Tradeweb Markets Inc. — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024, compared with Q1 2023. Tradeweb operates electronic trading marketplaces across rates, credit, equities and money markets, serving institutional, wholesale and retail clients. It reported one business segment.
Financial performance and liquidity
| Metric | Q1 2024 | Q1 2023 | Change |
|---|---|---|---|
| Revenue | $408.7 million | $329.2 million | +24.1% |
| Operating income | $167.7 million | $122.6 million | +36.8% |
| Net income | $143.4 million | $102.2 million | +40.3% |
| Net income attributable to Tradeweb Markets Inc. | $126.1 million | $87.9 million | +43.6% |
| Diluted EPS | $0.59 | $0.42 | +$0.17 |
| Operating cash flow | $37.9 million | $70.8 million | −46.5% |
| Free cash flow (non-GAAP) | $20.6 million | $54.1 million | −61.8% |
GAAP operating margin was approximately 41.0%, versus 37.2% a year earlier; net margin was 35.1%, versus 31.0%. Non-GAAP Adjusted EBITDA was $219.5 million, with a 53.7% margin; Adjusted EBIT was $204.6 million, with a 50.0% margin. Adjusted Net Income was $167.9 million and Adjusted Diluted EPS was $0.71. The company cautions that these non-GAAP measures supplement, and are not substitutes for, GAAP results.
Transaction fees and commissions rose 25.8% to $335.5 million; subscription fees, including LSEG market-data fees, rose 17.0% to $70.2 million. Revenue increased across client sectors and most asset classes. Rates revenue grew 25.6%, credit 30.1%, and market data 29.4%. Total trading volume increased 39.1%, while average variable fees per million declined 5.5%, reflecting product and trading mix.
Cash and cash equivalents were $1.545 billion at quarter-end, down from $1.706 billion at year-end 2023. The company had no borrowings and $0.5 million of letters of credit under its $500 million unsecured revolving facility, which matures in November 2028. Working capital was $1.620 billion. Total liabilities were $1.320 billion; these include a $432.0 million tax receivable agreement (TRA) liability. The filing reports no outstanding indebtedness.
Material changes and notable items
- Revenue growth was driven principally by higher trading volumes and revenue in rates derivatives, U.S. and European government bonds, and corporate bonds. International revenue rose 28.3%; U.S. revenue rose 21.8%.
- Expenses increased 16.6% to $241.1 million, below revenue growth. Employee compensation rose 25.0%, primarily from higher incentive compensation and headcount; technology and communications costs rose 21.3%. General and administrative expense fell 22.0%, helped by foreign-exchange gains.
- Operating cash flow declined primarily because of increased deposits with clearing organizations and working-capital timing. Investing cash outflow included $89.2 million, net of acquired cash, for the r8fin acquisition. Financing outflow included $25.5 million of TRA payments, $21.3 million of dividends and employee equity-award payroll taxes.
- On January 19, 2024, Tradeweb acquired r8fin for approximately $125.9 million, comprising $89.2 million in cash and $36.7 million in Class A shares. Purchase-price allocation remains preliminary, including valuations of acquired technology and customer relationships.
- Quarterly capital expenditures and capitalized software spending were $17.3 million, excluding acquisitions. Management expects 2024 spending of $75–$83 million, versus $61.8 million in 2023, citing technology investment and acquisition integration.
Outlook, risks and contingencies
No specific revenue or earnings forecast is provided. Management expects cash, operating cash flows and, if needed, revolver borrowings to cover liquidity needs for at least the next 12 months, including the announced ICD acquisition. The filing says 2024 capital expenditure and software-development spending is expected to be $75–$83 million.
On April 5, 2024, Tradeweb agreed to acquire Institutional Cash Distributors (ICD) for $785 million in cash, subject to customary adjustments and closing conditions, with closing expected in the second half of 2024. Management expects to fund the purchase with cash on hand. A $0.10-per-share second-quarter dividend was declared after quarter-end.
Following an ICBC ransomware incident affecting clearing operations, Tradeweb has self-cleared some U.S. Treasury trades and says this may continue, potentially increasing failed settlements. At March 31, it reported $676.1 million of related receivables and $646.6 million of payables, funding the $29.5 million difference; all those fails settled in April. Clearing deposits and margin requirements can also make liquidity needs fluctuate.
Other disclosed risks include trading activity and market volatility, competition, technology and cybersecurity incidents, extensive regulation, foreign-exchange movements, reliance on third parties and dealer clients, and LSEG/Refinitiv control. The company says it does not expect a material adverse effect from pending legal proceedings; the Second Circuit affirmed dismissal of the Treasury-auction antitrust claims against the company in February 2024. No contingency reserves were established for pending matters because loss amounts could not be reasonably estimated.
The TRA requires payment to eligible owners of 50% of specified realized or deemed tax savings. The recorded liability was $432.0 million; management estimated approximately $58.5 million due within 12 months and $373.5 million thereafter. It stated future TRA payments are expected to be significant.
Key investor verification points
- Whether elevated trading volumes and market-share gains persist, and how lower average variable fees per million affect revenue and margins.
- Whether lower operating and free cash flow was chiefly temporary working-capital and clearing-deposit timing, and how cash conversion develops in subsequent quarters.
- ICD’s closing, cash funding and integration, alongside r8fin integration progress and the final purchase-price allocation.
- Delivery of the $75–$83 million 2024 capital-spending plan and the related effect of acquisition integration costs.
- The timing and cash burden of TRA payments, dividends, regulatory capital and clearing-margin requirements.
- Ongoing exposure from self-clearing Treasury trades, cybersecurity and third-party service disruptions, and currency movements.