TRADEWEB MARKETS INC. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the sections titled "Basis of Presentation" and "Selected Historical Consolidated Financial and Other Data" and our audited consolidated financial statements and related notes and other information included elsewhere in this Annual Report on Form 10-K. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from the results described in or implied by the forward-looking statements. Factors that could cause or contribute to those differences include, but are not limited to, those identified below and those discussed in the sections titled "Risk Factors" and "Cautionary Note Regarding Forward-Looking Statements" included elsewhere in this Annual Report on Form 10-K.
Overview
We are a leader in building and operating electronic marketplaces for our global network of clients across the financial ecosystem. Our network is comprised of clients across the institutional, wholesale and retail client sectors, including many of the largest global asset managers, hedge funds, insurance companies, central banks, banks and dealers, proprietary trading firms and retail brokerage and financial advisory firms as well as regional dealers. Our marketplaces facilitate trading across a range of asset classes, including rates, credit, equities and money markets. We are a global company serving clients in over 65 countries with offices inNorth America ,Europe andAsia . We believe our proprietary technology and culture of collaborative innovation allow us to adapt our offerings to enter new markets, create new platforms and solutions and adjust to regulations quickly and efficiently. We support our clients by providing solutions across the trade lifecycle, including pre-trade, execution, post-trade and data. Our institutional client sector serves institutional investors in over 40 markets across 25 currencies, and in over 65 countries around the globe. We connect institutional investors with pools of liquidity using our flexible order and trading systems. Our clients trust the integrity of our markets and recognize the value they get by trading electronically: enhanced transparency, competitive pricing, efficient trade execution and regulatory compliance. In our wholesale client sector, we provide a broad range of electronic, voice and hybrid platforms to more than 300 dealers and financial institutions with more than 100 actively trading on our electronic or hybrid markets with ourDealerweb platform. This platform was launched in 2008 following the acquisition of inter-dealer brokerHilliard Farber 76
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& Co., Inc. In 2011, we acquired the brokerage assets of
In our retail client sector, we provide advanced trading solutions for financial advisory firms and traders with our Tradeweb Direct platform. We entered the retail sector in 2006 and launched our Tradeweb Direct platform following the 2013 acquisition ofBondDesk Group LLC , which was built to bring innovation and efficiency to the wealth management community. Tradeweb Direct has provided financial advisory firms access to live offerings, accurate pricing in the marketplace and fast execution. Our markets are large and growing. Electronic trading continues to increase across the markets in which we operate as a result of market demand for greater transparency, higher execution quality, operational efficiency and lower costs, as well as regulatory changes. We believe our deep client relationships, asset class breadth, geographic reach, regulatory knowledge and scalable technology position us to continue to be at the forefront of the evolution of electronic trading. Our platforms provide transparent, efficient, cost-effective and compliant trading solutions across multiple products, regions and regulatory regimes. As market participants seek to trade across multiple asset classes, reduce their costs of trading and increase the effectiveness of their trading, including through the use of data and analytics, we believe the demand for our platforms and electronic trading solutions will continue to grow.
Trends and Other Factors Impacting Our Performance
Economic Environment
Our business is impacted by the overall market activity and, in particular, trading volumes and market volatility. Lower volatility is correlated to lower liquidity, which may result in lower trading volume for our clients and may negatively impact our operating performance. Factors that may impact market activity in 2020 include, among other things, economic, political and social conditions, legislative, regulatory or government policy changes and health concerns associated with the coronavirus. As a result, our business is sensitive to slow trading environments and the continuity of conservative monetary policies of central banks internationally, which tend to lessen volatility. While our business is impacted by the overall activity of the market and market volatility, our revenues consist of a mix of fixed and variable fees that partially mitigates this impact. More importantly, we are actively engaged in the further electronification of trading activities, which will help mitigate this impact as we believe secular growth trends can partially offset market volatility risk.
Regulatory Environment
Our business is subject to extensive regulations inthe United States and internationally, which may expose us to significant regulatory risk and cause additional legal costs to ensure compliance. See "Business - Regulation." The existing legal framework that governs the financial markets is periodically reviewed and amended, resulting in enforcement of new laws and regulations that apply to our business. The current regulatory environment inthe United States may be subject to future legislative changes driven by the current administration and could be further impacted, depending on the results of the upcomingU.S. 2020 elections. The impact of any reform efforts on us and our operations remains uncertain. In addition, as a result of the referendum in favor of theUnited Kingdom's withdrawal from theEuropean Union ("Brexit") inJune 2016 , which occurred onJanuary 31, 2020 , we have incurred additional costs to address the potential effects of Brexit, including costs associated with establishing a new regulated subsidiary inthe Netherlands . Compliance with regulations may require us to dedicate additional financial and operational resources, which may adversely affect our profitability. In addition, compliance with regulations may require our clients to dedicate significant financial and operational resources, which may negatively affect their ability to pay our fees and use our platforms and, as a result, our profitability. However, under certain circumstances regulation may increase demand for our platforms and solutions, and we believe we are well positioned to benefit from any potential increased electronification due to regulatory changes as market participants seek platforms that meet regulatory requirements and solutions that help them comply with their regulatory obligations. For example, our 2018 revenue increased due in part to higher trading volumes as a result of, and the introduction of our new APA service in connection with, the implementation of MiFID II inJanuary 2018 . 77 Table of Contents Competitive Environment We and our competitors compete to introduce innovations in market structure and new electronic trading capabilities. While we endeavor to be a leader in innovation, new trading capabilities of our competitors are also adopted by market participants. On the one hand, this increases liquidity and electronification for all participants, but it also puts pressure on us to further invest in our technology and to innovate to ensure the continued growth of our network of clients and continued improvement of liquidity, electronic processing and pricing on our platforms. Our ability to compete is influenced by key factors such as (i) developments in trading platforms and solutions, (ii) the liquidity we provide on transactions, (iii) the transaction costs we incur in providing our solutions, (iv) the efficiency in execution of transactions on our platforms, (v) our ability to hire and retain talent and (vi) our ability to maintain the security of our platforms and solutions. Our competitive position is also influenced by the familiarity and integration of our clients with our electronic, voice and hybrid systems. When either a client wants to trade in a new product or we want to introduce a new product, trading protocol or other solution, we believe we benefit from our clients' familiarity with our offerings as well as our integration into their order management systems and back offices. See "Business - Competition" for more detail on our competitors.
Technology and Cybersecurity Environment
Our business and its success are largely impacted by the introduction of increasingly complex and sophisticated technology systems and infrastructures and new business models. Offering specialized trading venues and solutions through the development of new and enhanced platforms is essential to maintaining our level of competitiveness in the market and attracting new clients seeking platforms that provide advanced automation and better liquidity. We believe we will continue to increase demand for our platforms and solutions and the volume of transactions on our platforms, and thereby enhance our client relationships, by responding to new trading and information requirements by utilizing technological advances and emerging industry standards and practices in an effective and efficient way. We plan to continue to focus on and invest in technology infrastructure initiatives and continually improve and expand our platforms and solutions to further enhance our market position. We experience cyber-threats and attempted security breaches. If these were successful, these cyber security incidents could impact revenue and operating income and increase costs. We therefore continue to make investments, which may result in increased costs, to strengthen our cybersecurity measures.
Foreign Currency Exchange Rate Environment
We earn revenues, pay expenses, hold assets and incur liabilities in currencies other than theU.S. dollar. Accordingly, fluctuations in foreign currency exchange rates can affect our results of operations from period to period. In particular, fluctuations in exchange rates for non-U.S. dollar currencies may reduce theU.S. dollar value of revenues, earnings and cash flows we receive from non-U.S. markets, increase our operating expenses (as measured inU.S. dollars) in those markets, negatively impact our competitiveness in those markets or otherwise adversely impact our results of operations or financial condition. Future fluctuations of foreign currency exchange rates and their impact on our results of operations and financial condition are inherently uncertain. As we continue to grow the size of our global operations, these fluctuations may be material. See Part II, Item 7A - "Quantitative and Qualitative Disclosures About Market Risk - Foreign Currency and Derivative Risk" elsewhere in this Annual Report on Form 10-K.
Effect of Pushdown Accounting on our Financial Statements
As a result of the Refinitiv Transaction, and the application of pushdown accounting, our assets and liabilities were adjusted to their estimated fair values as ofOctober 1, 2018 , the closing date of the Refinitiv Transaction. These adjusted valuations resulted in an increase in depreciation and amortization expense, due to the increased carrying value of our assets and the related increase in depreciation of tangible assets and amortization of our intangible assets, and a decrease in occupancy expense as a result of the recognition of a leasehold interest liability. Additionally, the excess of the portion of the total purchase price of the Refinitiv Transaction attributable to the purchase of our assets and liabilities over their estimated fair value as of the closing date of the Refinitiv Transaction was allocated to goodwill.Goodwill is subject to annual impairment testing. Amounts allocated to intangible assets with definite lives are subject to amortization over the estimated useful life of the asset. See "Note 3 - Pushdown Accounting" to our audited 78 Table of Contents
consolidated financial statements included elsewhere in this Annual Report on Form 10-K and "- Critical Accounting Policies and Estimates - Pushdown Accounting."
Due to the change in the basis of accounting resulting from the application of pushdown accounting, the financial information for the period beginning onOctober 1, 2018 , and through and includingDecember 31, 2019 , which we refer to as the "Successor period," and the financial information for the periods prior to, and including,September 30, 2018 , which we refer to as the "Predecessor period," are not necessarily comparable. As discussed above, the new basis of accounting primarily impacted the values of our long-lived and indefinite-lived intangible assets and resulted in increased depreciation and amortization expense and decreased occupancy expense. However, the change in basis resulting from the Refinitiv Transaction and the application of pushdown accounting did not impact revenues or certain expenses, including employee compensation and benefits expense, general and administrative expense, technology and communications expense, professional fees and net interest income (expense), and, for these metrics, we believe combining the results for the 2018 Successor and 2018 Predecessor periods provides meaningful information. Accordingly, certain discussions below for revenues and certain expenses represent the combined results of the 2018 Successor and 2018 Predecessor periods for the full year endedDecember 31, 2018 . Such combination was performed by mathematical addition and is not a presentation made in accordance with GAAP, although we believe it provides a meaningful method of comparison for these metrics. The combined data is being presented for informational purposes only. The combined results for these metrics for the full year endedDecember 31, 2018 (i) have not been prepared on a pro forma basis, as if the Refinitiv Transaction occurred on the first day of the period, (ii) may not reflect the actual results we would have achieved absent the Refinitiv Transaction, (iii) may not be predictive of our future results of operations and (iv) should not be viewed as a substitute for the financial results of the Successor and Predecessor periods presented in accordance with GAAP. For all other metrics, to the extent that the change in basis had a material impact on our results, we have disclosed such impact under "- Results of Operations."
Taxation and Public Company Expenses
In connection with the Reorganization Transactions, we became the sole manager ofTWM LLC . As a result, beginning with the second quarter of 2019, we became subject toU.S. federal, state and local income taxes with respect to our allocable share of any taxable income ofTWM LLC and are taxed at prevailing corporate tax rates. Our actual effective tax rate is impacted by our ownership share ofTWM LLC , which will increase over time as the Continuing LLC Owners redeem or exchange their LLC Interests for shares of Class A common stock or Class B common stock, as applicable, or as we purchase LLC Interests from the Continuing LLC Owners. In addition to tax expenses, we also incur expenses related to our operations. Furthermore, in connection with the IPO, we entered into the Tax Receivable Agreement pursuant to which we will be required to make payments that we expect to be significant. We intend to causeTWM LLC to make distributions in an amount sufficient to allow us to pay our tax obligations, operating expenses, including payments under the Tax Receivable Agreement, and our quarterly cash dividends, as and when declared by our board of directors. In addition, as a public company, we have started to implement additional procedures and processes for the purpose of addressing the standards and requirements applicable to public companies. In particular, we expect our accounting, legal and personnel-related expenses and directors' and officers' insurance costs to continue to increase as we establish more comprehensive compliance and governance functions, establish, maintain and review internal control over financial reporting in accordance with the Sarbanes-Oxley Act and prepare and distribute periodic reports in accordance withSEC rules.
Components of our Results of Operations
Revenues
Our gross revenue is derived primarily from transaction fees, subscription fees, commissions and market data fees. For the 2018 Predecessor Period and the year endedDecember 31, 2017 , our gross revenue is offset by contingent consideration recognized as a contra-revenue adjustment related to the achievement of specific revenue earnout milestones, as further described below. This contingent consideration vested on, and has no additional impacts on our 79
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results of operations after,July 31, 2018 . We believe that gross revenue is the key driver of our operating performance and therefore is the revenue measure we utilize to assess our business on a period by period basis.
Transaction Fees
We earn transaction fees from transactions executed on our trading platforms through various fee plans. Transaction fees are generated on both a variable and fixed price basis and vary by geographic region, product type and trade size. For most of our products, clients pay both fixed minimum monthly transaction fees and variable transaction fees on a per transaction basis in excess of the monthly minimum. For certain of our products, clients also pay a subscription fee in addition to the minimum monthly transaction fee. For other products, instead of a minimum monthly transaction fee, clients pay a subscription fee and variable or fixed transaction fees on a per transaction basis. For variable transaction fees, we charge clients fees based on the mix of products traded and the volume of transactions executed. Transaction volume is determined by using either a measure of the notional volume of the products traded or a count of the number of trades. We typically charge higher fees for products that are less actively traded. In addition, because transaction fees are sometimes subject to fee plans with tiered pricing based on product mix, volume, monthly minimums and monthly maximum fee caps, average transaction fees per million generated for a client may vary each month depending on the mix of products and volume traded. Furthermore, because transaction fees vary by geographic region, product type and trade size, our revenues may not correlate with volume growth.
Subscription Fees
We earn subscription fees primarily for granting clients access to our markets for trading and market data. For a limited number of products, we only charge subscription fees and no transaction fees. Subscription fees are generally generated on a fixed price basis. For purposes of our discussion of our results of operations, we include Refinitiv (formerly Thomson Reuters) market data fees in subscription fees. We earn fixed license fees from our market data license agreement with Refinitiv. We also earn royalties from Refinitiv for referrals of new Eikon (a Refinitiv data platform) customers based on customer conversion rates. Royalties may fluctuate from period to period depending on the numbers of customer conversions achieved by Refinitiv during the applicable royalty fee earning period, which is typically five years from the date of the initial referral.
Commissions
We earn commission revenue from our electronic and voice brokerage services on a riskless principal basis. Riskless principal revenues are derived on matched principal transactions where revenues are earned on the spread between the buy and sell price of the transacted product. For TBA-MBS,U.S. treasury and repurchase agreement transactions executed by our wholesale clients, we also generate revenue from fixed commissions that are generally invoiced monthly.
