Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 10-Q

 

x  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2019

 

or

 

o         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Commission File Number: 001-38860

 

Tradeweb Markets Inc.

(Exact name of registrant as specified in its charter)

 


 

Delaware

 

83-2456358

(State of other jurisdiction of incorporation or organization)

 

(I.R.S. Employer Identification No.)

 

1177 Avenue of the Americas
New York, New York

 

10036

(Address of principal executive offices)

 

(Zip Code)

 

(646) 430-6000

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. o Yes x No

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). x Yes o No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

o

Accelerated filer

o

Non-accelerated filer

x

Smaller reporting company

o

Emerging growth company

x

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. x

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o Yes x No

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Trading Symbol(s)

 

Name of each exchange on which registered

Class A common stock, par value $0.00001

 

TW

 

Nasdaq Global Select Market

 

Class of Stock

 

Shares Outstanding as of May 15, 2019

 

Class A Common Stock, par value $0.00001 per share

 

46,000,000

 

Class B Common Stock, par value $0.00001 per share

 

96,933,192

 

Class C Common Stock, par value $0.00001 per share

 

10,006,269

 

Class D Common Stock, par value $0.00001 per share

 

69,282,736

 

 

 

 


Table of Contents

 

TRADEWEB MARKETS INC.

 

TABLE OF CONTENTS

 

 

Page

 

 

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

4

 

 

PART I — FINANCIAL INFORMATION

6

 

 

Item 1.

Financial Statements

6

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

37

 

 

 

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

58

 

 

 

Item 4.

Controls and Procedures

59

 

 

PART II — OTHER INFORMATION

60

 

 

Item 1.

Legal Proceedings

60

 

 

 

Item 1A.

Risk Factors

60

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

60

 

 

 

Item 3.

Defaults Upon Senior Securities

61

 

 

 

Item 4.

Mine Safety Disclosures

61

 

 

 

Item 5.

Other Information

61

 

 

 

Item 6.

Exhibits

62

 

2


Table of Contents

 

INTRODUCTORY NOTE

 

The financial statements and other disclosures contained in this report include those of Tradeweb Markets Inc., which is the registrant, and those of Tradeweb Markets LLC, which became the principal operating subsidiary of Tradeweb Markets Inc. in a series of reorganization transactions that were completed subsequent to March 31, 2019 (the “Reorganization Transactions”) in connection with Tradeweb Markets Inc.’s initial public offering (“IPO”), which was completed on April 8, 2019. Accordingly, because Tradeweb Markets Inc. had no business transactions or activities and no substantial assets or liabilities during the periods presented in this Quarterly Report on Form 10-Q and because the Reorganization Transactions had not been completed as of such date, we believe that it is informative to provide the financial statements and various other disclosures of TWM LLC as of March 31, 2019 and December 31, 2018 and for the three months ended March 31, 2019 and 2018. For more information regarding the transactions described above, see Note 4 to the unaudited financial statements of Tradeweb Markets Inc. and Note 18 to the unaudited consolidated financial statements of Tradeweb Markets LLC, each contained elsewhere in this Quarterly Report on Form 10-Q.

 

As used in this Quarterly Report on Form 10-Q, unless the context otherwise requires, references to:

 

·                  “We,” “us,” “our,” the “Company,” “Tradeweb” and similar references refer: (i) on or prior to the completion of the Reorganization Transactions, including the IPO, to Tradeweb Markets LLC, which we refer to as “TWM LLC,” and, unless otherwise stated or the context otherwise requires, all of its subsidiaries and any predecessor entities, and (ii) following the completion of the Reorganization Transactions, including the IPO, to Tradeweb Markets Inc., and, unless otherwise stated or the context otherwise requires, TWM LLC and all of its subsidiaries and any predecessor entities.

 

·                  “Bank Stockholders” refer collectively to entities affiliated with the following clients: Barclays Capital Inc., Citigroup Global Markets Inc., Credit Suisse Securities (USA) LLC, Deutsche Bank Securities Inc., Goldman Sachs & Co. LLC, J.P. Morgan Securities LLC, Merrill Lynch, Pierce, Fenner & Smith Incorporated (a subsidiary of Bank of America Corporation), Morgan Stanley & Co. LLC, RBS Securities Inc., UBS Securities LLC and Wells Fargo Securities, LLC.

 

·                  “Continuing LLC Owners” refer collectively to those Original LLC Owners, including an indirect subsidiary of Refinitiv (as defined below), the Bank Stockholders and members of management, that continued to own LLC Interests immediately prior to the closing of the IPO who received shares of our Class C common stock, shares of our Class D common stock or a combination of both, as the case may be, in connection with the completion of the Reorganization Transactions.

 

·                  “Investor Group” refer to certain investment funds affiliated with The Blackstone Group L.P., an affiliate of Canada Pension Plan Investment Board, an affiliate of GIC Special Investments Pte. Ltd. and certain co-investors, which collectively hold indirectly a 55% ownership interest in Refinitiv (as defined below).

 

·                  “LLC Interests” refer to the single class of newly issued common membership interests of TWM LLC.

 

·                  “Original LLC Owners” refer to the owners of TWM LLC prior to the Reorganization Transactions.

 

·                  “Refinitiv” refer to Refinitiv Holdings Limited, and unless otherwise stated or the context otherwise requires, all of its subsidiaries, which owns substantially all of the former financial and risk business of Thomson Reuters (as defined below), including an indirect majority ownership interest in Tradeweb, and is controlled by the Investor Group.

 

·                  “Refinitiv Transaction” refer to the transaction pursuant to which Refinitiv indirectly acquired on October 1, 2018 substantially all of the financial and risk business of Thomson Reuters and Thomson Reuters indirectly acquired a 45% ownership interest in Refinitiv.

 

·                  “Thomson Reuters” refer to Thomson Reuters Corporation, which indirectly holds a 45% ownership interest in Refinitiv.

 

3


Table of Contents

 

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). You can generally identify forward-looking statements by our use of forward-looking terminology such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “might,” “plan,” “potential,” “predict,” “projection,” “seek,” “should,” “will” or “would,” or the negative thereof or other variations thereon or comparable terminology. In particular, statements about the markets in which we operate, including our expectations about market trends, our market opportunity and the growth of our various markets, our expansion into new markets, any potential tax savings we may realize as a result of our organizational structure, our expected dividend policy and our expectations, beliefs, plans, strategies, objectives, prospects, assumptions, or future events or performance, contained in this Quarterly Report on Form 10-Q are forward-looking statements.

 

We have based these forward-looking statements on our current expectations, assumptions, estimates and projections. While we believe these expectations, assumptions, estimates and projections are reasonable, such forward-looking statements are only predictions and involve known and unknown risks and uncertainties, many of which are beyond our control. These and other important factors may cause our actual results, performance or achievements to differ materially from those expressed or implied by these forward-looking statements, or could affect our share price. Some of the factors that could cause actual results to differ materially from those expressed or implied by the forward-looking statements include:

 

·                    changes in economic, political and market conditions and the impact of these changes on trading volumes;

 

·                    our failure to compete successfully;

 

·                    our failure to adapt our business effectively to keep pace with industry changes;

 

·                    consolidation and concentration in the financial services industry;

 

·                    our dependence on dealer clients that are also stockholders;

 

·                    our dependence on third parties for certain market data and certain key functions;

 

·                    our inability to maintain and grow the capacity of our trading platforms, systems and infrastructure;

 

·                    design defects, errors, failures or delays with our platforms or solutions;

 

·                    systems failures, interruptions, delays in services, catastrophic events and resulting interruptions;

 

·                    our ability to implement our business strategies profitably;

 

·                    our ability to successfully integrate any acquisition or to realize benefits from any strategic alliances, partnerships or joint ventures;

 

·                    our ability to retain the services of certain members of our management;

 

·                    inadequate protection of our intellectual property;

 

·                    extensive regulation of our industry;

 

·                    limitations on operating our business and incurring additional indebtedness as a result of covenant restrictions under the $500.0 million senior secured revolving credit facility (the “Revolving Credit Facility”) with Citibank, N.A., as administrative agent and collateral agent, and the other lenders party thereto, and certain Refinitiv indebtedness;

 

·                    our dependence on distributions from TWM LLC to fund our expected dividend policy and to pay our taxes and expenses, including payments under the tax receivable agreement (the “Tax Receivable Agreement”) entered into in connection with the IPO;

 

·                    our ability to realize any benefit from our organizational structure;

 

·                    Refinitiv’s control of us and our status as a controlled company; and

 

·                    other risks and uncertainties, including those listed under “Risk Factors” in our final prospectus, dated April 3, 2019 (the “IPO Prospectus”), filed with the Securities and Exchange Commission (“SEC”) pursuant to Rule

 

 

4


Table of Contents

 

424(b) under the Securities Act, relating to our IPO, and in other filings we may make from time to time with the SEC.

 

Given these risks and uncertainties, you are cautioned not to place undue reliance on such forward-looking statements. The forward-looking statements contained in this Quarterly Report on Form 10-Q are not guarantees of future performance and our actual results of operations, financial condition, and liquidity, and the development of the industry in which we operate, may differ materially from the forward-looking statements contained in this Quarterly Report on Form 10-Q. In addition, even if our results of operations, financial condition, and liquidity, and events in the industry in which we operate, are consistent with the forward-looking statements contained in this Quarterly Report on Form 10-Q, they may not be predictive of results or developments in future periods.

 

Any forward-looking statement that we make in this Quarterly Report on Form 10-Q speaks only as of the date of such statement. Except as required by law, we do not undertake any obligation to update or revise, or to publicly announce any update or revision to, any of the forward-looking statements, whether as a result of new information, future events or otherwise, after the date of this Quarterly Report on Form 10-Q.

