Business context and reporting period
Marcus & Millichap, Inc. filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2014. The company provides commercial real estate investment sales brokerage, financing, research and advisory services. It operated 78 offices in the United States and Canada, with more than 1,400 investment sales and financing professionals.
Unless otherwise noted, financial amounts below are in millions of dollars. Comparisons are with the corresponding 2013 periods.
Financial performance and key metrics
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Revenue | $150.9 | $112.0 | $399.7 | $286.8 |
| Operating income | $23.7 | $12.6 | $57.5 | $29.5 |
| Operating margin | 15.7% | 11.2% | 14.4% | 10.3% |
| Net income | $13.5 | $7.3 | $33.1 | $16.9 |
| Net margin | 9.0% | 6.4% | 8.3% | 5.9% |
| Adjusted EBITDA (non-GAAP) | $25.6 | $15.7 | $63.1 | $36.8 |
- Q3 diluted EPS was $0.35. Nine-month diluted EPS was $0.85. The filing does not provide meaningful pre-IPO EPS comparisons.
- Real estate brokerage commissions were $140.2 million in Q3, up 37.8%, and $368.2 million for nine months, up 42.3%. Financing fees rose 15.9% to $7.9 million in Q3 and 19.7% to $22.3 million year to date. Other revenue fell 17.8% in Q3 and 2.7% year to date.
- Q3 operating expenses rose 28.0% to $127.2 million; nine-month expenses rose 33.0% to $342.2 million. Cost of services increased to 61.2% of revenue in Q3 and 60.1% year to date, from 60.5% and 59.4%, respectively. SG&A as a share of revenue declined.
- Q3 transactions exceeded 1,900, with approximately $9.9 billion in volume, versus more than 1,600 and $6.1 billion in Q3 2013. Nine-month transactions exceeded 5,500, totaling approximately $23.2 billion, versus more than 4,600 and $16.2 billion.
Liquidity, cash flow and debt
- Cash and cash equivalents were $134.0 million at September 30, 2014, up from $101.0 million at December 31, 2013. Current assets were $154.8 million and current liabilities $54.8 million.
- For the first nine months, operating cash flow was $34.9 million, investing cash outflow $1.8 million, and financing cash outflow $0.02 million; cash increased $33.1 million. Operating cash flow was below 2013's $62.1 million, which included a $67.4 million operating cash inflow from the return of funds following termination of the former parent’s cash-sweep arrangement.
- The company had no borrowings under its $60 million secured revolving credit facility, which matures June 1, 2017. It was in compliance with financial and other covenants at quarter-end. The facility requires minimum rolling four-quarter EBITDAR coverage of 1.25:1.0 and maximum funded debt-to-EBITDA of 2.0:1.0.
- Notes payable to former stockholders totaled $11.5 million, including $0.9 million current and $10.6 million long-term. The company also reported a $20.3 million stock appreciation rights liability within deferred compensation and commissions. Management said cash, expected operating cash flow and facility availability should meet operating needs for at least 12 months.
Material changes, outlook and risks
- Revenue and profit growth reflected more transactions and higher average transaction and commission sizes. Management noted lower commission rates on some larger transactions. For nine-month growth, it also cited an unusually weak Q1 2013 comparison, when “fiscal cliff” concerns had shifted some sales into 2012.
- Higher cost of services largely tracked revenue growth; the cost ratio increased because more transactions were handled by senior professionals on higher commission schedules. SG&A growth included higher management performance compensation, headcount, sales and marketing, public-company and other expansion costs.
- Seasonality is significant: historically, revenue and cash flow are lower in the first half and higher in the second half, particularly Q4. Margins can be lower in the second half because of graduated commission schedules.
- No specific earnings or revenue guidance was provided. Management cautioned that interim results are not necessarily indicative of full-year results. Key sensitivities include transaction activity, real estate market conditions, credit availability, interest rates, and recruiting and retaining professionals.
- Other items: Q3 included a write-off of approximately $7.7 million of fully depreciated, unused furniture and equipment; the filing does not identify a material income-statement charge for that write-off. The 2014 effective tax rate was 41.2%, with management estimating a 40.9% full-year rate. The company does not currently intend to pay a regular dividend.
- Ordinary-course litigation includes brokerage, employment and other claims; the company said it did not expect the outcomes to materially affect its financial position, results or cash flows. It identified possible liquidity effects if repayment of former-stockholder notes or SARs liabilities were accelerated. Market risks were described as not material; disclosure controls were deemed effective, with no material internal-control changes reported.
Important facts for investors to verify
- Whether transaction growth and larger average deal sizes are sustainable, and how seasonal Q4 results affect full-year performance.
- Whether rising commission costs and senior-professional payout rates will constrain margins as revenue grows.
- Cash generation excluding the unusual 2013 cash-sweep return, and the timing of commissions, bonuses and tax payments.
- Terms and potential acceleration triggers for the former-stockholder notes and SARs liability, and ongoing compliance with credit-facility covenants.
- The effect of the stand-alone tax rate, equity-based compensation and potential dilution from outstanding DSUs and awards.
- Developments in litigation, including independent-contractor classification claims, and changes in commercial real estate activity, credit conditions and interest rates.