BGC Partners reported its fourth quarter and full-year 2014 financial results Wednesday. The company did report an increase in revenues, but they also reported a decrease in profits. The question is whether this is a one-time event or something shareholders should get used to.
Overall non-GAAP earnings for the quarter increased by 19.1% over Q4 last year, from $432.9 million to $515.5 million. Non-GAAP pre-tax earnings grew by an impressive 57.8% over Q4 2013, from $46 million to $72.6 million. Under GAAP accounting rules, revenues for the quarter increased by a slightly smaller 16.1% over Q4 2013, from $421.3 million to $489.3 million.
But despite the increase in revenue, the quarter was an unprofitable one for the brokerage. The company went from a net income of $4.1 million in Q4 2013 to a net loss of $18.7 million in Q4 2014. When you consider the income (or loss) attributable to non-controlling interests in subsidiaries, the broker did even worse, going from a profit of $1.6 million in Q4 2013 to a loss of $36.8 million in Q4 2014.
Annual non-GAAP growth increased by 4.1% for the broker, from $1,768.2 million in 2013 to $1,841.5 million in 2014. Under GAAP, annual revenue increased by a slightly smaller 2.4% for the year, from $1,745 million to $1,787.5 million.
However, the overall year saw a major decline in net income as well. Consolidated net income was $102.8 million in 2013. In 2014 that number fell to a loss of $3.8 million. Factoring out the subsidiaries, BGC went from a profit of $70.9 million to a profit of just $4.1 million.
Financial Revenues by Segment
The company’s financial services revenues saw the largest boost from their foreign exchange offerings and their equities and other asset classes (including energy and commodities) offerings.
The report reads: “The increase in revenues from BGC’s equities and other asset classes included an 83% percent improvement from energy and commodities desks, which was driven by organic growth and the purchase of HEAT Energy Group in the first quarter of 2014. BGC’s quarterly foreign exchange results reflected strong top-line growth across the Company’s voice, hybrid, and fully electronic desks, most notably a 76 percent increase in revenues from BGC’s e-brokered foreign exchange spot and derivatives desks.”
However, overall credit revenues declined for the firm, mainly “due to lower industry-wide inter-bank activity in credit derivatives and corporate bonds. The quarterly decline in the Company’s rates revenue reflected generally lower European interest rate derivative and global government bond activity…”
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Tullett to the Head
The biggest expense for the quarter, seeing a 71% increase (equaling roughly $90 million) was their “non-compensation expense” (under GAAP). This expenses jumped from $123.7 million in Q4 2013 to $212.4 million in Q4 2014.
This, the company says, was mainly due to “charges with respect to acquisitions, dispositions and/or resolutions of litigation, largely related to the settlement of all legal claims with Tullett [Tullett Prebon Plc], as well as other non-cash, non-dilutive, and/or non-economic items.” The company adds that it believes “the settlement will lower expenses for distributable earnings due to the reduction in legal expenses related to the claims.”
Not Taking “No” for an Answer
The company also makes mention of its current tender offer for the purchase of GFI Group Inc. The company is “very excited that… stockholders representing approximately 43.3% of GFI shares supported [their] transaction as of the most recently announced tender offer results.”
Following completion of the purchase, the company expects to generate “increased productivity per front-office employee and to reduce annual expenses by at least $40 million in the first year.” It also expects to “free up tens of millions of dollars of duplicative capital currently set aside by GFI for regulatory and clearing purposes.” Read more about their decision-making process here.
In spite of the irregular non-compensation expense, Q4 2014 did prove a success for their fully electronic business. The company “continued to see tremendous success from [their] strategy of converting voice and hybrid Financial Services desks to much more profitable fully electronic trading.”
Their financial services business also improved as volatility picked up during the quarter across many asset classes. Their estate business segment, generating nearly half of BGC’s revenues during the quarter, also continued to benefit from “robust real estate industry trends.”
The overall losses didn’t prevent the company from issuing a 12 cent qualified dividend for the fourth quarter either. “Given our record performance over the last two quarters and our strong outlook, we expect to increase the dividend next quarter,” chairman and CEO Howard W. Lutnick added.