Tradeweb Markets Inc. — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021; comparisons are with the corresponding 2020 periods. Tradeweb operates electronic trading marketplaces and related services across rates, credit, equities and money markets for institutional, wholesale and retail clients. LSEG became Tradeweb’s parent through its acquisition of Refinitiv, which closed January 29, 2021.
Financial performance
| Metric | Q2 2021 | Q2 2020 | Change |
|---|---|---|---|
| Revenue | $260.8 million | $212.1 million | +23.0% |
| Operating income | $83.8 million | $55.6 million | +50.6% |
| Operating margin | 32.1% | 26.2% | +5.9 percentage points |
| Net income | $66.2 million | $42.4 million | +56.2% |
| Net income attributable to Tradeweb | $55.3 million | $30.5 million | +81.4% |
| Diluted EPS | $0.27 | $0.16 | Up $0.11 |
| Adjusted EBITDA / margin | $131.9 million / 50.6% | $101.3 million / 47.8% | Margin +2.8 points |
| Adjusted diluted EPS | $0.39 | $0.30 | Up $0.09 |
For the six months ended June 30, revenue was $534.2 million (+19.6%), operating income $182.1 million (+36.7%), net income $147.8 million (+40.9%), and net income attributable to Tradeweb $123.2 million (+65.5%). Adjusted EBITDA was $274.0 million, with a 51.3% margin, versus $221.0 million and 49.5% a year earlier; adjusted diluted EPS was $0.82 versus $0.67. These adjusted measures are non-GAAP and should be considered alongside GAAP results.
- Revenue drivers: Q2 transaction fees and commissions rose 28.2% to $205.4 million. Management attributed growth mainly to higher trading volumes and fees in U.S. and European corporate bonds, rates derivatives and U.S. government bonds. Credit revenue grew 47.1%; rates revenue grew 18.8%. Retail-sector revenue declined 10.3%.
- Costs and margins: Q2 expenses rose 13.2% to $177.0 million, slower than revenue growth. Compensation increased 10.8%; professional fees rose 56.9%, primarily due to NFI acquisition costs and consulting. The filing reports a 20.6% effective tax rate for Q2, versus 23.4% in 2020.
- Cash flow: Six-month operating cash flow was $204.0 million, compared with $164.6 million. Free cash flow, a non-GAAP measure, was $178.5 million versus $145.4 million. Investing used $234.4 million, including $208.9 million net cash paid for the NFI acquisition; financing used $80.5 million, principally for repurchases and dividends.
- Liquidity and debt: Cash and cash equivalents were $681.2 million at June 30, down from $791.3 million at year-end. Working capital was $673.8 million. No borrowings were outstanding under the $500 million revolving credit facility, which matures in April 2024; $0.5 million of letters of credit was issued. Management said available cash, operating cash flow and, if needed, the facility should meet liquidity needs for at least 12 months.
Material changes and notable items
- Tradeweb completed its $190 million all-cash acquisition of Nasdaq’s U.S. fixed-income electronic trading platform, formerly eSpeed, on June 25. The acquired business had no meaningful impact on Q2 results. The preliminary allocation included $88.0 million of goodwill and $99.2 million of customer relationships; valuation and working-capital adjustments remained subject to finalization.
- Tradeweb authorized a $150 million repurchase program through fiscal 2023. It repurchased 617,644 shares in Q2 for $51.7 million at an average $83.67 per share; $98.3 million remained available.
- The company paid $32.2 million in dividends in the first half and declared a subsequent-quarter dividend of $0.08 per share, payable September 15, 2021, subject to the stated record date. A $19.0 million TWM LLC distribution was also approved after quarter-end.
- The Tax Receivable Agreement liability was $425.2 million. Tradeweb owes eligible continuing LLC owners 50% of specified tax savings; substantially all amounts are payable over 15 years.
- Tradeweb’s ownership of TWM LLC increased to 86.9% from 85.1% at year-end; non-controlling interests held 13.1%. Refinitiv/LSEG held a controlling voting interest in Tradeweb.
Outlook, risks and contingencies
The filing gives no quantified revenue or earnings guidance. Management expects continued growth in electronic trading over time, while noting that lower market volatility can reduce client trading volumes and revenue. Fixed-fee revenue partly mitigates volume sensitivity. Management also cited ongoing investment in technology, data and cybersecurity and described a hybrid return-to-office approach beginning in June 2021.
- COVID-19’s future effects remained uncertain; management could not estimate the potential financial impact and said it could be material.
- Key risks include changing trading activity and market conditions, competition, dependence on dealer clients and third-party data or services, platform capacity and outages, cybersecurity incidents, regulation, foreign-exchange fluctuations, and the costs and obligations associated with the ownership structure and Tax Receivable Agreement.
- In Treasury-auction trading-practices antitrust class actions, an amended complaint was filed and Tradeweb moved to dismiss. The company said it intended to defend the matter; it could not reasonably estimate timing, outcome or loss and had no reserve. It described the risk of material loss under ordinary client indemnities as remote.
- The company reported no material changes to its principal risk factors, no material changes in internal control over financial reporting, and no off-balance-sheet arrangements.
Important facts for investors to verify
- Whether trading-volume growth and higher fee capture persist, particularly in rates and credit, and whether retail-sector weakness continues.
- Final NFI acquisition purchase-price allocation, integration results, and the expected contribution of the acquired platform.
- Cash generation after acquisition spending, dividends, share repurchases and Tax Receivable Agreement payments; also confirm remaining repurchase authorization.
- How the $425.2 million Tax Receivable Agreement liability and changes in TWM LLC ownership affect future cash needs, taxes and per-share results.
- Developments in the Treasury-auction litigation, COVID-19 impacts, cybersecurity and operational risks, and market-volatility sensitivity.