Tradeweb Markets Inc. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023; comparisons are with the same 2022 periods. Tradeweb operates electronic marketplaces across rates, credit, equities and money markets, serving institutional, wholesale and retail clients. It reported one business segment.
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $310.6 million (+4.5%) | $297.1 million | $639.9 million (+5.1%) | $608.6 million |
| Operating income | $116.3 million (+9.1%) | $106.6 million | $238.9 million (+9.5%) | $218.2 million |
| Net income | $101.9 million | $81.6 million | $204.1 million | $179.0 million |
| Net income attributable to Tradeweb Markets Inc. | $89.1 million (+30.3%) | $68.3 million | $176.9 million (+16.9%) | $151.3 million |
| Diluted EPS | $0.42 | $0.33 | $0.83 | $0.73 |
| Adjusted EBITDA margin | 52.5% | 52.4% | 52.4% | 52.0% |
Q2 operating margin was approximately 37.5%, versus 35.9% a year earlier. Six-month operating margin was approximately 37.3%, versus 35.9%. Adjusted diluted EPS, a non-GAAP measure, was $0.52 in Q2 versus $0.47 and $1.07 for six months versus $0.95.
Q2 revenue growth reflected increases in rates (+5.8%), money markets (+30.1%) and market data (+8.3%); credit was nearly flat and equities declined 2.3%. By client sector, Q2 retail revenue rose 14.5%, wholesale 7.8% and institutional 1.4%. Overall average daily trading volume increased 10.2%, while blended variable fees per million fell 6.6%, reflecting product and trading mix.
For the six months, cash from operations was $283.9 million, compared with $223.3 million. Free cash flow, a non-GAAP measure, was $252.3 million versus $190.2 million. Investing cash outflow was $34.1 million and financing cash outflow was $113.3 million. Cash and cash equivalents were $1.396 billion at June 30, 2023, up from $1.257 billion at year-end 2022.
There was no outstanding debt. The $500 million revolving credit facility had $499.5 million available, with $0.5 million of letters of credit outstanding; it matures in April 2024, and the company said it was discussing renewal. Working capital was $1.398 billion. The tax receivable agreement liability was $448.0 million, including an estimated $25.7 million payable within 12 months. Operating lease liabilities were $23.3 million.
Changes, outlook and notable matters
- Net interest income rose to $15.1 million in Q2 from $0.5 million, and to $27.6 million for six months from $0.1 million, mainly because of higher interest rates and average invested cash balances.
- Six-month employee compensation expense fell 4.2%, partly because the prior-year period included accelerated CEO-retirement stock compensation. Technology and communications, general and administrative, and professional fees increased; the latter included costs related to the planned Yieldbroker acquisition.
- Management cited client de-risking after the regional-bank liquidity crisis, an inverted yield curve affecting duration traded and fees per million, and above-average rate volatility. It said fixed-fee revenue and continued electronic trading adoption partly mitigate sensitivity to market activity. No revenue or earnings forecast was provided.
- 2023 non-acquisition capital expenditure and software-development spending guidance was $56–$62 million; $31.7 million had been spent in the first half. The company expects cash, operating cash flow and, if needed, the credit facility to fund liquidity needs for at least 12 months.
- The pending Yieldbroker acquisition is for A$125 million in cash (approximately $82.7 million at the June 30 exchange rate), subject to adjustments, closing conditions and regulatory review. Closing was expected later in 2023. A currency option partially hedges the expected payment.
- A proposed EU fixed-income consolidated-tape joint venture with Bloomberg and MarketAxess depends on selection through the ESMA tender and regulatory approvals. The company declared a Q3 dividend of $0.09 per Class A and Class B share.
- The company said inflation had not materially affected reported results to date, but could affect costs. It highlighted exposure to market volumes and volatility, competition, regulation, cybersecurity and systems disruptions, foreign exchange movements, client and counterparty credit risk, and the need to renew its credit facility.
- Two U.S. Treasury-auction antitrust class actions had been dismissed against Tradeweb; plaintiffs appealed, with oral argument scheduled for October 3, 2023. The company said it could not estimate potential loss and had established no reserve. It also recorded a loss related to a New Jersey tax settlement and reduced Refinitiv indemnification receivable. No material changes to reported risk factors or internal controls were disclosed.
Key facts for investors to verify
- Whether volume growth converts into revenue growth, particularly given the decline in blended variable fees per million and the Q2 macroeconomic conditions described by management.
- Yieldbroker closing, final purchase consideration, regulatory conditions and expected contribution to results.
- Renewal or replacement of the revolving credit facility before its April 2024 maturity.
- Timing and cash impact of the $448.0 million tax receivable agreement liability and related future tax savings.
- Progress and potential obligations of the EU consolidated-tape joint venture, and developments in the Treasury-auction litigation appeal.
- Non-GAAP measures are supplemental: reconcile adjusted results to GAAP and consider the company’s stated exclusions and limitations.