 

Investors and others should note that we announce material financial and operational information using our investor relations website, press releases, SEC filings and public conference calls and webcasts. Information about Tradeweb, our business, and our results of operations may also be announced by posts on Tradeweb’s accounts on the following social media channels: Instagram, LinkedIn and Twitter. The information that we post through these social media channels may be deemed material. As a result, we encourage investors, the media and others interested in Tradeweb to monitor these social media channels in addition to following our press releases, SEC filings and public conference calls and webcasts. These social media channels may be updated from time to time on our investor relations website.

 

5


Table of Contents

 

PART I — FINANCIAL INFORMATION

 

ITEM 1. — FINANCIAL STATEMENTS

 

 

 

 

Financial Statements (Unaudited)

 

 

 

 

Tradeweb Markets Inc.

 

 

Statements of Financial Condition

7

 

Notes to Statements of Financial Condition

8

 

 

 

Tradeweb Markets LLC and Subsidiaries

 

 

Consolidated Statements of Financial Condition

12

 

Consolidated Statements of Income

13

 

Consolidated Statements of Comprehensive Income

14

 

Consolidated Statements of Changes in Members’ Capital and Accumulated Other Comprehensive Income

15

 

Consolidated Statements of Cash Flows

16

 

Notes to Consolidated Financial Statements

18

 

6


Table of Contents

 

Tradeweb Markets Inc.

Statements of Financial Condition

(Unaudited)

 

 

 

March 31, 2019

 

December 31, 2018

 

Assets

 

 

 

 

 

Cash

 

$

100

 

$

100

 

Total assets

 

$

100

 

$

100

 

Stockholder’s Equity

 

 

 

 

 

Common Stock, par value $0.01 per share, 1,000 shares authorized, 100 issued and outstanding

 

$

1

 

$

1

 

Additional paid-in capital (see note 4)

 

99

 

99

 

Total stockholder’s equity

 

$

100

 

$

100

 

 

The accompanying notes are an integral part of these financial statements.

 

7


Table of Contents

 

Tradeweb Markets Inc.

Notes to Statements of Financial Condition

(Unaudited)

 

1.                            Organization

 

Tradeweb Markets Inc. (the “Corporation”) was formed as a Delaware corporation on November 7, 2018. The Corporation was formed for the purpose of completing certain reorganization transactions in order to carry on the business of Tradeweb Markets LLC (“TWM LLC”) and conducting an initial public offering (“IPO”).

 

On April 8, 2019, the Corporation closed an IPO of 46,000,000 shares of Class A common stock at a public offering price of $27.00, which includes 6,000,000 shares of Class A common stock issued pursuant to the underwriters’ option to purchase additional shares of Class A common stock.  The Corporation received $1,161,270,000 in net proceeds, after deducting underwriting discounts and commissions but before deducting offering expenses, which were used to purchase membership interests of TWM LLC from certain existing equityholders of TWM LLC (and cancelled the corresponding shares of common stock as described below), at a purchase price per interest equal to the public offering price of $27.00, less the underwriting discounts and commissions payable thereon. Subsequent to the Reorganization Transactions (as defined in note 4) that occurred after March 31, 2019, the Corporation is the sole manager of TWM LLC. As the sole manager of TWM LLC, the Corporation operates and controls all of the business and affairs of TWM LLC and, through TWM LLC and its subsidiaries, conducts the Corporation’s business. As a result of this control, and because the Corporation has a substantial financial interest in TWM LLC, the Corporation will consolidate the financial results of TWM LLC and report a non-controlling interest in the Corporation’s consolidated financial statements.

 

2.                            Summary of Significant Accounting Policies

 

Basis of Accounting

 

The statements of financial condition are presented in accordance with accounting principles generally accepted in the United States of America.  Separate statements of operations, comprehensive income, changes in stockholder’s equity and cash flows have not been presented in the financial statements because, as of March 31, 2019, there have been no activities in this entity other than the initial capitalization.

 

3.                            Stockholder’s Equity

 

As of March 31, 2019, the Corporation was authorized to issue 1,000 shares of Common Stock, par value $0.01 per share.  The Chief Executive Officer of TWM LLC was the sole shareholder of the Corporation and contributed $100 to the Corporation on November 7, 2018 to purchase 100 shares of common stock.  Holders of common stock were entitled to one vote for each share of common stock held on all matters submitted to shareholders for vote, consent or approval.

 

4.         Subsequent Events

 

As noted above, on April 8, 2019, the Corporation closed an IPO of 46,000,000 shares of Class A common stock at a public offering price of $27.00, which includes 6,000,000 shares of Class A common stock issued pursuant to the underwriters’ option to purchase additional shares of Class A common stock.  The Corporation received $1,161,270,000 in net proceeds, after deducting underwriting discounts and commissions but before deducting offering expenses, which were used to purchase membership interests of TWM LLC from certain of the Bank Stockholders (as defined below) (and cancel the corresponding shares of common stock), at a purchase price per interest equal to the public offering price of $27.00, less the underwriting discounts and commissions payable thereon.

 

8


Table of Contents

 

Tradeweb Markets Inc.

Notes to Statements of Financial Condition

(Unaudited)

 

Prior to the closing of the IPO, a series of reorganization transactions (the “Reorganization Transactions”) was completed among the Corporation, TWM LLC and the following parties:

 

·      The Owners of TWM LLC prior to the Reorganization Transactions, including an indirect subsidiary (the “Refinitiv LLC Owner”) of Refinitiv Holdings Limited (“Refinitiv”), certain investment and commercial banks (collectively, the “Bank Stockholders”) and members of management, that continued to own LLC Interests (as defined below) immediately prior to the closing of the IPO and who received shares of the Corporation’s Class C common stock, shares of the Corporation’s Class D common stock or a combination of both, as the case may be (collectively, the “Continuing LLC Owners”); and

 

·      An indirect subsidiary (the “Refinitiv Direct Owner” and, together with the Refinitiv LLC Owner, the “Refinitiv Owners”) of Refinitiv that owned interests in an entity that held membership interests of TWM LLC prior to the Reorganization Transactions and contributed such entity to the Corporation (the “Refinitiv Contribution”).

 

The following Reorganization Transactions occurred:

 

·      TWM LLC’s limited liability company agreement (the “TWM LLC Agreement”) was amended and restated to, among other things, (i) provide for a new single class of common membership interests in TWM LLC (“LLC Interests”), (ii) exchange all of the existing membership interests of TWM LLC’s existing equityholders for LLC Interests and (iii) appoint the Corporation as the sole manager of TWM LLC.

 

The TWM LLC Agreement also requires that TWM LLC at all times maintain (i) a one-to-one ratio between the number of shares of Class A common stock and Class B common stock issued by the Corporation and the number of LLC Interests owned by the Corporation and (ii) a one-to-one ratio between the number of shares of Class C common stock and Class D common stock issued by the Corporation and the number of LLC Interests owned by the holders of such Class C common stock and Class D common stock;

 

·      The Corporation’s certificate of incorporation was amended and restated to, among other things, provide for Class A common stock, Class B common stock, Class C common stock and Class D common stock. Each share of Class A common stock and Class C common stock entitles its holder to one vote on all matters presented to the Corporation’s stockholders generally. Each share of Class B common stock and Class D common stock entitles its holder to ten votes on all matters presented to the Corporation’s stockholders generally. The holders of Class C common stock and Class D common stock have no economic interests in the Corporation (where “economic interests” means the right to receive any dividends or distributions, whether cash or stock, in connection with common stock). These attributes are summarized in the following table:

 

Class of Common Stock

 

Par Value

 

Votes

 

Economic Rights

Class A common stock

 

$

 0.00001

 

1

 

Yes

Class B common stock

 

$

 0.00001

 

10

 

Yes

Class C common stock

 

$

 0.00001

 

1

 

No

Class D common stock

 

$

 0.00001

 

10

 

No

 

Holders of outstanding shares of Class A common stock, Class B common stock, Class C common stock and Class D common stock will vote together as a single class on all matters presented to the Corporation’s stockholders for their vote or approval, except as otherwise required by applicable law.

 

9


Table of Contents

 

Tradeweb Markets Inc.

Notes to Statements of Financial Condition

(Unaudited)

 

Each share of Class B common stock will automatically convert into one share of Class A common stock and each share of Class D common stock will automatically convert into one share of Class C common stock (i) immediately prior to any sale or other transfer of such share by a holder or its permitted transferees to a non-permitted transferee or (ii) once the Refinitiv Owners and their affiliates together no longer beneficially own a number of shares of common stock and LLC Interests that together entitle them to at least 10% of TWM LLC’s economic interest. Holders of LLC Interests that receive shares of Class C common stock upon any such conversion may continue to elect to have their LLC Interests redeemed for newly issued shares of Class A common stock as described below (in which case their shares of Class C common stock will be cancelled on a one-for-one basis upon such issuance).

 

·      The Corporation assumed sponsorship of an option plan and PRSU plan formerly sponsored by TWM LLC. Accordingly, all options and PRSUs granted under such plans were converted into economically equivalent awards of the Corporation with respect to shares of the Corporation’s Class A common stock;

 

·      The Corporation’s board of directors adopted a new omnibus equity incentive plan, under which equity awards may be made in respect of shares of the Corporation’s Class A common stock;

 

·      The Corporation issued 20,000,000 shares of Class C common stock and 105,289,005 shares of Class D common stock to the Continuing LLC Owners, on a one-to-one basis with the number of LLC Interests they owned immediately following the amendment and restatement of the TWM LLC Agreement for nominal consideration (the Corporation canceled 9,993,731 shares of such Class C common stock and 36,006,269 shares of such Class D common stock in connection with the Corporation’s purchase of LLC Interests from certain of the Bank Stockholders using the net proceeds of the IPO).

