Tradeweb Markets Inc. — Q1 2020 10-Q Summary
Reporting period: Three months ended March 31, 2020. Tradeweb operates electronic trading marketplaces and related services across rates, credit, equities and money markets. The 2019 comparison is the predecessor LLC’s pre-IPO period; the 2020 period reflects the post-IPO company, including non-controlling interests. The filing cautions that EPS comparisons are not comparable across these periods.
Financial performance
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Gross revenue | $234.6 million | $186.8 million | +25.6% |
| Operating income | $77.6 million | $46.3 million | +67.7% |
| Net income | $62.5 million | $42.4 million | +47.5% |
| Net income attributable to Tradeweb Markets Inc. | $43.9 million | Not presented on the same basis | — |
| Basic / diluted EPS | $0.26 / $0.25 | $0.19 / $0.19 | Not comparable |
| Adjusted EBITDA (non-GAAP) | $119.7 million | $80.3 million | +49% |
| Adjusted EBITDA margin (non-GAAP) | 51.0% | 43.0% | +799 basis points |
- Revenue growth was driven mainly by transaction fees, up 37.2% to $140.8 million, and commissions, up 24.3% to $42.5 million. Subscription fees were $49.1 million, up 2.2%.
- Trading volumes rose across asset classes: total average daily volume increased 39.0%; credit rose 101.4% and equities 129.0%. Revenue gains were broad, led by institutional clients (+33.3%) and wholesale (+23.6%).
- Total expenses increased 11.7% to $157.0 million. Employee compensation and benefits rose 17.1% to $90.5 million, reflecting incentive compensation, stock-based compensation and option-exercise payroll taxes. Depreciation and amortization increased 11.0% to $37.2 million.
- The effective tax rate was 20.2%, versus 10.1% in Q1 2019; the filing attributes much of the difference to the post-IPO tax structure and non-controlling interests.
Cash flow, liquidity and debt
- Operating cash flow was negative $21.8 million, compared with negative $21.1 million a year earlier. Free cash flow, a company-defined non-GAAP measure, was negative $30.1 million versus negative $29.4 million.
- Cash and cash equivalents were $424.4 million at March 31, down from $460.7 million at year-end. Working capital was $444.4 million, up from $372.7 million.
- Tradeweb had no outstanding borrowings and had $500 million available under its revolving credit facility, which matures in April 2024. It reported compliance with facility covenants.
- The Tax Receivable Agreement liability was $252.0 million. The company is generally required to pay eligible continuing LLC owners 50% of realized or deemed tax savings.
- Quarterly dividends paid in Q1 totaled $13.4 million. After quarter-end, the board declared a $0.08-per-share dividend for Q2, and TWM LLC approved an $18.1 million distribution.
Changes, outlook and material items
- Management said unusually strong March trading volumes amid market volatility supported Q1 results. Nearly all employees were working remotely by mid-March; the company reported business continuity and sufficient liquidity, but said the pandemic’s eventual financial impact could be material and could not be reasonably estimated.
- Management expected any future disruptive COVID-19 impact to be temporary, while noting uncertainty around its duration, severity and broader economic effects. No numerical earnings or revenue guidance was provided.
- On April 27, 2020, Tradeweb completed a follow-on offering of 12.8 million Class A shares at $50.25 per share, receiving $626.3 million net of underwriting discounts and commissions, before estimated offering expenses. Proceeds were used to purchase LLC interests and shares. Tradeweb owned 80.0% of TWM LLC as of May 1, 2020, versus 74.5% at quarter-end.
- The pending LSEG acquisition of Refinitiv was expected to close in the second half of 2020, subject to regulatory approvals and other conditions; the filing gives no assurance it would close on schedule or at all.
- Tradeweb remained a defendant in U.S. Treasury auction antitrust class actions, with no contingency reserve established because the timing, outcome and any loss could not be estimated. A separate IDC lawsuit was settled and dismissed with prejudice in early 2020 without material financial impact.
- The company identified market volatility and trading activity, client and dealer concentration, competition, technology and cybersecurity, regulation, foreign exchange and COVID-19 as risks. It reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether elevated trading activity and pandemic-related market volatility persist, and how trading volumes and variable fees evolve as markets normalize.
- The cash-flow conversion behind rising earnings, including receivables, unsettled trades and annual compensation payments.
- The impact of the April offering, LLC ownership exchanges, non-controlling interests and Tax Receivable Agreement payments on future attributable earnings and cash available for dividends.
- Progress and conditions for the LSEG-Refinitiv transaction, including any effects on Tradeweb’s ownership or business relationships.
- Developments in the Treasury auction litigation and the company’s ability to maintain platform resilience, cybersecurity and regulatory compliance.