Tradeweb Markets Inc. (NASDAQ:TW) Q3 2023 Earnings Call Transcript

Tradeweb Markets Inc. (NASDAQ:TW) Q3 2023 Earnings Call Transcript October 26, 2023

Tradeweb Markets Inc. reports earnings inline with expectations. Reported EPS is $0.55 EPS, expectations were $0.55.

Operator: Good morning, and welcome to Tradeweb’s Third Quarter 2023 Earnings Conference Call. As a reminder, today’s call is being recorded and will be available for playback. To begin, I will turn the call over to Head of Treasury, FP&A and Investor Relations, Ashley Serrao. Please go ahead.

Ashley Serrao: Thank you, and good morning. Joining me today for the call are our CEO, Billy Hult, who will review the highlights for the quarter and provide a brief business update. Our President, Tom Pluta, who will dive a little deeper into some growth initiatives; and our CFO, Sara Furber, who will review our financial results. We intend to use the website as a means of disclosing material, non-public information and complying with our disclosure obligations under Regulation FD. I’d like to remind you that certain statements in this presentation and during the Q&A may relate to future events and expectations and as such, constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

Statements related to, among other things, our guidance are forward-looking statements. Actual results may differ materially from these forward-looking statements. Information concerning factors that could cause actual results to differ from forward-looking statements is contained in our earnings release, presentation and periodic reports filed with the SEC. In addition, on today’s call, we will reference certain non-GAAP measures as well as certain market and industry data. Information regarding these non-GAAP measures, including reconciliations to GAAP measures is in our earnings release and presentation. Information regarding market and industry data, including sources is in our earnings presentation. Now let me turn the call over to Billy.

Billy Hult: Thanks, Ashley. Good morning, everyone, and thank you for joining our third quarter earnings call. I am extremely proud of our Tradeweb team that generated the second-best revenue quarter in our history. This quarter continued to showcase profitable share gains across many of our markets. While our business is not immune to the macro backdrop, we believe we are increasingly building an all-weather platform that helps our clients manage risk in a variety of environments. We’re also laser-focused on enhancing our one-stop shop value proposition for our clients by continuing to add and link products electronically. Diving into the third quarter, client activity and risk appetite continue to grow, which drove a return to double-digit revenue growth despite an uncertain macro backdrop.

Specifically on Slide 4, record revenues for any third quarter in our history of $328 million were up 14.4% year-over-year on a reported basis and 12.5% on a constant currency basis and adjusted EBITDA margins expanded by 92 basis points relative to the third quarter of 2022. We continue to balance revenue growth and expenses on an annual basis with revenue growth of 8% during the first 9 months of 2023, translating to a 58 basis point increase in our adjusted EBITDA margin to 52.2% relative to the first 9 months of 2022. Turning to Slide 5. Rates and credit led the way, accounting for 60% and 29% of our revenue growth, respectively. Specifically, the record revenues across our rates business were driven by continued growth across global government bonds and swaps and returning growth across our mortgage business.

Similarly, the record revenues across credit were led by strong U.S. and European corporate credit, including record quarterly market share in electronic U.S. investment grade and high-yield credit. Money markets produced its second highest quarterly revenues ever, fueled by growth in our retail certificate of deposit franchise and continued organic growth in institutional repos. Equities revenue fell 2% due to a double-digit decline in industry ETF volumes, which were partially offset by a strong equity derivatives revenue growth. Finally, market data revenues were driven by our proprietary third-party data products, which continue to enjoy robust growth and a strong product pipeline as well as by APA reporting revenues. Turning to Slide 6.

I will provide a brief update on 2 of our main focus areas, U.S. Treasuries and ETFs and turn it over to Tom to dig deeper into U.S. credit and global interest rate swaps. Starting with U.S. Treasuries. Revenues achieved a new record, increasing by 17% year-over-year and eclipsing industry volume growth of 15%, this was driven by our institutional business that had its best revenue quarter ever, led by record average daily volume across our institutional streaming protocol and growing adoption of our RFQ+ offering. The high rate environment continued to propel our retail business where revenues grew over 60% year-over-year. The leading indicators of the institutional business remains strong. We achieved record quarterly market share of longer-dated U.S. Treasuries versus Bloomberg.

