Tradeweb Markets Inc. — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020. Tradeweb operates electronic marketplaces and related services across rates, credit, equities and money markets for institutional, wholesale and retail clients. Comparisons with 2019 require care: the IPO and reorganization occurred in April 2019, so six-month attributable-income and EPS comparisons span pre- and post-IPO reporting periods.
Key financial metrics
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Gross revenue | $212.1 million | $190.5 million | $446.7 million | $377.3 million |
| Operating income | $55.6 million | $31.0 million | $133.3 million | $77.2 million |
| Operating margin | 26.2% | 16.3% | 29.8% | 20.5% |
| Net income | $42.4 million | $24.8 million | $104.9 million | $67.2 million |
| Net income attributable to Tradeweb Markets Inc. | $30.5 million | $12.8 million | $74.4 million | $12.8 million |
| Diluted EPS | $0.16 | $0.09 | $0.41 | 2019 includes separate pre- and post-IPO measures |
- Revenue drivers: Q2 transaction fees rose 17.5% to $122.1 million; subscription fees rose 3.4% to $49.6 million; commissions rose 4.7% to $38.1 million. Institutional revenue increased 17.0%. Credit and equities revenue grew 24.0% and 38.6%, respectively.
- Trading activity: Q2 total average daily volume increased 3.5% year over year, including credit up 46.5% and equities up 40.4%; rates ADV declined 0.6%. For the six-month period, total ADV rose 19.7%.
- Profitability: Q2 expenses fell 1.9% to $156.5 million, while six-month expenses rose 4.5% to $313.5 million. Q2 employee compensation declined partly because Q2 2019 included a $18.9 million immediate charge related to the Special Option Award. Six-month compensation was higher due to performance incentives and headcount, partly offset by lower option expense.
- Cash flow: Six-month operating cash flow was $164.6 million, versus $77.0 million a year earlier. Capital expenditures and capitalized software development totaled $19.2 million; company-defined free cash flow was $145.4 million. Cash and restricted cash totaled $560.9 million at June 30, 2020.
- Liquidity and debt: Working capital was $493.7 million, up from $372.7 million at December 31, 2019. No borrowings were outstanding; the $500 million revolving facility was fully available and matures in April 2024. The company reported compliance with facility covenants.
- Other balance-sheet items: Total assets were $5.46 billion and total equity was $4.83 billion. The Tax Receivable Agreement liability was $373.0 million, up from $240.8 million at year-end, primarily following the April 2020 follow-on offering and LLC-interest exchanges. Tradeweb owned 82.6% of TWM LLC; continuing LLC owners held 17.4%.
Material changes and management commentary
- Management attributed growth to higher client trading activity, further electronic trading, market-share gains, new products and clients, and increased volatility. Revenue growth was 11.4% in Q2 and 18.4% for the first half; constant-currency growth was 11.8% and 19.0%, respectively.
- Q2 adjusted EBITDA was $101.3 million, with a 47.8% adjusted EBITDA margin, compared with $86.9 million and 45.6% in Q2 2019. These are non-GAAP measures; management’s adjustments include specified stock compensation, foreign-exchange items and other exclusions.
- The April 2020 follow-on offering generated $626.3 million net of underwriting discounts, used to purchase LLC interests and shares. It is reflected in financing activity, not operating cash generation.
- The board declared a $0.08-per-share Q3 dividend, payable September 15, 2020. TWM LLC also approved a $27.8 million distribution payable in September. Future dividends depend on board discretion and distributions from TWM LLC.
Outlook, risks and contingencies
- Management believed cash, operating cash flows and, if needed, revolver capacity would fund liquidity needs for at least 12 months. It gave no quantified revenue or earnings guidance.
- COVID-19 caused remote working and heightened market volatility. Management said business continuity remained effective and expected future disruption to be temporary, but could not reasonably estimate the pandemic’s financial impact; effects could be material, including through later economic weakness or recession.
- Results are sensitive to trading volumes and volatility. Lower volatility may reduce liquidity and client trading, although fixed-fee revenue and secular electronic-trading growth partly mitigate this exposure. Foreign-exchange movements also affect results.
- The pending LSEG acquisition of Refinitiv was expected to close in the second half of 2020, subject to regulatory approvals and closing conditions; completion and timing were not assured.
- Two consolidated antitrust class actions concerning U.S. Treasury securities auctions remain pending. The company says it has substantial defenses, but cannot estimate the timing, outcome or potential loss; no contingency reserve was established.
- Other material risks include competition, reliance on dealer clients and third-party data, platform capacity and cybersecurity, extensive regulation, and Refinitiv’s control. Refinitiv held 85.1% of combined voting power at June 30, 2020.
Important facts for investors to verify
- Whether the elevated trading activity and revenue growth persist as volatility and market conditions change, especially given Q2 rates ADV was slightly lower year over year.
- How much reported earnings growth reflects durable operating improvement versus the prior-year Special Option Award charge and other non-GAAP adjustments.
- The future cash costs and tax benefits associated with the $373.0 million Tax Receivable Agreement liability and LLC-interest exchanges.
- Progress, approvals and timing of the LSEG transaction, and any effect on ownership, governance or commercial relationships.
- Developments in the Treasury-auction antitrust litigation and the pandemic’s effects on clients, volumes, operations and credit exposures.