Contingent Consideration
In 2014, we issued Class A Shares and unvested Class P1-(A) Shares to some of the Bank Stockholders as a result of a$120.0 million capital contribution to facilitate our expansion into new credit products. In connection with this investment, certain employees also invested$5.3 million in us and were issued ClassC Shares and unvested Class P1-(C) Shares. The Class P1-(A) Shares vested onJuly 31, 2018 upon the achievement of specific revenue earnout milestones related to the growth of specified credit products (the "Credit Initiative Earnout"). Prior to theJuly 31, 2018 vesting, we recognized contingent consideration with respect to the Credit Initiative Earnout as a contra-revenue adjustment, which partially offset gross revenue for the 2018 Predecessor Period and the year endedDecember 31, 2017 . See "- Critical Accounting Policies and Estimates - Contingent Consideration" for a discussion of the calculation of contingent consideration. The value of the contingent consideration of$156.2 million was finalized and contributed to members' capital or employee equity compensation payable onJuly 31, 2018 and we therefore no longer recognize any contra-revenue adjustments from the Credit Initiative Earnout subsequent to that date. In connection with the 80 Table of Contents
Reorganization Transactions, the Class A Shares, Class P1-(A) Shares, Class
Operating Expenses
Employee Compensation and Benefits
Employee compensation and benefits expense consists of wages, employee benefits, bonuses, commissions, stock-based compensation cost and related taxes. Factors that influence employee compensation and benefits expense include revenue and earnings growth, hiring new employees and trading activity which generates broker commissions. We expect employee compensation and benefits expense to increase as we hire additional employees and as our revenues and earnings grow. As a result, employee compensation and benefits can vary from period to period.
Depreciation and Amortization
Depreciation and amortization expense consists of costs relating to the depreciation and amortization of other intangible assets, acquired and internally developed software, leasehold improvements, furniture and equipment. As discussed in "- Effect of Pushdown Accounting on our Financial Statements," we applied pushdown accounting as a result of the Refinitiv Transaction and therefore depreciation and amortization expense in Successor reporting periods will differ from amounts reported in Predecessor periods.
General and Administrative
General and administrative expense consists of travel and entertainment, marketing, value-added taxes, state use taxes, foreign currency transaction gains and losses, charitable contributions, other administrative expenses and bad debt expense. We expect general and administrative expense to increase as we expand the number of our employees and product offerings and grow our operations.
Technology and communications expense consists of costs relating to software and hardware maintenance, our internal network connections, data center costs, clearance costs and data feeds provided by third-party service providers, including Refinitiv pursuant to a shared services agreement. Factors that influence technology and communications expense include the growth of our client base and product offerings. Professional Fees Professional fees consist primarily of accounting, tax and legal fees and fees paid to technology and software consultants to maintain our trading platforms and infrastructure. Accounting, tax and legal fees are expected to increase as a result of expanding public company and compliance requirements. Factors that influence technology and software consulting expense include the growth of our client base and product offerings.
Occupancy
Occupancy expense consists of operating lease rent and related costs for office space and data centers leased inNorth America ,Europe andAsia . Fees incurred by us under a shared services agreement with Refinitiv for office space are also included in occupancy expense. We expect occupancy expense to increase as we expand the number of our employees and grow our operations. In addition, we currently anticipate that in 2020 we will likely enter into a new lease to increase the size of our corporate headquarters in or nearNew York, New York , which may result in increased operating expenses. As discussed in "- Effect of Pushdown Accounting on our Financial Statements," we applied pushdown accounting as a result of the Refinitiv Transaction and therefore occupancy expense in Successor reporting periods will differ from amounts reported in Predecessor periods. 81 Table of Contents Net Interest Income (Expense) Interest income consists of interest earned from our cash deposited with large commercial banks and money market funds. Beginning with the second quarter of 2019, interest expense consists of commitment fees payable on, and, if applicable, interest payable on any borrowings outstanding under, the Revolving Credit Facility. Historically, interest expense consisted of interest payable to Thomson Reuters under a convertible term note. Thomson Reuters converted all outstanding borrowings under this note to equity of the Company inMay 2017 .
Income Taxes
Beginning with the second quarter of 2019, we became subject toU.S. federal, state and local income taxes with respect to our taxable income, including our allocable share of any taxable income ofTWM LLC , and are taxed at prevailing corporate tax rates.TWM LLC is a multiple member limited liability company taxed as a partnership and accordingly any taxable income generated byTWM LLC is passed through to and included in the taxable income of its members, including to us. Income taxes also include unincorporated business taxes on income earned or losses incurred for conducting business in certain state and local jurisdictions, income taxes on income earned or losses incurred in foreign jurisdictions on certain operations and federal and state income taxes on income earned or losses incurred, both current and deferred, on subsidiaries that are taxed as corporations forU.S. tax purposes.
Net Income Attributable to Non-Controlling Interests
We are the sole manager ofTWM LLC . As a result of this control, and because we have a substantial financial interest inTWM LLC , we began consolidating the financial results ofTWM LLC and reporting a non-controlling interest on our consolidated financial statements, representing the economic interests ofTWM LLC held by the Continuing LLC Owners. Income or loss is attributed to the non-controlling interests based on the relative ownership percentages of LLC Interests held during the period by us and the Continuing LLC Owners. In connection with the Reorganization Transactions, theTWM LLC Agreement was amended and restated to, among other things, (i) provide for LLC Interests and (ii) exchange all of the then existing membership interests inTWM LLC for LLC Interests. LLC Interests held by the Continuing LLC Owners are redeemable in accordance with theTWM LLC Agreement, at the election of such holders, for newly issued shares of Class A common stock or Class B common stock, as the case may be, on a one-for-one basis. In the event of such election by a Continuing LLC Owner, we may, at our option, effect a direct exchange of Class A common stock or Class B common stock for such LLC Interests of suchContinuing LLC Owner in lieu of such redemption. In connection with any redemption or exchange, we will receive a corresponding number of LLC Interests, increasing our total ownership interest inTWM LLC . Following the completion of the Reorganization Transactions and the IPO, we owned 64.3% ofTWM LLC and theContinuing LLC Owners owned the remaining 35.7% ofTWM LLC . As ofDecember 31, 2019 , we owned 73.4% ofTWM LLC and the Continuing LLC Owners owned the remaining 26.6% ofTWM LLC . The result of the foregoing is that, during the second quarter of 2019, we began reporting net income attributable to non-controlling interests. For the year endedDecember 31, 2019 , net income attributable to non-controlling interests totaled$46.9 million , which represents the Continuing LLC Owners' pro rata share of the net income ofTWM LLC subsequent to the Reorganization Transactions and the IPO. For pre-IPO periods, there were no non-controlling interests.
Results of Operations
For the Year Ended
The following table sets forth a summary of our statements of income for the year endedDecember 31, 2019 , the 2018 Successor Period and the 2018 Predecessor Period: Successor Successor Predecessor Year Ended October 1, 2018 to January 1, 2018 to 82 Table of Contents September December 31, 2019 December 31, 2018 30, 2018 (dollars in thousands) Gross revenue $ 775,566 $ 178,637$ 505,771 Contingent consideration - - (26,830) Net revenue 775,566 178,637 478,941 Total expenses 585,747 146,702 338,607 Operating income 189,819 31,935 140,334 Tax receivable agreement liability adjustment 33,134 - - Net interest income 2,373 787 1,726 Income before taxes 225,326 32,722 142,060 Provision for Income taxes (52,302) (3,415) (11,900) Net income $ 173,024 $ 29,307$ 130,160 Less: Pre-IPO net income attributable to Tradeweb Markets LLC 42,352 Net income attributable to Tradeweb Markets Inc. and non-controlling interests 130,672 Less: Net income attributable to non-controlling interests 46,903 Net income attributable to Tradeweb Markets Inc. $ 83,769 Overview During the year endedDecember 31, 2019 , our revenue grew due to a number of factors. Higher client trading activity drove revenue increases in our rates, credit, equities and money markets asset classes. Our market data business also grew due to the expansion of our market data license agreement with Refinitiv inNovember 2018 . Our expenses were impacted by higher depreciation and amortization expense as a result of the application of pushdown accounting and non-cash stock-based compensation expense related to the Special Option Award as a result of the completion of the IPO during the second quarter of 2019. Gross revenue increased by$91.2 million or 13.3% to$775.6 million for the year endedDecember 31, 2019 from$684.4 million for the combined year endedDecember 31, 2018 . This increase in gross revenue was mainly due to higher trading volumes, resulting in a$52.7 million increase in transaction fees and a$36.7 million increase in commission revenue. Net revenue increased by$118.0 million or 17.9% to$775.6 million for the year endedDecember 31, 2019 from$657.6 million for the combined year endedDecember 31, 2018 . Non-cash contingent consideration decreased by$26.8 million for the year endedDecember 31, 2019 as a result of the vesting of the Credit Initiative Earnout atJuly 31, 2018 . Total expenses for the year endedDecember 31, 2019 were$585.7 million . Total expenses for the 2018 Successor Period and the 2018 Predecessor Period were$146.7 million and$338.6 million , respectively. Total expenses for the year endedDecember 31, 2019 were impacted by higher depreciation and amortization expense as a result of the application of pushdown accounting and higher employee compensation and benefits expense, including the impact of non-cash stock-based compensation expense related to the Special Option Award, which, as a result of the completion of the IPO, we began to expense during the second quarter of 2019 (with$18.9 million recognized as compensation expense related to these options immediately upon the completion of the IPO). The tax receivable agreement liability adjustment of$33.1 million during the year endedDecember 31, 2019 was primarily due to changes in the tax receivable agreement liability recorded in our consolidated statement of financial condition as a result of changes in the mix of earnings, tax legislation and tax rates in various jurisdictions, which impacted our tax savings. Income before taxes for the year endedDecember 31, 2019 was$225.3 million . Income before taxes for the 2018 Successor Period and the 2018 Predecessor Period was$32.7 million and$142.1 million , respectively. Net income for the year endedDecember 31, 2019 was$173.0 million . Net income for the 2018 Successor Period and the 2018 Predecessor Period was$29.3 million and$130.2 million , respectively. Net income attributable toTradeweb Markets Inc. for the year endedDecember 31, 2019 was$83.8 million . Income before taxes, net income and net income 83 Table of Contents attributable toTradeweb Markets Inc. for the year endedDecember 31, 2019 were negatively impacted by higher depreciation and amortization expense as a result of the application of pushdown accounting, resulting in acquisition and Refinitiv related depreciation and amortization expense of$97.6 million , and by$24.4 million of stock-based compensation expense related to the Special Option Award and post-IPO options awarded in the second half of 2019, partially offset by higher revenue. Revenues
Our revenues for the year ended
Successor Combined(1) Successor Predecessor
Year Ended Year Ended October 1, 2018 to January 1, 2018 to Year
Ended
December 31, 2019 December 31, 2018 December 31, 2018 September 30, 2018
Combined Year Ended
% of Gross % of Gross % of Gross % of Gross
$ Revenue $ Revenue $ Revenue $ Revenue $ Change % Change
(dollars in thousands)
Revenues
Transaction fees $ 423,583 54.6 % $ 370,881 54.2 % $ 97,130 54.4% $ 273,751 54.1 % $ 52,702 14.2 %
Subscription fees(2) 194,366 25.1 % 190,500 27.8 % 46,519 26.0% 143,981 28.5 % 3,866 2.0 %
Commissions 149,365 19.3 % 112,670 16.5 % 32,840 18.4% 79,830 15.8 % 36,695 32.6 %
Other 8,252 1.1 % 10,357 1.5 % 2,148 1.2% 8,209 1.6 % (2,105) (20.3) %
Gross revenue 775,566 100.0 % 684,408 100.0 % 178,637 100.0% 505,771 100.0 % 91,158 13.3 %
Contingent
consideration - (26,830) - (26,830) 26,830 (100.0) %
Net revenue $ 775,566 $ 657,578 $ 178,637 $ 478,941 $ 117,988 17.9 %
Components of gross
revenue growth:
Constant currency
growth(3) 15.1 %
Foreign currency
impact (1.8) %
Total gross revenue
growth 13.3 %
--------------------------------------------------------------------------------
(1) Represents the combined results of the Successor and Predecessor periods for
the full year ended
mathematical addition and is not a presentation made in accordance with GAAP.
However, we believe it provides a meaningful method of comparison of revenues
for the year ended
2018. Revenue accounts were not impacted by the Refinitiv Transaction or the
application of pushdown accounting.
(2) Subscription fees for the year ended December 31, 2019 , the combined year
ended
Period, include $55.6 million , $50.3 million , $13.4 million and $36.8
million , respectively, of Refinitiv (formerly Thomson Reuters) market data
fees.
(3) Constant currency growth, which is a non-GAAP financial measure, is defined
as gross revenue growth excluding the effects of foreign currency
fluctuations. Gross revenue excluding the effects of foreign currency
fluctuations is calculated by translating the current period and prior
period's gross revenue using the average exchange rates for 2018. We use
constant currency growth as a supplemental metric to evaluate our underlying
gross revenue performance between periods by removing the impact of foreign
currency fluctuations. We believe that providing constant currency growth
provides a useful comparison of our gross revenue performance and trends
between periods.
Transaction fees. Transaction fees increased by$52.7 million or 14.2% to$423.6 million for the year endedDecember 31, 2019 from$370.9 million for the combined year endedDecember 31, 2018 primarily due to higher trading volumes for rates derivatives, rates cash, credit cash and money markets products and European ETFs. Subscription fees. Subscription fees increased by$3.9 million or 2.0% to$194.4 million for the year endedDecember 31, 2019 from$190.5 million for the combined year endedDecember 31, 2018 primarily due to higher market data and Institutional MBS fees, partially offset by lower Retail fees. Commissions. Commissions increased by$36.7 million or 32.6% to$149.4 million for the year endedDecember 31, 2019 from$112.7 million for the combined year endedDecember 31, 2018 primarily due to higher trading volumes forU.S. corporate bonds andU.S. government bonds. Other. Other revenue decreased by$2.1 million or (20.3)% to$8.3 million for the year endedDecember 31, 2019 from$10.4 million for the combined year endedDecember 31, 2018 primarily as a result of decreased fees from a third party for certain licensing and development inCanada . 84 Table of Contents Contingent consideration. There was no contingent consideration for the year endedDecember 31, 2019 due to the vesting of the Credit Initiative Earnout atJuly 31, 2018 . Contingent consideration for the combined year endedDecember 31, 2018 was$26.8 million . Our gross revenue by client sector for the year endedDecember 31, 2019 , the combined year endedDecember 31, 2018 , the 2018 Successor Period and the 2018 Predecessor Period, and the resulting dollar and percentage changes, were as follows: Successor Combined (1) Successor Predecessor Year Ended December 31, 2019 vs Combined Year Ended December 31, Year Ended Year Ended October 1, 2018 to January 1, 2018 to 2018 December 31, 2019 December 31, 2018 December 31, 2018 September 30, 2018 $ Change % Change (dollars in thousands) Revenues Institutional $ 453,379 $ 405,889 $ 103,971 $ 301,918 $ 47,490 11.7 % Wholesale 171,096 137,181 38,153 99,028 33,915 24.7 % Retail 80,368 77,546 19,780 57,766 2,822 3.6 % Market Data 70,723 63,792 16,733 47,059 6,931 10.9 % Gross revenue $ 775,566 $ 684,408 $ 178,637 $ 505,771 $ 91,158 13.3 %
--------------------------------------------------------------------------------
(1) Represents the combined results of the Successor and Predecessor periods for
the full year ended
mathematical addition and is not a presentation made in accordance with GAAP.
However, we believe it provides a meaningful method of comparison of revenues
for the year ended
2018. Revenue accounts were not impacted by the Refinitiv Transaction or the
application of pushdown accounting.