Client engagement was healthy with institutional average daily trades up over 60% year-over-year. Automation continues to be an important theme with institutional U.S. treasury AiEX average daily trades increasing by more than 150% year-over-year. Our U.S. Treasury’s wholesale business produced its best revenue quarter in our history, led by record volumes across our sessions protocols and strong growth across our streaming protocol. While our central limit order book protocol faced tough market conditions, the team has made initial progress in deepening client wallet share with average daily volume up 20% quarter-over-quarter and we expect to onboard more liquidity providers over the coming quarters. Within equities, our ETF business outperformed the overall market, but faced a tough industry backdrop, given lower equity market volatility and a lack of price dispersion that minimize portfolio rebalance activity.

During the quarter, we added notional-based trading for ETFs to complement our legacy share-based trading, responding to increased demand from asset managers, retail aggregators and the wealth management community. Other initiatives to expand our equity brand beyond our flagship ETF franchise continue to bear fruit. Institutional equity derivatives revenues were up nearly 30% year-over-year, driven by strong double-digit growth across options and convertibles. ADR volumes also saw a dramatic year-over-year increase. Looking ahead, the client pipeline remains strong as the benefits of our electronic solutions continue to resonate. We believe we are well positioned to capitalize on the long-term secular ETF growth story not just in equities, but across our fixed income business.

Moving on to our international business, which is another component of our growth. Revenues grew 18.1% year-over-year on a reported basis and 13% on a constant currency basis. The growth was driven by strong performance across European government bonds, European swaps, emerging market swaps, European credit and market data. Revenue growth was driven in part by growing adoption across Asian and North American clients trading non-U.S. products. Looking forward, we’re excited to broaden our international presence with the closing of the Yieldbroker acquisition, which complements our existing rate business, deepens our product presence and expands our client footprint deeper into the APAC region. Similar to Tradeweb, Yieldbroker has a comprehensive product offering across Australian and New Zealand debt capital markets and a diverse set of clients and protocols.

We have hit the ground running with the integration and we’ll be focusing on consolidating technology over the next 18 months. Additionally, we are spending significant time with the talented Yieldbroker employees that we welcome to Tradeweb and with local clients to set the stage for further collaboration. Finally, today, we announced our new market data agreement with Refinitiv, who will distribute our data to their clients for a period of 2 years. This contract not only generates significantly more revenue for Tradeweb, which Sara will touch on later, but also provides more flexibility to grow our proprietary data business. We also see additional upside as we build more products to enhance the trading experience of our clients. Separately, we also announced a strategic partnership with FTSE Russell to expand benchmark pricing, broaden index inclusion and enhanced trading functionality across fixed income products.

We’ll update you on that initiative as we make progress. With that, I will turn it over to Tom.

Tom Pluta: Thanks, Billy. Turning to Slide 7 for a closer look at credit. Strong double-digit revenue growth was driven by 21% and 49% year-over-year revenue growth across U.S. and European credit, respectively. This was partially offset by unattractive yield differentials still dampening client interest in munis and softer industry trends across credit derivatives. We Automation continued to surge with Global Credit AIX average daily trades increasing over 95% year-over-year. Honing in on U.S. corporate credit, revenue growth was driven by all 3 client channels. The strong share gains across IG and high-yield were driven by our continued focus on providing all our clients regardless of client channel, with a diverse set of protocols that meet their execution needs across a variety of market environments.

This strategy is resonating as we continue to expand our wallet share across RFQ and dealer RFQ, especially with respect to the rising share we have accomplished within our all-to-all network, and we continue to grow our leading footprint across portfolio trading and sessions. We also continue to increase our engagement and wallet share with ETF market makers, where inquiry volume was up over 80% year-over-year and traded volume was up over 100% year-over-year. Finally, we achieved our second highest block market share across both IG and high yield. Our institutional business continues to scale to new highs. Despite mixed industry volume trends with IG growing 7%, but high yield falling 9% year-over-year, our institutional U.S. credit revenues grew over 25% year-over-year.

