Tradeweb Markets Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020; comparisons are with the same 2019 periods. Tradeweb operates electronic marketplaces across rates, credit, equities and money markets. Because of its 2019 reorganization and IPO, 2019 comparisons include pre-IPO and post-IPO reporting effects; per-share comparisons are not fully comparable across those periods.
Financial performance and position
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Gross revenue | $212.9 million | $201.0 million | $659.6 million | $578.3 million |
| Operating income | $58.5 million | $58.3 million | $191.8 million | $135.5 million |
| Net income | $47.0 million | $48.6 million | $151.9 million | $115.7 million |
| Net income attributable to Tradeweb Markets Inc. | $36.8 million | $29.6 million | $111.2 million | $42.4 million |
| GAAP operating margin | 27.5% | 29.0% | 29.1% | 23.4% |
| Adjusted EBITDA / margin | $100.9 million / 47.4% | $93.4 million / 46.5% | $321.9 million / 48.8% | $260.7 million / 45.1% |
| Adjusted diluted EPS | $0.30 | $0.27 | $0.97 | $0.74 |
Q3 revenue grew 5.9%; transaction fees rose 7.0%, commissions 5.3%, and subscription fees 3.8%. Credit revenue increased 26.9%, while retail-sector revenue declined 13.5%. Nine-month revenue grew 14.1%, led by transaction fees (+20.1%) and commissions (+11.1%). Nine-month average daily trading volume rose 10.6% overall, including 53.4% in credit and 65.2% in equities. Q3 total average daily volume declined 4.5%, principally reflecting lower rates activity.
Q3 operating income was nearly flat year over year as expenses rose 8.1%, faster than revenue. For the nine months, operating income rose 41.5% as revenue growth outpaced expense growth. Higher compensation, depreciation and amortization, and technology and communications costs were notable expense drivers. Consolidated net income declined 3.1% in Q3, while income attributable to Tradeweb Inc. rose 24.3%, reflecting changes in the share of earnings allocated to non-controlling interests as Tradeweb Inc.’s ownership of Tradeweb Markets LLC increased to 82.6% from 64.3% a year earlier.
Cash flow and liquidity: Nine-month operating cash flow was $303.5 million versus $190.5 million; free cash flow, a non-GAAP measure, was $274.2 million versus $160.7 million. Investing cash outflow was $29.3 million, primarily software development and equipment. Cash and cash equivalents were $677.4 million at September 30, up from $460.7 million at year-end 2019; working capital was $585.2 million. The company reported no borrowings under its $500 million revolving credit facility and stated it had sufficient liquidity for at least the next 12 months.
Debt and other obligations: No outstanding indebtedness; the revolving facility matures in April 2024 and carries financial covenants, with the company reporting compliance. The tax receivable agreement liability was $373.0 million, up from $240.8 million at year-end, primarily due to the April follow-on offering and LLC-interest exchanges. Payments to eligible continuing owners equal 50% of specified realized tax savings and are generally expected over 15 years.
Outlook, risks and unusual items
- Outlook: The filing provides no specific financial guidance. Management said it expects COVID-19 disruption to be temporary but could not reasonably estimate its potential financial impact; it believes liquidity and business-continuity measures are adequate.
- Market exposure: Revenue is sensitive to trading activity, volumes, volatility, product mix and fee levels. Fixed-fee revenue partly mitigates volume sensitivity. Management cited electronic-trading growth as a potential offset to market volatility risk.
- COVID-19 and operations: Most employees continued working remotely. Risks include prolonged economic disruption, reduced trading activity, client or counterparty stress, cyber incidents and technology interruptions.
- Pending LSEG transaction: The announced acquisition of Refinitiv by London Stock Exchange Group was expected to close in Q1 2021, subject to regulatory approvals and other conditions; the filing cautions that timing or completion is not assured.
- Legal contingency: Tradeweb is a defendant in consolidated antitrust class actions involving U.S. Treasury securities auctions. It intends to defend itself; it cannot estimate the timing, outcome or potential loss and has established no reserve for these matters.
- Ownership and tax structure: Refinitiv held majority voting control. Changes in LLC ownership, tax law, geographic earnings mix or estimated tax savings may affect taxes and the tax receivable agreement obligation. Deferred tax assets were $516.1 million, versus $256.5 million at year-end 2019.
- Capital returns: The board declared a Q4 2020 dividend of $0.08 per Class A and Class B share. Payment depends on distributions from Tradeweb Markets LLC and remains subject to board discretion.
- Foreign exchange: A hypothetical 10% U.S. dollar move would change nine-month gross revenue by approximately $21.3 million and operating income by approximately $13.8 million, in either direction, according to the filing’s sensitivity analysis.
Key facts for investors to verify
- Whether growth in transaction fees and trading activity persists, particularly in credit, and whether weaker Q3 rates volume or retail revenue continues.
- How reported GAAP results compare with non-GAAP adjusted measures, including the adjustments and assumptions used in adjusted earnings and margins.
- The impact of ownership exchanges and the tax receivable agreement on future cash obligations, taxes and the portion of earnings attributable to public shareholders.
- Whether the LSEG-Refinitiv transaction closes as expected and whether it changes Tradeweb’s control, operations or commercial relationships.
- Developments in the Treasury-auction antitrust litigation, COVID-19 effects, cybersecurity and platform resilience, and regulatory or foreign-exchange risks.