Marcus & Millichap, Inc. — Q2 2017 Form 10-Q
Reporting period: Three and six months ended June 30, 2017; financial statements are unaudited. The company is a commercial real estate brokerage and financing firm, operating 80 offices with 1,749 investment sales and financing professionals at quarter-end.
Financial performance
Amounts are in millions of dollars except per-share data and percentages.
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $180.4 | $183.4 | $333.6 | $347.7 |
| Operating income | $25.0 | $28.8 | $44.0 | $53.7 |
| Net income | $15.6 | $17.5 | $27.6 | $32.3 |
| Diluted EPS | $0.40 | $0.45 | $0.70 | $0.83 |
| Adjusted EBITDA | $28.7 | $31.8 | $51.1 | $58.9 |
| Operating margin | 13.9% | 15.7% | 13.2% | 15.4% |
| Net margin | 8.6% | 9.6% | 8.3% | 9.3% |
- Q2 revenue declined 1.6%; first-half revenue declined 4.0%. Brokerage commissions fell 4.4% in Q2 and 6.5% for the half, mainly reflecting lower sales volume. Financing fees rose 18.5% and 17.0%, respectively; other revenue increased substantially, including a large Q2 consulting/advisory fee without a comparable prior-year fee.
- Q2 brokerage sales volume was $7.3 billion, down 14.8%; the average commission rate increased 25 basis points, partly offsetting the volume decline. First-half brokerage volume was $13.8 billion, down 14.3%.
- Operating income and net income decreased in both comparisons. SG&A increased 8.1% in Q2 and 5.1% for the first half, including spending on growth, technology, marketing, office expansion, legal costs and stock-based compensation. Cost of services declined with lower commissions.
- First-half cash provided by operations was $0.5 million, versus $12.3 million in 2016. Cash and cash equivalents decreased $23.5 million from year-end to $163.8 million. Investing activities used $22.0 million, including net purchases of marketable securities; financing activities used $2.0 million.
- At June 30, cash and cash equivalents were $163.8 million and available-for-sale securities were $123.7 million. Current assets were $252.3 million and current liabilities $58.1 million. Total assets were $399.9 million; stockholders’ equity was $289.6 million.
- No amounts were drawn on the $60 million revolving credit facility; $533,000 of its letter-of-credit sublimit was in use. Notes payable to former stockholders totaled $8.7 million and are due in installments, with final principal due in 2020. The company reported compliance with credit-facility covenants.
Material changes and management commentary
- Management described commercial real estate transaction activity as stepping down from 2015 peak levels. It cited cautious underwriting, longer closing timelines, interest-rate volatility, and investor uncertainty about government policy as near-term headwinds. Management also pointed to generally sound property fundamentals, limited overbuilding in many markets, and ample lender liquidity.
- The company closed 2,191 transactions totaling about $11.3 billion in Q2, compared with 2,257 transactions and $10.6 billion in Q2 2016. For the first half, it closed 4,258 transactions totaling $19.8 billion, versus 4,295 and $20.3 billion.
- Management said existing cash, operating cash flows, securities and available credit should meet operating requirements for at least the next 12 months. The filing provides no specific earnings or revenue guidance; results for the interim periods are not necessarily indicative of full-year results.
- Operating lease obligations were approximately $82.8 million at June 30. The company expected adoption of the new lease standard in 2019 to materially affect its balance sheet; the amount and income-statement and cash-flow effects were still under evaluation.
- Ordinary-course litigation includes brokerage, commercial, employment and other claims. The company said it did not expect the ultimate resolution to materially adversely affect its financial condition, results or cash flows; outcomes remain uncertain. Potential advances to sales and financing professionals under performance-related agreements totaled $1.7 million.
- The company adopted share-based payment accounting guidance in 2017, with no material impact on financial position or results. It expected the new revenue-recognition standard effective in 2018 to have no significant effect on the manner or timing of revenue recognition.
Important facts for investors to verify
- Whether brokerage transaction volume and closing activity stabilize, and how further changes in deal mix affect commission rates and revenue.
- How much Q2 and first-half results depended on the non-recurring large consulting/advisory fee.
- Whether low operating cash generation persists; review the timing of receivables, professional advances, bonus payments and deferred commissions.
- Liquidity and investment portfolio exposure: securities totaled $123.7 million, with an average AA credit rating; management disclosed sensitivity to interest-rate changes and no impairment write-downs.
- Future lease-standard balance-sheet impact, the $82.8 million operating lease commitments, litigation developments, and the company’s ability to meet obligations without drawing its revolver.
- Adjusted EBITDA is a non-GAAP measure and should be considered alongside GAAP results; management cautions it is not comparable across all companies.