Looking at the underlying protocols, our primary focus on growing institutional RFQ continues to pay off, with ADV growing 29% year-over-year with strong double-digit growth across both IG and high yield. Overall, portfolio trading ADV rose 23% year-over-year, led by growth across U.S. and European PT. In the third quarter, we produced record ADV across IG portfolio trading. Retail credit revenues were up low single digits year-over-year as financial advisers remain focused on buying U.S. Treasuries. All trade produced a record quarter with over $137 billion in volume. Our all-to-all volumes grew over 50% year-over-year, aided by 60% year-over-year growth in our dealer RFQ offering. The team continues to be focused on broadening out our network and increasing the number of responses on the AllTrade platform.

In the third quarter, the number of all-to-all responders rose by over 10% and — and responses increased by nearly 50% year-over-year. Our sessions ADV grew over 35% year-over-year, while ReMatch produced 30% year-over-year growth. Looking ahead, U.S. Credit remains our biggest focus area, and we like the way we are positioned across our 3 client channels. We believe we have a long runway of growth ahead of us. As I’ve said in the past, electronically, Credit is a young market that is ripe for further innovation. The team remains focused on growing our wallet share over the long term, led by further product innovation and enhancements as we work with our clients to further electronify the market. Beyond U.S. Credit, our EM expansion efforts continue to progress steadily.

One quarter after completing our first Mexican local currency bond trade we saw our largest EM portfolio trade in September, and we completed our first local currency bond trade that utilized our FXall collaboration. Moving to Slide 8. We — Global swaps produced record revenues despite facing a volatile macro environment in the quarter. The third quarter saw continued headwinds from lower duration as clients traded on the shorter end of the yield curve, and record compression activity in August. Despite the 17% reduction in duration and elevated quarterly compression activity, which improved materially in September, variable swaps revenues increased 24% year-over-year. Overall, global swaps revenues grew 20% year-over-year, and market share rose to 18.2% and with record share across U.S. dollar-denominated swaps.

Electronic adoption continues to grow from the utilization of electronic trading of products for the first time to the expansion of automated trading. During the quarter, we saw certain clients trade swaptions electronically for the first time, a product that we are focused on electronifying. Additionally, we’ve seen banks look to expand their usage of electronic protocols across their strategies. Finally, we’ve seen macro hedge funds increasingly look to utilize automated trading as they expand their footprint across global swaps. Electronic adoption is different across our different clients, but the trend is all the same. We believe clients will look to trade more of their flow electronically moving forward. Our core focus is to be the valued partner our clients look towards as they expand their electronic footprint.

Finally, we continue to make progress across emerging market swaps and a rapidly growing RFM protocol. Our third quarter EM swaps revenues increased over 165% year-over-year and we believe there is still a lot of room to grow given the low levels of electronification. Our RFM protocol saw ADV rise over 100% year-over-year with adoption picking up, especially across our European swaps business. Looking ahead, we believe the long-term swaps revenue growth potential is meaningful. We believe recent cyclical tailwinds around the shape of the yield curve will provide clients with the opportunity to start extending duration. With the market still less than 30% electronified, we believe there remains a lot that we can do to help digitize our clients’ manual workflows while the global fixed income markets and broader swaps market grow.

And with that, let me turn it over to Sara to discuss our financials in more detail.

Sara Furber: Thanks, Tom, and good morning. As I go through the numbers, all comparisons will be to the prior year period, unless otherwise noted. Let me begin with an overview of our volumes on Slide 9. We reported third quarter average daily volume of nearly $1.4 trillion, up nearly 30% year-over-year and up 29% when excluding short-tenor swaps. Among the 22 product categories that we include in our monthly activity report, 12 of them produced year-over-year volume growth of more than 20%. We — Areas of strong growth include global swaps, U.S. investment-grade credit, China bonds, equity derivatives and repos. Slide 10 provides a summary of our quarterly earnings performance. The third quarter volume growth translated into gross revenues increasing by 14.4% on a reported basis and 12.5% on a constant currency basis.

