Tradeweb Markets Inc. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022; filed October 27, 2022. Tradeweb operates electronic marketplaces across rates, credit, equities and money markets for institutional, wholesale and retail clients. Figures below are in U.S. dollars; financial statement amounts are in millions unless otherwise noted.
Financial performance and liquidity
| Metric | Q3 2022 | Q3 2021 | Change |
|---|---|---|---|
| Revenue | $287.1 | $265.3 | +8.2%; +13.1% constant currency |
| Operating income | $102.8 | $85.5 | +20.2% |
| Operating margin | 35.8% | 32.2% | +3.6 percentage points |
| Net income | $81.6 | $65.3 | +24.9% |
| Net income attributable to Tradeweb Markets Inc. | $69.1 | $54.8 | +26.1% |
| Diluted EPS | $0.33 | $0.26 | +26.9% |
| Adjusted EBITDA / margin | $146.3 / 51.0% | $132.9 / 50.1% | +10.1% / +0.9 points |
| Adjusted Diluted EPS | $0.45 | $0.39 | +15.4% |
Q3 revenue growth was primarily transaction-driven: transaction fees and commissions rose 10.5% to $228.0 million, while subscription fees were nearly flat at $56.7 million. Retail-sector revenue increased 73.9% to $28.5 million; equities revenue rose 29.3%, credit 8.1%, and rates 6.3%. Reported growth was reduced by foreign exchange; management cited sustained elevated volatility and growth in rates derivatives, municipals and U.S. ETFs.
| Nine-month metric | 2022 | 2021 | Change |
|---|---|---|---|
| Revenue | $895.7 | $799.6 | +12.0%; +15.6% constant currency |
| Operating income | $321.0 | $267.6 | +19.9% |
| Net income | $260.6 | $213.1 | +22.3% |
| Net income attributable to Tradeweb Markets Inc. | $220.4 | $177.9 | +23.9% |
| Diluted EPS | $1.06 | $0.86 | +23.3% |
| Adjusted EBITDA / margin | $462.6 / 51.6% | $406.9 / 50.9% | +13.7% / +0.7 points |
| Adjusted Diluted EPS | $1.40 | $1.22 | +14.8% |
| Operating cash flow / free cash flow | $424.8 / $379.4 | $386.4 / $350.8 | Both increased |
For the nine months, revenue gains reflected higher volumes across rates, credit and equities; reported international revenue growth was partly offset by currency movements. Operating expenses increased 8.0%, slower than revenue. Employee compensation rose 10.2%, technology and communications 15.1%, and depreciation and amortization 5.0%; professional fees declined 10.9%, partly because the prior-year period included acquisition costs.
- Cash and working capital: Cash and cash equivalents were $1.11 billion at September 30, 2022, versus $972.0 million at year-end 2021. Working capital was $1.08 billion, up from $887.4 million.
- Cash flows: Nine-month operating cash flow was $424.8 million. Investing used $45.4 million, including $27.5 million of capitalized software development and $18.0 million of equipment and related purchases. Financing used $221.9 million, including dividends, share repurchases and stock-award payroll taxes.
- Debt and liquidity: No borrowings were outstanding; $0.5 million of letters of credit were issued under the $500 million revolving facility, which matures in April 2024. The company reported covenant compliance and believes available cash, operating cash flow and, if needed, the facility should fund requirements for at least 12 months.
- Margins and tax: GAAP operating margin was approximately 35.8% for both the quarter and nine-month period, versus 32.2% and 33.5%, respectively, in comparable 2021 periods. Effective tax rates were 23.2% for Q3 and 19.7% for the nine months.
Material changes, outlook and risks
- Management transition: CEO Lee Olesky was scheduled to retire effective December 31, 2022; President Billy Hult was selected to succeed him January 1, 2023. Thomas Pluta was appointed president effective the same date. The CEO transition contributed $9.4 million of accelerated stock-based compensation expense and related payroll taxes in the first nine months; $2.0 million was incurred in Q3. These costs are excluded from certain company-defined adjusted measures.
- Capital spending outlook: Management expected fiscal 2022 capital expenditures and software development costs of $62–$68 million, versus $51.3 million in 2021, primarily reflecting technology investment. This is an estimate, not a full-year earnings or revenue forecast.
- Capital returns and tax obligations: The company paid $49.4 million in dividends and repurchased $65.3 million under its program during the first nine months. The board declared a further $0.08-per-share quarterly dividend after quarter-end. The tax receivable agreement liability was $439.3 million; approximately $7.0 million was expected to be paid within 12 months and $432.4 million thereafter. Payments generally equal 50% of specified realized tax savings.
- Market and operating risks: Results depend partly on trading volumes and volatility; lower volatility may reduce client activity. Management also cited foreign-exchange exposure, inflation-related expense pressure, competition, regulation, reliance on clients and third parties, and technology, cybersecurity and platform resilience risks. Currency translation reduced Q3 revenue by about $12.8 million and operating income by $8.6 million.
- Legal contingency: Plaintiffs appealed the March 2022 dismissal of antitrust claims concerning U.S. Treasury auctions. The company intended to defend the dismissal; it said the outcome and any loss could not be reasonably estimated and had established no reserve. It reported no material changes to its principal risk factors.
- Other items: The Inflation Reduction Act introduced a 15% corporate minimum tax effective after 2022 and a 1% excise tax on certain post-2022 stock repurchases; the company was evaluating potential impacts. Disclosure controls were judged effective at a reasonable assurance level, with no material change in internal control over financial reporting reported for the quarter.
Important facts for investors to verify
- Whether transaction-volume growth and elevated market activity persist, and how trading volumes, product mix and fees per million develop.
- How much reported international revenue and operating income continue to be affected by currency translation and hedging gains.
- Execution of the leadership transition and the impact of ongoing compensation, technology and cybersecurity investment on GAAP margins and cash generation.
- Actual capital spending versus the $62–$68 million fiscal 2022 estimate, and cash available after dividends, buybacks, regulatory capital needs and tax receivable agreement payments.
- Developments in the Treasury-auction antitrust appeal, the tax agreement liability and any financial effects from the Inflation Reduction Act.
- Reconcile company-defined adjusted measures with GAAP results; these non-GAAP measures exclude selected costs and may not be comparable with similarly titled measures at other companies.