 

LLC Interests are redeemable, 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 (and such holders’ shares of Class C common stock or Class D common stock, as the case may be, will be cancelled on a one-for-one basis upon any such issuance). The Corporation’s board of directors, which includes directors who hold LLC Interests or are affiliated with holders of LLC Interests and may include such directors in the future, may, at its option, instead of the foregoing redemptions of LLC Interests, cause the Corporation to make a cash payment equal to the volume weighted average market price of one share of Class A common stock for each LLC Interest redeemed (subject to customary adjustments, including for stock splits, stock dividends and reclassifications) in accordance with the terms of the TWM LLC Agreement. Holders of Class D common stock may also from time to time exchange all or a portion of their shares of Class D common stock for newly issued shares of Class C common stock on a one-for-one basis (in which case their shares of Class D common stock will be cancelled on a one-for-one basis upon such issuance). In addition, with respect to each Bank Stockholder that holds shares of Class D common stock, immediately prior to the occurrence of any event that would cause the combined voting power held by such Bank Stockholder to exceed 4.9%, the minimum number of shares of Class D common stock of such Bank Stockholder that would need to convert into shares of Class C common stock such that the combined voting power held by such Bank Stockholder would not exceed 4.9% will automatically convert into shares of Class C common stock;

 

·      As a result of the Refinitiv Contribution, the Corporation received 96,933,192 LLC Interests and the Refinitiv Direct Owner received 96,933,192 shares of Class B common stock. The Refinitiv Direct Owner and other future holders of Class B common stock may from time to time exchange all or a portion of their shares of the Corporation’s Class B common stock for newly issued shares of Class A common stock on a one-for-one basis (in which case their shares of Class B common stock will be cancelled on a one-for-one basis upon any such issuance); and

 

10


Table of Contents

 

Tradeweb Markets Inc.

Notes to Statements of Financial Condition

(Unaudited)

 

·      The Corporation entered into a Tax Receivable Agreement with TWM LLC and the Continuing LLC Owners that provides for the payment by the Corporation to a Continuing LLC Owner of 50% of the amount of U.S. federal, state and local income or franchise tax savings, if any, that the Corporation actually realizes (or in some circumstances is deemed to realize) as a result of (i) increases in the tax basis of TWM LLC’s assets resulting from (a) the purchase of LLC Interests from such Continuing LLC Owner using the net proceeds of the IPO or any future offering or (b) redemptions or exchanges by such Continuing LLC 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 the Corporation making payments under the Tax Receivable Agreement.

 

Following the completion of the Reorganization Transactions, including the IPO and the application of the proceeds therefrom as described above, the Corporation owns 64.3% of TWM LLC. The Continuing LLC Owners that continue to own LLC Interests own the remaining 35.7% of TWM LLC.

 

On May 8, 2019, the Corporation’s board of directors declared a cash dividend of $0.08 per share of Class A common stock and Class B common stock for the second quarter of 2019. This dividend will be payable on June 15, 2019 to stockholders of record as of June 1, 2019.

 

There were no other subsequent events requiring adjustment to the financial statements or disclosure.

 

11


Table of Contents

 

Tradeweb Markets LLC and Subsidiaries

Consolidated Statements of Financial Condition

(in thousands)

(Unaudited)

 

 

 

Successor

 

Successor

 

 

 

March 31,
2019

 

December 31,
2018

 

Assets

 

 

 

 

 

Cash and cash equivalents including cash deposited with related parties of $246,416 and $283,790 at March 31, 2019 and December 31, 2018, respectively

 

$

361,608

 

$

410,104

 

Restricted cash

 

1,200

 

1,200

 

Receivable from brokers and dealers and clearing organizations including receivables from related parties of $199 and $3,332 at March 31, 2019 and December 31, 2018, respectively

 

88,422

 

174,591

 

Deposits with clearing organizations including deposits from related parties of $500 at both March 31, 2019 and December 31, 2018

 

8,872

 

11,427

 

Accounts receivable, net of allowance including receivables from related parties of $46,947 and $40,730 at March 31, 2019 and December 31, 2018, respectively

 

94,284

 

87,192

 

Furniture, equipment, purchased software and leasehold improvements, net of accumulated depreciation and amortization

 

36,790

 

38,128

 

Right-of-use assets

 

32,647

 

 

Software development costs, net of accumulated amortization

 

171,705

 

170,582

 

Intangible assets, net of accumulated amortization

 

1,355,996

 

1,380,848

 

Goodwill

 

2,694,797

 

2,694,797

 

Receivable from affiliates

 

3,026

 

3,243

 

Other assets including other assets from related parties of $0 and $9 at March 31, 2019 and December 31, 2018, respectively

 

32,238

 

25,027

 

Total assets

 

$

4,881,585

 

$

4,997,139

 

Liabilities and Members’ Capital

 

 

 

 

 

Liabilities

 

 

 

 

 

Payable to brokers and dealers and clearing organizations including payables to related parties of $0 and $2,404 at March 31, 2019 and December 31, 2018, respectively

 

$

81,214

 

$

171,214

 

Accrued compensation

 

54,087

 

120,158

 

Deferred revenue including deferred revenue from related parties of $8,556 and $9,151 at March 31, 2019 and December 31, 2018, respectively

 

28,487

 

27,883

 

Accounts payable, accrued expenses and other liabilities including payables to related parties of $387 and $0 at March 31, 2019 and December 31, 2018, respectively

 

33,295

 

42,548

 

Employee equity compensation payable

 

299

 

24,187

 

Lease liability

 

37,310

 

 

Payable to affiliates

 

6,050

 

5,009

 

Deferred tax liability

 

19,589

 

19,627

 

Total liabilities

 

260,331

 

410,626

 

 

 

 

 

 

 

Commitments and contingencies (note 13)

 

 

 

 

 

Mezzanine Capital Class C Shares and Class P(C) Shares

 

23,275

 

14,179

 

Members’ capital

 

 

 

 

 

Members’ capital

 

4,597,857

 

4,573,200

 

Accumulated other comprehensive income

 

122

 

(866

)

Total members’ capital

 

4,597,979

 

4,572,334

 

Total liabilities and members’ capital

 

$

4,881,585

 

$

4,997,139

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

12


Table of Contents

 

Tradeweb Markets LLC and Subsidiaries

Consolidated Statements of Income

(in thousands, except share and per share data)

(Unaudited)

 

 

 

Successor

 

 

Predecessor

 

 

 

Three Months
Ended
March 31,
2019

 

 

Three Months
Ended
March 31,
2018

 

Revenues

 

 

 

 

 

 

Transaction fees including from related parties of $59,643 and $52,918 in the three months ended March 31, 2019 and 2018, respectively

 

$

102,640

 

 

$

90,139

 

Subscription fees including from related parties of $5,670 and $5,220 in the three months ended March 31, 2019 and 2018, respectively

 

34,445

 

 

36,326

 

Commissions including from related parties of $16,186 and $11,631 in the three months ended March 31, 2019 and 2018, respectively

 

34,197

 

 

27,883

 

Refinitiv market data fees

 

13,616

 

 

12,237

 

Other

 

1,894

 

 

2,918

 

Gross revenue

 

186,792

 

 

169,503

 

Contingent consideration

 

 

 

(10,070

)

Net revenue

 

186,792

 

 

159,433

 

 

 

 

 

 

 

 

Expenses

 

 

 

 

 

 

Employee compensation and benefits

 

77,273

 

 

71,570

 

Depreciation and amortization

 

33,503

 

 

16,268

 

Technology and communications including from related parties of $740 in both the three months ended March 31, 2019 and 2018

 

10,040

 

 

8,463

 

General and administrative including from related parties of $180 in both the three months ended March 31, 2019 and 2018

 

9,089

 

 

6,517

 

Professional fees

 

6,971

 

 

5,538

 

Occupancy including from related parties of $155 in both the three months ended March 31, 2019 and 2018

 

3,639

 

 

3,722

 

Total expenses

 

140,515

 

 

112,078

 

Operating income

 

46,277

 

 

47,355

 

Interest income including from related parties of $208 and $21 in the three months ended March 31, 2019 and 2018, respectively

 

858

 

 

471

 

Income before taxes

 

47,135

 

 

47,826

 

Provision for income taxes

 

(4,783

)

 

(2,518

)

Net income

 

$

42,352

 

 

$

45,308

 

Net income per share

 

 

 

 

 

 

Basic

 

$

0.19

 

 

$

0.21

 

Diluted

 

$

0.19

 

 

$

0.21

 

Weighted average number of shares outstanding (note 14)

 

 

 

 

 

 

Basic

 

222,222,197

 

 

213,435,321

 

Diluted

 

223,320,457

 

 

213,435,321

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

13


Table of Contents

 

Tradeweb Markets LLC and Subsidiaries

Consolidated Statements of Comprehensive Income

(in thousands)

(Unaudited)

 

 

 

Successor

 

 

Predecessor

 

 

 

Three Months

 

 

Three Months

 

 

 

Ended

 

 

Ended

 

 

 

March 31,

 

 

March 31,

 

 

 

2019

 

 

2018

 

 

 

 

 

 

 

 

Net income

 

$

42,352

 

 

$

45,308

 

Foreign currency translation adjustments

 

988

 

 

1,928

 

Comprehensive income

 

$

43,340

 

 

$

47,236

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

14


Table of Contents

 

Tradeweb Markets LLC and Subsidiaries

Consolidated Statements of Changes in Members’ Capital and Accumulated Other Comprehensive Income

(in thousands)

(Unaudited)

 

 

 

Members’
Capital

 

Accumulated
Other
Comprehensive
Loss

 

Total
Members’
Capital

 

Predecessor

 

 

 

 

 

 

 

Members’ capital at December 31, 2017

 

$

999,735

 

$

(13,267

)

$

986,468

 

Comprehensive income:

 

 

 

 

 

 

 

Net income

 

45,308

 

 

 

45,308

 

Foreign currency translation adjustments

 

 

 

1,928

 

1,928

 

Capital distributions

 

(25,000

)

 

 

(25,000

)

Members’ capital at March 31, 2018

 

$

1 ,020,043

 

$

(11,339

)

$

1 ,008,704

 

 

 

 

Members’
Capital

 

Accumulated
Other
Comprehensive
Income

 

Total
Members’
Capital

 

Successor

 

 

 

 

 

 

 

