Marcus & Millichap, Inc. — Q1 2014 Form 10-Q
Business and period. The filing covers the three months ended March 31, 2014, with comparisons to Q1 2013. Marcus & Millichap is a commercial real estate brokerage and financing firm operating 76 offices in the U.S. and Canada, with more than 1,300 investment sales and financing professionals. It reported one aggregated reportable segment.
Financial performance and liquidity
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Revenue | $114.6 million | $69.4 million | +65.2% |
| Operating income | $12.1 million | $2.7 million | +354.0% |
| Net income | $6.8 million | $1.6 million | +314.0% |
| Net margin | 5.9% | 2.4% | Up 3.5 percentage points |
| Adjusted EBITDA (non-GAAP) | $13.5 million | $4.1 million | +232.8% |
| Operating cash flow | $(17.1) million | $35.5 million | Down $52.6 million |
- Brokerage commissions were $104.7 million, up 71.2%; financing fees were $6.1 million, up 21.7%; other revenue was $3.7 million, up 18.5%.
- Cost of services was $68.4 million, or 59.7% of revenue, compared with 59.4%. SG&A was $33.4 million, or 29.1% of revenue, versus 35.7%. Operating margin rose to 10.5% from 3.8%.
- Basic and diluted earnings per share were $0.17. Comparable Q1 2013 EPS was not presented because the company completed its IPO in 2013.
- Cash and cash equivalents were $83.3 million at March 31, down from $101.0 million at year-end 2013. Current assets were $98.8 million and current liabilities $31.6 million.
- Operating cash use reflected payment timing, including decreases in commissions payable ($13.7 million), accrued employee expenses ($9.5 million), deferred compensation and commissions ($3.2 million), and income taxes payable ($3.2 million). The prior-year operating cash flow included a $52.9 million inflow principally from the return of cash under the former MMC cash-sweep arrangement.
- Former-stockholder notes payable totaled $12.4 million, including $0.9 million current and $11.5 million long-term. The SARs liability was $20.2 million and accrues interest; Q1 interest expense totaled $0.4 million. The filing identifies no material change in contractual obligations.
Material changes and management commentary
- Brokerage revenue growth reflected more transactions, larger average commission amounts and larger average transaction sizes. Sales transactions rose 37.2%; average commission per transaction rose 24.8%; average transaction size rose 10.0%.
- Management cautioned that the comparison benefited partly from abnormally low Q1 2013 sales volumes, when “fiscal cliff” concerns had accelerated some transactions into 2012.
- SG&A rose 34.9%, principally due to higher management performance compensation, staff and benefit costs, legal costs and public-company expenses.
- Management estimated a 41.5% effective tax rate for 2014, versus 43.5% in Q1 2013. The company now files as a stand-alone tax entity following termination of its MMC tax-sharing agreement.
- The business is seasonal: historically, revenue, operating income, net income and operating cash flow are stronger in the second half, particularly Q4. Management said existing cash and expected operating cash flows should meet requirements for at least 12 months; it issued no specific revenue or earnings guidance.
- The company does not intend to pay a regular dividend. Management reported effective disclosure controls and no material changes to internal control over financial reporting during the quarter.
Risks, contingencies and unusual items
- Results depend on commercial real estate transaction activity, the economy, investor demand, credit availability and interest rates; recruiting and retaining transaction professionals is also important.
- Management noted that notes payable and the SARs liability contain provisions that could accelerate repayment and adversely affect liquidity. It also cautioned that additional capital, if needed, may not be available on acceptable terms.
- The company faces ordinary-course litigation, including brokerage disputes and claims challenging the classification of sales professionals as independent contractors. It did not expect the proceedings, based on information then available, to materially adversely affect its financial position, results or cash flows.
- The company reported no off-balance-sheet arrangements and no material market risk exposure. Q1 results are not necessarily indicative of full-year results.
Investor facts to verify
- Whether transaction growth and improved operating margins persist after accounting for the unusually weak Q1 2013 comparison and normal seasonality.
- Whether operating cash flow recovers as commission, payroll and tax-related liabilities fluctuate through the year.
- The terms, timing and potential acceleration triggers for the former-stockholder notes and SARs obligations.
- How the stand-alone tax position affects the effective tax rate and deferred tax assets, including the valuation allowance related to Canadian operations.
- Share dilution and compensation expense from equity awards and fully vested deferred stock units; also note the filing reports 36,600,897 shares outstanding at March 31 and 36,623,781 at May 9, 2014.