difference between first quarter 2011 compensation and employee benefits as calculated for GAAP and distributable earnings was due primarily to $11.0 million in non-cash, non-economic, and non-dilutive charges relating to grants of exchangeability to unit holders and/or redemption of limited partnership units; and a charge of $0.3 million related to non-cash and non-dilutive pre-merger grants of equity or units. The difference between first quarter 2010 compensation and employee benefits as calculated for GAAP and distributable earnings was due to a one-time $41.3 million, non-recurring charge related to the modification of pre-merger employee contractual arrangements; a $15.7 million in charges relating to the redemption of units; and $0.1 million in expenses related to dividend equivalents to holders of restricted stock units. These charges were partially offset by a $0.2 million credit related to non-cash and non-dilutive pre-merger grants of equity or units.
The difference between non-compensation expenses in the first quarter of 2011 as calculated for GAAP and distributable earnings is due to a $19.2 million charge with respect to acquisitions, dispositions, and/or resolutions of litigation. This was partially offset by a $0.4 million non-cash, non-dilutive, and non-economic credit related to the Company having assumed the liability of a September 11, 2001 workers’ compensation policy.
Nontaxable Return of Capital
BGC Partners intends to pay not less than 75 percent of its post-tax distributable earnings per fully diluted share as cash dividends to all common stockholders. The Company also intends to use the balance of its quarterly post-tax distributable earnings, after distributions to all partnership units and dividend payments to common stockholders, to buy back shares and/or partnership units.
BGC Partners’ common dividend is based on post-tax distributable earnings, which, due mainly to non-cash, non-dilutive, and non-economic GAAP charges, are expected to be higher than its earnings and profits under GAAP and U.S. Federal tax principles for the year ended December 31, 2011. In addition, BGC Partners’ net income for both GAAP and distributable earnings includes income earned by foreign affiliates of the Company, corporate subsidiaries, and other entities not taxable under U.S. Federal tax principles. The Company believes not less than 50 percent of its common dividend paid for earnings generated in 2011 will be treated as a nontaxable return of capital for common stockholders.
Under U.S. Federal income tax principles, a nontaxable return of capital, sometimes referred to as a “nondividend distribution”, is a cash distribution that is not paid out of the taxable earnings and profits of a corporation. For common stockholders, a nontaxable return of capital reduces the cost basis of an investment. It is not taxed until the cost basis of said investment is fully recovered. BGC Partners believes that a portion of its dividends paid to common stockholders in the year ended December 31, 2011 is expected to be treated under U.S. Federal income tax principles as a return of capital to the extent of each stockholder’s basis, and as capital gains to the extent such portion exceeds a stockholder’s basis.
The remaining portion of the dividend is expected to be treated as a qualified dividend for U.S. Federal income tax purposes. The portion of the common dividend taxable as a dividend for U.S. Federal income tax purposes will be reported to U.S. recipients of BGC’s dividend on the IRS Forms 1099-DIV and to non-U.S. recipients on IRS Forms 1042-S. These forms will be sent to common stockholders in early 2012.
The portion of dividends to common stockholders that will be taxable will not impact BGC Partners’ financial results for either GAAP or distributable earnings or the Company’s or its affiliates’ ability to pay distributions to all partnership units and dividend payments to common stockholders.
This information is not intended to be all-inclusive or to render specific professional tax advice.
Conference Call
The Company will host a conference call on Thursday, May 5, 2011 at 10:00 a.m. ET to discuss these results. It will accessible at the “Investor Relations” section of http://www.bgcpartners.com or directly at http://www.bgcpartners.com/ir. Additionally, call participants may dial in with the following information:
LIVE CALL:
Date - Start Time: 05/05/2011 10:00 AM Eastern Time
U.S. Dial In: 888-713-4205
International Dial In: 617-213-4862
Participant Passcode: 13207582
Pre Registration: https://www.theconferencingservice.com/prereg/key.process?key=PWKK6RC9A
REPLAY:
Available From – To: 05/05/2011 1:00 PM - 05/12/2011
U.S. Dial In: 888-286-8010
International Dial In: 617-801-6888
Passcode: 69926604
(Note: If clicking on the above links does not open up a new web page, you may need to cut and paste the above urls into your browser's address bar.)