Members’ capital at December 31, 2018

 

$

4 ,573,200

 

$

(866

)

$

4 ,572,334

 

Comprehensive income:

 

 

 

 

 

 

 

Net income

 

42,352

 

 

 

42,352

 

Foreign currency translation adjustments

 

 

 

988

 

988

 

Adjustment to Class C Shares and Class P(C) Shares in mezzanine capital

 

(2,369

)

 

 

(2,369

)

Share-based compensation

 

4,674

 

 

 

4,674

 

Capital distributions

 

(20,000

)

 

 

(20,000

)

Members’ capital at March 31, 2019

 

$

4 ,597,857

 

$

122

 

$

4 ,597,979

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

15


Table of Contents

 

Tradeweb Markets LLC and Subsidiaries

Consolidated Statements of Cash Flows

(in thousands)

(Unaudited)

 

 

 

Successor

 

 

Predecessor

 

 

 

Three Months
Ended
March 31, 2019

 

 

Three Months
Ended
March 31, 2018

 

Cash flows from operating activities

 

 

 

 

 

 

Net income

 

$

42,352

 

 

$

45,308

 

Adjustments to reconcile net income to net cash used in operating activities:

 

 

 

 

 

 

Depreciation and amortization

 

33,503

 

 

16,268

 

Contingent consideration

 

 

 

10,070

 

Share-based compensation expense

 

4,674

 

 

 

Deferred taxes

 

(39

)

 

452

 

(Increase) decrease in operating assets:

 

 

 

 

 

 

Receivable from brokers and dealers and clearing organizations

 

86,169

 

 

4,324

 

Deposits with clearing organizations

 

2,570

 

 

(950

)

Accounts receivable

 

(6,406

)

 

(29,762

)

Receivable from affiliates

 

217

 

 

(119

)

Other assets

 

(7,152

)

 

903

 

Increase (decrease) in operating liabilities:

 

 

 

 

 

 

Payable to brokers and dealers and clearing organizations

 

(90,000

)

 

(4,322

)

Accrued compensation

 

(66,447

)

 

(59,693

)

Deferred revenue

 

602

 

 

1 ,479

 

Accounts payable, accrued expenses and other liabilities

 

(4,911

)

 

4 ,201

 

Employee equity compensation payable

 

(17,161

)

 

(11,797

)

Payable to affiliates

 

950

 

 

9 ,412

 

Net cash used in operating activities

 

(21,079

)

 

(14,226

)

Cash flows from investing activities

 

 

 

 

 

 

Purchase of furniture, equipment, software and leasehold improvements

 

(1,516

)

 

(1,244

)

Capitalized software development costs

 

(6,767

)

 

(6,198

)

Net cash used in investing activities

 

(8,283

)

 

(7,442

)

Cash flows from financing activities

 

 

 

 

 

 

Capital distributions

 

(20,000

)

 

(25,000

)

Net cash used in financing activities

 

(20,000

)

 

(25,000

)

Effect of exchange rate changes on cash and cash equivalents

 

866

 

 

1 ,813

 

Net decrease in cash and cash equivalents

 

(48,496

)

 

(44,855

)

Cash and cash equivalents and restricted cash

 

 

 

 

 

 

Beginning of period

 

411,304

 

 

353,798

 

End of period

 

$

362,808

 

 

$

308,943

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

16


Table of Contents

 

Tradeweb Markets LLC and Subsidiaries

Consolidated Statements of Cash Flows — (Continued)

(in thousands)

(Unaudited)

 

 

 

Successor

 

 

Predecessor

 

 

 

Three Months
Ended

 

 

Three Months
Ended

 

 

 

March 31, 2019

 

 

March 31, 2018

 

Supplemental disclosure of cash flow information

 

 

 

 

 

 

Interest paid

 

$

 

 

$

 

Income taxes paid

 

$

7,301

 

 

$

1,784

 

 

The following table provides a reconciliation of cash and cash equivalents and restricted cash that sum to the amounts shown in the consolidated statements of cash flows:

 

 

 

Successor

 

 

Predecessor

 

 

 

Three Months
Ended

 

 

Three Months
Ended

 

 

 

March 31, 2019

 

 

March 31, 2018

 

Cash and cash equivalents

 

$

361,608

 

 

$

307,743

 

Restricted cash

 

1,200

 

 

1 ,200

 

Cash and cash equivalents and restricted cash

 

$

362,808

 

 

$

308,943

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

17


Table of Contents

 

Tradeweb Markets LLC and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

 

1.                            Organization

 

Tradeweb Markets LLC (the “Company”) is a leader in building and operating electronic marketplaces for a global network of clients across the institutional, wholesale and retail client sectors.

 

The Company, a Delaware limited liability company, is a consolidating subsidiary of BCP York Holdings (“BCP”), a company owned by certain investment funds affiliated with The Blackstone Group L.P., through BCP’s majority ownership interest in Refinitiv Holdings Limited (“Refinitiv” or the “Parent”).  As of March 31, 2019, Refinitiv owned a majority ownership interest in the Company and a minority ownership interest of the Company was owned by a group of investment and commercial banks (the “Banks”).

 

A majority interest of Refinitiv (formerly the Thomson Reuters Financial & Risk Business) was acquired by BCP on October 1, 2018 (the “Refinitiv Transaction”) from Thomson Reuters Corporation (“TR”). The accompanying consolidated financial statements are presented for two periods: predecessor and successor, which relate to the periods preceding and succeeding the Refinitiv Transaction, respectively.  The Refinitiv Transaction results in a new basis of accounting beginning on October 1, 2018 and the financial reporting periods are presented as follows:

 

·                  The successor period of the Company, reflecting the Refinitiv Transaction, as of March 31, 2019 and December 31, 2018 and for the three months ended March 31, 2019.

 

·                  The predecessor period of the Company for the three months ended March 31, 2018.

 

The Company, through its subsidiary Tradeweb Global LLC (“TWG”), owns:

 

·                  Tradeweb LLC (“TWL”), a registered broker-dealer under the Securities Exchange Act of 1934, a member of the Financial Industry Regulatory Authority (“FINRA”), a registered independent introducing broker with the Commodities Future Trading Commission (“CFTC”) and a member of the National Futures Association (“NFA”).

 

·                  Tradeweb Europe Limited (“TEL”), a Multilateral Trading Facility regulated by the Financial Conduct Authority (the “FCA”) in the UK, which maintains branches in Asia which are regulated by certain Asian securities regulators.

 

·                  TW SEF LLC (“TW SEF”), a Swap Execution Facility (“SEF”) regulated by the CFTC.

 

·                  DW SEF LLC (“DW SEF”), a SEF regulated by the CFTC.

 

·                  Tradeweb Japan K.K. (“TWJ”), a security house regulated by the Japanese Financial Services Agency (“JFSA”) and the Japan Securities Dealers Association (“JSDA”).

 

·                  Tradeweb EU B.V. (“TWEU”), a Trading Venue and Approved Publication Arrangement regulated by the Netherlands Authority for the Financial Markets (“AFM”).

 

The Company, through its subsidiary Tradeweb IDB Markets Inc. (“TWIDB”) (formerly known as Hydrogen Holdings Corporation), owns Dealerweb Inc. (“DW”) (formerly known as Hilliard Farber & Co., Inc.).  DW is a registered broker-dealer under the Securities Exchange Act of 1934 and a member of FINRA.  DW is also registered as an introducing broker with the CFTC and NFA.

 

18


Table of Contents

 

Tradeweb Markets LLC and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

 

The Company, through its subsidiary BondDesk Group LLC, owns Tradeweb Direct LLC (“TWD”) (formerly known as BondDesk Trading LLC), a registered broker-dealer under the Securities Exchange Act of 1934 and a member of FINRA.

 

2.                            Significant Accounting Policies

 

The following is a summary of significant accounting policies:

 

Basis of Accounting

 

The consolidated financial statements have been presented in conformity with accounting principles generally accepted in the United States of America.  All adjustments, which are, in the opinion of management, necessary to a fair statement of the results for the interim periods presented, are normal and recurring in nature.

 

Use of Estimates

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates and the difference may be material to the consolidated financial statements.

 

Basis of Consolidation

 

The consolidated financial statements include the accounts of the Company and its subsidiaries.  All intercompany transactions and balances have been eliminated in consolidation.

 

Recapitalization

 

As discussed in note 18, on April 4, 2019, the Company’s limited liability company agreement (“LLC Agreement”) was amended and restated to, among other things, (i) provide for a new single class of common membership interests in the Company (“LLC Interests”) and (ii) exchange all of the existing membership interests of the Company’s existing equityholders for LLC Interests.  For purposes of calculating net income per share on the consolidated statements of income, the number of outstanding shares have been adjusted retroactively for all periods to reflect the above-mentioned amendment and resulting recapitalization.  Other share amounts and related disclosures in the notes to the consolidated financial statements reflect the share classes and amounts prior to the recapitalization unless otherwise indicated.

 

Cash and Cash Equivalents

 

Cash and cash equivalents consists of cash and highly liquid investments (such as short-term money market instruments) with original maturities of less than three months.

 

Allowance for Doubtful Accounts

 

The Company continually monitors collections and payments from its clients and maintains an allowance for doubtful accounts.  The allowance for doubtful accounts is based upon the historical collection experience and specific collection issues that have been identified.  Additions, if any, to the allowance for doubtful accounts are charged to bad debt expense, which is included in general and administrative expenses on the consolidated statements of income.

 

Furniture, Equipment, Purchased Software and Leasehold Improvements

 

Furniture, equipment, purchased software and leasehold improvements are carried at cost less accumulated depreciation.  Depreciation for furniture, equipment and purchased software, including the allocated fair value of assets as a result of pushdown accounting (see note 3), is computed on a straight-line basis over the estimated useful lives of the related assets, ranging from three to seven years.  Leasehold improvements are amortized over the lesser of the estimated useful lives of the leasehold improvements or the remaining term of the lease for office space.

