Tradeweb Markets Inc. — 2019 Form 10-K Summary
Business context and reporting period
Tradeweb operates electronic trading marketplaces and related data and workflow services across rates, credit, equities and money markets, serving institutional, wholesale and retail clients in more than 65 countries. This annual report covers the fiscal year ended December 31, 2019; Q4 figures below are unaudited.
Comparisons require care: the Refinitiv acquisition led to pushdown accounting from October 1, 2018, and Tradeweb completed its IPO and reorganization in April 2019. The filing combines 2018 successor and predecessor results for certain comparisons; that combined presentation is not GAAP and is not fully comparable.
Financial performance and liquidity
| Metric | 2019 | Comparable period / change |
|---|---|---|
| Gross revenue | $775.6 million | $684.4 million for combined 2018; up 13.3% |
| Net income | $173.0 million | Combined 2018 comparison is not clearly presented on the same basis |
| Net income attributable to Tradeweb Markets Inc. | $83.8 million | Post-IPO attribution reflects non-controlling interests |
| Operating income | $189.8 million | 24.5% of gross revenue |
| Adjusted EBITDA (non-GAAP) | $353.2 million; 45.5% margin | 2018 combined-year value is not clearly provided on a comparable basis |
| Operating cash flow | $311.0 million | |
| Free cash flow (non-GAAP) | $266.5 million | Operating cash flow less software development and equipment/leasehold spending |
| Cash and cash equivalents | $460.7 million at year-end | $410.1 million at December 31, 2018 |
| Debt and revolving credit facility | No borrowings; $500 million available | Facility matures April 2024 |
| Working capital | $372.7 million | $296.8 million at December 31, 2018 |
2019 gross revenue consisted of transaction fees of $423.6 million, subscription fees of $194.4 million, commissions of $149.4 million and other revenue of $8.3 million. Rates generated 56% of gross revenue; credit 21%, equities 6% and money markets 5%. Fixed revenue represented 43.6% of gross revenue.
Average daily trading volume rose 32.3% to $725.4 billion. Rates ADV increased 38.3%, credit 16.7% and money markets 22.7%; equities ADV was essentially flat. International revenue was $278.3 million, about 36% of gross revenue, and foreign exchange movements reduced it by $11.8 million.
In Q4 2019, gross revenue was $197.3 million, versus $178.6 million in Q4 2018. Operating income was $54.3 million and net income was $57.3 million. Q4 net income included a $33.1 million tax receivable agreement liability adjustment; reported Q4 net income therefore includes a significant unusual benefit.
Material changes versus prior periods
- Revenue growth reflected higher trading activity across major asset classes. Transaction fees rose 14.2% and commissions 32.6% versus combined 2018; subscription fees rose 2.0%.
- Operating expenses included $139.3 million of depreciation and amortization, including $97.6 million related to acquisition and Refinitiv fair-value accounting. The resulting accounting basis makes expense and earnings comparisons with earlier periods less straightforward.
- Employee compensation and benefits increased 13.8% versus combined 2018, including $24.4 million of non-cash compensation for the Special Option Award and post-IPO options.
- The April IPO and October follow-on offering changed the ownership structure. Tradeweb owned 73.4% of Tradeweb Markets LLC at year-end; the remainder was held by non-controlling owners.
- The recorded tax receivable agreement liability was $240.8 million at year-end. The agreement generally requires Tradeweb to pay continuing LLC owners 50% of specified realized or deemed tax savings.
Outlook, commentary, risks and unusual items
- Management cited continued electronic trading adoption, client demand, market volatility, new products and regulatory change as factors affecting performance. Trading volumes and revenue remain sensitive to market activity and volatility; no formal financial guidance was provided.
- Management expected 2020 capital expenditures and capitalized software spending of $45 million to $50 million, and believed cash, operating cash flows and the revolver would cover liquidity needs for at least 12 months.
- The company intended to continue quarterly dividends of $0.08 per share, subject to board discretion, legal and contractual limits, and distributions from its operating subsidiary.
- The pending London Stock Exchange Group acquisition of Refinitiv, announced at an enterprise value of approximately $27 billion, was expected to close in the second half of 2020, subject to approvals and conditions. Tradeweb expected to remain a standalone public company; the filing noted that Refinitiv’s non-compete period was expected to end upon closing.
- Material risks include reliance on dealer clients and market liquidity, competition, cyber and service interruptions, regulation, Brexit and foreign exchange exposure, and Refinitiv’s control. Pre-IPO Bank Stockholders and affiliates generated 44.8% of 2019 revenue. Refinitiv held approximately 77.2% of combined voting power at year-end.
- Legal matters include the IDC data-distribution case, in which the plaintiff’s original $80 million damages theory was challenged and an alternative $4 million to $8 million theory was offered; trial was scheduled for October 2020. Tradeweb also disclosed Treasury antitrust litigation. It had been dismissed from the interest-rate-swaps antitrust case, though plaintiffs had reserved rights.
- Goodwill was $2.695 billion and indefinite-lived intangible assets were $323.1 million, creating potential impairment exposure. Management reported effective disclosure controls, but the company had not yet provided management’s Section 404 assessment of internal control over financial reporting.
Most important facts for investors to verify
- Reconcile consolidated net income of $173.0 million with $83.8 million attributable to Tradeweb Markets Inc., and assess the effect of non-controlling interests and the post-IPO ownership structure.
- Separate recurring operating performance from the $33.1 million tax receivable agreement liability adjustment and from acquisition-related depreciation and amortization and stock-based compensation.
- Review the calculation and future cash-payment timing of the $240.8 million tax receivable agreement liability, alongside the company’s dividend and liquidity needs.
- Track trading volumes, fee capture and client concentration, particularly dependence on dealer clients and the rates asset class.
- Monitor the LSEG-Refinitiv transaction, Brexit-related operating and regulatory changes, and the status and potential exposure of disclosed litigation.