Marcus & Millichap, Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; comparisons are with Q1 2014 unless otherwise noted. The company is a commercial real estate brokerage and financing firm operating 78 offices in the U.S. and Canada. It reported more than 1,800 transactions totaling approximately $8.1 billion.
Financial performance and liquidity
| Metric | Q1 2015 | Q1 2014 / comparison |
|---|---|---|
| Total revenue | $146.5 million | $114.6 million; up 27.9% |
| Brokerage commissions | $134.2 million | $104.7 million; up 28.1% |
| Financing fees | $8.0 million | $6.1 million; up 31.7% |
| Operating income / margin | $23.8 million / 16.2% | $12.1 million / 10.5% |
| Net income / net margin | $13.7 million / 9.3% | $6.8 million / 5.9% |
| Basic and diluted EPS | $0.35 | $0.17 |
| Adjusted EBITDA (non-GAAP) | $26.3 million; 17.9% of revenue | $13.5 million; 11.8% of revenue |
| Cash flow from operations | $(18.0) million | $(17.1) million |
| Cash and cash equivalents | $124.1 million at March 31 | $149.2 million at December 31, 2014 |
Revenue growth reflected more brokerage transactions and higher average commission per transaction, along with increased financing activity and fees. Cost of services rose 26.0% to $86.2 million, slower than revenue growth; it declined to 58.8% of revenue from 59.7%. SG&A rose 7.4% to $35.8 million, and total operating expenses increased 19.7% to $122.8 million.
Investing activities used $11.1 million, principally reflecting net purchases of marketable securities. Financing activities provided $4.0 million, primarily from $4.7 million in excess tax benefits from stock-based awards, partly offset by $0.7 million of withholding taxes. Cash fell by $25.1 million during the quarter. Management says first-quarter operating cash use is typical, in part because prior-year bonuses and deferred commissions are paid in Q1.
At March 31, total assets were $217.3 million and total liabilities were $84.9 million. The company had $11.5 million in notes payable to former stockholders. It had no borrowings outstanding on its $60 million revolving credit facility, maturing June 2017, and reported compliance with its covenants. It held $25.3 million of available-for-sale marketable securities. The filing does not report a separate conventional debt-to-equity or net-debt measure.
Material changes and notable items
- Brokerage transaction count increased 16.3%; average commission per transaction increased 10.1%. Brokerage sales volume rose to $6.1 billion from $4.4 billion. Average commission rates declined, partly because larger transactions generally carry lower rates.
- Financing transaction count rose 8.0%, while average fee per transaction increased 21.9%; financing volume increased to $879 million from $622 million.
- SG&A included higher sales and promotional costs, management performance compensation, stock-based compensation and support-staff costs. These increases were partly offset by a $2.4 million decline in legal costs, attributed to an insurance-carrier settlement and settlement of outstanding litigation.
- Stock-based compensation expense increased to $1.9 million from $0.7 million. A $4.7 million excess tax benefit was reported in financing cash flows, rather than as a reduction of income tax expense.
- The company wrote off approximately $1.1 million of fully depreciated equipment and software no longer in use; this did not represent a material cash outlay in the period.
- In March, selling stockholders sold 4.6 million shares, including the underwriters’ option shares, at $31.9925 per share. The company received no proceeds.
Outlook, risks and contingencies
- No specific revenue or earnings guidance was provided. Management stated that cash, marketable securities, expected operating cash flows and available credit should be sufficient for operating requirements for at least the next 12 months.
- Management cautioned that Q1 results are not necessarily indicative of full-year results. Revenue and cash generation are seasonal, historically stronger in the second half, especially Q4; operating margins may be lower in the second half because of graduated commission schedules.
- Key business sensitivities include commercial real estate transaction activity, economic conditions, credit availability, investor demand, interest rates, and the ability to recruit and retain sales and financing professionals.
- The $60 million secured revolver is subject to financial covenants; the company reported compliance. Management also noted that repayment provisions in the former-stockholder notes and stock appreciation rights liability could accelerate payments and affect liquidity.
- The company faces ordinary-course legal claims, including brokerage, employment and other disputes. Most are insured subject to policy limits and deductibles. Management does not expect the proceedings to have a material adverse effect; loss outcomes remain uncertain.
- Marketable securities are exposed to interest-rate changes. The filing estimates that a 1% increase in rates would reduce investment fair value by approximately $1.5 million and a 2% increase by approximately $3.0 million. The company reported no material changes to its previously disclosed risk factors.
- The company does not currently intend to pay a regular dividend. It stated that it had no off-balance-sheet arrangements.
Important facts for investors to verify
- Whether transaction volume and average deal economics remain strong, and whether lower commission rates on larger deals affect margins.
- How seasonal Q1 cash outflows compare with cash generation in later quarters; Q1 operating cash flow was negative despite higher net income.
- The liquidity and investment portfolio, including market-value sensitivity to interest rates and the absence of revolver borrowings at quarter-end.
- The sustainability of earnings growth after considering stock-based compensation and the non-GAAP nature and comparability limits of Adjusted EBITDA.
- Potential cash or earnings effects from legal claims, covenant requirements, and possible acceleration of former-stockholder notes or the SARs liability.