 

19


Table of Contents

 

Tradeweb Markets LLC and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

 

Software Development Costs

 

The Company capitalizes 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, in accordance with Accounting Standards Codification (“ASC”)  350.  The Company capitalizes employee compensation and related benefits and third party consulting costs incurred during the application development stage which directly contribute to such development.  Once the product is ready for its intended use, such costs are amortized on a straight-line basis over three years.  Costs capitalized as part of the pushdown accounting allocation (see note 3) are amortized over nine years.  The Company reviews the amounts capitalized for impairment whenever events or changes in circumstances indicate that the carrying amounts of the assets may not be fully recoverable, or that their useful lives are shorter than originally expected.  Non-capitalized software costs and routine maintenance costs are expensed as incurred.

 

Intangible Assets

 

Intangible assets with a finite life are amortized over the estimated lives in accordance with ASC 350.  Intangible assets subject to amortization are tested for impairment whenever events or changes in circumstances suggest that an asset’s or asset group’s carrying value may not be fully recoverable in accordance with ASC 360.  Intangible assets with an indefinite useful life are tested for impairment at least annually.  An impairment loss is recognized if the sum of the estimated undiscounted cash flows relating to the asset or asset group is less than the corresponding fair value.  Intangible assets are amortized over their estimated useful lives of seven to sixteen years.

 

Goodwill

 

Goodwill is the excess of the fair value of the Company above the fair value accounting basis of the net assets and liabilities of the Company under pushdown accounting.  Goodwill is also the cost of acquired companies in excess of the fair value of identifiable net assets at acquisition date.  Goodwill is not amortized, but in accordance with ASC 350, goodwill is tested for impairment annually and between annual tests whenever events or changes in circumstances indicate that the carrying amount may not be fully recoverable.  In 2019, the Company changed the annual date on which goodwill is tested for impairment from July 1st to October 1st to align with the annual impairment testing date of the Company’s Parent.  This change did not accelerate, delay, avoid or cause an impairment charge, nor does this change result in adjustments to the Company’s previously issued financial statements.  Goodwill is tested at the reporting unit level, which is defined as an operating segment or one level below the operating segment.  An impairment loss is recognized if the estimated fair value of a reporting unit is less than its net book value.  Such loss is calculated as the difference between the estimated fair value of goodwill and its carrying value.

 

Deferred IPO Costs

 

In 2018 the Company began incurring costs in connection with the filing of a Registration Statement on Form S-1, which are deferred in other assets in accordance with ASC 505-10-25 in the consolidated statements of financial condition. Initial public offering (“IPO”) costs consist of legal, accounting, and other costs directly related to the Company’s efforts to raise capital through an IPO. These deferred costs were offset against proceeds received from the offering which closed on April 8, 2019 and will be reclassified to additional paid-in capital on the consolidated statements of financial condition.  See note 18.

 

Translation of Foreign Currency

 

Revenues and expenses denominated in foreign currencies are translated at the rate of exchange prevailing at the transaction date.  Assets and liabilities denominated in foreign currencies are translated at the rate prevailing at the consolidated statements of financial condition date.  Foreign currency re-measurement gains or losses on transactions in nonfunctional currencies are recognized in the consolidated statements of income.  Gains or losses on translation in the financial statements of a non-U.S. operation, when the functional currency is other than the U.S. dollar, are included as a component of comprehensive income.

 

Income Tax

 

The Company is a multiple member limited liability company which is taxed as a partnership.  No federal income tax provision is required on the earnings of the Company as it is a partnership, and therefore the tax effects of its activities accrue directly to its partners.  As a partnership, the Company and certain subsidiaries are subject to unincorporated business taxes on income earned, or losses incurred, by conducting business in

 

20


Table of Contents

 

Tradeweb Markets LLC and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

 

certain state and local jurisdictions and income taxes in foreign jurisdictions on certain of their operations.  Additionally, TWIDB and its subsidiary DW are C Corporations and therefore incur corporate federal, state and local income tax expense.  Income taxes are accounted for in accordance with ASC 740.  The Company recorded 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.  The Company measures deferred taxes using the enacted tax rates and laws that will be in effect when such temporary differences are expected to reverse.  Based on the weight of the positive and negative evidence considered, management believes 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.

 

The Company records uncertain tax positions in accordance with ASC 740 on the basis of a two-step process whereby (1) the Company determines whether it is more likely than not that the tax positions will be sustained on the basis of the technical merits of the position and (2) for those tax positions that meet the more-likely-than-not recognition threshold, the Company recognizes the amount of tax benefit that is more than 50 percent likely to be realized upon ultimate settlement with the related tax authority.

 

The Company recognizes interest and penalties related to income taxes within the provision for income taxes in the consolidated statements of income.  Accrued interest and penalties are included within accounts payable, accrued expenses and other liabilities in the consolidated statements of financial condition.

 

The Company has elected to treat taxes due on future U.S. inclusions in taxable income under the GILTI provision as a current period expense when incurred.

 

Revenue Recognition

 

The Company earns transaction fees from transactions executed on the Company’s trading platforms through various fee plans. Transaction fees are generated both on a variable and fixed price basis and vary by geographic region, product type and trade size. For variable transaction fees, the Company charges clients fees based on the mix of products traded and the volume of transactions executed. Transaction fee revenue is recorded at a point in time when the trade occurs and is generally billed monthly.

 

The Company earns subscription fees from granting access to institutional investors to the Company’s electronic marketplaces. Subscription fees are recognized into income in the period that access is provided on a monthly basis. Also included in subscription fees on the consolidated statements of income are viewer fees earned monthly from institutional investors accessing fixed income market data. The frequency of subscription fee billings varies from monthly until annually, depending on contract terms. Fees received by the Company which are not yet earned are included in deferred revenue on the consolidated statements of financial condition until the revenue recognition criteria has been met.

 

The Company earns commission revenue from its 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. Securities transactions and related commission income for brokerage transactions are recorded on a trade-date basis. This income is received by the Company when the transactions settle or is billed monthly.

 

The Company earns fees from Refinitiv, formerly TR in the predecessor periods, relating to the sale of market data to Refinitiv, which redistributes that data.  Included in these fees, which are billed quarterly, are real-time market data fees which are recognized in the period that the data is provided, generally on a monthly basis and historical data sets which are recognized when the historical data set is provided to Refinitiv.

 

On January 1, 2018, the Company 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 recognition of revenue in any prior reporting periods.  However, subsequent to the adoption,

 

21


Table of Contents

 

Tradeweb Markets LLC and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

 

the Company was 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 the Company’s market data and pricing information for historical data sets provided by other companies.

 

Some commission and transaction fees earned by the Company have fixed fee components, such as monthly minimums or fixed monthly fees, and variable components, such as transaction based fees.  The breakdown of revenues between fixed and variable revenues, in thousands, for the three months ended March 31, 2019 and 2018 is as follows:

 

 

 

Successor

 

 

Predecessor

 

 

 

Three Months Ended
March 31, 2019

 

 

Three Months Ended
March 31, 2018

 

 

 

(in thousands)

 

 

(in thousands)

 

 

 

Variable

 

Fixed

 

 

Variable

 

Fixed

 

Revenues

 

 

 

 

 

 

 

 

 

 

Transaction fees

 

$

78,915

 

$

23,725

 

 

$

69,637

 

$

20,502

 

Subscription Fees including Refinitiv market data fees

 

455

 

47,606

 

 

475

 

48,088

 

Commissions

 

24,310

 

9,887

 

 

17,780

 

10,103

 

Other

 

303

 

1,591

 

 

12

 

2,906

 

Gross revenues

 

$

103,983

 

$

82,809

 

 

$

87,904

 

$

81,599

 

 

Share-Based Compensation

 

The Company accounts for share-based compensation in accordance with ASC 718.  ASC 718 focuses primarily on accounting for a transaction in which an entity obtains employee services in exchange for share-based payments.  Under ASC 718, the share-based payments received by the employees of the Company are accounted for either as equity awards or as liability awards.

 

As an 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 members’ capital.

 

As a liability award, the cost of 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 the settlement in accordance with ASC 505.  Changes in the equity instrument’s fair value during the requisite service period are recognized as compensation cost over that period.

 

Under ASC 718, the grant-date fair value of share-based awards that do not require future service (i.e., vested awards) are expensed immediately.  The grant-date fair value of share-based employee awards that require future service, and are graded-vesting awards, are amortized over the relevant service period on a straight-line basis, with each tranche separately measured.  The grant-date fair value of share-based employee awards that require both future service and the achievement of Company performance-based conditions, are amortized over the relevant service period for the performance-based condition.  If in a reporting period it is

 

22


Table of Contents

 

Tradeweb Markets LLC and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

 

determined that the achievement of a performance target for a performance-based tranche is not probable, then no expense is recognized for that tranche and any expenses already recognized relating to that tranche in prior reporting periods are reversed in the current reporting period.

 

Determining the appropriate fair value model and calculating the fair value of the share-based payment awards requires the input of highly subjective assumptions, including the expected life of the share-based payment awards and the stock price volatility.  The Company uses the Black-Scholes pricing model to value some of its share-based awards. Application of alternative assumptions could produce significantly different estimates of the fair value of stock-based compensation and consequently, the related amounts recognized in the Company’s consolidated statements of income.

 

Net Income Per Share

 

Basic net income per share is computed by dividing the net income attributable to the Company’s shares by the weighted-average number of the Company’s shares outstanding during the period.  For purposes of computing diluted net income per share, the weighted-average number of the Company’s shares reflects the dilutive effect that could occur if convertible securities were converted into or exercised for the Company’s shares using the treasury stock method.

 

Fair Value Measurement

 

The fair value of a financial instrument is the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (the exit price).  Instruments that the Company owns (long positions) are marked to bid prices, and instruments that the Company has sold, but not yet purchased (short positions), are marked to offer prices.  Fair value measurements do not include transaction costs.