Institutional. Revenues from our Institutional client sector increased by$47.5 million or 11.7% to$453.4 million for the year endedDecember 31, 2019 from$405.9 million for the combined year endedDecember 31, 2018 . The increase was derived primarily from higher trading volumes for rates derivatives products, mortgages, credit cash products, ETFs and repurchase agreements, partially offset by the impact of foreign exchange, mainly the weakening of the euro. Wholesale. Revenues from our Wholesale client sector increased by$33.9 million or 24.7% to$171.1 million for the year endedDecember 31, 2019 from$137.2 million for the combined year endedDecember 31, 2018 . The increase was derived primarily from higher trading volumes forU.S. corporates andU.S. government bonds. Retail. Revenues from our Retail client sector increased by$2.8 million or 3.6% to$80.4 million for the year endedDecember 31, 2019 from$77.6 million for the combined year endedDecember 31, 2018 . The increase was derived primarily from higher trading volumes for certificates of deposit, credit cash products, andU.S. government bonds partially offset by lower revenues from software development and implementation on behalf of certain clients.
Market Data. Revenues from our Market Data client sector increased by
Our gross revenue by asset class for the year endedDecember 31, 2019 , the combined year endedDecember 31, 2018 , the 2018 Successor Period and the 2018 Predecessor Period, and the resulting dollar and percentage changes, were as follows: Year Ended December Successor Combined (1) Successor Predecessor 31, 2019 vs Combined Year Ended Year Ended Year Ended October 1, 2018 to January 1, 2018 to December 31, 2018 December 31, 2019 December 31, 2018 December 31, 2018 September 30, 2018 $ Change % Change (dollars in thousands) Revenues Rates $ 434,197 $ 379,233 $ 97,592 $ 281,641$ 54,964 14.5 % Credit 162,154 139,656 37,204 102,452 22,498 16.1 % Equities 46,912 40,939 12,592 28,347 5,973 14.6 % Money Markets 40,392 34,741 9,493 25,248 5,651 16.3 % Market Data 70,723 63,792 16,733 47,059 6,931 10.9 % Other Fees 21,188 26,047 5,023 21,024 (4,859) (18.7) % Gross revenue $ 775,566 $ 684,408 $ 178,637 $ 505,771$ 91,158 13.3 %
--------------------------------------------------------------------------------
(1) Represents the combined results of the Successor and Predecessor periods for
the full year ended
mathematical addition and is not a presentation made in accordance with GAAP.
However, we believe it provides a
85
Table of Contents
meaningful method of comparison of revenues for the year ended December 31, 2019
to the combined year ended December 31, 2018 . Revenue accounts were not impacted
by the Refinitiv Transaction or the application of pushdown accounting.
Our variable and fixed revenues by asset class for the year ended December 31,
2019 , the combined year ended December 31, 2018 , the 2018 Successor Period and
the 2018 Predecessor Period, and the resulting dollar and percentage changes,
were as follows:
Successor Combined(1) Successor Predecessor Year Ended December 31, 2019 vs
Year Ended Year Ended October 1, 2018 to January 1, 2018 to Combined Year Ended December 31, 2018
December 31, 2019 December 31, 2018 December 31, 2018 September 30, 2018 $ Change % Change
Variable Fixed Variable Fixed Variable Fixed Variable Fixed Variable Fixed Variable Fixed
(dollars in thousands)
Revenues
Rates $ 232,423 $ 201,774 $ 181,051 $ 198,182
141,343 20,811 119,217 20,439 31,976 5,228 87,241 15,211 22,126 372 18.6 % 1.8 %
Equities 38,515 8,397 34,443 6,496 10,949 1,643 23,494 4,853 4,072 1,901 11.8 % 29.3 % Money Markets
25,461 14,931 20,843 13,898 6,040 3,453 14,803 10,445 4,618 1,033 22.2 % 7.4 %
Market Data - 70,723 - 63,792 - 16,733 - 47,059 - 6,931 - % 10.9 %
Other - 21,188 40 26,007 - 5,023 40 20,984 (40) (4,819) (100.0) % (18.5) %
Gross revenue $ 437,742 $ 337,824 $ 355,594 $ 328,814 --------------------------------------------------------------------------------
(1) Represents the combined results of the Successor and Predecessor periods for
the full year ended
mathematical addition and is not a presentation made in accordance with GAAP.
However, we believe it provides a meaningful method of comparison of revenues
for the year ended
2018. Revenue accounts were not impacted by the Refinitiv Transaction or the
application of pushdown accounting.
Rates. Revenues from our Rates asset class increased by$55.0 million or 14.5% to$434.2 million for the year endedDecember 31, 2019 from$379.2 million for the combined year endedDecember 31, 2018 primarily due to higher trading volumes for derivatives products,U.S. government bonds and mortgages. Credit. Revenues from our Credit asset class increased by$22.5 million or 16.1% to$162.2 million for the year endedDecember 31, 2019 from$139.7 million for the combined year endedDecember 31, 2018 primarily due to higher trading volumes forU.S. corporate bonds and Chinese bonds. Equities. Revenues from our Equities asset class increased by$6.0 million or 14.6% to$46.9 million for the year endedDecember 31, 2019 from$40.9 million for the combined year endedDecember 31, 2018 primarily due to higher trading volumes for European ETFs and derivatives products, as well as higher revenues fromU.S. ETFs. Money Markets. Revenues from our Money Markets asset class increased by$5.7 million or 16.3% to$40.4 million for the year endedDecember 31, 2019 from$34.7 million for the combined year endedDecember 31, 2018 primarily due to higher trading volumes for repurchase agreements and certificates of deposit. Market Data. Revenues from Market Data increased by$6.9 million or 10.9% to$70.7 million for the year endedDecember 31, 2019 from$63.8 million for the combined year endedDecember 31, 2018 as a result of an increase in the number of market data feeds provided to Refinitiv (formerly Thomson Reuters) and revenue from our APA reporting service. Other Fees. Revenues from Other Fees decreased by$4.9 million or (18.7)% to$21.2 million for the year endedDecember 31, 2019 from$26.1 million for the combined year endedDecember 31, 2018 primarily due to lower fees from a third party for certain licensing and development inCanada and lower Retail revenues from software development and implementation on behalf of certain clients. A significant percentage of our revenues are tied directly to overall trading volumes in the rates, credit, equities and money markets asset classes. The average daily volumes and total volumes on our trading platforms by asset class for the years endedDecember 31, 2019 and 2018 were as follows: Year Ended December 31, 2019 December 31, 2018 ADV ADV Volume ADV Volume % Change (dollars in millions) Rates$ 489,645 $ 122,871,725 $ 354,023 $ 88,625,615 38.3 % 86 Table of Contents Credit 14,777 3,721,199 12,658 3,186,209 16.7 % Equities 7,795 1,972,767 7,798 1,962,566 - % Money Markets 213,209 53,706,377 173,743 43,462,916 22.7 % Total$ 725,426 $ 182,272,068 $ 548,222 $ 137,237,306 32.3 % We believe the increases in average daily volumes for our rates, credit and money markets asset classes in the year endedDecember 31, 2019 can be attributed to various factors, including further electronification of trading activities across our asset classes, increase in market share, new products, new clients and volatility. Rates ADV increased due mainly to higher trading activity in long and short-tenor interest rate swaps and swaptions, mortgages andU.S. treasuries. Credit ADV increased due to higher trading activity inU.S. high-grade and high-yield credit products, derivatives products and Chinese bonds. Equities ADV was flat, as an increase in European ETFs and derivatives products was offset by lowerU.S. ETF notional volumes. Money Markets ADV increased mainly due to bilateral electronic trading in repurchase agreements. The average variable fees per million dollars of volume traded on our trading platforms by asset class for the years endedDecember 31, 2019 and 2018 are summarized below. There are three potential drivers of quarterly fluctuations in our average variable fees per million: (1) volume discounts, (2) the mix of cash and derivatives products traded, and (3) the mix of protocols underpinning cash and derivatives products. Average variable fees per million should be reviewed in conjunction with our trading volumes and gross revenue by asset class. Since variable fees are sometimes subject to fee plans with tiered pricing based on product mix and volume, average variable fees per million for a specific asset class may not correlate with volumes or revenue growth. For example, average variable fees per million dollars of volume for our Rates asset class decreased 7.4% for the year endedDecember 31, 2019 while gross revenue for our Rates asset class increased 14.5% over the same period. Year Ended December 31, 2019 2018 $ Change % Change Rates$ 1.89 $ 2.04 $ (0.15) (7.4) % Rates - excluding short-tenor swaps (less than 1 year)$ 2.21 $ 2.15 $ 0.06 2.8 % Credit$ 37.98 $ 37.42 $ 0.56 1.5 % Equities$ 19.52 $ 17.55 $ 1.97 11.2 % Money Markets$ 0.47 $ 0.48 $ (0.01) (2.1) % Total Fees per Million$ 2.40 $ 2.59 $ (0.19) (7.3) % Total Fees per Million - excluding short-tenor swaps (less than 1 year)$ 2.66 $ 2.68 $ (0.02) (0.7) % Rates average variable fees per million was impacted by the growth in short tenor swap volumes, a product which has a lower variable fee capture compared to other rates products. Credit average variable fees per million was impacted by the growth in credit cash volumes, products which have a higher variable fee capture compared to credit derivative products. Equities average variable fees per million was impacted by a mix shift in volumes towards Institutional ETFs and away from Wholesale products. Money Markets average variable fees per million was impacted by a mix shift in volumes towards repurchase agreements and away from other lower variable fee capture Money Markets products. Our gross revenue by geography (based on client location) for the year endedDecember 31, 2019 , the combined year endedDecember 31, 2018 , the 2018 Successor Period and the 2018 Predecessor Period, and the resulting dollar and percentage changes, were as follows: Year Ended December 31, Successor Combined (1) Successor Predecessor 2019 vs Combined Year Ended Year Ended Year Ended October 1, 2018 to January 1, 2018 to December 31, 2018 December 31, 2019 December 31, 2018 December 31, 2018 September 30, 2018 $ Change % Change (dollars in thousands) Revenues U.S. $ 497,316 $ 440,211 $ 115,907 $ 324,304 57,105 13.0 % International 278,250 244,197 62,730 181,467 34,053 13.9 % Gross revenue $ 775,566 $ 684,408 $ 178,637 $ 505,771 91,158 13.3 % 87 Table of Contents
--------------------------------------------------------------------------------
(1) Represents the combined results of the Successor and Predecessor periods for
the full year ended
mathematical addition and is not a presentation made in accordance with GAAP.
However, we believe it provides a meaningful method of comparison of revenues
for the year ended
2018. Revenue accounts were not impacted by the Refinitiv Transaction or the
application of pushdown accounting.
U.S. Revenues fromU.S. clients increased by$57.1 million or 13.0% to$497.3 million for the year endedDecember 31, 2019 from$440.2 million for the combined year endedDecember 31, 2018 primarily due to higher trading volumes forU.S. credit products,U.S. government bonds, mortgages and rates derivatives products. International. Revenues from International clients increased by$34.1 million or 13.9% to$278.3 million for the year endedDecember 31, 2019 from$244.2 million for the combined year endedDecember 31, 2018 primarily due to higher trading volumes for rates derivatives products, European equities products, Chinese bonds and repurchase agreements. Compared to 2018 average rates, fluctuations in foreign currency rates throughout 2019 decreased our International gross revenue by$11.8 million .
Operating Expenses
Our expenses for the year ended
Successor Successor Predecessor
Year Ended October 1, 2018 to January 1, 2018 to
December 31, 2019 December 31, 2018 September 30, 2018
(in thousands)
Employee compensation and benefits(1) $ 329,457 $ 80,436 $ 209,053
Depreciation and amortization 139,330 33,020 48,808
Technology and communications(1) 39,285 9,907 26,598
General and administrative(1) 34,960 11,837 23,056
Professional fees(1) 28,029 8,194 20,360
Occupancy 14,686 3,308 10,732
Total Expenses $ 585,747 $ 146,702 $ 338,607
--------------------------------------------------------------------------------
(1) The change in basis resulting from the Refinitiv Transaction and the
application of pushdown accounting did not impact these operating expense
accounts.
Employee Compensation and Benefits. Employee compensation and benefits expense increased by$40.0 million or 13.8% to$329.5 million for the year endedDecember 31, 2019 from$289.5 million for the combined year endedDecember 31, 2018 . The increase was primarily due to$24.4 million of non-cash stock-based compensation expense related to the Special Option Award, which, as a result of the completion of the IPO, we began to expense during the second quarter of 2019 (with$18.9 million recognized as compensation expense related to these options immediately upon the completion of the IPO), and post-IPO options awarded in the second half of 2019, an increase in commission related expenses of$9.9 million related to higher Wholesale revenues and an increase in salaries, bonus and benefits of$3.9 million . Depreciation and Amortization. Depreciation and amortization expense for the year endedDecember 31, 2019 was$139.3 million . Depreciation and amortization expense for the 2018 Successor Period and the 2018 Predecessor Period was$33.0 million and$48.8 million , respectively. As a result of the Refinitiv Transaction and the application of pushdown accounting, we adjusted our assets and liabilities to their estimated fair values as ofOctober 1, 2018 , which resulted in an increase in depreciation of tangible assets and amortization of our intangible assets. For the year endedDecember 31, 2019 , acquisition and Refinitiv related depreciation and amortization was$97.6 million . For the 2018 Successor Period, and the 2018 Predecessor Period, acquisition and Refinitiv related depreciation and amortization was$22.4 million and$19.6 million , respectively. 88 Table of ContentsTechnology and Communications . Technology and communications expense increased by$2.8 million or 7.6% to$39.3 million for the year endedDecember 31, 2019 from$36.5 million for the combined year endedDecember 31, 2018 . The increase was primarily due to increased clearance and data fees as a result of higher trading volumes. General and Administrative. General and administrative expense increased by$0.1 million or 0.2% to$35.0 million for the year endedDecember 31, 2019 from$34.9 million for the combined year endedDecember 31, 2018 . The increase was primarily a result of an increase in insurance costs of$2.2 million associated with being a public company, and foreign exchange losses of$1.1 million , partially offset by lower bad debt expenses of$1.5 million associated with an evaluation of the reserve, sales and use taxes of$1.2 million , and lower recruiting fees of$0.6 million . Professional Fees. Professional fees decreased by$0.5 million or (1.8)% to$28.0 million for the year endedDecember 31, 2019 from$28.6 million for the combined year endedDecember 31, 2018 . The decrease was primarily due to lower legal and consulting fees, as well as lower advisory fees in 2019, as 2018 included higher fees incurred in connection with the IPO, partially offset by higher audit and tax advisory fees associated with being a public company. Occupancy. Occupancy expense for the year endedDecember 31, 2019 was$14.7 million . Occupancy expense for the 2018 Successor Period and the 2018 Predecessor Period was$3.3 million and$10.7 million , respectively. As a result of the Refinitiv Transaction and the application of pushdown accounting, atOctober 1, 2018 , we established a leasehold interest liability, which resulted in contra expense of$0.4 million during the year endedDecember 31, 2019 . Occupancy expense for the year endedDecember 31, 2019 also was impacted by an increase in costs associated with ourEurope andAsia offices.
Net Interest Income (Expense)
Net interest income for the year endedDecember 31, 2019 decreased by$0.1 million , or (5.5)% to$2.4 million from$2.5 million for the combined year endedDecember 31, 2018 . The decrease was due to higher interest expense associated with credit facility fees related to the Revolving Credit Facility of$1.3 million , partially offset by higher interest income from cash investments. The change in basis resulting from the Refinitiv Transaction and the application of pushdown accounting did not impact net interest income (expense).
