Marcus & Millichap, Inc. — Q2 2016 Form 10-Q
Reporting period: Three and six months ended June 30, 2016. Unless otherwise noted, financial amounts below are in U.S. dollars; statement amounts are converted from thousands to millions for readability.
Business context
Marcus & Millichap brokers commercial real estate investment sales and arranges financing, with additional research, advisory and consulting services. At quarter-end it operated 81 offices in the U.S. and Canada and had more than 1,600 investment sales and financing professionals. The company reported one aggregated operating segment.
Financial results and liquidity
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Revenue | $183.4m | $173.5m | $347.7m | $320.0m |
| Operating income | $28.8m | $29.5m | $53.7m | $53.3m |
| Operating margin | 15.7% | 17.0% | 15.4% | 16.7% |
| Net income | $17.5m | $17.6m | $32.3m | $31.2m |
| Net margin | 9.6% | 10.1% | 9.3% | 9.8% |
| Diluted EPS | $0.45 | $0.45 | $0.83 | $0.80 |
| Adjusted EBITDA | $31.8m | $33.0m | $58.9m | $59.3m |
Revenue mix and activity: Brokerage commissions generated 92.8% of Q2 revenue and 93.1% year to date. Q2 brokerage revenue rose 6.2%, while financing fees fell 3.8%; for the first six months, brokerage revenue rose 10.0%, financing fees rose 1.4%, and other revenue fell 31.3%, primarily due to lower consulting and advisory services. Year-to-date transactions increased 6.2% to 4,295 and sales volume rose 16.1% to $20.3 billion. The private-client market ($1–$10 million) remained the largest brokerage segment.
Cash flow: For the six months, operating cash flow was $12.3m, down from $21.9m. Investing cash flow was negative $14.5m, compared with negative $90.5m in 2015, mainly reflecting lower net purchases of marketable securities. Financing cash flow was negative $1.5m. Cash and cash equivalents declined $3.7m from year-end to $92.4m.
Balance sheet and debt: At June 30, cash was $92.4m and available-for-sale marketable securities totaled $146.0m. Current assets were $189.2m versus current liabilities of $53.2m. Notes payable to former stockholders totaled $9.7m, bear 5% interest and have a final principal payment due in 2020. The $60m revolving credit facility had no borrowings outstanding; $0.533m of its letter-of-credit sublimit was in use. The company reported compliance with all facility covenants. Total liabilities were $104.8m and stockholders’ equity was $225.0m.
The filing cites approximately $80.3m of future operating lease obligations. Management expects the new lease accounting standard to materially affect the balance sheet, but had not determined the amount. The company stated it did not intend to pay a regular dividend.
Changes versus prior comparable periods
- Q2 revenue increased 5.7%, but operating income declined 2.4% and net income was essentially unchanged. Operating expenses grew 7.4%, faster than revenue, compressing operating margin.
- For the first six months, revenue increased 8.6%, operating income rose 0.7% and net income increased 3.6%; both operating and net margins declined. Adjusted EBITDA decreased 0.6% to $58.9m.
- Brokerage growth reflected more transactions and larger average transaction sizes, partly offset by lower average commission rates as the mix shifted toward larger institutional transactions. Cost of services as a share of revenue increased, partly reflecting a greater share of transactions closed by more highly compensated senior professionals.
- Year-to-date SG&A increased 12.6%, including higher salaries and benefits, marketing and facilities costs associated with expansion. The effective tax rate declined to 39.8% from 40.9%.
Outlook, management commentary and risks
- No specific full-year revenue or earnings guidance was provided. Management cautioned that interim results are not necessarily indicative of full-year results and described the business as seasonal, historically stronger in the second half, particularly the fourth quarter.
- Management characterized the commercial real estate backdrop as attractive but noted lower growth rates, market uncertainty following the Brexit vote and market volatility, a maturing sales cycle, more cautious underwriting, and longer transaction timelines. It said liquidity remained ample and financing costs had not significantly increased, while slower transaction velocity could persist.
- Results depend on transaction volume and size, market conditions, interest rates, financing availability, recruiting and retaining professionals, and the timing of individual closings. The company highlighted seasonality and commission-rate mix as factors that can change margins.
- Ordinary-course litigation includes brokerage, employment and other claims; most matters are insured subject to policy limits and deductibles. Management did not expect the proceedings to have a material adverse effect, but outcomes could not be determined.
- Management said liquidity resources should meet operating requirements for at least 12 months, while noting that additional capital, if needed, might not be available on acceptable terms. Certain participant retirements accelerated anticipated SARs and deferred-compensation payments.
- The company reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. It reported no material changes to previously disclosed risk factors.
Most important facts for investors to verify
- Whether revenue growth can continue while commission rates and operating margins face pressure from transaction mix and rising expenses.
- Whether lower operating cash flow reflects timing and compensation accrual changes, and how cash conversion develops in the second half.
- The pace of commercial real estate closings, financing activity and transaction timelines amid market uncertainty and more cautious underwriting.
- The timing and amount of future payments for former-stockholder notes, SARs and deferred compensation, and the impact of the $80.3m lease commitments.
- The effects of future accounting-standard adoption, particularly lease accounting and employee share-based compensation, on reported results and balance-sheet measures.