Marcus & Millichap, Inc. — Q2 2014 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2014. The company brokers commercial real estate investment sales and financing and provides research and advisory services, operating 77 offices in the U.S. and Canada. Figures are unaudited; dollar amounts below are in millions unless stated otherwise.
Financial performance
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Revenue | $134.3 | $105.5 | $248.9 | $174.8 |
| Operating income | $21.7 | $14.2 | $33.8 | $16.8 |
| Net income | $12.8 | $8.0 | $19.6 | $9.6 |
| Operating margin | 16.2% | 13.4% | 13.6% | 9.6% |
| Net margin | 9.5% | 7.6% | 7.9% | 5.5% |
| Adjusted EBITDA (non-GAAP) | $24.0 | $17.1 | $37.5 | $21.1 |
- Revenue mix: Q2 brokerage commissions were $123.3 million, financing fees $8.4 million, and other revenue $2.6 million. Brokerage generated about 92% of revenue.
- Per share: Q2 and first-half 2014 basic and diluted EPS were $0.33 and $0.50, respectively. The company says pre-IPO comparative EPS is not meaningful.
- Cash flow: First-half operating cash flow was $5.8 million, versus $44.3 million in 2013; investing cash use was $1.3 million and financing cash use $0.9 million. Cash increased $3.7 million to $104.6 million.
- Liquidity and debt: Current assets were $123.8 million and current liabilities $40.9 million at June 30. No borrowings were outstanding on the new $60 million revolving facility. Notes payable to former stockholders totaled $11.5 million, including $0.9 million current; the company also reported a $20.5 million SARs liability.
Changes versus prior comparable periods
- Q2 revenue rose 27.3%; first-half revenue rose 42.3%. First-half growth partly reflects unusually low Q1 2013 sales after transactions were accelerated into 2012 amid “fiscal cliff” concerns.
- Growth was led by brokerage commissions: up 28.7% in Q2 and 45.3% in the first half. The company attributed this to more sales transactions and higher average commission size. Financing fees increased 22.0% in Q2 and 21.8% in the first half.
- Net income increased 59.8% in Q2 and 102.9% for the first half. Operating margins improved, although cost of services as a share of revenue also increased, to 59.3% in Q2 and 59.5% for the first half, partly due to more transactions by senior professionals on higher commission rates.
- SG&A increased 10.4% in Q2 and 21.7% for the first half, reflecting growth-related staffing, performance compensation, legal costs, and public-company expenses; lower pre-IPO stock compensation partly offset increases.
- First-half operating cash flow was much lower than 2013, when it included a $63.3 million release of cash due from the former parent under a cash-sweep arrangement. In 2014, cash flow was also reduced by the timing of commission and employee-related payments.
Outlook, risks, and unusual items
- No specific revenue or earnings guidance is provided. Management expects a 2014 effective tax rate of about 40.5%; reported effective rates were 40.9% for Q2 and 41.1% for the first half. A $0.84 million tax benefit from deductible IPO costs was credited to additional paid-in capital.
- Management says cash on hand, expected operating cash flow, and available revolver capacity should cover operating requirements for at least 12 months. The facility matures June 1, 2017, is secured by substantially all company assets, and includes minimum EBITDAR coverage and maximum funded-debt-to-EBITDA covenants. The company reported compliance at quarter-end.
- Results are seasonal: historically revenue, earnings, and operating cash flow are lower in the first half and higher in the second half, particularly Q4. Commission structures can also pressure second-half margins.
- Key business sensitivities include commercial real estate transaction activity, credit availability, investor demand, interest rates, and recruiting and retaining transaction professionals. The company says results for the first half are not necessarily indicative of full-year results.
- Ordinary-course litigation includes brokerage, employment, and other claims; most matters are insured, subject to policy limits and exclusions. Management does not expect the proceedings to materially adversely affect financial position, results, or cash flows. Notes and SARs arrangements may contain provisions that could accelerate repayment and affect liquidity.
- The company does not intend to pay a regular dividend at present. It reported no material changes to previously disclosed contractual commitments, no off-balance-sheet arrangements, and no material changes to annual-report risk factors.
Important facts for investors to verify
- Whether transaction growth and higher average deal values persist, and how much first-half growth reflects the depressed 2013 comparison.
- Cash conversion and working-capital timing, particularly commission, bonus, and other employee-related payments.
- The non-GAAP Adjusted EBITDA definition and reconciliation; it should not be treated as a substitute for GAAP earnings or cash flow.
- Revolver availability and covenant headroom, and the terms that could accelerate notes payable or SARs obligations.
- Seasonality, commission-rate changes, legal accruals, and the effect of the stand-alone tax regime on future results.