Tradeweb Markets Inc. — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023; filed October 26, 2023. Tradeweb operates electronic marketplaces and related services across rates, credit, equities and money markets, serving institutional, wholesale and retail clients. It reports as one business segment.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $328.4m | $287.1m | $968.2m | $895.7m |
| Operating income | $124.7m | $102.8m | $363.6m | $321.0m |
| Net income | $111.6m | $81.6m | $315.8m | $260.6m |
| Net income attributable to Tradeweb Markets Inc. | $98.6m | $69.1m | $275.6m | $220.4m |
| Diluted EPS | $0.46 | $0.33 | $1.30 | $1.06 |
| Adjusted EBITDA | $170.4m | $146.3m | $505.6m | $462.6m |
| Adjusted EBITDA margin | 51.9% | 51.0% | 52.2% | 51.6% |
Q3 revenue increased 14.4% year over year, or 12.5% on a constant-currency basis; nine-month revenue rose 8.1%. Transaction fees and commissions grew 15.6% in Q3 and 8.2% for the nine months, while subscription fees grew 9.0% and 7.2%, respectively. Growth reflected higher activity and revenue in rates and credit, with money markets also contributing. Equities revenue declined 1.8% in Q3 and 1.7% for the nine months.
Q3 total platform volumes rose 29.6% year over year, including 49.7% growth in rates derivatives. However, blended average variable fees per million fell 8.2%, reflecting product and duration mix. Q3 GAAP operating margin was approximately 38.0%, versus 35.8% a year earlier; nine-month operating margin was approximately 37.6%, versus 35.8%.
For the nine months, net cash provided by operating activities was $501.3m, compared with $424.8m. Free cash flow, a non-GAAP measure, was $451.8m versus $379.4m after capitalized software and equipment-related spending. Cash, cash equivalents and restricted cash increased by $236.2m to $1.494bn. Cash and cash equivalents were $1.493bn at September 30.
Balance sheet, liquidity and capital allocation
- No borrowings were outstanding under the $500m revolving credit facility; $499.5m was available, with $0.5m of letters of credit issued. The facility matures in April 2024, and the company said it was discussing renewal. It reported compliance with covenants.
- Working capital was $1.456bn, up from $1.184bn at December 31, 2022. Total liabilities were $692.8m; the tax receivable agreement (TRA) liability was $448.0m, including $25.7m expected to be paid within 12 months.
- Operating lease liabilities were $22.0m. Tradeweb expects to fund liquidity needs from cash and operating cash flow and said it believes these resources are sufficient for at least 12 months, even if the credit facility is not renewed.
- The company paid $56.8m in dividends and repurchased $35.2m of shares under its program during the first nine months. A further $239.8m remained authorized for repurchases at quarter-end. A $0.09-per-share Q3 dividend was declared after quarter-end, payable December 15, 2023.
Material changes, outlook and notable items
- Yieldbroker acquisition: Completed August 31 for A$123.6m (approximately $80.1m, net of acquired cash and before working-capital and other closing adjustments). The platform expands Tradeweb’s Australian and New Zealand government bond and derivatives presence. One month of activity did not materially affect Q3 results. Purchase accounting remains preliminary, including valuation of acquired intangibles and final working-capital adjustments.
- Spending outlook: Management expects fiscal 2023 non-acquisition capital expenditures and software development costs of $56m–$63m, compared with $60.1m in 2022. $49.6m had been spent through September 30.
- Management commentary: The company described a challenging macroeconomic backdrop, including rising rates, sustained market volatility and an inverted yield curve, which affected duration traded and fees per million. It noted that fixed-fee revenue and continued electronic adoption partly mitigate market-activity volatility. No specific revenue or earnings guidance was provided in the supplied filing text.
- Expenses and unusual items: Q3 expenses increased 10.5%, slower than revenue growth; higher compensation, technology and communications, and acquisition-related costs were among the increases. Q3 included $4.6m of acquisition transaction and integration costs in the company’s non-GAAP reconciliation and a $1.9m loss on the Australian-dollar call option used in connection with the acquisition. Nine-month other loss was $2.0m, including the option loss and a tax-indemnification receivable reduction.
- Risks and contingencies: Results are sensitive to trading volumes, volatility, competition, technology reliability and cybersecurity, regulation, foreign exchange and client/counterparty performance. The company identified concentration of cash at financial institutions and margin requirements as liquidity considerations. An appeal in a U.S. Treasury auction antitrust class action was under advisement after October 3, 2023 oral argument; the company said it intends to defend the case and had not established a contingency reserve because loss could not be reasonably estimated. Management did not expect pending proceedings to have a material adverse effect.
- Other developments: A new Refinitiv data licensing agreement became effective November 1, 2023, with initial schedules running through October 31, 2025 and fees based on fixed licenses or revenue sharing. The filing also describes a proposed EU fixed-income consolidated-tape joint venture, whose operation depends on selection and regulatory approvals. Refinitiv/LSEG’s control and Tradeweb’s reliance on distributions from its operating subsidiary are relevant governance and liquidity considerations.
Key facts investors should verify
- Whether the revolving credit facility was renewed before its April 2024 maturity, and on what terms.
- Whether Q3 volume growth and lower blended fees per million persist, including the mix and pricing effects across asset classes.
- Final Yieldbroker purchase-price allocation, working-capital adjustments, integration costs and contribution to results.
- TRA payment timing and the cash-tax savings available to support the $448.0m recorded liability.
- Developments in the Treasury auction litigation and the EU consolidated-tape tender and approvals.
- How the new Refinitiv data agreement affects recurring market-data revenue and the related-party relationship.
Adjusted EBITDA, adjusted margins and free cash flow are non-GAAP measures; the company cautions that they supplement, and do not replace, GAAP results.