Tax Receivable Agreement Liability Adjustment
The tax receivable agreement liability adjustment for the year endedDecember 31, 2019 was$33.1 million , which represents income recognized during the year endedDecember 31, 2019 primarily due to changes in the tax receivable agreement liability recorded in our consolidated statement of financial condition as a result of changes in the mix of earnings, tax legislation and tax rates in various jurisdictions which impacted our tax savings.
Income Taxes
Provision for income taxes for the year endedDecember 31, 2019 was$52.3 million . Provision for income taxes for the 2018 Successor Period and the 2018 Predecessor Period was$3.4 million and$11.9 million , respectively. Provision for income taxes for the year endedDecember 31, 2019 was impacted by the Reorganization Transactions and the IPO, which resulted inTradeweb Markets Inc. becoming subject toU.S. federal, state and local income taxes with respect to its taxable income, including its allocable share of any taxable income ofTWM LLC , and being taxed at prevailing corporate tax rates. Prior to the Reorganization Transactions, income taxes consisted only of business taxes incurred byTWM LLC and certain subsidiaries for business conducted in certain state, local and foreign jurisdictions as well as federal, state and local taxes for certain subsidiaries that are taxed as corporations forU.S. tax purposes. The provision for income taxes for the year endedDecember 31, 2019 was also impacted by an increase inTradeweb Market Inc.'s ownership interest inTWM LLC following the completion of theOctober 2019 follow-on offering and the application of the use of proceeds therefrom. 89
Table of Contents
For
The following table sets forth a summary of our statements of income for the 2018 Successor Period, the 2018 Predecessor Period and the year endedDecember 31, 2017 : Successor Predecessor Predecessor October 1, 2018 to January 1, 2018 to Year Ended December 31, 2018 September 30, 2018 December 31, 2017 (dollars in thousands) Gross revenue $ 178,637 $ 505,771 $ 562,968 Contingent consideration - (26,830) (58,520) Net revenue 178,637 478,941 504,448 Total expenses 146,702 338,607 415,356 Operating income 31,935 140,334 89,092 Net interest income 787 1,726 685 Income before taxes 32,722 142,060 89,777 Provision for Income taxes (3,415) (11,900) (6,129) Net income $ 29,307 $ 130,160 $ 83,648 Overview During the combined year endedDecember 31, 2018 , our business was impacted by a number of factors, including higher client trading activity, driving revenue increases in rates, credit, equities and money markets trading. Our market data business also grew due to the expansion of our market data license agreement with Refinitiv. Our expenses were impacted by higher employee compensation and benefits expense and higher professional fees, as well as higher depreciation and amortization expense as a result of the application of pushdown accounting. Gross revenue increased by$121.4 million or 21.6% to$684.4 million for the combined year endedDecember 31, 2018 from$563.0 million for the year endedDecember 31, 2017 . This increase in gross revenue was mainly due to higher trading volumes resulting in a$103.9 million increase in transaction fees and a$15.9 million increase in commissions. Net revenue increased by$153.1 million or 30.4% to$657.6 million for the combined year endedDecember 31, 2018 from$504.4 million for the year endedDecember 31, 2017 . Non-cash contingent consideration decreased by$31.7 million to$26.8 million for the combined year endedDecember 31, 2018 from$58.5 million for the year endedDecember 31, 2017 as a result of changes in projected and actual revenues related to the Credit Initiative Earnout during the periods. Total expenses for the 2018 Successor Period and the 2018 Predecessor Period were$146.7 million and$338.6 million , respectively. Total expenses for the year endedDecember 31, 2017 were$415.4 million . Total expenses for the 2018 Successor Period and the 2018 Predecessor Period were impacted by higher employee compensation and benefits expense and higher professional fees. The 2018 Successor Period was also impacted by higher depreciation and amortization expense as a result of the application of pushdown accounting. Income before taxes for the 2018 Successor Period and the 2018 Predecessor Period was$32.7 million and$142.1 million , respectively. Income before taxes for the year endedDecember 31, 2017 was$89.8 million . Net income for the 2018 Successor Period and the 2018 Predecessor Period was$29.3 million and$130.2 million , respectively. Net income for the year endedDecember 31, 2017 was$83.6 million . Income before taxes and net income for the 2018 Successor Period and the 2018 Predecessor Period were positively impacted by higher revenues partially offset by higher compensation costs. Revenues 90 Table of Contents Our revenues for the 2018 Successor Period, the 2018 Predecessor Period, the combined year endedDecember 31, 2018 and the year endedDecember 31, 2017 , and the resulting dollar and percentage changes, were as follows: Successor Predecessor Combined(1) Predecessor Combined Year Ended December 31, 2018
October 1, 2018 to January 1, 2018 to Year Ended Year Ended vs
December 31, 2018 September 30, 2018 December 31, 2018 December 31, 2017 Year Ended December 31, 2017
% of Gross % of Gross
$ $ $ Revenue $ Revenue $ Change % Change
Revenues
Transaction fees $ 97,130 $ 273,751
370,881 54.2 %
38.9 %
Subscription fees(2) 46,519 143,981 190,500 27.8 % 194,534 34.6 % (4,034) (2.1) %
Commissions 32,840 79,830 112,670 16.5 % 96,745 17.2 % 15,925 16.5 %
Other 2,148 8,209 10,357 1.5 % 4,669 0.8 % 5,688 121.8 %
Gross revenue 178,637 505,771 684,408 100.0 % 562,968 100.0 % 121,440 21.6 %
Contingent consideration - (26,830) (26,830) (58,520) 31,690 (54.2) %
Net revenue $ 178,637 $ 478,941 657,578 $ 504,448 $ 153,130 30.4 %
Components of gross
revenue growth:
Constant currency
growth(3) 19.7 %
Foreign currency impact 1.8 %
Total gross revenue
growth 21.6 %
--------------------------------------------------------------------------------
(1) Represents the combined results of the Successor and Predecessor periods for
the full year ended
mathematical addition and is not a presentation made in accordance with GAAP.
However, we believe it provides a meaningful method of comparison of revenues
for the combined year ended
2017. Revenue accounts were not impacted by the Refinitiv Transaction or the
application of pushdown accounting.
(1) Subscription fees for the combined year ended December 31, 2018 , the 2018
Successor Period, the 2018 Predecessor Period and the year ended
2017 include
respectively, of Refinitiv (formerly Thomson Reuters) market data fees.
(1) Constant currency growth, which is a non-GAAP financial measure, is defined
as gross revenue growth excluding the effects of foreign currency
fluctuations. Gross revenue excluding the effects of foreign currency
fluctuations is calculated by translating the current period and prior
period's gross revenue using the average exchange rates for 2017. We use
constant currency growth as a supplemental metric to evaluate our underlying
gross revenue performance between periods by removing the impact of foreign
currency fluctuations. We believe that providing constant currency growth
provides a useful comparison of our gross revenue performance and trends
between periods.
Transaction Fees. Transaction fees increased by$103.9 million or 38.9% to$370.9 million for the combined year endedDecember 31, 2018 from$267.0 million for the year endedDecember 31, 2017 from increased Institutional transactional volumes forU.S. credit products, derivative products (led by Dollar swaps, European interest rate swaps andU.S. and European credit default indexes),U.S. and European ETF, European repurchase agreements andU.S. treasury, as well as adjustments to contracts as a result of MiFID II pursuant to which annual subscription fees were replaced with monthly minimum transaction fees and the product launch ofChina bonds. Subscription fees. Subscription fees decreased by$4.0 million or (2.1)% to$190.5 million for the combined year endedDecember 31, 2018 from$194.5 million for the year endedDecember 31, 2017 due primarily to a$10.3 million decline from MiFID II contract adjustments where certain annual subscription fees were replaced with monthly minimum transaction fees, partially offset by a$2.5 million increase in market data fees, a$1.4 million increase in Retail fees and a$2.6 million increase in Institutional fees. Commissions. Commissions increased by$15.9 million or 16.5% to$112.7 million for the combined year endedDecember 31, 2018 from$96.7 million for the year endedDecember 31, 2017 primarily due to higher trading volumes in our Wholesale client sector forU.S. credit products, repurchase agreements,U.S. ETF andU.S. treasury. The revenue increase was partially offset by lower municipal bond, ARM and specified pool trading volumes. Other. Other revenue increased by$5.7 million or 121.8% to$10.4 million for the combined year endedDecember 31, 2018 from$4.7 million for the year endedDecember 31, 2017 primarily as a result of revenue from our APA reporting service launched inJanuary 2018 in response to MiFID II. Other fees also consisted of fees from a third party for certain licensing and development inCanada .
Contingent consideration. Contingent consideration decreased by
91Table of Contents
result of changes in projected and actual revenues related to the Credit
Initiative Earnout during the periods and the vesting of the Credit Initiative
Earnout at
Our gross revenue by client sector for the 2018 Successor Period, the 2018 Predecessor Period, the combined year endedDecember 31, 2018 and the year endedDecember 31, 2017 , and the resulting dollar and percentage changes, were as follows: Combined Combined Year Ended Successor Predecessor (1) Predecessor December 31, 2018 vs Year Ended December 31, October 1, 2018 to January 1, 2018 to Year Ended Year Ended 2017 December December 31, 2018 September 30, 2018 31, 2018 December 31, 2017 $ Change % Change (dollars in thousands) Revenues Institutional $ 103,971 $ 301,918$ 405,889 $ 318,038$ 87,851 27.6 % Wholesale 38,153 99,028 137,181 118,451 18,730 15.8 % Retail 19,780 57,766 77,546 70,857 6,689 9.4 % Market Data 16,733 47,059 63,792 55,622 8,170 14.7 % Gross revenue $ 178,637 $ 505,771$ 684,408 $ 562,968$ 121,440 21.6 %
--------------------------------------------------------------------------------
(1) Represents the combined results of the Successor and Predecessor periods for
the full year ended
mathematical addition and is not a presentation made in accordance with GAAP.
However, we believe it provides a meaningful method of comparison of revenues
for the combined year ended
2017. Revenue accounts were not impacted by the Refinitiv Transaction or the
application of pushdown accounting.
Institutional. Revenues from our Institutional client sector increased by$87.9 million or 27.6% to$405.9 million for the combined year endedDecember 31, 2018 from$318.0 million for the year endedDecember 31, 2017 . The increase was derived primarily from increased Institutional transactional volumes forU.S. and European credit products, derivative products (led by European interest rate swaps, Dollar swaps andU.S. and European credit default indexes),U.S. and European ETF, European government bonds,U.S. treasury, European repurchase agreements and the product launch ofChina bonds. Wholesale. Revenues from our Wholesale client sector increased by$18.7 million or 15.8% to$137.2 million for the combined year endedDecember 31, 2018 from$118.5 million for the year endedDecember 31, 2017 . Revenue increased primarily due to higher trading volumes inU.S. credit products, repurchase agreements,U.S. ETF andU.S. treasury. The revenue increase was partially offset by lower municipal bond, ARM and specified pool trading volumes.
Retail. Revenues from our Retail client sector increased by
Market Data. Revenues from our Market Data client sector increased by$8.2 million or 14.7% to$63.8 million for the combined year endedDecember 31, 2018 from$55.6 million for the year endedDecember 31, 2017 as a result of revenue from our APA reporting service launched inJanuary 2018 in response to MiFID II, increased Refinitiv (formerly Thomson Reuters) license fees due to an increase in the number of market data feeds provided to Refinitiv and increased Gilt closing price revenues. Our gross revenue by asset class for the 2018 Successor Period, the 2018 Predecessor Period, the combined year endedDecember 31, 2018 and the year endedDecember 31, 2017 , and the resulting dollar and percentage changes, were as follows: Combined Combined Year Ended Successor Predecessor (1) Predecessor December 31, 2018 vs Year Ended December 31, October 1, 2018 to January 1, 2018 to Year Ended Year Ended 2017 December December 31, 2018 September 30, 2018 31, 2018 December 31, 2017 $ Change % Change (dollars in thousands) Revenues Rates $ 97,592 $ 281,641$ 379,233 $ 324,302$ 54,931 16.9 % Credit 37,204 102,452 139,656 105,336 34,320 32.6 % Equities 12,592 28,347 40,939 23,681 17,258 72.9 % Money Markets 9,493 25,248 34,741 28,633 6,108 21.3 % Market Data 16,733 47,059 63,792 55,622 8,170 14.7 % Other Fees 5,023 21,024 26,047 25,394 653 2.6 % Total gross revenue $ 178,637 $ 505,771$ 684,408 $ 562,968$ 121,440 21.6 % -------------------------------------------------------------------------------- 92
Table of Contents
(1) Represents the combined results of the Successor and Predecessor periods for
the full year ended
mathematical addition and is not a presentation made in accordance with GAAP.
However, we believe it provides a meaningful method of comparison of revenues
for the combined year ended
2017. Revenue accounts were not impacted by the Refinitiv Transaction or the
application of pushdown accounting.
Our variable and fixed revenues by asset class for the 2018 Successor Period, the 2018 Predecessor Period, the combined year endedDecember 31, 2018 and the year endedDecember 31, 2017 , and the resulting dollar and percentage changes, were as follows: Successor Predecessor Combined(1) Predecessor Combined
Year Ended
October 1, 2018 to January 1, 2018 to Year Ended Year Ended Year Ended December 31, 2017
December 31, 2018 September 30, 2018 December 31, 2018 December 31, 2017 $ Change % Change
Variable Fixed Variable Fixed Variable Fixed Variable Fixed Variable
Fixed Variable Fixed
(dollars in thousands)
Revenues
Rates $ 47,868 $ 49,724 $ 133,183 $ 148,458 $ 181,051 $ 198,182 $ 143,840 $ 180,462 $ 37,211 $ 17,720 25.9 % 9.8 %
Credit 31,976 5,228 87,241 15,211 119,217 20,439 90,846 14,490 28,371 5,949 31.2 % 41.1 %
Equities 10,949 1,643 23,494 4,853 34,443 6,496 19,150 4,531 15,293 1,965 79.9 % 43.4 %
Money Markets 6,040 3,453 14,803 10,445 20,843 13,898 15,055 13,578 5,788 320 38.4 % 2.4 %
Market Data - 16,733 - 47,059 - 63,792 - 55,622 - 8,170 - % 14.7 %
Other - 5,023 40 20,984 40 26,007 36 25,358 4 649 11.1 % 2.6 %
Gross revenue $ 96,833 $ 81,804 $ 258,761 $ 247,010 $ 355,594 $ 328,814 $ 268,927 $ 294,041 $ 86,667 $ 34,773 32.2 % 11.8 %
--------------------------------------------------------------------------------
(1) Represents the combined results of the Successor and Predecessor periods for
the full year ended
mathematical addition and is not a presentation made in accordance with GAAP.
However, we believe it provides a meaningful method of comparison of revenues
for the combined year ended
2017. Revenue accounts were not impacted by the Refinitiv Transaction or the
application of pushdown accounting.
