Tradeweb Markets Inc. — Q1 2019 Form 10-Q
Business context and reporting period
For the quarter ended March 31, 2019. Tradeweb operates electronic marketplaces and related services across rates, credit, equities and money markets, serving institutional, wholesale and retail clients. The parent company had no substantive operations at quarter-end; the financial results summarized are principally those of Tradeweb Markets LLC (TWM LLC).
Comparisons are between TWM LLC’s “successor” Q1 2019 results, after Refinitiv’s October 2018 acquisition and pushdown accounting, and “predecessor” Q1 2018 results. The changed accounting basis, especially higher acquired-asset amortization, limits comparability.
Financial performance and liquidity
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Gross and net revenue | $186.8 million | Gross $169.5 million; net $159.4 million | Gross +10.2%; net +17.2% |
| Operating expenses | $140.5 million | $112.1 million | +25.4% |
| Operating income | $46.3 million | $47.4 million | -2.3% |
| Net income | $42.4 million | $45.3 million | -6.5% |
| Diluted earnings per share | $0.19 | $0.21 | Down $0.02 |
| Adjusted EBITDA / margin | $80.3 million / 43.0% | $72.7 million / 42.9% | Margin up 14 basis points |
| Adjusted net income / diluted EPS | $52.2 million / $0.23 | $46.7 million / $0.22 | Non-GAAP measures |
Revenue growth reflected higher activity: transaction fees rose 13.9% to $102.6 million and commissions rose 22.6% to $34.2 million. Subscription fees declined 1.0% to $48.1 million. Revenue increased across client sectors, with wholesale up 21.0%, retail up 11.4%, market data up 8.7% and institutional up 6.8%. Management cited higher trading volumes, expansion of Refinitiv market-data feeds and further electronic trading.
Q1 2018 net revenue was reduced by $10.1 million of contingent consideration; that item was absent in 2019 after the earnout vested in July 2018. Thus, net revenue growth exceeded gross revenue growth partly for this nonrecurring comparison. Expenses included $33.5 million of depreciation and amortization, up $17.2 million year over year; management attributed $16.7 million of the increase to pushdown accounting. Compensation rose 8.0%, partly with headcount growth to 931 from 848. IPO-related costs, foreign-exchange losses and increased technology spending also contributed to expense growth.
Cash and cash equivalents were $361.6 million at March 31, down from $410.1 million at December 31, 2018. Operating cash flow was negative $21.1 million; free cash flow, a company-defined non-GAAP measure, was negative $29.4 million after capitalized software and equipment spending. Management attributed operating cash use mainly to annual compensation and employee-equity payments. Working capital was $347.8 million. The company had no debt outstanding at quarter-end. A $500 million, five-year revolving credit facility was entered into on April 8, 2019.
After quarter-end, the April 8 IPO priced 46 million Class A shares at $27 each and generated $1.161 billion in proceeds after underwriting discounts and commissions, before approximately $12.1 million of offering expenses. Proceeds purchased TWM LLC interests from certain bank stockholders. Following the reorganization and IPO, Tradeweb Markets Inc. owned 64.3% of TWM LLC, with continuing LLC owners holding 35.7%. Lease liabilities were $37.3 million at quarter-end following adoption of ASC 842.
Outlook, commentary, risks and unusual items
No numerical revenue or earnings guidance was provided. Management said available cash, operating cash flow and, if needed, the revolving facility should cover liquidity needs for at least 12 months. The company intended to pay quarterly dividends initially at $0.08 per Class A and Class B share; the board declared the second-quarter dividend, payable June 15, 2019. Management expects public-company compliance costs, taxes on the parent’s share of TWM LLC income and payments under the Tax Receivable Agreement; the amount and timing of tax-receivable payments may vary and are expected to be significant.
Management expects non-cash compensation expense of approximately $33.5–$35.7 million for the special option award, beginning in Q2 2019 and continuing over the following three years. The IPO made the options exercisable, and $18.9 million of related expense was recognized on April 8.
Key risks include trading-volume and volatility sensitivity, competition and technology investment, cyber threats and platform outages, reliance on dealer clients and third-party data/services, extensive regulation and Brexit-related costs, foreign-exchange exposure, Refinitiv control, and the ability to fund dividends and tax obligations from TWM LLC distributions. A hypothetical 10% U.S. dollar move against other currencies would have affected Q1 2019 gross revenue by approximately $5.7 million and operating income by $3.6 million.
Legal matters include U.S. Treasury securities trading-practices antitrust litigation and an IDC data-distribution case alleging approximately $80 million in damages plus punitive damages. The interest-rate-swaps antitrust matter was dismissed as to Tradeweb. The company said it could not reasonably estimate potential losses and had no reserves for pending matters. The IDC case remained pending, with trial rescheduled for March 2020. Management stated disclosure controls were effective and there were no material changes in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Confirm the extent to which reported growth reflects underlying trading activity versus the $10.1 million prior-year contingent-consideration adjustment, currency effects and the successor/predecessor accounting-basis change.
- Track whether trading volumes, revenue mix and client activity sustain growth, and whether higher operating costs moderate earnings conversion.
- Review post-IPO cash flows, revolver terms and usage, dividend funding, TWM LLC distributions, and the cash and tax effects of the Tax Receivable Agreement.
- Monitor the special option award’s expense recognition and other public-company costs, and assess the potential outcomes of the disclosed legal proceedings.
- Check subsequent filings for any updates to the Refinitiv purchase-price allocation, which management was still finalizing, and for material changes to the company’s risk factors.