Marcus & Millichap, Inc. — Q1 2016 Form 10-Q
Period: Three months ended March 31, 2016; unaudited. The company provides commercial real estate investment sales brokerage, financing, research and advisory services, operating 79 U.S. and Canadian offices. Comparisons are with Q1 2015 unless otherwise stated. Dollar amounts below are in millions except per-share data.
Key financial results
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Revenue | $164.3 | $146.5 | +12.1% |
| Operating income | $24.9 | $23.8 | +4.6% |
| Operating margin | 15.1% | 16.2% | Down 1.1 percentage points |
| Net income | $14.8 | $13.7 | +8.4% |
| Net margin | 9.0% | 9.3% | Down 0.3 percentage points |
| Diluted EPS | $0.38 | $0.35 | +$0.03 |
| Adjusted EBITDA | $27.2 | $26.3 | +3.5% |
| Cash flow from operations | $(19.0) | $(18.0) | Greater cash use |
- Brokerage commissions rose 14.5% to $153.7 million; financing fees increased 8.7% to $8.7 million. Other revenue fell 56.6% to $1.9 million, primarily reflecting lower consulting and advisory services.
- Operating expenses rose 13.6% to $139.4 million. Cost of services increased 11.6% to $96.2 million; SG&A increased 17.9% to $42.3 million. SG&A growth reflected marketing and sales activity, office expansion, added support staff, and higher legal costs.
- Q1 brokerage activity included 1,499 transactions and $7.5 billion in sales volume, up from 1,374 transactions and $6.1 billion. Total company transactions were 2,038 with $9.6 billion of volume, versus 1,877 and $8.1 billion.
- Brokerage revenue growth reflected more transactions and larger average transaction size, partly offset by a lower average commission rate (2.04% versus 2.19%), in part due to a larger institutional-market mix. Financing transactions increased to 370 from 311, while average fee per transaction declined.
Balance sheet, cash flow and liquidity
- At March 31, 2016, cash and cash equivalents were $76.9 million, down from $96.2 million at year-end 2015. Available-for-sale marketable securities totaled $132.1 million; cash plus these securities was approximately $209.1 million.
- Total assets were $297.6 million and total liabilities were $92.6 million. Current assets were $167.5 million versus current liabilities of $39.9 million.
- Cash decreased by $19.3 million during the quarter. Investing activities provided $0.7 million, including net proceeds from securities; financing activities used $0.9 million. Management attributes first-quarter operating cash use in part to the seasonal payment of prior-year bonuses and deferred commissions.
- Notes payable to former stockholders totaled $10.6 million, bear 5% interest, and have a final principal payment due in Q2 2020. No borrowings were outstanding on the $60 million revolving credit facility; $0.5 million of its letter-of-credit sublimit was in use. The company reported covenant compliance.
- Management said existing cash, operating cash flows, securities proceeds and available credit should meet operating requirements for at least the next 12 months. It does not intend to pay a regular dividend currently.
Outlook, commentary and risks
- No quantitative earnings or revenue guidance is provided. Management cautions that Q1 results are not necessarily indicative of full-year performance and notes typical seasonality: revenue, income and operating cash flow tend to be lower in the first half and higher in the second half, particularly Q4.
- Management described commercial real estate fundamentals and investor yields as supportive, with ample market liquidity and disciplined lending. It also noted transactions were taking longer to close in late 2015 and early 2016, and interest-rate and global-growth uncertainty remained.
- Business performance depends on transaction volume and size, recruiting and retaining professionals, financing availability, property-market conditions and interest rates. The private-client segment ($1–$10 million properties) generated about 68% of brokerage commissions, down from 71% in Q1 2015.
- Operating lease commitments for autos and office space were approximately $84.8 million at quarter-end. The company expects the future lease-accounting standard to materially affect its balance sheet; the eventual amount and income-statement and cash-flow effects were not yet determined.
- Ordinary-course litigation includes brokerage, employment, consumer-fraud and other claims. The company said it did not expect the proceedings to materially adversely affect its financial position, results or cash flows. No material risk-factor changes from the 2015 Form 10-K were reported.
- Investment securities had a fair value of $132.1 million and a weighted-average rating of AA+. A 2% interest-rate increase was estimated to reduce their fair value by about $4.7 million. The company reported no material foreign-exchange impact to date.
Most important facts for investors to verify
- Whether transaction growth and higher brokerage volume continue, and whether lower commission rates or a shift toward larger deals further affect margins.
- Whether operating expenses—especially marketing, facilities and staffing—grow faster than revenue, and whether margin compression persists.
- Seasonal cash requirements, including bonus and deferred-commission payments, and the resulting cash and securities position.
- Terms and potential acceleration provisions for former-stockholder notes and the SARs liability, as well as compliance with revolver covenants.
- The eventual balance-sheet effect of the $84.8 million operating lease obligations and outcomes of ordinary-course litigation.