Rates. Revenues from our Rates asset class increased by$54.9 million or 16.9% to$379.2 million for the combined year endedDecember 31, 2018 from$324.3 million for the year endedDecember 31, 2017 primarily due to increased Institutional transactional volumes in European interest rate swaps, Dollar swaps,U.S. treasury and European governments. Credit. Revenues from our Credit asset class increased by$34.3 million or 32.6% to$139.7 million for the combined year endedDecember 31, 2018 from$105.3 million for the year endedDecember 31, 2017 primarily due to increased Institutional and Wholesale transactional volumes forU.S. credit products, increased Institutional transaction volumes forU.S. and European credit default indexes, European credit products and the product launch ofChina bonds. The revenue increase was partially offset by lower Wholesale municipal bond volumes. Equities. Revenues from our Equities asset class increased by$17.3 million or 72.9% to$40.9 million for the combined year endedDecember 31, 2018 from$23.7 million for the year endedDecember 31, 2017 primarily due to increased Institutional transactional volumes forU.S. and European ETF. Money Markets. Revenues from our Money Markets asset class increased by$6.1 million or 21.3% to$34.7 million for the combined year endedDecember 31, 2018 from$28.6 million for the year endedDecember 31, 2017 primarily due to increased Wholesale transactional volumes for repurchase agreements and higher Institutional transactional volumes for European repurchase agreements. Market Data. Revenues from Market Data increased by$8.2 million or 14.7% to$63.8 million for the combined year endedDecember 31, 2018 from$55.6 million for the year endedDecember 31, 2017 as a result of revenue from our APA reporting service launched inJanuary 2018 in response to MiFID II, increased Refinitiv (formerly Thomson Reuters) license fees due to an increase in the number of market data feeds provided to Refinitiv and increased Gilt closing price revenues. Other Fees. Revenues from Other Fees increased by$0.7 million or 2.6% to$26.0 million for the combined year endedDecember 31, 2018 from$25.4 million for the year endedDecember 31, 2017 primarily due to increased Retail fees for software development and implementation. 93 Table of Contents A significant percentage of our revenues are tied directly to overall trading volumes in the rates, credit, money markets and equities asset classes. The average daily volumes and total volumes on our trading platforms by asset class for the years endedDecember 31, 2018 and 2017 were as follows: Year Ended December 31, 2018 December 31, 2017 ADV ADV Volume ADV Volume % Change (dollars in millions) Rates$ 354,023 $ 88,625,615 $ 253,432 $ 63,475,383 39.7 % Credit 12,658 3,186,209 7,554 1,864,700 67.6 % Equities 7,798 1,962,566 4,817 1,214,081 61.9 % Money Markets 173,743 43,462,916 132,105 33,060,749 31.5 % Total$ 548,222 $ 137,237,306 $ 397,908 $ 99,614,913 37.8 % We believe the increases in average daily volumes in the year endedDecember 31, 2018 can be attributed to various factors, including increased volatility, further electronification of trading activities, increase in market share, new products and new clients. In addition, we believe that certain trading volumes increased in the year endedDecember 31, 2018 as customers adapted to electronic trading in order to comply with obligations pursuant to MiFID II, which was implemented by regulatory bodies inEurope inJanuary 2018 . Rates ADV increased due mainly to higher trading activity in interest rate swaps,U.S. treasuries and mortgages. Credit ADV increased due mainly to higher trading activity in credit default swaps,U.S. high-grade credit, European credit and Chinese bonds. Equities ADV increased due mainly to higher trading activity inU.S. and European ETFs and equity futures. Money Markets ADV increased due to the continued growth of bilateral electronic trading in repurchase agreements. The average variable fees per million dollars of volume traded on our trading platforms by asset class for the years endedDecember 31, 2018 and 2017 are summarized below. There are three potential drivers of quarterly fluctuations in our average variable fees per million: (1) volume discounts, (2) the mix of cash and derivatives products traded, and (3) the mix of protocols underpinning cash and derivatives products. Average variable fees per million should be reviewed in conjunction with our trading volumes and gross revenue by asset class. Since variable fees are sometimes subject to fee plans with tiered pricing based on product mix and volume, average variable fees per million for a specific asset class may not correlate with volumes or revenue growth. For example, average variable fees per million dollars of volume for our Credit asset class decreased 23.2% for the year endedDecember 31, 2018 while gross revenue for our Credit asset class increased 32.6% over the same period. Year Ended December 31, 2018 2017 $ Change % Change Rates$ 2.04 $ 2.27 $ (0.23) (10.1) % Rates - excluding short-tenor swaps (less than 1 year)$ 2.15 $ 2.34 $ (0.19) (8.1) % Credit$ 37.42 $ 48.72 $ (11.30) (23.2) % Equities$ 17.55 $ 15.77 $ 1.78 11.3 % Money Markets$ 0.48 $ 0.46 $ 0.02 4.3 % Total Fees per Million$ 2.59 $ 2.70 $ (0.11) (4.1) % Total Fees per Million - excluding short-tenor swaps (less than 1 year)$ 2.68 $ 2.75 $ (0.07) (2.5) % Rates average variable fees per million was impacted by volume discounts in both cash and derivatives products. Credit average variable fees per million was impacted by a mix shift in volumes towards derivatives products and away from cash products, as well as a shift in volumes towards electronically processed institutional cash products. Equities average variable fees per million was impacted by a mix shift towards institutional derivatives protocols and away from wholesale derivatives protocols. Money Markets average variable fees per million was impacted by a mix shift towards repurchase agreements and away from other lower variable fee capture Money Markets products. 94 Table of Contents Our gross revenue by geography (based on client location) for the 2018 Successor Period, the 2018 Predecessor Period, the combined year endedDecember 31, 2018 and the year endedDecember 31, 2017 , and the resulting dollar and percentage changes, were as follows: Combined Combined Year Ended Successor Predecessor (1) Predecessor December 31, 2018 vs Year Ended December 31, October 1, 2018 to January 1, 2018 to Year Ended Year Ended 2017 December December 31, 2018 September 30, 2018 31, 2018 December 31, 2017 $ Change % Change (dollars in thousands) Revenues U.S. $ 115,907 $ 324,304$ 440,211 $ 385,176$ 55,035 14.3 % International 62,730 181,467 244,197 177,792 66,405 37.3 % Gross revenue $ 178,637 $ 505,771$ 684,408 $ 562,968$ 121,440 21.6 %
--------------------------------------------------------------------------------
(1) Represents the combined results of the Successor and Predecessor periods for
the full year ended
mathematical addition and is not a presentation made in accordance with GAAP.
However, we believe it provides a meaningful method of comparison of revenues
for the combined year ended
2017. Revenue accounts were not impacted by the Refinitiv Transaction or the
application of pushdown accounting.
U.S. Revenues fromU.S. clients increased by$55.0 million or 14.3% to$440.2 million for the combined year endedDecember 31, 2018 from$385.2 million for the year endedDecember 31, 2017 primarily due to increased transactional volumes from our Institutional client sector forU.S. credit products,U.S. ETF andU.S. treasury, higher trading volumes from our Wholesale client sector, which saw an increase in volumes forU.S. credit,U.S. treasury and repurchase agreements and higher trading volumes for our Retail client sector, which saw an increase in middle markets trading volumes. International. Revenues from International clients increased by$66.4 million or 37.3% to$244.2 million for the combined year endedDecember 31, 2018 from$177.8 million for the year endedDecember 31, 2017 primarily due to increased transactional volumes from our Institutional client sector for European interest rate swaps, European credit default indexes, European ETF, European governments and European credit products. Fluctuations in foreign currency rates increased our International gross revenue by$9.1 million . Operating Expenses
Our expenses for the 2018 Successor Period, the 2018 Predecessor Period and the
year ended
Successor Predecessor Predecessor
October 1, 2018 to December 31, 2018
(in thousands)
Employee compensation and benefits(1) $ 80,436 $ 209,053 $ 248,963 Depreciation and amortization 33,020 48,808 68,615 Technology and communications(1) 9,907 26,598 33,973 General and administrative(1) 11,837 23,056 30,013 Professional fees(1) 8,197 20,360 19,351 Occupancy 3,308 10,732 14,441 Total Expenses $ 146,705 $ 338,607 $ 415,356
--------------------------------------------------------------------------------
(1) The change in basis resulting from the Refinitiv Transaction and the
application of pushdown accounting did not impact these operating expense
accounts.
Employee Compensation and Benefits. Employee compensation and benefits expense for the 2018 Successor Period and the 2018 Predecessor Period was$80.4 million and$209.1 million , respectively. Employee compensation and benefits expense increased by$40.5 million or 16.3% to$289.5 million for the combined year endedDecember 31, 2018 from$249.0 million for the year endedDecember 31, 2017 . The increase was due to a$14.1 million increase in salaries and benefits, due to an increase in employee headcount, and an increase in annual incentive compensation of$26.0 million , which is based on operating performance, primarily due to our financial results. Total employee headcount increased to 919 as ofDecember 31, 2018 from 857 as ofDecember 31, 2017 . 95 Table of Contents Depreciation and Amortization. Depreciation and amortization expense for the 2018 Successor Period and the 2018 Predecessor Period was$33.0 million and$48.8 million , respectively. Depreciation and amortization expense was$68.6 million for the year endedDecember 31, 2017 . As a result of the Refinitiv Transaction and the application of pushdown accounting, we adjusted our assets and liabilities to their estimated fair market values as ofOctober 1, 2018 , which resulted in an increase in depreciation of tangible assets and amortization of our intangible assets. The impact of such adjustments increased depreciation and amortization expense during the 2018 Successor Period by$15.9 million . General and Administrative. General and administrative expense for the 2018 Successor Period and the 2018 Predecessor Period was$11.8 million and$23.1 million , respectively. General and administrative expense increased by$0.9 million or 2.7% to$34.9 million for the combined year endedDecember 31, 2018 from$34.0 million for the year endedDecember 31, 2017 . The increase was primarily a result of$1.0 million in recruiting and expatriate expense,$0.9 million increase in marketing expense due to increased marketing efforts for key growth, client acquisition and regulatory initiatives,$0.5 million increase in value-added taxes and$0.8 million increase in other administrative fees, partially offset by a reduction in foreign exchange losses of$2.4 million .Technology and Communications . Technology and communications expense for the 2018 Successor Period and the 2018 Predecessor Period was$9.9 million and$26.6 million , respectively. Technology and communications expense increased by$6.5 million or 21.6% to$36.5 million for the combined year endedDecember 31, 2018 from$30.0 million for the year endedDecember 31, 2017 . The increase was primarily due to an increase in third-party software and technology maintenance and support as a result of certain cybersecurity and infrastructure initiatives and increased clearance fees as a result of higher trading volumes. Professional Fees. Professional fees for the 2018 Successor Period and the 2018 Predecessor Period was$8.2 million and$20.4 million , respectively. Professional fees increased by$9.2 million or 47.6% to$28.6 million for the combined year endedDecember 31, 2018 from$19.4 million for the year endedDecember 31, 2017 . The increase was primarily due to higher investment banking advisory, legal and audit fees, including fees incurred in connection with the IPO. Occupancy. Occupancy expense for the 2018 Successor Period and the 2018 Predecessor Period was$3.3 million and$10.7 million , respectively. Occupancy expense for the year endedDecember 31, 2017 was$14.4 million . As a result of the Refinitiv Transaction and the application of pushdown accounting, atOctober 1, 2018 , we established a leasehold interest liability, which resulted in a$0.1 million decrease in occupancy expense in the 2018 Successor Period.
Net Interest Income (Expense)
Net interest income for the 2018 Successor Period and the 2018 Predecessor Period was$0.8 million and$1.7 million , respectively. Net interest income for the year endedDecember 31, 2017 was$0.7 million . Net interest income for the 2018 Successor Period and the 2018 Predecessor Period was impacted by an increase in interest rates. Net interest income for the year endedDecember 31, 2017 was impacted by the conversion of our former convertible notes into equity inMay 2017 . Income Taxes Provision for income taxes for the 2018 Successor Period and the 2018 Predecessor Period was$3.4 million and$11.9 million , respectively. Provision for income taxes for the year endedDecember 31, 2017 was$6.1 million . Provision for income taxes for the 2018 Successor Period and the 2018 Predecessor Period was impacted by increased earnings which resulted in higher tax expense in certain jurisdictions. Provision for income taxes for the 2018 Predecessor Period was also impacted by a$3.3 million adjustment related to an uncertain tax position during the period.
Quarterly Results of Operations
96
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Our quarterly results have been and will continue to be affected by changes in
trading volumes due to market conditions, changes in the number of trading days
during certain quarters and seasonal effects caused by slow-downs in trading
activity during certain periods. As a result of these and other factors, our
financial results for any single quarter or for periods of less than a year are
not necessarily indicative of the results that may be achieved for a full fiscal
year or any future periods. For our quarterly results of operations for the
years ended December 31, 2019 and 2018, see Note 21-Quarterly Results of
Operations to our audited consolidated financial statements included elsewhere
in this Annual Report on Form 10-K.
Liquidity and Capital Resources
Overview
Liquidity describes the ability of a company to generate sufficient cash flows to meet the cash requirements of its business operations, including working capital needs to meet operating expenses, debt service, acquisitions, other commitments and contractual obligations. We consider liquidity in terms of cash flows from operations and availability under the Revolving Credit Facility and their sufficiency to fund our operating and investing activities.
Historically, we have generated significant cash flows from operations and have funded our business operations through cash on hand and cash flows from operations.
Our primary cash needs are for day to day operations, working capital requirements, capital expenditures, primarily for software and equipment, and our expected dividend payments. In addition, we are obligated to make payments under the Tax Receivable Agreement. Although the actual timing and amount of any payments that may be made under the Tax Receivable Agreement will vary, we expect that the payments that we will be required to make under the Tax Receivable Agreement will be significant. Any payments made by us under the Tax Receivable Agreement will generally reduce the amount of overall cash flows that might have otherwise been available to us or toTWM LLC . These payments will offset some of the tax benefits that we expect to realize as a result of the ownership structure ofTWM LLC . To the extent that we are unable to make payments under the Tax Receivable Agreement for any reason, the unpaid amounts generally will be deferred and will accrue interest until paid by us. Total amounts due to the Continuing LLC Owners as ofDecember 31, 2019 under the Tax Receivable Agreement were$240.8 million . We expect to fund our liquidity requirements through cash and cash equivalents and cash flows from operations. While historically we have generated significant and adequate cash flows from operations, in the event of an unexpected event in the future or otherwise, we may fund our liquidity requirements through borrowings under the Revolving Credit Facility. We believe that our projected cash position, cash flows from operations and, if necessary, borrowings under the Revolving Credit Facility, will be sufficient to fund our liquidity requirements for at least the next 12 months. However, our future liquidity requirements could be higher than we currently expect as a result of various factors. For example, any future investments, acquisitions, joint ventures or other similar transactions, which we consider from time to time, may require additional capital. In addition, our ability to continue to meet our future liquidity requirements will depend on, among other things, our ability to achieve anticipated levels of revenues and cash flows from operations and our ability to manage costs and working capital successfully, all of which are subject to general economic, financial, competitive and other factors beyond our control. In the event we require any additional capital, it will take the form of equity or debt financing, or both, and there can be no assurance that we will be able to raise any such financing on terms acceptable to us or at all. As ofDecember 31, 2019 and 2018, we had cash and cash equivalents of approximately$460.7 million and$410.1 million , respectively. All cash and cash equivalents were held in accounts with banks such that the funds are immediately available or in fixed term deposits with a maximum maturity of three months. 97 Table of Contents
Factors Influencing Our Liquidity and Capital Resources
Dividend Policy
Subject to legally available funds, we intend to continue to pay quarterly cash dividends on our Class A common stock and Class B common stock equal to$0.08 per share. As discussed below, our ability to pay these quarterly cash dividends on our Class A common stock and Class B common stock will depend on distributions to us fromTWM LLC . Dividends declared and paid to Class A and B common stockholders during the year endedDecember 31, 2019 amounted to$35.9 million . The declaration, amount and payment of any dividends will be at the sole discretion of our board of directors and will depend on our and our subsidiaries' results of operations, capital requirements, financial condition, business prospects, contractual restrictions, restrictions imposed by applicable laws and other factors that our board of directors deem relevant. Because we are a holding company and all of our business is conducted through our subsidiaries, we expect to pay dividends, if any, only from funds we receive from our subsidiaries. Accordingly, our ability to pay dividends to our stockholders is dependent on the earnings and distributions of funds from our subsidiaries. As the sole manager ofTWM LLC , we intend to cause, and will rely on,TWM LLC to make distributions in respect of LLC Interests to fund our dividends. IfTWM LLC is unable to cause these subsidiaries to make distributions, it may have inadequate funds to distribute to us and we may be unable to fund our dividends. In addition, whenTWM LLC makes distributions to us, the other holders of LLC Interests will be entitled to receive proportionate distributions based on their economic interests inTWM LLC at the time of such distributions. Our board of directors will periodically review the cash generated from our business and the capital expenditures required to finance our growth plans and determine whether to modify the amount of regular dividends and/or declare any periodic special dividends. Any future determination to change the amount of dividends and/or declare special dividends will be at the discretion of our board of directors and will be dependent upon then-existing conditions and other factors that our board of directors considers relevant. See "Risk Factors - Risks Relating to the Company and Our Organizational Structure - Our principal asset is our equity interest inTWM LLC , and, accordingly, we depend on distributions fromTWM LLC to pay our taxes and expenses, including payments under the Tax Receivable Agreement" and "Risk Factors - Risks Relating to Ownership of our Class A common stock - We intend to pay regular dividends on our Class A common stock and Class B common stock, but our ability to do so may be limited." Cash Distributions
In March and
In May, September and
Cash Dividends
In June, September andDecember 2019 ,Tradeweb Markets Inc. paid quarterly cash dividends to the holders of Class A common stock and Class B common stock in aggregate amounts of$11.4 million ,$11.4 million and$13.1 million , respectively. OnFebruary 11, 2020 , our board of directors declared a cash dividend of$0.08 per share of Class A common stock and Class B common stock for the first quarter of 2020. This dividend will be payable onMarch 16, 2020 to stockholders of record as ofMarch 2, 2020 .