We derived approximately 37% of our revenues from international customers and recall that approximately 30% of our revenue base is denominated in currencies other than dollars, predominantly in euros. Our variable revenues increased by 18% and total trading revenues increased by 15%. The — Total fixed revenues related to our 4 major asset classes were up 7.8% on a reported and 6.2% on a constant currency basis. Rates fixed revenues growth was driven by the addition of new dealers across our mortgage specified pools platform and our U.S. Treasury streams and CLOB protocols. Credit fixed revenue growth was driven by the previously disclosed dealer fee floor price increases, which we instituted at the start of the third quarter. And other trading revenues were up 9%.

The — As a reminder, this line fluctuates as it reflects revenues tied to periodic technology enhancements performed for our retail clients. Year-to-date, adjusted EBITDA margin of 52.2% increased by 29 basis points on a reported basis and 78 basis points on a constant currency basis from the full year 2022. Moving on to fees per million on Slide 11 and a highlight of the key trends for the quarter. You can see Slide 16 of the earnings presentation for additional detail regarding our fee per million performance this quarter. Overall, our blended fees per million decreased 8% year-over-year, primarily due to a mix shift away from cash rates and a decrease in cash credit and cash equities fee per million. For cash rate products, fees per million were up 8%, primarily due to a positive mix shift towards higher fee per million U.S. Treasuries.

U.S. Treasuries fee per million were also aided by the continued pickup in our retail channel. For long-tenor swaps, fees per million were down 21%, primarily due to a 17% decline in duration year-over-year and an increase in compression trades. This was partially offset by growth in EM, European swaps and our RFM protocol. For cash credit, average fees per million decreased 4% due to a mix shift away from munis, partially offset by an increase in European credit fee per million. For cash equities, average fees per million decreased by 13% due to a mix shift away from higher fee per million European ETFs and a reduction in U.S. ETF fee per million given an increase in notional per share traded. Recall in the U.S., we charge per share and not for notional value traded.

And finally, within money markets, average fees per million increased 5%, driven by a mix shift towards U.S. CDs, partially offset by a mix shift away from EU repos. Slide 12 details our adjusted expenses. At a high level, the scalability and variable nature of our expense base allows us to continue to invest for growth and grow margins. There has been no change in our philosophy here. Adjusted expenses for the third quarter increased 12.1% on a reported basis and 8.5% on a constant currency basis. Compensation costs increased 14.1% due to increases in head count and performance-related compensation. Technology and communication costs increased primarily due to higher data fees and our previously communicated investments in data strategy and infrastructure.

Professional fees decreased 9.7%, mainly due to a decrease in legal and consulting fees. Adjusted general and administrative costs increased due to unfavorable movements in FX. Unfavorable movements in FX resulted in a $1.4 million loss in 3Q ’23 versus a $2.2 million gain in 3Q ’22. Slide 13 details capital management and our guidance. On our cash position and capital return policy, we ended the third quarter in a strong position with nearly $1.5 billion in cash and cash equivalents. Free cash flow reached approximately $645 million for the trailing 12 months, up 16% year-over-year. As a reminder, we funded our yield broker acquisition with cash on hand. Our net interest income of $17.5 million increased due to a combination of higher cash balances and interest yields.

This was primarily driven by recent Fed hikes and more efficient management of our cash. Non-acquisition CapEx and capitalized software development for the quarter was $17.9 million, with the increase driven primarily due to the timing of our investment spend. Year-to-date, non-acquisition CapEx and capitalized software development is up 9% year-over-year. With this quarter’s earnings, the Board declared a quarterly dividend of $0.09 per share of Class A and Class B common stock. And finally, we spent approximately $4.9 million under our share buyback program, which included opportunistic and planned repurchases to offset dilution from stock-based compensation plans, leaving approximately $239.8 million at the end of the quarter for future deployment.

Turning to guidance items. We are now tightening our 2023 adjusted expenses to range from $670 million to $695 million, including Yieldbroker. We now expect CapEx and capitalized software development to be about $56 million to $63 million with the increase due to the Yieldbroker acquisition. An acquisition and Refinitiv transaction-related D&A, which we adjust out due to the increase associated with pushdown accounting, is now expected to be $128 million due to the Yieldbroker acquisition. For forecasting purposes, we continue to use an assumed non-GAAP tax rate of between 24% and 25% for the year. And finally, we expect 2024 and 2025 revenues generated under the new master data agreement with Refinitiv to be approximately $80 million and $90 million, respectively.

