Tradeweb Markets Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; financial statements are unaudited. Tradeweb operates electronic marketplaces across rates, credit, equities and money markets, serving institutional, wholesale and retail clients. On January 29, 2021, LSEG completed its acquisition of Refinitiv, Tradeweb’s majority owner; Tradeweb became an LSEG consolidating subsidiary.
Financial performance and liquidity
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Revenue | $273.4 million | $234.6 million | +16.5% |
| Operating income | $98.3 million | $77.6 million | +26.7% |
| Operating margin | 36.0% | 33.1% | +2.9 percentage points |
| Net income | $81.6 million | $62.5 million | +30.5% |
| Net income attributable to Tradeweb | $67.9 million | $43.9 million | +54.5% |
| Diluted EPS | $0.33 | $0.25 | +32.0% |
| Adjusted EBITDA (non-GAAP) | $142.1 million | $119.7 million | +18.7% |
| Adjusted EBITDA margin (non-GAAP) | 52.0% | 51.0% | +1.0 percentage point |
- Revenue drivers: Transaction fees and commissions rose 18.8% to $217.8 million; subscription fees, including Refinitiv market-data fees, rose 7.9% to $53.0 million. Credit revenue increased 37.8% and rates revenue 13.4%; retail-sector revenue fell 13.7%.
- Expenses: Total expenses increased 11.5% to $175.1 million. Compensation rose 14.5%, technology and communications 31.3%, and professional fees 40.8%; general and administrative expense decreased 58.5%, partly reflecting foreign-exchange gains and lower travel costs.
- Cash flow: Operating cash flow was $55.6 million, versus cash used of $21.8 million in Q1 2020. Free cash flow, a non-GAAP measure, was $42.9 million versus negative $30.1 million. The prior-period operating cash outflow included a $40.6 million increase in net unsettled-trade receivables; the comparable Q1 2021 movement was $0.1 million.
- Cash and liquidity: Cash and cash equivalents were $809.9 million at March 31, 2021, up from $791.3 million at year-end; working capital was $806.9 million. Management stated available cash, operating cash flow and, if needed, the revolving facility should fund requirements for at least 12 months.
- Debt and facilities: No borrowings were outstanding. The $500 million revolving credit facility matures in April 2024; $0.5 million of letters of credit were issued. The company reported compliance with facility covenants.
- Other balance-sheet items: Total assets were $5.81 billion and total liabilities $643.8 million. The tax receivable agreement liability was $425.2 million, substantially payable over 15 years; the first payment was made in January 2021.
Material changes and management commentary
- Management attributed revenue growth primarily to higher volumes and fees in U.S. and European corporate bonds, rates derivatives and U.S. government bonds. Total trading volume rose 18.0%; reported revenue growth included a 2.6% foreign-currency benefit, with constant-currency growth of 13.9%.
- Tradeweb announced a $190 million all-cash agreement to acquire Nasdaq’s U.S. fixed-income electronic trading platform, formerly eSpeed. The deal had not closed by March 31 and was expected to close later in 2021, subject to customary conditions and regulatory approvals. Q1 included $1.8 million of related transaction costs.
- A new share repurchase authorization permits up to $150 million of Class A purchases through fiscal 2023, primarily to offset equity-compensation dilution. No program repurchases occurred in Q1. The company withheld shares worth $45.5 million for employee payroll taxes; these were not program repurchases.
- The company paid a $0.08-per-share dividend in March and declared another $0.08 dividend for Q2, payable June 15, 2021. Management said future dividends depend on board discretion and distributions from TWM LLC.
- Management described COVID-19 disruption as potentially temporary but said the effects remain uncertain and could be material. Most employees continued to work remotely; the company reported maintaining business continuity and sufficient liquidity.
Risks, contingencies and unusual items
- Results are sensitive to trading activity and market volatility; lower volatility may reduce client liquidity and trading volumes. Competition, technology investment, cybersecurity, system availability, regulation, client concentration and foreign-exchange movements are also cited risks.
- Two U.S. Treasury auction antitrust class actions were dismissed on March 31, 2021, with plaintiffs permitted to amend by May 14. Tradeweb intended to defend itself; it said it could not reasonably estimate any loss or range and had no contingency reserve. The filing also notes a separate interest-rate-swaps matter from which Tradeweb was dismissed in 2017, which continued against other defendants.
- Foreign-currency forward contracts had $122.4 million notional value at quarter-end and generated $5.7 million of realized and unrealized gains in Q1. A hypothetical 10% U.S.-dollar move would change quarterly revenue by approximately $9.2 million and operating income by approximately $6.3 million, in either direction.
- Tradeweb reported no material changes to its previously disclosed risk factors, no off-balance-sheet arrangements, and effective disclosure controls and procedures.
Investor verification points
- Track whether growth in transaction fees, volumes and credit products continues, and whether lower retail revenue or changing market conditions offset it.
- Verify closing, regulatory approvals, purchase accounting and integration costs for the Nasdaq platform acquisition.
- Monitor cash conversion and working-capital swings from unsettled trades, as well as capital spending and free cash flow.
- Assess the timing and cash burden of tax receivable agreement payments, LLC-interest exchanges and distributions supporting dividends.
- Follow amendments or further proceedings in the Treasury antitrust litigation and any resulting change in the company’s loss assessment.
- Consider that Adjusted EBITDA, Adjusted EBIT, Adjusted Net Income and related margins or EPS are non-GAAP measures; the filing cautions they have limitations and may not be comparable with similarly titled measures at other companies.