Indebtedness
As of
98Table of Contents
Historically, the Company has only issued debt in connection with significant investment transactions and all debt issued by the Company has been issued to subsidiaries of Thomson Reuters. In 2013, we issued$29.3 million of convertible notes to a subsidiary of Thomson Reuters in connection with the acquisition ofBondDesk Group LLC and subsidiaries. During 2017, Thomson Reuters converted all outstanding convertible notes into equity. OnApril 8, 2019 ,TWM LLC entered into the Revolving Credit Facility with a syndicate of banks. The Revolving Credit Facility provides borrowing capacity to be used to fund our ongoing working capital needs, letters of credit and for general corporate purposes, including potential future acquisitions and expansions. OnNovember 7, 2019 ,TWM LLC entered into an amendment to the Revolving Credit Facility amongTWM LLC and the lenders party thereto, which revised the Revolving Credit Facility to permit the pending LSEG Transaction. The amendment did not otherwise impact the terms of the Revolving Credit Facility and did not impact the amount of borrowings available toTWM LLC under the Revolving Credit Facility.TWM LLC is the borrower under the Revolving Credit Facility. The Revolving Credit Facility permits borrowings of up to$500.0 million byTWM LLC . Subject to the satisfaction of certain conditions, we will be able to increase the Revolving Credit Facility by$250.0 million with the consent of lenders participating in the increase. The Revolving Credit Facility provides for the issuance of up to$5.0 million of letters of credit as well as borrowings on same-day notice, referred to as swingline loans, in an amount of up to$30.0 million . The Revolving Credit Facility will mature onApril 8, 2024 .
As of
Under the terms of the credit agreement that governs the Revolving Credit Facility, borrowings under the Revolving Credit Facility bear interest at a rate equal to, at our option, either (a) a base rate equal to the greatest of (i) the administrative agent's prime rate, (ii) the federal funds effective rate plus ½ of 1.0% and (iii) one month LIBOR plus 1.0%, in each case plus 0.75%, or (b) LIBOR plus 1.75%, subject to a 0.00% floor. The credit agreement also requires that we pay a commitment fee of 0.25% for available but unborrowed amounts. We are also required to pay customary letter of credit fees and agency fees. We have the option to voluntarily repay outstanding loans at any time without premium or penalty other than customary "breakage" costs with respect to LIBOR loans.
There will be no scheduled amortization under the Revolving Credit Facility. The principal amount outstanding will be due and payable in full at maturity.
Obligations under the Revolving Credit Facility are guaranteed by our existing and future direct and indirect material wholly-owned domestic subsidiaries, subject to certain exceptions. The Revolving Credit Facility is secured by a first-priority security interest in substantially all of the assets ofTWM LLC and the guarantors under the facility, subject to certain exceptions. The credit agreement that governs the Revolving Credit Facility contains a number of covenants that, among other things and subject to certain exceptions, restrict the ability ofTWM LLC and the ability of its restricted subsidiaries to: · incur additional indebtedness and guarantee indebtedness; · create or incur liens; · pay dividends and distributions or repurchase capital stock; · make investments, loans and advances; and · enter into certain transactions with affiliates. 99 Table of Contents The Revolving Credit Facility contains a financial covenant requiring compliance with a (i) maximum total net leverage ratio tested on the last day of each fiscal quarter not to exceed 3.5 to 1.0 (increasing to 4.0 to 1.0 for the four-quarter period following a material acquisition and the fiscal quarter in which such material acquisition is consummated) and (ii) minimum cash interest coverage ratio tested on the last day of each fiscal quarter not less than 3.0 to 1.0. The credit agreement that governs the Revolving Credit Facility also contains certain affirmative covenants and events of default customary for facilities of this type, including relating to a change of control. If an event of default occurs, the lenders under the Revolving Credit Facility will be entitled to take various actions, including the acceleration of amounts due under the Revolving Credit Facility and all actions permitted to be taken by secured creditors under applicable law.
As of
Capital Requirements
Certain of ourU.S. subsidiaries are registered as broker-dealers, SEFs or introducing brokers and are subject to the applicable rules and regulations of theSEC and CFTC. These rules contain minimum net capital or other financial resource requirements, as defined in the applicable regulations. These rules may also require a significant part of the registrants' assets be kept in relatively liquid form. Certain of our foreign subsidiaries are regulated by theFinancial Conduct Authority in theU.K. , theNederlandsche Bank inthe Netherlands , theJapanese Financial Services Agency , theJapanese Securities Dealers Association and other foreign regulators, and must maintain financial resources, as defined in the applicable regulations, in excess of the applicable financial resources requirement. As ofDecember 31, 2019 and 2018, each of our regulated subsidiaries had maintained sufficient net capital or financial resources to at least satisfy their minimum requirements which in aggregate were$53.2 million and$41.7 million , respectively. We maintain capital balances in these subsidiaries in excess of our minimum requirements in order to satisfy working capital needs and to ensure that we have enough cash on hand to satisfy margin requirements and credit risk, including the excess capital expectations of our clients.
Fails to Deliver/Fails to Receive
At times, transactions executed on our wholesale platform fail to settle due to the inability of a transaction party to deliver or receive the transacted security. Until the failed transaction settles, we will recognize a receivable from (and a matching payable to) brokers and dealers and clearing organizations for the proceeds from the unsettled transaction. The impact on our liquidity and capital resources is minimal as receivables and payables for failed transactions are usually recognized simultaneously and predominantly offset.
Working Capital
Working capital is defined as current assets minus current liabilities. Current
assets consist of cash and cash equivalents, restricted cash, receivable from
brokers and dealers and clearing organizations, deposits with clearing
organizations, accounts receivable and receivable from affiliates. Current
liabilities consist of payable to brokers and dealers and clearing
organizations, accrued compensation, deferred revenue, accounts payable, accrued
expenses and other liabilities, employee equity compensation payable, lease
liability, payable to affiliates and tax receivable agreement liability. Changes
in working capital, which impact our cash flows provided by operating
activities, can vary depending on factors such as delays in the collection of
receivables, changes in our operating performance, changes in trading
100Table of Contents
patterns, changes in client billing terms and other changes in the demand for our platforms and solutions. Our working capital was as follows:
December 31, December 31,
2019 2018
(dollars in thousands)
Cash and cash equivalents $ 460,711 $ 410,104
Restricted cash 1,000 1,200
Receivable from brokers and dealers and clearing organizations 30,641 174,591
Deposits with clearing organizations 9,724 11,427
Accounts receivable 92,814 87,192
Receivable from affiliates 2,525 3,243
Current assets 597,415 687,757
Payable to brokers and dealers and clearing organizations 30,452 171,214
Accrued compensation 119,415 120,158
Deferred revenue 23,990 27,883
Accounts payable, accrued expenses and other liabilities 32,834 42,548
Employee equity compensation payable 1,048 24,187
Lease liability 8,516 -
Payable to affiliates 1,506 5,009
Tax receivable agreement liability 6,949 -
Current liabilities 224,710 390,999
Working capital $ 372,705 $ 296,758
Current assets
Current assets decreased to $597.4 million as of December 31, 2019 from $687.8
million as of December 31, 2018 due to a decrease in receivable from brokers and
dealers and clearing organizations resulting from a lower number of fails to
deliver from unsettled wholesale platform transactions, offset by higher cash
and cash equivalents as a result of an increase in gross revenues.
Current liabilities
Current liabilities decreased to$224.7 million as ofDecember 31, 2019 from$391.0 million as ofDecember 31, 2018 due to a decrease in payable to brokers and dealers and clearing organizations resulting from a lower number of fails to receive from unsettled wholesale platform transactions and a decrease in employee equity compensation payable as a result of payments of cash-settled PRSUs.
See "- Liquidity and Capital Resources - Factors Influencing Our Liquidity and Capital Resources - Capital Requirements."
Cash Flows
Our cash flows for the year endedDecember 31, 2019 , the 2018 Successor Period, the 2018 Predecessor Period and the year endedDecember 31, 2017 were as follows: Successor Successor Predecessor Predecessor January 1, Year Ended October 1, 2018 2018 Year Ended December 31, To to December 31, September 30, 2019 December 31, 2018 2018 2017 (in thousands) Net cash flows provided by operating activities$ 311,003 $ 112,556$ 164,828 $ 224,580 Net cash flows (used in) investing activities (44,462) (16,246) (25,850) (45,552) Net cash flows (used in) financing activities (218,142) (36,000) (139,350) (153,461) Effect of exchange rate changes on cash and cash equivalents 2,008 (389) (2,043) 3,157 Net increase (decrease) in cash and cash equivalents$ 50,407 $ 59,921$ (2,415) $ 28,724 101 Table of Contents Operating Activities Operating activities consist primarily of net income adjusted for noncash items that include depreciation and amortization, stock-based compensation expense and contingent consideration. Cash flows from operating activities can fluctuate significantly from period-to-period as working capital needs and the timing of payments for accrued compensation (primarily in the first quarter) and other items impact reported cash flows.
Net cash provided by operating activities for the year ended
Net cash provided by operating activities for the 2018 Successor Period and the 2018 Predecessor Period was$112.6 million and$164.8 million , respectively, which was primarily driven by increased gross revenue partially offset in the 2018 Predecessor Period by an increase in accounts receivable due to changes to the billing process associated with MiFID II resulting in less billings annually in advance and more billings monthly in arrears. Net cash provided by operating activities for the year endedDecember 31, 2017 was$224.6 million , which was primarily driven by an increase in gross revenue and an improvement in working capital.
Investing Activities
Investing activities consist of software development costs, investments in technology hardware, purchases of equipment and other tangible assets, business acquisitions and investments.
Net cash used in investing activities was
Net cash used in investing activities was$16.2 million for the 2018 Successor Period, which consisted of$7.2 million of capitalized software development costs and$9.1 million of purchases of furniture, equipment, purchased software and leasehold improvements. Net cash used in investing activities was$25.9 million for the 2018 Predecessor Period, which consisted of$19.5 million of capitalized software development costs and$6.3 million of purchases of furniture, equipment, purchased software and leasehold improvements.
Net cash used in investing activities was
Financing Activities
Financing activities consist of purchases of LLC Interests, cash dividends to our Class A common stockholders and Class B common stockholders during the post-IPO period and cash distributions fromTWM LLC to the Original LLC Owners during the pre-IPO period. Net cash used in financing activities for the year endedDecember 31, 2019 was$218.1 million , which consisted of purchases of LLC Interests and shares of Class A common stock of$1,971.2 million from certain of the Bank Stockholders and members of management using the net proceeds from the IPO and theOctober 2019 follow-on offering, as applicable, cash dividends to our Class A and Class B common stockholders of$35.9 million , capital distributions to non-controlling interests of$38.3 million and pre-IPO capital distributions of$120.0 million , which includes a one-time distribution of$100.0 million paid to the Original LLC Owners in connection with the IPO. Net cash used in financing activities for the 2018 Successor Period and the 2018 Predecessor Period was$36.0 million and$139.4 million , respectively, which consisted of capital distributions to the Original LLC Owners. 102
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Net cash used in financing activities was
Non-GAAP Financial Measures Free Cash Flow In addition to cash flow from operating activities presented in accordance with GAAP, we use Free Cash Flow to measure liquidity. Free Cash Flow is defined as cash flow from operating activities less expenditures for capitalized software development costs and furniture, equipment and leasehold improvements. We present Free Cash Flow because we believe it is a useful indicator of liquidity that provides information to management and investors about the amount of cash generated from our core operations after expenditures for capitalized software development costs and furniture, equipment and leasehold improvements. Free Cash Flow has limitations as an analytical tool, and you should not consider Free Cash Flow in isolation or as an alternative to cash flow from operating activities or any other liquidity measure determined in accordance with GAAP. You are encouraged to evaluate each adjustment. In addition, in evaluating Free Cash Flow, you should be aware that in the future, we may incur expenditures similar to the adjustments in the presentation of Free Cash Flow. In addition, Free Cash Flow may not be comparable to similarly titled measures used by other companies in our industry or across different industries. The table set forth below presents a reconciliation of our cash flow from operating activities to Free Cash Flow for the year endedDecember 31, 2019 , the 2018 Successor Period, the 2018 Predecessor Period and the year endedDecember 31, 2017 : Successor Successor Predecessor Predecessor Year October 1, 2018 January 1, 2018 Year Ended to to Ended December 31, December 31, September 30, December 31, 2019 2018 2018 2017
Cash flow from operating activities
164,828 $ 224,580
Less: Capitalization of software
development costs (28,681) (7,156) (19,523) (27,157)
Less: Purchases of furniture,
equipment and leasehold improvements (15,781) (9,090) (6,327) (13,461)
Free Cash Flow $ 266,541 $ 96,310 $ 138,978 $ 183,962
Adjusted EBITDA, Adjusted EBITDA margin, Adjusted EBIT, Adjusted EBIT margin,
Adjusted Net Income and In addition to net income and net income attributable to
Tradeweb Markets Inc. , each presented in accordance with GAAP, we present
Adjusted EBITDA, Adjusted EBITDA margin, Adjusted EBIT and Adjusted EBIT margin
as measures of our operating performance and Adjusted Net Income and Adjusted
Diluted EPS as measures of our profitability.
