Tradeweb Markets Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; comparisons are with Q1 2022 unless noted. Tradeweb operates global electronic marketplaces across rates, credit, equities and money markets, serving institutional, wholesale and retail clients. It reports one business segment. The company is controlled by LSEG through Refinitiv.
Financial performance
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Revenue | $329.2 million | $311.5 million | +5.7%; +7.5% constant currency |
| Operating income | $122.6 million | $111.6 million | +9.8% |
| Operating margin | 37.2% | 35.8% | +1.4 percentage points |
| Net income | $102.2 million | $97.4 million | +4.9% |
| Net income attributable to Tradeweb Markets Inc. | $87.9 million | $83.0 million | +5.9% |
| Diluted EPS | $0.42 | $0.40 | +5.0% |
| Adjusted EBITDA (non-GAAP) | $172.2 million | $160.6 million | +7.2% |
| Adjusted EBITDA margin (non-GAAP) | 52.3% | 51.6% | +0.7 percentage points |
| Adjusted Diluted EPS (non-GAAP) | $0.54 | $0.48 | +12.5% |
Transaction fees and commissions rose 5.9% to $266.6 million; subscription fees, including Refinitiv market data fees, rose 5.2% to $60.0 million. Revenue growth was strongest in retail (+59.5%), money markets by asset class (+28.5%) and rates (+6.3%). Total platform average daily volume increased 16.2%, while blended average variable fees per million declined 7.8%, reflecting product and trading mix.
Expenses increased 3.4% to $206.7 million. Lower compensation costs, including reduced CEO-retirement-related accelerated stock compensation, were more than offset by increases in technology, general and administrative, professional-fee and occupancy costs. Net interest income improved to $12.5 million from a $0.4 million expense, primarily reflecting higher interest rates and invested cash. The effective tax rate rose to 24.5% from 12.3%; income tax expense was $33.2 million versus $13.7 million.
Cash flow, balance sheet and capital
- Operating cash flow was $70.8 million, up from $45.2 million. Free cash flow, a non-GAAP measure, was $54.1 million versus $27.2 million.
- Investing cash outflow was $16.7 million, including $9.8 million of capitalized software development and $6.9 million of equipment and other purchases. Financing cash outflow was $80.5 million, mainly for payroll taxes on equity awards, $20.8 million of repurchases and $18.7 million of dividends.
- Cash and cash equivalents were $1.233 billion at March 31, 2023, down from $1.257 billion at year-end. Working capital was $1.248 billion, up from $1.178 billion.
- No borrowings were outstanding under the $500 million revolving credit facility; $499.5 million was available, subject to covenants. The facility matures in April 2024. The company reported no outstanding indebtedness and said it was in compliance with facility covenants.
- Total liabilities were $639.2 million, including a $420.1 million tax receivable agreement liability. The company expects approximately $25.7 million of tax receivable agreement payments within 12 months and $394.4 million thereafter.
- Quarterly repurchases totaled $22.7 million; $252.3 million remained under the $300 million authorization. The company paid a $0.09-per-share dividend in March and declared another $0.09 dividend for Q2, payable June 15, 2023.
Outlook, commentary and notable items
- Management expects available cash, operating cash flow and, if needed, the credit facility to fund liquidity needs for at least the next 12 months. Capital expenditures and software development spending guidance for FY2023 is $56 million–$62 million, versus $60.1 million in FY2022.
- Management described a turbulent quarter, with rate volatility and the regional bank liquidity crisis affecting trading behavior, including some migration to phone orders during periods of stress. It cited electronic trading adoption and fixed-fee revenue as partial offsets to market-volume volatility.
- On April 26, 2023, the company disclosed advanced discussions to acquire Yieldbroker for an anticipated AUD 125 million in cash. No definitive agreement or closing is assured; the proposal remains subject to approvals, documentation, regulatory review and customary conditions.
- Two consolidated antitrust class actions concerning U.S. Treasury auction trading practices were dismissed against Tradeweb; plaintiffs’ appeal remained pending, with no oral-argument date set. The company said it could not estimate a loss range and had no contingency reserve for pending legal matters.
- Key risks cited include market activity and volatility, competition, reliance on dealer clients and third parties, technology and cybersecurity incidents, extensive regulation, foreign-exchange movements, and the company’s dependence on distributions from TWM LLC for dividends, taxes and tax receivable agreement payments. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Most important facts for investors to verify
- Whether volume growth and improving reported margins persist if market volatility and trading mix change; monitor variable fees per million as well as volumes.
- Drivers and durability of the higher effective tax rate, and the timing and cash burden of the $420.1 million tax receivable agreement liability.
- Cash conversion and working-capital movements, including the effect of annual compensation payments, clearing deposits and equity-award tax withholding.
- Status, final price and expected funding of the proposed Yieldbroker acquisition, if a definitive transaction is agreed.
- Progress and potential consequences of the Treasury-auction antitrust appeal, and renewal or replacement of the revolving facility before its April 2024 maturity.
- Non-GAAP measures are supplemental and depend on company-defined adjustments; compare them with GAAP results and review the filing’s reconciliations.