Now I’ll turn it back to Bill for concluding remarks.

Billy Hult: Thanks, Sara. In today’s ever-changing financial landscape, market participants are constantly seeking efficient and reliable trading solutions to navigate periods of market stress and volatility. While the first half of this year saw a more challenging macro environment, it did provide our teams with the opportunity to sit down with clients to problem solve real-time inefficiencies in their current workflows. We — the combination of a reliable product that delivers proven performance improvement, to close collaboration with clients to address their pain points and the flexibility to continually enhance that product creates a recipe for perpetual innovation. I continue to be excited about the road ahead. With a couple of important month-end trading days left in October, which tend to be our strongest revenue days, overall revenue growth is up mid- to high teens relative to October 2022.

We — The diversity of our growth remains a theme as we are seeing strong volume growth across global government bonds, global interest rate swaps, corporate credit, equity derivatives and global repos. Our IG share is higher than September levels, while high-yield share is lower than September levels. I would like to conclude my remarks by thanking our clients for their business and partnership in the quarter. and I want to thank my colleagues for their efforts that contributed to our record quarterly volumes and best third quarter revenues at Tradeweb. With that, I will turn it back to Ashley for your questions.

Ashley Serrao: Thanks, Billy. [Operator Instructions] Q&A will end at 10:30 a.m. Eastern Time. Operator, you can now take our first question.

Operator: [Operator Instructions]. And our first question comes from Craig Siegenthaler with Bank of America.

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Q&A Session

Craig Siegenthaler : When we take a step back, I think we all need to remember that we’re still currently in year 3 of a bond market bear market, which I think makes your results even more impressive today. But this has been driving layoffs and expense tightening at the dealers and buy side. So with volumes up but fewer people trading bonds, what have you been seeing across your client base? And we’re especially interested in the low-touch and no-touch [indiscernible] like AiEX and also, has there been more or less pushback on price recently?

Billy Hult: Craig, and thanks very much for the question and completely kind of hearing where you’re coming from. And I think as you know really well, what I would start with is our real core approach for 25 years has been this sort of like collaboration and how we listen to our biggest clients in a lot of ways, our biggest clients are the biggest banks. So your question has a lot of sort of real-time validity to it. And that collaboration has been a central theme to who we are as a company forever and ever. And you’re right, there have been some what we would describe as kind of like rough roads for some of our big bank partners recently, and that’s been in the headlines. My instinct is the roughest of those roads in a sort of significant way has been really on the sort of what we would describe as like the DCM side, the M&A side, the capital market side, et cetera.

And actually, interestingly, if you look at the sort of overall kind of global capital markets activity from the biggest banks, it’s actually been pretty robust and healthy. That being said, your point is a good one. And without question, there is always this concept of, from their perspective, a little bit of a pressure to do more with less. And so the question becomes like from a bank perspective, how can I connect with my most important clients in the cheapest and most efficient way. Our instinct is that aspect plays very well to us, obviously. And this migration from kind of high-touch trades to low-touch trades, doing more with less has been like a central theme for us for this year. So like interestingly, the numbers kind of bear out where we’re putting our intensity.

Craig, AiEX numbers for this year have been like exceptionally strong, like across the board, right? So we’re up, I think, over 60% year-over-year on our flat out AiEX numbers. On the rate side, average daily trades from an AiEX perspective were up 90%. Strong adoption like a cross credit globally in the U.S., I believe it’s like high 80% and in Europe, like low 90s. So this is like — I’ve described this as like just one-way train effect. around how clients are connecting with their most important dealers through algorithms and electronically. That’s where we’re headed. And I think it plays a really large role in allowing the biggest, most important banks to make markets to their most important clients efficiently. We talked a little bit at the last quarter around the rise of alternative market makers I still think there’s this like straightforward headline around how Citadel and Citadel like companies continue to enter the marketplace, around leading with electronification.

