Marcus & Millichap, Inc. — Q2 2015 Form 10-Q
Reporting period: Three and six months ended June 30, 2015; comparisons are with the same 2014 periods. The company is a commercial real estate brokerage, financing, research and advisory firm operating 79 U.S. and Canadian offices.
Financial performance and liquidity
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Revenue | $173.5 million | $134.3 million | $320.0 million | $248.9 million |
| Operating income | $29.5 million | $21.7 million | $53.3 million | $33.8 million |
| Net income | $17.6 million | $12.8 million | $31.2 million | $19.6 million |
| Diluted EPS | $0.45 | $0.33 | $0.80 | $0.50 |
| Adjusted EBITDA (non-GAAP) | $33.0 million | $24.0 million | $59.3 million | $37.5 million |
- Q2 revenue grew 29.2%; operating income grew 35.9% and net income grew 37.2%. Six-month revenue grew 28.6%; operating income grew 57.8% and net income grew 59.5%.
- Operating margin was 17.0% in Q2 versus 16.2%; six-month margin was 16.7% versus 13.6%. Net margin was 10.1% versus 9.5% in Q2 and 9.8% versus 7.9% for six months.
- Brokerage commissions remained the main revenue source: 92.4% of Q2 revenue and 92.0% for six months. Financing fees grew 33.0% in Q2 and 32.4% for six months.
- Growth reflected more brokerage transactions and larger average transaction sizes, alongside more financing transactions and higher financing transaction sizes. Q2 brokerage sales volume rose to $7.3 billion from $5.6 billion; six-month volume increased to $13.5 billion from $10.0 billion.
- Cost of services rose 32.6% in Q2, faster than revenue, and increased to 60.8% of revenue from 59.3%, partly because more transactions were closed by higher-commission senior professionals. For six months, the ratio was 59.9% versus 59.5%.
- Six-month operating cash flow was $21.9 million versus $5.8 million. Investing used $90.5 million, principally reflecting $88.2 million of net marketable-securities purchases. Cash declined by $65.0 million to $84.2 million; management attributed the decrease to investing cash in securities for higher yields.
- At June 30, cash and cash equivalents were $84.2 million and marketable securities were $102.9 million. Current assets were $162.0 million and current liabilities $58.3 million. The $60 million revolving facility had no borrowings outstanding; $0.5 million of its letter-of-credit sublimit was used.
- Notes payable to former stockholders totaled $10.6 million, bear 5% interest and mature in 2020. The company reported compliance with credit-facility covenants. Total liabilities were $107.9 million.
Changes, outlook and risks
- Q2 SG&A increased 17.0%, including higher management performance compensation, stock-based compensation, sales and promotional costs, and support staffing. Six-month SG&A rose 12.1%; lower legal costs partly offset increases, including a decrease related to insurance recovery and litigation settlements.
- Stock-based compensation expense increased to $4.6 million for the first half from $1.9 million. The company said the increase reflected its higher share price, additional awards and vesting effects. Adjusted EBITDA is a company-defined non-GAAP measure and should not be treated as a substitute for GAAP results.
- Management expected existing cash, securities, operating cash flow and available credit to fund operating requirements for at least the next 12 months. No specific revenue or earnings guidance was provided. Management estimated a 2015 effective tax rate of approximately 40.7%; interim results are not necessarily indicative of full-year results.
- The business is transaction- and market-sensitive: economic conditions, commercial property demand, credit availability, interest rates and recruitment or retention of professionals can affect activity and results. Revenue and cash flow are seasonal, historically stronger in the second half, especially Q4; margins may be lower in the second half due to commission schedules.
- Available-for-sale securities had $102.9 million fair value. Unrealized losses were attributed to interest-rate movements, not credit deterioration, and management reported no other-than-temporary impairment. Its sensitivity analysis estimated a $2.6 million fair-value decline for a 1 percentage-point rate increase and $5.2 million for a 2-point increase.
- Ordinary-course litigation includes brokerage, employment and other claims; most matters are insured subject to policy limits and deductibles. The company said it did not expect their resolution to materially adversely affect its financial position or results. It reported no material change in previously disclosed risk factors, no off-balance-sheet arrangements, and no material change in contractual obligations.
Important facts for investors to verify
- Whether revenue growth and transaction-size gains continue, and how much depends on real estate values and market activity.
- Whether brokerage commission costs, senior-agent mix and seasonal commission schedules affect future margins.
- Cash generation and liquidity after substantial securities purchases; review securities maturity, valuation and interest-rate exposure.
- Stock-based compensation trends and the distinction between GAAP earnings and Adjusted EBITDA.
- Developments in litigation, credit-facility covenant compliance, former-stockholder notes and the company’s stated 12-month liquidity outlook.