Marcus & Millichap, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; comparisons are with Q1 2017 unless otherwise noted. Marcus & Millichap is a commercial real estate brokerage and financing firm operating 78 U.S. and Canadian offices, with one reportable operating segment. Amounts below are in U.S. dollars; financial statement figures are rounded to millions.
Financial performance and liquidity
| Metric | Q1 2018 | Q1 2017 / prior date | Change |
|---|---|---|---|
| Total revenue | $174.5m | $153.2m | +13.9% |
| Real estate brokerage commissions | $162.5m | $140.1m | +16.0% |
| Financing fees | $9.7m | $10.1m | -3.3% |
| Operating income | $23.5m | $19.0m | +23.2% |
| Operating margin | 13.4% | 12.4% | +1.0 percentage point |
| Net income | $18.0m | $12.0m | +50.1% |
| Net margin | 10.3% | 7.8% | +2.5 percentage points |
| Diluted EPS | $0.46 | $0.31 | Higher |
| Adjusted EBITDA | $27.4m | $22.4m | +22.3% |
| Cash and cash equivalents | $199.4m | $220.8m at Dec. 31, 2017 | -$21.4m |
| Marketable securities | $130.4m | $125.7m at Dec. 31, 2017 | +$4.7m |
- Cash flow: Operating activities used $13.0m, versus $37.1m used in Q1 2017. Investing activities used $6.8m and financing activities used $1.7m; cash declined by $21.4m overall. Management attributed first-quarter operating cash outflows in part to the seasonal payment of prior-year bonuses and deferred commissions.
- Expenses: Operating expenses rose 12.6% to $151.1m, slower than revenue growth. Cost of services was 58.2% of revenue versus 58.5%; SG&A was 27.6% versus 28.2%.
- Debt and liquidity: The company had no borrowings under its $60m revolving credit facility; $0.533m of its letter-of-credit sublimit was in use. Notes payable to former stockholders totaled $8.7m, with final principal due in Q2 2020. Cash plus marketable securities totaled about $329.8m. Current assets were $309.1m and current liabilities $48.3m. The company reported compliance with credit-facility covenants.
Material changes and operating drivers
- Revenue growth was led by brokerage: brokerage sales volume increased 22.0% to $7.9bn and transaction count rose 6.4% to 1,585. Average commission rate declined 11 basis points to 2.05%, partly reflecting more larger-market transactions.
- Total transactions, including financing and other activity, rose to 2,085 from 2,067, while total volume increased to $9.8bn from $8.5bn. Financing transactions and volume declined to 324 and $1.0bn, respectively, from 391 and $1.2bn.
- SG&A increased 11.2% to $48.1m, reflecting investment in sales support, marketing, technology, compensation and office expansion. Stock-based compensation rose to $2.6m from $1.9m.
- The effective tax rate fell to 25.9% from 38.5%, primarily reflecting the reduction in the U.S. federal statutory rate to 21%. Net income growth therefore exceeded operating income growth.
Outlook, risks, contingencies and unusual items
- Outlook: No numerical revenue or earnings guidance was provided. Management said available cash, operating cash generation, marketable securities and the credit facility should meet operating requirements for at least the next 12 months.
- Management commentary and risks: Management described the outlook as conservatively optimistic, citing economic growth, property fundamentals and potential support from tax reductions. It also identified rising interest rates, market volatility, trade and geopolitical risks, tighter lender underwriting, uncertainty around tax-law guidance, and a maturing real estate transaction cycle as potential headwinds.
- Taxes and accounting: The company adopted the new revenue-recognition standard in Q1 2018; it reported no effect on the manner or timing of revenue recognition. It retained a provisional $11.6m tax charge recorded in Q4 2017 related to the Tax Cuts and Jobs Act and said further IRS guidance could require adjustments by Q4 2018. Adoption of the stranded-tax-effects standard reclassified $13,000 from accumulated other comprehensive income to retained earnings.
- Lease accounting: Remaining operating-lease commitments were approximately $83.6m. The company expected the new lease standard, effective January 1, 2019, to materially affect its balance sheet; the amount and income-statement/cash-flow effects had not yet been determined.
- Investments and contingencies: Available-for-sale securities had an average credit rating of AA; management considered unrealized losses temporary and reported no impairment write-downs. The company faces ordinary-course legal claims, including brokerage and employment matters, but did not expect their resolution to materially affect financial position, results or cash flows. Performance-related advances committed to professionals totaled $1.4m.
- Other matters: The filing notes that SARs and former-stockholder note provisions could accelerate payments and affect liquidity. The company reported effective disclosure controls and no material changes in internal control over financial reporting.
Important facts for investors to verify
- Whether brokerage transaction growth and the larger average deal size can continue, and how commission-rate mix affects future revenue and margins.
- Whether financing activity recovers after the year-over-year decline, and how interest rates and lender standards affect transaction volume.
- How seasonal compensation and commission payments affect operating cash flow and cash balances during the rest of 2018.
- The ultimate tax-law adjustments and the balance-sheet impact of adopting lease accounting, given $83.6m of stated lease commitments.
- Potential payment acceleration under SARs and former-stockholder notes, and developments in litigation or other commitments.
- Adjusted EBITDA is a company-defined non-GAAP measure and should be considered alongside GAAP results, not as a substitute for them.