Tradeweb Markets Inc. — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. Tradeweb operates electronic marketplaces across rates, credit, equities and money markets, serving institutional, wholesale and retail clients. Its IPO closed April 8, 2019. The company became a holding company controlling Tradeweb Markets LLC and reported a 35.7% non-controlling interest at quarter-end.
Comparability: The 2019 post-IPO and 2018 predecessor periods are not fully comparable. The Refinitiv transaction introduced pushdown accounting from October 2018, increasing depreciation and amortization; the IPO reorganization changed the tax and ownership structure. The six-month 2019 results include pre-IPO and post-IPO periods, with separate earnings-per-share presentation.
Financial performance and position
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Gross/net revenue | $190.5m | $171.0m gross; $151.7m net | $377.3m | $340.5m gross; $311.2m net |
| Operating income | $31.0m | $40.2m | $77.2m | $87.5m |
| Net income | $24.8m consolidated; $12.8m attributable to Tradeweb Inc. | $38.9m | $67.2m consolidated | $84.2m |
| Operating margin on reported net revenue | 16.3% | 26.5% | 20.5% | 28.1% |
| Cash from operations | Not separately provided for quarter | Not separately provided for quarter | $77.0m | $65.0m |
| Free cash flow | Not separately provided for quarter | Not separately provided for quarter | $59.3m | $49.1m |
- Q2 gross revenue grew 11.4%; reported net revenue rose 25.6%, partly because 2018 net revenue was reduced by $19.3m of contingent consideration. Six-month gross revenue rose 10.8%; net revenue rose 21.3%, including the comparable $29.4m prior-year contra-revenue adjustment.
- Q2 transaction fees increased 14.2% to $104.0m and commissions increased 32.2% to $36.4m. Subscription fees declined 3.6% to $48.0m. Management attributed revenue growth mainly to higher trading activity and expanded Refinitiv market-data fees.
- Q2 Adjusted EBITDA was $86.9m, with a 45.6% margin, versus $74.8m and 43.8% in Q2 2018. These are non-GAAP measures; reported Q2 operating income fell 22.9% and net income fell 36.2%.
- Q2 basic and diluted EPS were $0.09 for Tradeweb Markets Inc.; the 2018 predecessor LLC EPS was $0.18 and is not directly comparable. Six-month 2019 EPS is presented separately for pre-IPO and post-IPO periods, not as one comparable figure.
- Cash and cash equivalents were $313.6m at June 30, down from $410.1m at December 31, 2018. Working capital was $276.7m, versus $296.8m. Cash-flow changes included IPO-related purchases of LLC interests, distributions and dividends.
- No borrowings were outstanding under the $500m revolving credit facility; availability was approximately $500m. The filing reports no other outstanding indebtedness. The company reported compliance with facility covenants.
Material changes, outlook and risks
- Expenses increased materially: Q2 employee compensation and benefits rose to $96.0m, including $20.4m of non-cash special-option compensation; depreciation and amortization rose to $34.3m, including a $17.6m increase attributed to pushdown accounting. Management expects total special-option compensation of approximately $33.5m–$35.7m, with expense continuing over the following three years.
- The effective tax rate was 20.3% for Q2 and 14.2% for the six-month period, higher than the prior-year rates primarily because the post-IPO corporation is subject to corporate income taxes. The company recorded a $171.4m Tax Receivable Agreement liability; it must pay participating owners 50% of certain realized or deemed tax savings.
- Management said cash, operating cash flows and, if needed, the revolving facility should fund liquidity needs for at least 12 months. It expects public-company compliance, legal, accounting, personnel and insurance costs to increase. No numeric revenue or earnings guidance was provided.
- The company intends initially to pay quarterly dividends of $0.08 per Class A and Class B share, subject to board discretion and distributions from Tradeweb Markets LLC. A third-quarter dividend of $0.08 per share was declared after quarter-end. The board also approved a $33.0m LLC distribution payable in September.
- Key business risks include market activity and volatility, competition, dealer-client concentration, technology and cybersecurity failures, extensive regulation, foreign-exchange exposure, and Brexit-related costs. Management cited electronic-trading adoption and client activity as potential growth drivers, while noting market conditions can affect volumes.
- Legal matters include U.S. Treasury auction antitrust class actions and a financial-strength-ratings distribution case in which the plaintiff claims approximately $80m plus punitive damages. The company said it could not reasonably estimate the timing, outcome or potential loss and had established no reserves for these matters.
- On August 1, 2019, London Stock Exchange Group announced an agreement to acquire Refinitiv in an all-share transaction valued at approximately $27bn enterprise value, subject to regulatory and shareholder approvals and expected to close in the second half of 2020. Refinitiv held a 54% economic interest in Tradeweb at the time disclosed.
Most important facts for investors to verify
- Separate underlying operating growth from the prior-year contingent-consideration adjustment and from the effects of higher pushdown-accounting amortization and special-option compensation.
- Review the ownership structure and economic attribution: Tradeweb Inc. owned 64.3% of Tradeweb Markets LLC at June 30, while non-controlling owners held 35.7%; reported parent-company earnings therefore differ from consolidated net income.
- Assess cash generation against distributions, dividends, future Tax Receivable Agreement payments and regulated-subsidiary capital needs; confirm facility availability and covenant compliance in later filings.
- Track the LSEG–Refinitiv transaction, its approvals and any effect on Refinitiv’s ownership, control or commercial relationship with Tradeweb.
- Monitor trading volumes, average fees per million, foreign-exchange effects and material legal proceedings; the filing does not quantify a probable loss for the disclosed litigation.