I think that’s like a one-way trend that, obviously, we continue to partner with and collaborate with, and we think is good for our business. The fee conversation is always there, right? And from our perspective, we’ve navigated the concept of fees again from the very, very beginning. And I think we’re, as a company, pretty adept at that. At the end of the day, are you creating value? Are you figuring out ways to deliver the client base to the most important banks? Are you picking up market share? And all of those things I think we’ve excelled the fact. So we feel good about where we are from a fee perspective. And we’re always going to lead with having the most important conversations with the banks listening and collaborating and we feel good about where that relationship is in an overall way.

And thanks a lot for the question.

Operator: Our next question comes from Benjamin Budish with Barclays.

Benjamin Budish : I wanted to ask kind of a similar question, thinking high level about overall market electronification, specifically on the treasury D2C business. I saw from your October investor presentation, it looks like the sort of electronic penetration has kind of gone up a little bit from prior estimates around 45%. But what are your thoughts on sort of the longer-term achievable level? How far can that market go relative to the D2D market? And what are the kind of key hurdles to getting there? And how are you going after that opportunity?

Billy Hult: Yes, super good question, Ben. And it is actually kind of a little bit of a similar theme that I was describing when Craig asked an excellent question as well. If you kind of heard the way Tom and I and Sara spoke like in my office and we talked about the major priorities of the company, without question, right at the top of the list would be, from our perspective, the focus on kind of increasing the electronification of the very first market trade what was in way back when, which is the Treasury market, particularly on the dealer client side, which is kind of interesting. To start with around your question, I think from where this market can go and should go, and from my perspective, will go, take a look at where the wholesale market is on the treasury side.

the levels of electronification that’s there, which is sort of in that 75% to 80% zone. That has to be where we’re going. I would also bring up the TBA mortgage market. which is obviously also higher electronified in that kind of 75% to 80% zone. That’s where we need to take this, right? And I’ve talked a lot about kind of why in 2023, as we’re kind of entering into 2024, there are still clients that pick up the phone and do trades like it’s 1994, right? And the reason why that is, is typically larger trades, more complex trades still get done on the phone. A lot of what we’re doing around AiEX from our perspective begins to really address that as we think about the concept of larger trades getting broken down. That’s a little bit of the sort of beginning of it all, right?

And so we’ll remain like super focused on aspects of the government bond market in terms of like how we are really kind of electronifying, like micro things like roll trades, how we’re continuing to roll out AiEX trades to our larger group of clients. General instinct is, again, if you think about the push and pull that we’re dealing with a little bit back to Craig’s conversation, the forward momentum around this is really strong. Do you have to get the protocols right? Absolutely. And so from a company perspective, we are highly engaged and highly focused on making sure we get all of those different protocols, right? I’m happy to – Tom, forgotten more about the treasury market than like I know. I grew up, as you guys know, it’s like a little bit of like a mortgage gig.

So happy to give Tom, a little perspective on that, if you want to add?

Tom Pluta: Yes. I think Billy described it well. I think if you look at some of the specific areas and treasuries that are yet to be electronified that we’re going after. As always, it’s the larger size trades. It’s illiquid securities like deep off-the-runs and tips and strips. And it’s multi-leg trades across rates products. So for example, the cash versus futures trade that’s very popular and treasury versus swaps, asset swap trades. We think that — and we do have plans for each of these areas with blocks, we’re constantly encouraging our clients to push a little further in the size threshold electronically, and we think that will continue to grow over time. Billy mentioned AiEX, that’s been growing rapidly. That’s now 50% of our U.S. treasury tickets are executed by AiEX and it’s about 10% to 15% of our treasury volumes.

So increasingly, we’ve seen more clients take large trades and break them down into small pieces and executing algorithmically via AiEX. So there’s a lot of ways to attack that. On the liquid securities solutions that we have for the wholesale market like U.S. Treasury sweep allows dealers to offset very efficiently their deep off-the-run risk, and that’s continuing to grow. And on things like cash futures basis and swap spreads the cross product trades, we are working on algorithmic solutions, and we feel that we do have ways that will make it more efficient to execute these trades electronically. So I think if you look at all of these efforts taken together, we are confident that we will continue to grow the share of D2C electronic trading.

Billy Hult: Thanks for your question, Ben.

Benjamin Budish : That was very thorough.

Operator: Okay. Our next question comes from Andrew Bond with Rosenblatt Securities.