Marcus & Millichap, Inc. — Q3 2015 Form 10-Q
Reporting period: Three and nine months ended September 30, 2015; financial statements are unaudited. The company brokers commercial real estate investment sales and financing, and also provides research and advisory services. It operated 80 offices in the U.S. and Canada, with more than 1,500 investment sales and financing professionals.
Financial performance
Amounts below are in millions except per-share data. Comparisons are with the corresponding 2014 period.
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Revenue | $165.9 | $150.9 | $485.9 | $399.7 |
| Operating income | $27.4 | $23.7 | $80.7 | $57.5 |
| Net income | $15.2 | $13.5 | $46.4 | $33.1 |
| Diluted EPS | $0.39 | $0.35 | $1.19 | $0.85 |
| Adjusted EBITDA | $29.6 | $25.6 | $88.9 | $63.1 |
Revenue increased 9.9% in Q3 and 21.6% year to date; net income rose 12.2% and 40.2%, respectively. Operating margin was 16.5% in Q3 versus 15.7%, and 16.6% year to date versus 14.4%. Net margin was 9.1% in Q3 versus 9.0%, and 9.5% year to date versus 8.3%. Adjusted EBITDA is a non-GAAP measure and should not be treated as a substitute for GAAP results.
- Brokerage commissions, the main revenue source, rose 8.4% in Q3 and 21.2% year to date. Financing fees increased 38.2% and 34.4%, respectively.
- Q3 brokerage transaction count rose 10.5%, but brokerage sales volume fell to $6.4 billion from $7.9 billion as average transaction size declined. Year-to-date brokerage volume increased to $19.9 billion from $17.9 billion.
- Cost of services was 61.5% of revenue in Q3 versus 61.2%, and 60.4% year to date versus 60.1%. SG&A grew more slowly than revenue year to date, at 9.5%.
Cash flow, balance sheet and liquidity
- Nine-month cash from operations was $38.6 million, up from $34.9 million. Investing cash use was $123.8 million, primarily reflecting net purchases of marketable securities; financing provided $3.7 million.
- Cash and cash equivalents declined to $67.6 million from $149.2 million at year-end 2014. Marketable securities totaled $134.8 million, so cash plus securities was approximately $202.4 million. Management attributed the cash decline principally to investing cash in securities for higher yields.
- Total assets were $284.2 million and total liabilities $113.9 million. The company reported $10.6 million of notes payable to former stockholders, including current and non-current portions. No amounts were drawn on its $60 million revolving credit facility; $533,000 of its letter-of-credit sublimit was in use.
- The credit facility was extended to mature June 1, 2018. The company said it was in compliance with its covenants at September 30, 2015. Management believed cash, securities, expected operating cash flow and available borrowing capacity would cover requirements for at least 12 months.
Outlook, risks and notable items
- No revenue, earnings or transaction-volume guidance was provided. Management cited an estimated 2015 annual effective tax rate of approximately 41.1%.
- Results are sensitive to commercial real estate transaction activity, credit availability, interest rates, investor demand and the ability to recruit and retain professionals. Revenue and cash flow are seasonal, historically stronger in the second half, especially Q4; margins can also be lower in the second half due to commission schedules.
- The company’s marketable securities portfolio had a 3.4-year weighted-average maturity and an AA+ weighted-average rating, excluding cash. Management attributed unrealized losses to interest-rate movements and reported no other-than-temporary impairment. Its sensitivity analysis estimated fair-value declines of $2.6 million and $5.3 million for 1% and 2% rate increases, respectively.
- Ordinary-course litigation includes brokerage, employment and other claims; some matters are insured subject to policy limits and deductibles. Management did not expect the proceedings to materially affect financial position, results or cash flows. Risk factors were reported as unchanged from the 2014 Form 10-K.
- Unusual or notable items included $6.8 million of nine-month stock-based compensation, a $4.8 million realized tax benefit from stock-based award activity, and lower legal costs year over year following litigation settlements and an insurance recovery. The company reported no off-balance-sheet arrangements and no material control changes; disclosure controls were considered effective.
Important facts for investors to verify
- Whether the revenue and profit growth continues, given lower Q3 brokerage sales volume and smaller average transaction size.
- How the large shift from cash into marketable securities affects liquidity, investment income and exposure to interest-rate changes.
- Whether commission costs, stock-based compensation and other operating expenses affect margins as business activity and agent production change.
- Whether the estimated tax rate, seasonal pattern and management’s 12-month liquidity assessment remain applicable.
- Developments in litigation and the company’s ability to retain independent-contractor professionals and meet credit-facility covenants.