Adjusted EBITDA, Adjusted EBITDA margin, Adjusted EBIT and Adjusted EBIT margin
Adjusted EBITDA is defined as net income before contingent consideration, net
interest income, provision for income taxes and depreciation and amortization,
adjusted for the impact of certain other items, including certain stock-based
compensation expense and payroll taxes associated with certain option exercises,
tax receivable agreement liability adjustments and gains and losses from
outstanding foreign exchange forward contracts and the revaluation of foreign
denominated cash. Adjusted EBIT is defined as net income before contingent
consideration, net interest income and provision for income taxes, adjusted for
the impact of certain other items, including certain stock-based compensation
expense and payroll taxes associated with certain option exercises, tax
receivable agreement liability adjustments, acquisition and Refinitiv
Transaction-related depreciation and amortization and gains and losses from
outstanding foreign exchange forward contracts and the revaluation of foreign
denominated cash. Adjusted EBITDA margin and Adjusted EBIT margin are defined as
Adjusted EBITDA and Adjusted EBIT, respectively, divided by gross revenue for
the applicable period. We present Adjusted EBITDA, Adjusted EBITDA margin,
Adjusted EBIT and Adjusted EBIT margin because we believe they assist investors
and analysts in comparing our operating performance
103Table of Contents
across reporting periods on a consistent basis by excluding items that we do not believe are indicative of our core operating performance. For example, we exclude contingent consideration because it is equity settled and its balance is based on our value at a certain time and may not reflect our actual operating performance. We also exclude non-cash stock-based compensation expense associated with the Special Option Award discussed below under "- Critical Accounting Policies and Estimates - Stock-Based Compensation" and options awarded to management and other employees following the IPO during 2019 as well as payroll taxes associated with exercises of such options during the applicable period. We believe it is useful to exclude this stock-based compensation expense and associated payroll taxes because the amount of expense associated with the Special Option Award and the post-IPO option awards in 2019 may not directly correlate to the underlying performance of our business and will vary across periods. We do not expect to exclude any non-cash stock-based compensation expense associated with options that may be awarded to management and other employees during 2020. In addition, we exclude the tax receivable agreement liability adjustments discussed below under "- Critical Accounting Policies and Estimates - Tax Receivable Agreement." We believe it is useful to exclude the tax receivable agreement liability adjustment because the recognition of income during a period due to changes in the tax receivable agreement liability recorded in our consolidated statement of financial condition as a result of changes in the mix of earnings, tax legislation and tax rates in various jurisdictions, or other factors that may impact our tax savings, may not directly correlate to the underlying performance of our business and will vary across periods. With respect to Adjusted EBIT and Adjusted EBIT margin, we believe it is useful to exclude the depreciation and amortization of acquisition related tangible and intangible assets resulting from certain acquisitions, the Refinitiv Transaction and the application of pushdown accounting in order to facilitate a period-over-period comparison of our financial performance.
Management and our board of directors use Adjusted EBITDA, Adjusted EBITDA margin, Adjusted EBIT and Adjusted EBIT margin to assess our financial performance and believe it is helpful in highlighting trends in our core operating performance, while other measures can differ significantly depending on long-term strategic decisions regarding capital structure, the tax jurisdictions in which we operate and capital investments. Further, our executive incentive compensation is based in part on components of Adjusted EBITDA and Adjusted EBITDA margin.
Adjusted Net Income and Adjusted Diluted EPS
We present Adjusted Net Income and Adjusted Diluted EPS forTradeweb Markets Inc. for post-IPO periods andTradeweb Markets LLC for pre-IPO periods. As discussed below, because Adjusted Net Income and Adjusted Diluted EPS give effect to certain tax related adjustments to reflect an assumed effective tax rate for all periods presented and, for post-IPO periods, assumes all LLC Interests held by non-controlling interests are exchanged for shares of Class A or Class B common stock, we believe that Adjusted Net Income and Adjusted Diluted EPS forTradeweb Markets Inc. andTradeweb Markets LLC are comparable. Adjusted Net Income is defined as net income attributable toTradeweb Markets Inc. assuming the full exchange of all outstanding LLC Interests held by non-controlling interests for shares of Class A common stock or Class B common stock ofTradeweb Markets Inc. , for post-IPO periods, and net income, for pre-IPO periods, in each case adjusted for contingent consideration, certain stock-based compensation expense and payroll taxes associated with certain option exercises, tax receivable liability adjustments, acquisition and Refinitiv Transaction related depreciation and amortization and gains and losses from outstanding foreign exchange forward contracts and the revaluation of foreign denominated cash. Adjusted Net Income also gives effect to certain tax related adjustments to reflect an assumed effective tax rate and, for pre-IPO periods, assumesTWM LLC was subject to a corporate tax rate for the periods presented. Adjusted Diluted EPS is defined as Adjusted Net Income divided by the diluted weighted average number of shares of Class A common stock and Class B common stock outstanding for the applicable period, assuming the full exchange of all outstanding LLC Interests held by non-controlling interests for shares of Class A common stock or Class B common stock, for post-IPO periods, and the diluted weighted average number of shares ofTWM LLC outstanding for the applicable period, for pre-IPO periods. The diluted weighted average number of shares outstanding for the pre-IPO periods and post-IPO periods give effect to potentially dilutive securities using the treasury stock method. We use Adjusted Net Income and Adjusted Diluted EPS as supplemental metrics to evaluate our business performance in a way that also considers our ability to generate profit without the impact of certain items. We exclude contingent consideration, stock-based compensation expense associated with the Special Option Award and the post-IPO 104 Table of Contents option awards in 2019 and payroll taxes associated with exercises of such options, tax receivable liability adjustments and acquisition and Refinitiv Transaction-related depreciation and amortization for the reasons described above. Each of the normal recurring adjustments and other adjustments described in the definition of Adjusted Net Income helps to provide management with a measure of our operating performance over time by removing items that are not related to day-to-day operations or are non-cash expenses. In addition to excluding items that are non-recurring or may not be indicative of our ongoing operating performance, by assuming the full exchange of all outstanding LLC Interests held by non-controlling interests, we believe that Adjusted Net Income and Adjusted Diluted EPS forTradeweb Markets Inc. facilitate comparisons with other companies that have different organizational and tax structures, as well as comparisons period over period, because it eliminates the effect of any changes in net income attributable toTradeweb Markets Inc. driven by increases in our ownership ofTWM LLC , which are unrelated to our operating performance. Adjusted EBITDA, Adjusted EBITDA margin, Adjusted EBIT, Adjusted EBIT margin, Adjusted Net Income and Adjusted Diluted EPS have limitations as analytical tools, and you should not consider these non-GAAP financial measures in isolation or as alternatives to net income attributable toTradeweb Markets Inc. , net income, operating income, gross margin, earnings per share or any other financial measure derived in accordance with GAAP. You are encouraged to evaluate each adjustment and, as applicable, the reasons we consider it appropriate for supplemental analysis. In addition, in evaluating Adjusted EBITDA, Adjusted EBITDA margin, Adjusted EBIT, Adjusted EBIT margin, Adjusted Net Income and Adjusted Diluted EPS you should be aware that in the future, we may incur expenses similar to the adjustments in the presentation of these non-GAAP financial measures. Our presentation of Adjusted EBITDA, Adjusted EBITDA margin, Adjusted EBIT, Adjusted EBIT margin, Adjusted Net Income and Adjusted Diluted EPS should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items. In addition, Adjusted EBITDA, Adjusted EBITDA margin, Adjusted EBIT, Adjusted EBIT margin, Adjusted Net Income and Adjusted Diluted EPS may not be comparable to similarly titled measures used by other companies in our industry or across different industries. The table set forth below presents a reconciliation of net income to Adjusted EBITDA, Adjusted EBITDA margin, Adjusted EBIT and Adjusted EBIT margin for the year endedDecember 31, 2019 , the 2018 Successor Period, the 2018 Predecessor Period and the year endedDecember 31, 2017 : Successor Successor Predecessor Predecessor October 1, Year 2018 January 1, 2018 Year Ended to to Ended December December 31, 31, September 30, December 31, 2019 2018 2018 2017 Net income$ 173,024 $ 29,307 $ 130,160 $ 83,648 Contingent consideration - - 26,830 58,520 Interest income, net (2,373) (787) (1,726) (685) Depreciation and amortization 139,330 33,020 48,808 68,615 Stock-based compensation expense(1) 25,098 - - - Provision for income taxes 52,302 3,415 11,900 6,129 Unrealized foreign exchange (gains) / losses (2,310) 263 (960) (364) (Gain) / loss from revaluation of foreign denominated cash(2) 1,225 90 (921) (678) Tax receivable agreement liability adjustment(3) (33,134) - - - Adjusted EBITDA$ 353,162 $ 65,308 $ 214,091 $ 215,185 Less: Depreciation and amortization (139,330) (33,020) (48,808) (68,615) Add: Acquisition and Refinitiv Transaction related D&A(4) 97,565 22,413 19,576 31,236 Adjusted EBIT$ 311,397 $ 54,701 $ 184,859 $ 177,806 Adjusted EBITDA margin 45.5 % 36.6 % 42.3 % 38.2 % Adjusted EBIT margin 40.2 % 30.6 % 36.5 % 31.6 %
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(1) Represents non-cash stock-based compensation expense associated with the
Special Option Award and post-IPO options awarded in 2019 and payroll taxes
associated with exercises of such options during the applicable period.
(2) Represents foreign exchange gain or loss from the revaluation of cash
denominated in a different currency than the entity's functional currency.
(3) Represents income recognized during the applicable period due to changes in
the tax receivable agreement liability recorded in the statement of financial
condition as a result of changes in the mix of earnings, tax legislation and
tax rates in various jurisdictions which impacted our tax savings.
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(4) Represents acquisition-related intangibles amortization and increased
tangible asset and capitalized software depreciation and amortization
resulting from the Refinitiv Transaction and the application of pushdown
accounting (where all assets were marked to fair value as of the closing date
of the Refinitiv Transaction).
The table set forth below presents a reconciliation of net income attributable toTradeweb Markets Inc. and net income, as applicable, to Adjusted Net Income and Adjusted Diluted EPS for the year endedDecember 31, 2019 , the 2018 Successor Period and the 2018 Predecessor Period: Successor Successor Predecessor Predecessor October 1, Year 2018 January 1, 2018 Year Ended to to Ended December December 31, 31, September 30, December 31, 2019 2018 2018 2017 (a) / Earnings per diluted share(1) $ 0.190.54 (b)$ 0.13 (a) $ 0.60 (a) $ 0.39 (a) Pre-IPO net income attributable to Tradeweb Markets LLC (1) 42,352 29,307 (a) 130,160 (a) 83,648 (a) Add: Net income attributable to Tradeweb Markets Inc. (1) 83,769 - - - Add: Net income attributable to non-controlling interests (1)(2) 46,903 - - - Net income $ 173,024 (a)(b) $
29,307 (a)
52,302 3,415 11,900 6,129
Contingent consideration - - 26,830 58,520
Acquisition and Refinitiv
Transaction related D&A(3) 97,565 22,413 19,576 31,236
Stock-based compensation expense(4) 25,098 - - -
Unrealized foreign exchange (gains)
/ losses (2,310) 263 (960) (364)
(Gain) / loss from revaluation of
foreign denominated cash(5) 1,225 90 (921) (678)
Tax receivable agreement liability
adjustment(6) (33,134) - - -
Adjusted Net Income before income
taxes 313,770 55,488 186,585 178,491
Adjusted income taxes(7) (82,835) (14,649) (49,258) (47,122)
Adjusted Net Income $ 230,935 $
40,839
0.23 (a) /
Adjusted Diluted EPS (1)(8) $ 0.77 (b) $ 0.18 (a) $ 0.64 (a) $ 0.62 (a)
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(1) In
IPO. Therefore, certain earnings information is being presented separately
for
a) Presents information for
a) Presents information for
See "Basis of Presentation" and Note 18 - Earnings Per Share to our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K.
(1) For post-IPO periods, represents the reallocation of net income attributable
to non-controlling interests from the assumed exchange of all outstanding LLC
Interests held by non-controlling interests for shares of Class A or Class B
common stock.
(1) Represents acquisition-related intangibles amortization and increased
tangible asset and capitalized software depreciation and amortization
resulting from the Refinitiv Transaction and the application of pushdown
accounting (where all assets were marked to fair value as of the closing date
of the Refinitiv Transaction).
(1) Represents non-cash stock-based compensation expense associated with the
Special Option Award and post-IPO options awarded in 2019 and payroll taxes
associated with exercises of such options during the applicable period.
(1) Represents foreign exchange gain or loss from the revaluation of cash
denominated in a different currency than the entity's functional currency.
(1) Represents income recognized during the applicable period due to changes in
the tax receivable agreement liability recorded in the statement of financial
condition as a result of changes in the mix of earnings, tax legislation and
tax rates in various jurisdictions which impacted our tax savings.
(1) Represents corporate income taxes at an assumed effective tax rate of 26.4%
for all periods presented applied to Adjusted Net Income before income taxes.
For pre-IPO periods, this adjustment assumes
to a corporate tax rate for the periods presented.
(1) Due to the Reorganization Transactions and the IPO completed in
shares outstanding during the year ended
of
Tradeweb Markets Inc. (post-IPO period). 106 Table of Contents The table set forth below summarizes the calculation of Adjusted Diluted EPS for the periods presented above: Pre-IPO Period Post-IPO Period Successor Predecessor Predecessor Three Months Nine MonthsOctober 1, 2018 January 1, 2018 Year Ended Ended to to EndedMarch 31 ,December 31 ,December 31 ,September 30 ,December 31, 2019 2019 2018 2018 2017 Diluted weighted averageTWM LLC shares outstanding 223,320,457 - 222,243,851 215,365,920
212,568,635
Diluted weighted average shares of Class A and Class B common stock outstanding - 156,540,246 - - - Assumed exchange of LLC interests for shares of Class A or Class B common stock (1) - 74,279,741 - - - Adjusted diluted weighted average shares outstanding 223,320,457 230,819,987 222,243,851 215,365,920
212,568,635
Adjusted Net Income (in thousands) $ 52,190 $ 178,745 $ 40,839 $ 137,327 $ 131,369 Adjusted Diluted EPS $ 0.23 $ 0.77 $ 0.18 $ 0.64 $ 0.62
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(1) Assumes the full exchange of all outstanding LLC Interests held by
non-controlling interests for shares of Class A or Class B common stock,
resulting in the elimination of the non-controlling interests and recognition
of the net income attributable to non-controlling interests.
Contractual Obligations
As of
Payments due by period
Total Less than 1 year 1 to 3 years 3 to 5 years More than 5 years
(in thousands)
Lease obligations $ 33,752 $ 8,516 $ 10,089 $ 7,514 $ 7,633
Tax receivable agreement liability 240,817 6,949 49,000 14,316 170,552
Total $ 274,569 $ 15,465 $ 59,089 $ 21,830 $ 178,185
Our operating lease obligations are primarily related to rental payments under
lease agreements for office space in
Liabilities under the Tax Receivable Agreement include amounts to be paid to Continuing LLC Owners, assuming we will have sufficient taxable income over the term of the Tax Receivable Agreement to utilize the related tax benefits. In the normal course of business, we enter into user agreements with our dealer clients which indemnify such clients from third parties in the event that our network infringes upon the intellectual property or other proprietary right of a third party. Our exposure under these user agreements is unknown as this would involve estimating future claims against the Company that have not yet occurred. However, based on our experience, we expect the risk of a material loss to be remote.