 

The fair value hierarchy under ASC 820 prioritizes the inputs to valuation techniques used to measure fair value.  The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurements) and the lowest priority to unobservable inputs (level 3 measurements).  The three levels of the fair value hierarchy under ASC 820 are described below:

 

Basis of Fair Value Measurement

 

Level 1               Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;

 

Level 2               Quoted prices in markets that are not considered to be active or financial instruments for which all significant inputs are observable, either directly or indirectly;

 

Level 3               Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable.

 

A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement.

 

Recent Accounting Pronouncements

 

In June 2016, the FASB issued ASU 2016-13, Financial Instruments — Credit Losses.  The ASU provides new guidance for estimating credit losses on certain types of financial instruments by introducing an approach based on expected losses.  This ASU is effective in the fiscal year beginning January 1, 2020.  The Company is currently evaluating the impact of this ASU on the Company’s consolidated financial statements.

 

In January 2017, the FASB issued ASU 2017-04, Intangibles — Goodwill and Other.  The ASU simplifies the quantitative goodwill impairment test by eliminating the second step of the test.  Under this ASU, impairment will be measured by comparing the estimated fair value of the reporting unit with its carrying value.  The ASU is applicable for the Company in the fiscal year beginning January 1, 2021.  The Company

 

23


Table of Contents

 

Tradeweb Markets LLC and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

 

does not anticipate the adoption of this ASU to have a material impact on the Company’s consolidated financial statements.

 

3.                          Pushdown Accounting

 

The Refinitiv Transaction was accounted for by Refinitiv in accordance with the acquisition method of accounting pursuant to ASC 805, 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.  The Company, as a consolidating subsidiary of Refinitiv, also accounted for the Refinitiv Transaction using pushdown accounting. Under pushdown accounting, the excess of the fair value of the Company above the fair value accounting basis of the net assets and liabilities of the Company was recorded as goodwill. The Company has one year from the date of the Refinitiv Transaction to finalize these amounts.

 

The adjusted valuations resulted in an increase in depreciation and amortization expense, due to the increased carrying value of the Company’s assets and the related increase in depreciation of tangible assets and amortization of intangible assets, and a decrease in occupancy expense as a result of the recognition of a leasehold interest liability.

 

4.                            Leases

 

Effective January 1, 2019, the Company adopted ASC 842. This standard requires the Company to recognize a right-of-use asset and a lease liability for all leases with an initial term in excess of twelve months. The Company accounts for an option to extend a lease when the option is reasonably certain to be exercised.  The asset reflects the present value of unpaid lease payments coupled with initial direct costs, prepaid lease payments, and lease incentives. The amount of the lease liability is calculated as the present value of unpaid lease payments.  The Company adopted ASC 842 using a modified retrospective approach and did not restate comparative periods.  The Company elected to take the package of practical expedients allowing the Company to not reassess (i) whether any expired or existing contracts are or contain leases, (ii) the lease classification for any expired or existing leases and (iii) initial direct costs for any existing leases.  The Company has elected to account for nonlease components in a contract as part of the single lease component to which they are related.

 

Significant assumptions and judgements in calculating the right-of-use assets and lease liability include the determination of the applicable borrowing rate for each lease.

 

On January 1, 2019, upon the adoption of ASC 842, the Company recorded, for office space and data center leases in the US and UK, right-of-use assets of $34,760,000, lease liabilities of $39,635,000 and eliminated deferred rent of $4,875,000.  The leases have initial lease terms ranging from 3 to 11 years.

 

Activity related to the Company’s leases for the three months ended March 31, 2019 is as follows (in thousands):

 

Operating lease expense

 

$

2 ,589

 

Cash for amounts included in the measurement of operating liability

 

2 ,834

 

Right-of-use assets obtained in exchange for operating liabilities

 

 

 

At March 31, 2019, the weighted average borrowing rate and weighted average lease term are as follows:

 

Weighted average borrowing rate

 

2.9

%

Weighted average remaining lease term (years)

 

5.9

 

 

24


Table of Contents

 

Tradeweb Markets LLC and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

 

The following table presents the maturity of lease liabilities as of March 31, 2019 (in thousands):

 

Remainder of 2019

 

$

1,715

 

2020

 

1,953

 

2021

 

6,873

 

2022

 

 

2023

 

1,225

 

Thereafter

 

29,013

 

Total future minimum lease payments

 

40,779

 

Less imputed interest

 

(3,469

)

Lease liability

 

$

37,310

 

 

At March 31, 2019, the future minimum lease payments are as follows (in thousands):

 

Remainder of 2019

 

$

8,511

 

2020

 

7,725

 

2021

 

5,380

 

2022

 

4,081

 

2023

 

3,907

 

Thereafter

 

11,175

 

 

 

$

40,779

 

 

One US lease is secured by a letter of credit in the amount of $1,200,000, which is guaranteed by Refinitiv.

 

5.                          Intangible Assets and Goodwill

 

Intangible assets and goodwill relate to the allocation of purchase price associated with the Refinitiv Transaction (see note 3).

 

The following is a summary of intangible assets which have an indefinite useful life at both March 31, 2019 and December 31, 2018 (in thousands):

 

Licenses

 

$

168,800

 

Tradename

 

154,300

 

Total

 

$

323,100

 

 

Intangible assets that are subject to amortization, including the related accumulated amortization, are comprised as follows (in thousands):

 

 

 

 

 

Successor

 

Successor

 

 

 

 

 

March 31, 2019

 

December 31, 2018

 

 

 

Amortization
Period

 

Cost

 

Accumulated
Amortization

 

Net Carrying
Amount

 

Cost

 

Accumulated
Amortization

 

Net Carrying
Amount

 

Customer relationships - Refinitiv Transaction

 

12 Years

 

$

928,200

 

$

(38,675

)

$

889,525

 

$

928,200

 

$

(19,338

)

$

908,862

 

Content and data

 

7 Years

 

154,400

 

(11,029

)

143,371

 

154,400

 

(5,514

)

148,886

 

 

 

 

 

$

1,082,600

 

$

(49,704

)

$

1,032,896

 

$

1,082,600

 

$

(24,852

)

$

1,057,748

 

 

For the three months ended March 31, 2019 and 2018, amortization expense relating to intangible assets was $24,852,000 and $6,506,000, respectively.

 

25


Table of Contents

 

Tradeweb Markets LLC and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

 

The estimated annual future amortization for existing intangibles assets through December 31, 2023 is as follows (in thousands):

 

Remainder of 2019

 

$

74,556

 

2020

 

99,408

 

2021

 

99,408

 

2022

 

99,408

 

2023

 

99,408

 

 

6.                            Deferred Revenue

 

The Company records deferred revenue when cash payments are received or due in advance of services to be performed.  The recognized revenue and remaining balance is shown below (in thousands):

 

Deferred revenue balance - December 31, 2018

 

$

27,883

 

New billings

 

29,165

 

Revenue recognized

 

(28,561

)

Deferred revenue balance - March 31, 2019

 

$

28,487

 

 

7.                          Income Taxes

 

The provision for income taxes consists of the following (in thousands):

 

 

 

Successor

 

 

Predecessor

 

 

 

Three Months Ended

 

 

Three Months Ended

 

 

 

March 31, 2019

 

 

March 31, 2018

 

Current:

 

 

 

 

 

 

Federal

 

$

 

 

$

 

State and Local

 

1,487

 

 

856

 

Foreign

 

3,335

 

 

1,210

 

 

 

4,822

 

 

2,066

 

Deferred - Federal

 

704

 

 

299

 

Deferred - state and local

 

577

 

 

153

 

Deferred - foreign

 

(1,320

)

 

 

Total deferred

 

(39

)

 

452

 

Total

 

$

4,783

 

 

$

2,518

 

 

The Company and certain of its subsidiaries are taxed as partnerships for U.S federal income tax purposes. The Company’s effective tax rate was 10.1% and 5.3% for the three months ended March 31, 2019 and 2018, respectively. The Company’s consolidated effective tax rate can vary from period to period depending on the geographic mix of its earnings and changes in tax legislation and tax rates.

 

8.                          Shares

 

The Company’s issued and vested shares as of both March 31, 2019 and December 31, 2018 are as follows:

 

Class A Shares

 

146,333

Class C Shares

 

447

Class P(A) Shares

 

6,887

Class P(C) Shares

 

2

Class P-1(A) Shares

 

6,094

Class P-1(C) Shares

 

232

 

26


Table of Contents

 

Tradeweb Markets LLC and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

 

As described in note 18, on April 4, 2019, the LLC Agreement was amended and restated, pursuant to which, among other things, all of the outstanding Class A Shares, Class P(A) Shares, Class P-1(A) Shares, Class C Shares, Class P(C) Shares and Class P-1(C) Shares of the Company were exchanged for 222,222,197 LLC Interests.

 

Each formerly outstanding Class A Share, Class P(A) Share, Class P-1(A) Share, Class C Share, Class P(C) Share and Class P-1(C) Share equally participated in the earnings of the Company.  All of these shares could not be transferred without approval by the former Board of Managers of the Company, with the exception of transfers to certain related parties.  Most of the Class A and Class P(A) Shareholders had the right to appoint the members of the former Board of Managers.  The Class C Shareholders, Class P(C) Shareholders and Class P-1(C) Shareholders did not have the right to appoint members of the former Board of Managers.

 

9.                          Share-Based Compensation Plans

 

As of March 31, 2019, the Company maintained a share-based incentive plan (the “PRSU Plan”) which provided for the grant of performance-based restricted share units (“PRSUs”) to encourage employees of the Company to participate in the long-term success of the Company.

 

PRSUs vest in the third plan year following the year of grant. The outstanding PRSUs vest on January 1, 2020, 2021 and 2022.  The final number of the PRSUs received upon vesting is determined by a performance modifier, which is adjusted as a result of the financial performance of the Company.  If an employee’s employment with the Company is terminated, subject to certain exceptions, all unvested PRSUs are forfeited.

