Tradeweb Markets Inc. — Q3 2019 Form 10-Q
Business context and reporting period. Tradeweb operates electronic marketplaces and related services across rates, credit, equities and money markets for institutional, wholesale and retail clients. This unaudited filing covers the quarter and nine months ended September 30, 2019. Comparisons require care: the April 2019 IPO and reorganization changed the reporting entity, and the Refinitiv transaction’s October 2018 pushdown accounting established a new accounting basis. The nine-month 2019 results include both pre-IPO and post-IPO periods; reported net income and EPS are therefore not directly comparable with 2018 or a single-company post-IPO measure.
Key financial metrics
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Net revenue | $201.0 million | $167.8 million | $578.3 million | $478.9 million |
| Operating income | $58.3 million | $52.8 million | $135.5 million | $140.3 million |
| Net income | $48.6 million | $46.0 million | $115.7 million | $130.2 million |
| Net income attributable to Tradeweb Markets Inc. | $29.6 million | Not applicable to predecessor comparison | $42.4 million for post-IPO period | Not applicable |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $190.5 million | $164.8 million |
| Free cash flow (company-defined, non-GAAP) | Not provided for quarter | Not provided for quarter | $160.7 million | $139.0 million |
Q3 gross revenue increased 21.6%; net revenue increased 19.8%. Nine-month gross revenue increased 14.3% and net revenue increased 20.7%, with the latter comparison also reflecting the absence of 2018 contingent-consideration adjustments. GAAP operating margin was approximately 29.0% in Q3 2019 versus 31.5% in Q3 2018, and 23.4% versus 29.3% for the nine-month periods. Company-reported adjusted EBITDA margin, a non-GAAP measure, was 46.5% versus 40.3% for Q3 and 45.1% versus 42.3% for nine months.
Q3 basic/diluted EPS was $0.21/$0.20. For the nine months, the filing reports pre-IPO basic/diluted EPS of $0.19/$0.19 and post-IPO EPS of $0.30/$0.28; these periods are not directly comparable. Adjusted diluted EPS was $0.27 for Q3 and $0.23 for the post-IPO portion of the nine-month period, as defined by the company.
Revenue drivers. Q3 transaction fees rose 21.8% to $112.7 million, commissions rose 54.1% to $37.6 million, and subscription fees rose 6.5% to $48.6 million. Management attributed growth mainly to higher trading volumes, including rates derivatives, ETFs, U.S. corporate bonds and Treasuries. Q3 platform average daily trading volume rose 53.3% year over year. For nine months, transaction fees rose 16.7% and commissions rose 35.5%; subscription fees were nearly flat. Growth was broad across client sectors, with Q3 institutional revenue up 24.0% and wholesale up 26.0%.
Cash, debt and liquidity. Cash and cash equivalents were $389.9 million at September 30, 2019, compared with $410.1 million at December 31, 2018. The company had no borrowings under its $500 million revolving credit facility, which matures in April 2024, and reported full availability and covenant compliance. Working capital was $327.4 million. Current assets and liabilities included large, largely offsetting broker/dealer settlement balances: approximately $698.8 million of receivables and $664.3 million of payables outstanding at quarter-end were settled on October 1. Operating cash flow was $190.5 million; investing cash outflow was $29.8 million, primarily software development and equipment. Financing cash outflow was $178.9 million, including IPO-related purchases of LLC interests, distributions and dividends. The company said projected cash, operating cash flows and, if needed, credit-facility borrowings should meet liquidity needs for at least 12 months.
Material changes versus prior comparable period
- Q3 net income increased to $48.6 million from $46.0 million, while nine-month net income declined to $115.7 million from $130.2 million. Nine-month operating income fell despite revenue growth, principally reflecting higher expenses.
- Depreciation and amortization rose by $18.8 million in Q3 and $54.1 million for nine months, substantially due to pushdown accounting. Management estimated the pushdown-related increase at $18.3 million and $52.5 million, respectively.
- Employee compensation and benefits increased 15.3% in Q3 and 21.0% for nine months. Nine-month expense included $22.4 million of stock-based compensation related to the pre-IPO Special Option Award and post-IPO options.
- The effective tax rate was 17.5% for Q3 and 15.6% for nine months, up from 14.1% and 8.4%, respectively, primarily due to the post-IPO corporate tax structure.
- Cash provided by operations rose 15.6% year over year for the nine-month period; capital expenditures also increased, to $29.8 million from $25.9 million.
Outlook, commentary, risks and unusual items
No quantified financial guidance was provided. Management cited continued electronic-trading adoption, technology investment, new products and market-share gains as potential growth drivers, while noting that revenue is sensitive to trading volumes and volatility. Lower volatility can reduce client activity; product mix, pricing and volume discounts can also affect fees per million. Q3 total variable fees per million declined 10.9%, despite higher volumes.
Key risks include competition, dependence on dealer clients and third-party market data, platform capacity and cybersecurity, extensive regulation, foreign-exchange movements, and the effect of market conditions on trading activity. The company reported foreign-currency effects reduced gross revenue by $3.6 million in Q3 and $8.4 million for nine months. Brexit-related preparation, including establishing a regulated Netherlands subsidiary, had generated additional costs.
The LSEG agreement to acquire Refinitiv for approximately $27 billion was pending customary regulatory approvals and closing conditions, with closing expected in the second half of 2020; completion and timing were not assured. Tradeweb amended its revolving-credit agreement after quarter-end to permit the transaction. The company is controlled through Refinitiv and depends on distributions from TWM LLC to fund taxes, expenses, tax-receivable-agreement payments and dividends. The tax receivable agreement requires payment to eligible owners of 50% of realized or deemed tax savings; the recorded liability was $171.4 million.
Legal proceedings include U.S. Treasury auction antitrust class actions and a financial-strength-ratings distribution matter. In the latter, the court dismissed some claims and rejected the plaintiff’s damages theory supporting its approximately $80 million claim; Tradeweb said it would continue to defend the matter. The company had no contingency reserves for these proceedings because it could not reasonably estimate the outcome or loss range. It stated there were no material changes to previously disclosed principal risk factors.
Subsequent to quarter-end, Tradeweb completed a follow-on offering on October 22, 2019, receiving $704.3 million in net proceeds before estimated offering expenses, used primarily to purchase LLC interests. On November 6, the board declared a $0.08-per-share quarterly dividend on Class A and Class B shares.
Important facts for investors to verify
- Reconcile reported and adjusted earnings and margins, including the effects of pushdown accounting, stock-based compensation, taxes and 2018 contingent consideration.
- Assess whether volume growth is sustainable and whether product and protocol mix, pricing or lower fees per million constrain revenue conversion.
- Monitor settlement-related receivables and payables, cash generation, capital spending, and the company’s dependence on TWM LLC distributions for dividends and other obligations.
- Review the LSEG transaction’s regulatory and closing status, implications for Refinitiv’s control, and the tax-receivable-agreement liability and payments.
- Track the unresolved litigation, particularly the remaining claims in the ratings-distribution case, and confirm whether subsequent developments require a loss accrual.