Tradeweb Markets Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; comparisons are with the three months ended March 31, 2021 unless stated otherwise. Tradeweb operates electronic marketplaces across rates, credit, equities and money markets. It reported one business segment.
Financial performance and liquidity
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Total revenue | $311.5 million | $273.4 million | +13.9% |
| Operating income | $111.6 million | $98.3 million | +13.5% |
| Operating margin | 35.8% | 36.0% | Down about 0.1 percentage point |
| Net income | $97.4 million | $81.6 million | +19.5% |
| Net income attributable to Tradeweb Markets Inc. | $83.0 million | $67.9 million | +22.3% |
| Diluted EPS | $0.40 | $0.33 | +21.2% |
| Adjusted EBITDA | $160.6 million | $142.1 million | +13.1% |
| Adjusted EBITDA margin | 51.6% | 52.0% | Down 40 basis points |
| Adjusted Diluted EPS | $0.48 | $0.43 | +11.6% |
Adjusted measures are non-GAAP; the filing cautions they have limitations and should be considered alongside GAAP results. Revenue growth was 15.9% on a constant-currency basis; foreign exchange reduced reported revenue growth by 2.0 percentage points. The effective tax rate fell to 12.3% from 16.6%.
Revenue drivers: Transaction fees and commissions rose 15.6% to $251.8 million, principally on higher rates derivatives, U.S. corporate bond and U.S. government bond activity. Subscription fees, including Refinitiv market data fees, increased 7.6% to $57.0 million. By asset class, equities grew 40.7%, credit 16.1%, rates 12.2% and money markets 6.5%. Total platform ADV increased 10.9%; excluding other rates derivatives, it rose 7.4%.
Cash, debt and liquidity: Cash and cash equivalents were $828.1 million at March 31, down from $972.0 million at year-end. Operating cash flow was $45.2 million, versus $55.6 million; free cash flow, a non-GAAP measure, was $27.2 million, versus $42.9 million. Investing used $18.0 million and financing used $168.1 million, including $93.2 million of payroll tax payments related to equity awards, $47.3 million of share repurchases and $16.4 million of dividends. Working capital was $861.5 million, compared with $887.4 million at year-end.
Tradeweb had no borrowings outstanding under its $500 million revolving credit facility, with $0.5 million of letters of credit issued; the facility matures in April 2024. Management said available cash, operating cash flows and, if needed, the facility should cover liquidity needs for at least 12 months. The tax receivable agreement liability was $409.1 million; approximately $6.3 million was expected to be payable within 12 months and $402.8 million thereafter. Total assets were $6.0 billion and total liabilities were $707.4 million.
Material changes versus the prior period
- Revenue and earnings increased, led by higher trading activity and fees. International revenue rose 14.7%; currency movements reduced it by $4.6 million.
- Expenses increased 14.2% to $199.9 million. Employee compensation rose 13.9%, depreciation and amortization 8.5%, and technology and communications 16.5%. General and administrative expense increased by $6.9 million, partly because foreign-exchange gains were lower than in Q1 2021.
- Operating cash flow and free cash flow declined year over year, while investing outflows increased, including higher equipment and software-related purchases.
- Financing outflows were substantially higher, mainly due to equity-award payroll taxes and the share repurchase program. The company repurchased 559,428 shares at an average $84.59; $27.0 million remained authorized.
Outlook, commentary and risks
- Management expects 2022 capital expenditures and software development costs of $62 million to $68 million, versus $51.3 million in 2021; about 20% of 2022 spending is expected to be non-recurring. No specific revenue or earnings guidance is provided in the filing.
- Management cited electronic-trading adoption and continued technology investment as business drivers. Results remain sensitive to trading volumes, market volatility, competition, regulation, cybersecurity and foreign-exchange movements.
- CEO Lee Olesky is to retire effective December 31, 2022; President Billy Hult is designated to succeed him on January 1, 2023. The filing records $1.7 million of accelerated stock-based compensation expense in Q1 and expects further 2022 expense under the revised vesting schedule.
- A U.S. Treasury auction antitrust class action was dismissed in full on March 31, 2022; plaintiffs appealed on April 28. The company intends to defend the dismissal. It reported no contingency reserves for pending legal matters because losses could not be reasonably estimated.
- The company stated that no material changes had occurred in its principal risk factors. It noted that COVID-19’s future effects remain uncertain. Disclosure controls were deemed effective at a reasonable assurance level, with no material change to internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether revenue and trading-volume growth persist, particularly in rates derivatives, credit and equities, and how trading mix affects fees per million.
- The drivers of weaker cash flow and the effects of equity-award tax payments, buybacks, dividends and planned technology spending on cash balances.
- The estimated timing and amount of tax receivable agreement payments and the assumptions behind expected tax savings.
- Progress and costs associated with the CEO transition, and whether the disclosed accelerated compensation estimate changes with performance outcomes.
- The status and potential outcome of the appeal in the Treasury auction antitrust case, as well as any developments in other legal proceedings.