 

The following table reports the activity for equity-settled PRSUs of the Company:

 

Successor

 

Number of
PRSUs

 

Weighted
Average
Fair Value
of PRSUs

 

Outstanding at December 31, 2018

 

1,442.2

 

$30,472

 

Granted

 

554.3

 

31,563

 

Outstanding at March 31, 2019

 

1,996.5

 

$34,151

 

 

Subsequent to March 31, 2019, in connection with the reorganization transactions described in note 18, the Corporation’s board of directors adopted and assumed sponsorship of the Amended & Restated Tradeweb Markets Inc. PRSU Plan, including all awards previously granted under the predecessor plan of the Company. As a result, the equity-settled PRSUs outstanding at March 31, 2019, converted into equity-settled PRSUs of the Corporation represented by 2,770,334 shares of Class A common stock of the Corporation.

 

Certain PRSUs are cash-settled and are accounted for as liability awards.  The Company measures the cost of employee services received in exchange for the award based on the fair value of the Company and the value of accumulated dividend rights associated with each award.  The fair value of that award is remeasured subsequently at each reporting date through to settlement.  Changes in the award’s fair value during the requisite service period is recognized as compensation cost over that period.

 

27


Table of Contents

 

Tradeweb Markets LLC and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

 

The following table reports the activity for cash-settled PRSUs of the Company:

 

Successor

 

Number of
PRSUs

 

Weighted
Average
Fair Value
of PRSUs

 

Outstanding at December 31, 2018

 

522.5

 

$

34,075

 

Exercised

 

(507.2

)

33,694

 

Outstanding at March 31, 2019

 

15.3

 

$

51,334

 

 

In October 2018, the Company made a special award of options under an option plan (the “Option Plan”). Each option vests one half based solely on the passage of time and one half only if the Company achieves certain performance targets. The time vesting portion of the options has a graded vesting schedule with vesting dates of January 1, 2019, 2020, 2021 and 2022.

 

In accounting for the options issued under the Option Plan, the Company measures and recognizes compensation expense for all awards based on their estimated fair values measured as of the grant date.  These options are exercisable only any time following the closing of an initial public offering (“IPO”) or during a 15-day period following a change in control of the Company.  Costs related to these options will be recognized as an expense in the consolidated statements of income over the requisite service period, when exercisability is considered probable.  Therefore expense will be recognized only upon the completion of an IPO or a change in control, over the vesting period, with an offsetting increase to members’ capital.  On April 8, 2019, as a result of the options becoming exercisable because of completion of the Corporation’s IPO, the Company recognized $18,883,000 of compensation expense related to these options.

 

The fair value of the options was calculated at the date of grant using the Black-Scholes model.  The significant assumptions used to estimate the fair value of the options as of grant date did not reflect changes that would have occurred to these assumptions as a result of the Corporation’s IPO.  See note 18.  The significant assumptions used to estimate the fair value of the options were as follows:

 

Weighted Average Expected Life (years)

 

5.7

 

Weighted Average Risk Free Interest Rate

 

2.94

%

Weighted Average Expected Volatility

 

20.0

%

Weighted Average Expected Dividend Yield

 

4.01

%

Share Price

 

$

25,692

 

Exercise Price

 

$

28,601

 

 

The following table reports the activity for options held by employees of the Company:

 

Successor

 

Number of
Options

 

Weighted
Average
Fair Value
of Options

 

Intrinsic
Value
(in
thousands)

 

Outstanding at December 31, 2018

 

13,025.8

 

$

2,569

 

 

 

Granted

 

130.4

 

4,132

 

 

 

Forfeited

 

(97.8

)

4,159

 

 

 

Outstanding at March 31, 2019

 

13,058.4

 

$

2,573

 

$

74,421

 

 

28


Table of Contents

 

Tradeweb Markets LLC and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

 

Subsequent to March 31, 2019, in connection with the reorganization transactions described in note 18, the Corporation’s board of directors adopted and assumed sponsorship of the Amended and Restated Tradeweb Markets Inc. 2018 Share Option Plan, including all awards previously granted under the predecessor plan of the Company. As a result, the options outstanding at March 31, 2019 converted into 18,137,050 options of the Corporation with respect to shares of the Corporation’s Class A common stock.

 

As of March 31, 2019, total unrecognized compensation cost related to non-vested share-based compensation arrangements and the expected recognition period are as follows:

 

 

 

Cash-Settled
PRSUs

 

Equity Settled
PRSUs

 

Options

 

Total unrecognized compensation cost

 

$

390,000

 

$

36,199,000

 

$

33,460,000

 

Weighted average recognition period

 

1.54 years

 

2.02 years

 

0.6 years

 

 

Certain employees acquired or vested in Class C Shares, Class P(C) Shares and Class P-1(C) Shares of the Company (collectively, the “Employee Shares”).

 

The Employee Shares outstanding at March 31, 2019 and December 31, 2018 are as follows:

 

Class C
Shares

 

Class P(C)
Shares

 

Class P-1(C)
Shares

 

447

 

2

 

232

 

 

On April 4, 2019, as a result of the amendment to the LLC Agreement described in note 18, the Employee Shares outstanding at March 31, 2019 converted into 946,569 LLC Units.

 

The Employee Shares were classified as mezzanine capital, as opposed to members’ capital, due to the right of employees to sell the shares back to the Company at fair value upon termination of employment.  Employee Shares that have been outstanding for less than six months were included in employee equity compensation payable.  At December 31, 2018, $6,727,000 of vested Class P-1(C) Shares were included in employee compensation payable with any changes in the value of the shares included in compensation cost on the consolidated statements of income.  There were no vested Class P-1(C) Shares included in employee compensation payable at March 31, 2019.  Changes in the fair value of the Employee Shares included in mezzanine capital were not recognized as compensation cost.

 

For the three months ended March 31, 2019 and 2018, $4,878,000 and $5,946,000, respectively, has been expensed relating to PRSUs, options and shares and included in employee compensation and benefits in the consolidated statements of income.

 

29


Table of Contents

 

Tradeweb Markets LLC and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

 

10.                   Related Party Transactions

 

The Company enters into transactions with affiliates of the Banks and Refinitiv.  At March 31, 2019 and December 31, 2018, the following balances with such affiliates were included in the consolidated statements of financial condition in the following line items (in thousands):

 

 

 

Successor

 

Successor

 

 

 

March 31, 2019

 

December 31, 2018

 

Cash and cash equivalents

 

$

246,416

 

$

283,790

 

Receivables from brokers and dealers and clearing organizations

 

199

 

$

3,332

 

Deposits with clearing organizations

 

500

 

500

 

Accounts receivable

 

46,947

 

40,730

 

Receivable from affiliates

 

3,026

 

3,243

 

Other assets

 

 

9

 

Payable to brokers and dealers and clearing organizations

 

 

2,404

 

Deferred revenue

 

8,556

 

9,151

 

Accounts payable, accrued expenses and other liabilities

 

387

 

 

Payable to affiliates

 

6,050

 

5,009

 

 

The Company maintains a shared services agreement with Refinitiv (TR in the predecessor period).  Under the terms of the agreement, Refinitiv provides the Company with certain real estate, payroll, benefits administration, insurance, content, financial reporting and tax support.  For both the three months ended March 31, 2019 and 2018, the Company incurred shared services fees of $1,075,000 relating to this agreement. These fees are included in occupancy, technology and communications and general and administrative expenses in the consolidated statements of income.

 

The Company maintains a market data license agreement with Refinitiv (TR in the predecessor period).  Under the agreement, the Company delivers to Refinitiv certain market data feeds which Refinitiv redistributes to its customers.  The Company earns license fees or royalties for these feeds.  For the three months ended March 31, 2019 and 2018, the Company earned $13,616,000 and $12,237,000, respectively, of revenue under this agreement.

 

The Company reimburses affiliates of Refinitv (TR in the predecessor period) for expenses paid on behalf of the Company for various services including salaries and bonuses, marketing, professional fees, communications, data costs and certain other administrative services.  For the three months ended March 31, 2019 and 2018, the Company reimbursed such affiliates approximately $1,027,000 and $6,258,000, respectively, for these expenses.

 

For the three months ended March 31, 2019 and 2018, the Company earned approximately $81,499,000 and $69,769,000, respectively, of transaction, subscription and other fees from affiliates of the Banks.

 

For the three months ended March 31, 2019 and 2018, the Company earned $208,000 and $21,000, respectively, of interest income from money market funds invested with and savings accounts deposited with affiliates of the Banks.  Interest rates earned on the money market and savings accounts are comparable to rates offered to third parties.

 

During 2014, the Company issued Class A Shares and unvested Class P-1(A) Shares to some of the Banks as a result of a $120,000,000 capital contribution.  In connection with this investment, employees invested $5,266,000 in the Company and were issued Class C Shares and unvested Class P-1(C) Shares.  Certain Class P-1(A) Shares and Class P-1(C) Shares vested on July 31, 2018, based on a formula determined by the Company’s new credit platforms’ revenues and any remaining unvested Class P-1(A) Shares and Class P-1(C) Shares were cancelled and as a result  no contingent consideration has been recognized related to these shares subsequent to that date.  The Company recognized contingent consideration for the three months ended March 31, 2018 of $10,070,000 relating to these shares, which is included in net revenue on the consolidated statements of income.

 

30


Table of Contents

 

Tradeweb Markets LLC and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

 

11.                   Fair Value of Financial Instruments

 

Certain financial instruments that are not carried at fair value on the consolidated statements of financial condition are carried at amounts that approximate fair value.  These instruments include deposits with clearing organizations and accounts receivable.

 

Following is a description of the fair value methodologies used for the Company’s instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy:

 

The Company’s money market funds are classified within level 1 of the fair value hierarchy because they are valued using quoted market prices in active markets.

 

The Company has no instruments that are classified within level 2 or level 3 of the fair value hierarchy.