Off-Balance Sheet Arrangements
As of
Critical Accounting Policies and Estimates
Our consolidated financial statements are prepared in accordance withU.S. GAAP which requires us to make estimates and assumptions about future events that affect the reported amounts of assets, liabilities, revenues and expenses, and disclosure of contingent assets and liabilities. Management evaluates its accounting policies, estimates and judgments on an on-going basis. Management evaluated the development and selection of its critical accounting policies and estimates and believes that the following policies are most critical to the portrayal of our financial condition and results of operations, and that require our most difficult, subjective or complex judgments in estimating the effect of inherent uncertainties. With respect to critical accounting policies, even a relatively minor variance between actual and expected experience can potentially have a materially favorable or unfavorable impact on subsequent results of operations. More information on all of our significant accounting policies can be found in "Note 2 - Summary of Significant Accounting Policies" to our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K. 107 Table of Contents Use of Estimates The preparation of financial statements in conformity withU.S. GAAP requires management to make estimates and assumptions that affect the reported amounts and disclosures in our consolidated financial statements and accompanying notes. These estimates and assumptions are based on judgment and the best available information at the time. Management bases its estimates on historical experience, observance of trends in particular areas, information available from outside sources and various other assumptions that are believed to be reasonable under the circumstances. Information from these sources form the basis for making judgments about the carrying values of assets and liabilities that may not be readily apparent from other sources. Therefore, actual results could differ materially from those estimates. Such estimates include pushdown accounting, intangible assets, goodwill, software development costs, stock based compensation, contingent consideration payable and current and deferred income taxes. Pushdown Accounting The Refinitiv Transaction was accounted for by Refinitiv in accordance with the acquisition method of accounting pursuant to ASC 805 "Business Combinations" and pushdown accounting was applied to Refinitiv to record the fair value of the assets and liabilities of Refinitiv on the date of the Refinitiv Transaction. We, as a consolidating subsidiary of Refinitiv, also accounted for the Refinitiv Transaction using pushdown accounting. Under pushdown accounting, the excess of our fair value above the fair value accounting basis of our net assets and liabilities is recorded as goodwill. The fair value of assets acquired and liabilities assumed was determined based on assumptions that reasonable market participants would use in the principal (or most advantageous) market for the asset or liability.
In determining the fair value of the assets acquired and the liabilities assumed, we considered a report of a third-party valuation expert. Management is responsible for these internal and third-party valuations and appraisals.
Intangible Assets
We amortize our intangible assets over the estimated useful lives and test for impairment whenever events or changes in circumstances suggest that an asset's or asset group's carrying value may not be fully recoverable. We test our intangible assets with an indefinite useful life for impairment at least annually. An impairment loss is recognized if the sum of the estimated discounted cash flows relating to the asset or asset group is less than the corresponding carrying value. Intangible assets are amortized over their estimated useful lives of seven to sixteen years.
Goodwill arises out of pushdown accounting and business combinations and is the cost of acquired companies in excess of the fair value of identifiable net assets at acquisition date. We test our goodwill at least annually for impairment and recognize an impairment loss if the estimated fair value of a reporting unit is less than its net book value. The Company is one reporting unit for goodwill impairment testing purposes. The fair value of a reporting unit is calculated based on the fair market value of our Class A common stock and Class B common stock. We calculate such loss as the difference between the estimated fair value of goodwill and its carrying value. If future events or results differ adversely from the estimates and assumptions made at acquisition or as part of subsequent impairment tests, we may record increased impairment charges in the future. Software Development Costs We capitalize certain costs associated with the development of internal use software at the point at which the conceptual formulation, design and testing of possible software project alternatives have been completed, including among other items, employee compensation and related benefits and third-party consulting costs incurred during the application development stage which directly contribute to such development. Such costs are amortized on a straight-line basis over three years. Costs capitalized as part of the pushdown accounting allocation are amortized over nine years. We review the amounts capitalized for impairment whenever events or changes in circumstances indicate that the 108 Table of Contents
carrying amounts of the assets may not be fully recoverable, or that their useful lives are shorter than originally expected. Due to rapidly changing technology and the uncertainty of the software development process itself, future results could be affected if management's current assessment of its software projects differs from actual performance.
Revenue Recognition
We earn transaction fees from transactions executed on our trading platforms through various fee plans. Transaction fees are generated on both a variable and fixed price basis and vary by geographic region, product type and trade size. For variable transaction fees, we charge clients fees based on the mix of products traded and the volume of transactions executed.
We earn subscription fees primarily for granting clients access to our markets for trading and market data. Subscription fees are generally generated on a fixed price basis.
We earn commission revenue from our electronic and voice brokerage services on a riskless principal basis. Riskless principal revenues are derived on matched principal transactions where revenues are earned on the spread between the buy and sell price of the transacted product. We earn fees from Refinitiv relating to the sale of market data to Refinitiv, which redistributes that data. Included in these fees are real-time market data fees which are recognized in the period that the data is provided, generally on a monthly basis, and fees for historical data sets which are recognized when the historical data set is provided to Refinitiv. OnJanuary 1, 2018 , we adopted ASU 2014-09, Revenue from Contracts with Customers, using the modified retrospective approach. The adoption of ASU 2014-09 did not have a material impact on the measurement or timing of recognition of revenue in any prior reporting periods. However, we are required to make significant judgements for the Refinitiv market data fees. Significant judgements used in accounting for this contract include:
•The provision of real-time market data feeds and annual historical data sets are distinct performance obligations.
•The performance obligations under this contract are recognized over time from the initial delivery of the data feeds or each historical data set until the end of the contract term. •Determining the transaction price for the performance obligations by using a market assessment analysis. Inputs in this analysis include a consultant study which determined the overall value of our market data and pricing information for historical data sets provided by other companies.
Stock-Based Compensation
The stock-based compensation that our employees receive is accounted for as equity or liability awards. As a stock-based equity award, the Company measures and recognizes the cost of employee services received in exchange for awards of equity instruments based on their estimated fair values measured as of the grant date. These costs are recognized as an expense over the requisite service period, with an offsetting increase to additional paid-in capital and members' capital in our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K). As a stock-based liability award, the cost of the employee services received in exchange for an award of equity instruments is generally measured based on the grant-date fair value of the award. The fair value of that award is remeasured subsequently at each reporting date through to settlement. Changes in the fair value of the equity instrument are recognized as compensation cost over that period in our consolidated statements of income. For grants made during the post-IPO period, the fair value of the equity instruments is determined based on the price of our Class A common stock on the grant date. For grants made during the pre-IPO period, the fair value of the equity instruments was determined in accordance with theAmerican Institute of Certified Public Accountants Practice Aid , Valuation of Privately Held Company Securities Issued as Compensation. Factors that were considered in determining the fair value include forecasted future cash flows, the weighted average cost of capital, and the performance multiples of comparable companies. 109
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OnDecember 31, 2018 , certain PRSUs, which previously were cash-settled, were converted to equity-settled PRSUs. The conversion was at fair value, using a unit price consistent with the share price of the Company. As a result of the modification, an additional$19.1 million was recorded in equity. Prior to the IPO, we awarded options to management and other employees (collectively, the "Special Option Award") under theAmended and Restated Tradeweb Markets Inc. Option Plan. In accounting for the options issued under this plan, we measure and recognize compensation expense for all awards based on their estimated fair values measured as of the grant date. Costs related to these options are recognized as an expense in our consolidated statements of income over the requisite service period, with an offsetting increase to additional paid-in capital. We expect the non-cash stock-based compensation expense associated with the Special Option Award to be between approximately$33.5 million and$35.7 million , which we started to expense beginning in the second quarter of 2019, with a charge of$20.4 million during the second quarter of 2019 ($18.9 million of which was charged immediately upon the completion of the IPO), and will continue to expense over the following three years. We use the Black-Scholes pricing model to value some of our stock-based awards. Determining the appropriate fair value model and calculating the fair value of the stock-based awards requires the input of highly subjective assumptions, including the expected life of the stock-based awards, the number of expected stock-based awards that will be forfeited prior to the completion of the vesting requirements, and the stock price volatility.
Income Taxes
Tradeweb Markets Inc. is subject toU.S. federal, state and local income taxes with respect to its taxable income, including its allocable share of any taxable income ofTWM LLC , and is taxed at prevailing corporate tax rates.TWM LLC is a multiple member limited liability company taxed as a partnership and accordingly any taxable income generated byTWM LLC is passed through to and included in the taxable income of its members, including us for the post-IPO period.TWM LLC records taxes for conducting business in certain state, local and foreign jurisdictions and recordsU.S. federal taxes for subsidiaries that are taxed as corporations forU.S. tax purposes. We currently record deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities and measure the deferred taxes using the enacted tax rates and laws that will be in effect when such temporary differences are expected to reverse. We believe that it is more likely than not that the Company will be able to realize its deferred tax assets in the future; therefore, no valuation allowance is necessary. We recognize interest and penalties related to unrecognized tax benefits within the provision for income taxes in our consolidated statements of income. Accrued interest and penalties are included within accounts payable, accrued expenses and other liabilities in our consolidated statements of financial condition. OnDecember 22, 2017 , the President signed into law the Tax Cuts and Jobs Act ("TCJA") effective for tax years ending afterDecember 31, 2017 . This legislation replaces the prior corporate tax rate structure with a flat 21% rate, effective in 2018. There were many other impacts of the tax reform such as the repeal of the corporate alternative minimum tax rate, tax loss carryback and carryforward limitations effective in 2019. AU.S. shareholder of a controlled foreign corporation ("CFC") is required to include in income, as a deemed dividend, the global intangible low-taxed income ("GILTI") of the CFC. We have elected to treat taxes due on futureU.S. inclusions in taxable income of GILTI as a current period expense when incurred.
Tax Receivable Agreement
Tradeweb Markets Inc. entered into a Tax Receivable Agreement withTWM LLC and the Continuing LLC Owners which provides for the payment byTradeweb Markets Inc. to a Continuing LLC Owner of 50% of the amount ofU.S. federal, state and local income or franchise tax savings, if any, thatTradeweb Markets Inc. actually realizes (or in some circumstances is deemed to realize) as a result of (i) increases in the tax basis ofTWM LLC's assets resulting from (a) the purchase of LLC Interests from such Continuing LLC Owner, including with the net proceeds from the IPO, theOctober 2019 follow-on offering and any future offering or (b) redemptions or exchanges by suchContinuing LLC 110
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Owner of LLC Interests for shares of Class A common stock or Class B common
stock or for cash, as applicable, and (ii) certain other tax benefits related to
We recorded an initial liability of$171.4 million related to our projected obligations under the Tax Receivable Agreement with respect to LLC Interests that were purchased by us using the net proceeds from the IPO. The impact of any changes in the projected obligations under the Tax Receivable Agreement as a result of changes in the geographic mix of the our earnings, changes in tax legislation and tax rates or other factors that may impact our tax savings will be reflected in income before taxes in the period in which the change occurs. During 2019, the liability increased to$240.8 million primarily due to the purchase of additional LLC Interests using the net proceeds from theOctober 2019 follow-on offering, as well as exchanges of LLC Interests byContinuing LLC owners during the year endedDecember 31, 2019 , partially offset by changes in tax rates of$33.1 million recorded in our consolidated income statement as tax receivable agreement liability adjustment.
Contingent Consideration
In 2014, we issued Class A Shares and unvested Class P-1(A) Shares to some of the Bank Stockholders as a result of a capital contribution to facilitate our expansion into new credit products. The proceeds from the issuance of the shares were included in members' capital. In connection with the investment, certain employees also invested in the Company and were issued ClassC Shares and unvested Class P-1(C) Shares. The proceeds from the issuance of these shares were included in members' capital. The Class A Shares and ClassC Shares issued in connection with the investment equally participated in the earnings of the Company together with the other Class A Shares, Class P(A) Shares, ClassC Shares and Class P(C) Shares of the Company. Most of the holders of Class A shares had the right to appoint members to the board of managers of the Company. The Class P-1(A) Shares and Class P-1(C) Shares did not have any earnings participation rights, nor did any of the Class P-1(A) Shares have the right to appoint members to the former board of managers, until they vested. The Class P-1(A) Shares and Class P-1(C) Shares vested inJuly 2018 upon the achievement of specific revenue earnout milestones related to the growth of our credit products, as defined by the agreement, fromAugust 2014 through the vesting date ofJuly 2018 . Prior to theJuly 2018 vesting, we recognized contingent consideration with respect to the potential vesting of Class P-1(A) Shares and Class P-1(C) Shares as a contra-revenue adjustment in accordance with ASC 605-50-45-2 because the vesting could be viewed as a sales incentive to participating Bank Stockholders since they are also customers of the Company. The contingent consideration for each reporting period was calculated by estimating the final contingent consideration value using a monte carlo simulation and recognizing that value on a straightline basis over the 48 month period of the agreement, adjusting at each reporting period for any changes in the final value estimate. The revenue milestones provided that shares would vest only if certain credit revenue milestones would be achieved in the twelve months endedJuly 2016 , 2017 and 2018. As a result of achieving these milestones, the final earnout amount was calculated based on the credit revenues during the twelve months endedJuly 31, 2018 . OnJuly 31, 2018 , members' capital increased by$150.5 million as a result of the vesting of the Class P-1(A) Shares and employee equity compensation payable increased by$5.7 million as a result of the vesting of the Class P-1(C) Shares. The value of the vested Class P-1(C) Shares was included in employee equity compensation payable because the Class P-1(C) were owned for less than six months by employees who had the ability to exercise a put option of those shares under certain conditions under their control.
Recent Accounting Pronouncements
See "Note 2 - Summary of Significant Accounting Policies" to our audited
consolidated financial statements included elsewhere in this Annual Report on
Form 10-K for a discussion of recent accounting pronouncements (adopted and not
yet adopted).
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Effects of Inflation
While inflation may impact our revenues and operating expenses, we believe the
effects of inflation, if any, on our results of operations and financial
condition have not been significant. However, there can be no assurance that our
results of operations and financial condition will not be materially impacted by
inflation in the future.
Jumpstart Our Business Startups Act of 2012
The JOBS Act permits us, as an "emerging growth company," to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies. We have elected to "opt out" of this provision and, as a result, we will comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for public companies that are not emerging growth companies. This decision to opt out of the extended transition period under the JOBS Act is irrevocable.
Internal Control over Financial Reporting
The process of improving our internal controls has required and will continue to require us to expend resources to design, implement and maintain a system of internal controls that is adequate to satisfy our reporting obligations as a public company. There can be no assurance that any actions we take will be completely successful. We will continue to evaluate the effectiveness of our disclosure controls and procedures and internal control over financial reporting on an on-going basis. As part of this process, we may identify specific internal controls as being deficient. We continue to evaluate our internal control procedures in order to comply with the requirements of Section 404 of the Sarbanes-Oxley Act. Section 404 requires annual management assessments of the effectiveness of our internal control over financial reporting and a report by our independent auditors addressing these assessments; however, for so long as we qualify as an emerging growth company, we will not be required to engage an auditor to report on our internal control over financial reporting. We will be required to comply with the management certification requirements of Section 404 in our annual report on Form 10-K for the year endingDecember 31, 2020 (subject to any change in applicableSEC rules). We will be required to comply with Section 404 in full (including an auditor attestation on management's internal controls report) in our annual report on Form 10-K at the later of the year following our first annual report required to be filed with theSEC or the date on which we are no longer an emerging growth company (subject to any change in applicableSEC rules).
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