 

The fair value measurements are as follows (in thousands):

 

Successor

 

Quoted Prices in
active Markets
for Indentical
Assets
(Level 1)

 

Significant
Observable
Inputs
(Level 2)

 

Significant
Unobservable
Inputs
(Level 3)

 

Total

 

As of March 31, 2019

 

 

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

 

Money market funds

 

$

137,502

 

$

 

$

 

$

137,502

 

 

 

$

137,502

 

$

 

$

 

$

137,502

 

As of December 31, 2018

 

 

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

 

Money market funds

 

$

127,927

 

$

 

$

 

$

127,927

 

 

 

$

127,927

 

$

 

$

 

$

127,927

 

 

12.                   Credit Risk

 

The Company may be exposed to credit risk regarding its receivables, which are primarily receivables from financial institutions, including investment managers and broker/dealers.  At March 31, 2019 and December 31, 2018 the Company established an allowance for doubtful accounts of $1,253,000 and $1,169,000, respectively, with regard to these receivables.

 

In the normal course of business the Company, as agent, executes transactions with, and on behalf of, other brokers and dealers.  If the agency transactions do not settle because of failure to perform by either counterparty, the Company may be obligated to discharge the obligation of the non-performing party and, as a result, may incur a loss if the market value of the security is different from the contract amount of the transaction.

 

A substantial number of the Company’s transactions are collateralized and executed with, and on behalf of, a limited number of brokers and dealers.  The Company’s exposure to credit risk associated with the nonperformance of these clients in fulfilling their contractual obligations pursuant to securities transactions can be directly impacted by volatile trading markets which may impair the clients’ ability to satisfy their obligations to the Company.

 

The Company does not expect nonperformance by counterparties in the above situations.  However, the Company’s policy is to monitor its market exposure and counterparty risk.  In addition, the Company has a

 

31


Table of Contents

 

Tradeweb Markets LLC and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

 

policy of reviewing, as considered necessary, the credit standing of each counterparty with which it conducts business.

 

13.                   Commitments and Contingencies

 

In the normal course of business, the Company enters into user agreements with its dealers which provide the dealers with indemnification from third parties in the event that the electronic marketplaces of the Company infringe upon the intellectual property or other proprietary right of a third party.  The Company’s exposure under these user agreements is unknown as this would involve estimating future claims against the Company which have not yet occurred.  However, based on its experience, the Company expects the risk of a material loss to be remote.

 

The Company has been named as a defendant, along with dozens of financial institutions, in antitrust class actions (consolidated into two actions) relating to trading practices in United States Treasury securities auctions and, separately, interest rate swaps.  The Company was dismissed from the interest rate swaps matter and believes it has substantial defenses to the other plaintiff’s claims and intends to defend itself vigorously.

 

The Company is a co-defendant in a matter relating to the distribution of financial strength ratings over the Company’s trading platform to one of its customers.  The matter alleges that while certain business units of the client were licensed to receive the data via the Company’s platform, the data was also distributed without authorization to certain end clients of the customer.  The plaintiff claims to have suffered approximately $80,000,000 in damages and also seeks punitive damages, attorneys’ fees and costs.  The Company intends to continue to vigorously defend what the Company believes to be meritless and excessive claims.

 

The Company records its best estimate of a loss, including estimated defense costs, when the loss is considered probable and the amount of such loss can be reasonably estimated.  Based on its experience, the Company believes that the amount of damages claimed in a legal proceeding is not a meaningful indicator of the potential liability.  At this time, the Company cannot reasonably predict the timing or outcomes of, or estimate the amount of loss, or range of loss, if any, related to its pending legal proceedings, including the matters described above, and therefore does not have any contingency reserves established for any of these matters.

 

32


Table of Contents

 

Tradeweb Markets LLC and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

 

14.                   Net Income Per Share

 

On April 4, 2019, the LLC Agreement was amended and restated to, among other things, (i) provide for LLC Interests and (ii) exchange all of the existing membership interests of the Company’s existing equityholders for LLC Interests.  See note 18.  For purposes of calculating net income per share on the consolidated statements of income, the number of outstanding shares has been adjusted retroactively for all periods presented to reflect the above-mentioned amendment and resulting recapitalization.  The following table sets forth the computation of basic and diluted net income per share:

 

 

 

Successor

 

 

Predecessor

 

 

 

Three Months Ended

 

 

Three Months Ended

 

 

 

March 31, 2019

 

 

March 31, 2018

 

Net Income (in thousands)

 

$

42,352

 

 

$

45,308

 

 

 

 

 

 

 

 

Basic Weighted Average Shares Outstanding

 

222,222,197

 

 

213,435,321

 

Dilutive Effect of equity settled PRSUs

 

1,098,260

 

 

 

Diluted Weighted Average Shares Outstanding

 

223,320,457

 

 

213,435,321

 

 

 

 

 

 

 

 

Basic Net Income Per Share

 

$

0.19

 

 

$

0.21

 

 

 

 

 

 

 

 

Diluted Net Income Per Share

 

$

0.19

 

 

$

0.21

 

 

Shares from the contingent consideration payable totaling 5,519,568 for three months ended March 31, 2018 were excluded from the computation of diluted net income per share because their effect would have been anti-dilutive.

 

15.                   Regulatory Capital Requirements

 

TWL, DW and TWD are subject to the Uniform Net Capital Rule 15c3-1 under the Securities Exchange Act of 1934.  TEL is subject to certain financial resource requirements with the FCA in the UK, TWJ is subject to certain financial resource requirements with the FCA in Japan and TWEU is subject to certain finance resource requirements with the AFM in the Netherlands.

 

At March 31, 2019 and December 31, 2018, the regulatory capital requirements and regulatory capital for TWL, DW, TWD, TEL, TWJ and TWEU were as follows (in thousands):

 

As of March 31, 2019

 

TWL

 

DW

 

TWD

 

TEL

 

TWJ

 

TWEU

 

Regulatory Capital

 

$

13,981

 

$

39,711

 

$

26,695

 

$

46,537

 

$

10,532

 

$

4,034

 

Regulatory Capital Requirement

 

1,398

 

1,133

 

311

 

17,515

 

3,804

 

4,034

 

Excess Regulatory Capital

 

$

12,583

 

$

38,578

 

$

26,384

 

$

29,022

 

$

6,728

 

$

 

 

As of December 31, 2018

 

TWL

 

DW

 

TWD

 

TEL

 

TWJ

 

Regulatory Capital

 

$

18,986

 

$

41,164

 

$

24,042

 

$

46,157

 

$

10,592

 

Regulatory Capital Requirement

 

2,698

 

1,803

 

599

 

17,493

 

3,413

 

Excess Regulatory Capital

 

$

16,288

 

$

39,361

 

$

23,443

 

$

28,664

 

$

7,179

 

 

As SEFs, TW SEF and DW SEF are required to maintain adequate financial resources and liquid financial assets in accordance with CFTC regulations.  The required and maintained financial resources and liquid financial assets at March 31, 2019 and December 31, 2018 are as follows (in thousands):

 

33


Table of Contents

 

Tradeweb Markets LLC and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

 

 

 

As of March 31, 2019

 

As of December 31, 2018

 

 

 

TW SEF

 

DW SEF

 

TW SEF

 

DW SEF

 

Financial Resources

 

$

28,912

 

$

18,524

 

$

31,232

 

$

17,837

 

Required Financial Resources

 

10,500

 

5,440

 

10,500

 

5,169

 

Excess Financial Resources

 

$

18,412

 

$

13,084

 

$

20,732

 

$

12,668

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liquid Financial Assets

 

$

15,929

 

$

12,517

 

$

16,662

 

$

11,888

 

Required Liquid Financial Assets

 

5,250

 

2,720

 

5,250

 

2,585

 

Excess Liquid Financial Assets

 

$

10,679

 

$

9,797

 

$

11,412

 

$

9,303

 

 

16.                   Employees Savings Plan

 

The Company sponsors a 401(k) savings plan for its US employees.  Employees may voluntarily contribute up to 75% of their annual compensation, including bonus.  The Company matches 100% of the employee’s contribution, up to 4% of their annual compensation, not to exceed the maximum tax deferred amount, which vests immediately.  Company’s expense for matching contributions for these plans was $2,436,000 and $2,136,000 for the three months ended March 31, 2019 and 2018, respectively.

 

The Company has deferred compensation plans for its International employees.  Employer contributions to the plans were $425,000 and $398,000 for the three months ended March 31, 2019 and 2018, respectively.

 

17.                   Business Segment and Geographic Information

 

The Company operates electronic marketplaces for the trading of products across the rates, credit, equities and money markets asset classes and provides related pre-trade pricing and post-trade processing services.  The Company’s operations constitute a single business segment because of the integrated nature of these marketplaces and services.  Information regarding revenue by client sector is as follows (in thousands):

 

 

 

Successor

 

 

Predecessor

 

 

 

Three Months Ended
March 31, 2019

 

 

Three Months Ended
March 31, 2018

 

 

 

 

 

 

 

 

Net revenue:

 

 

 

 

 

 

Institutional

 

$

109,252

 

 

$

102,320

 

Wholesale

 

39,431

 

 

32,595

 

Retail

 

21,206

 

 

19,036

 

Market Data

 

16,903

 

 

15,552

 

Contingent consideration

 

 

 

(10,070

)

Net revenue

 

186,792

 

 

159,433

 

Operating expenses

 

140,515

 

 

112,078

 

 

 

 

 

 

 

 

Operating income

 

$

46,277

 

 

$

47,355

 

 

The Company operates in the U.S. and internationally, primarily in Europe and Asia.  Revenues are attributed to geographic area based on the jurisdiction where the underlying transactions take place.  The results by geographic region are not meaningful in understanding the Company’s business.  Long-lived assets are attributed to the geographic area based on the location of the particular subsidiary.  Information regarding revenue for the three months ended March 31, 2019 and 2018 and long-lived assets as of March 31, 2019 and December 31, 2018 is as follows (in thousands):

 

34


Table of Contents

 

Tradeweb Markets LLC and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

 

 

 

Successor

 

 

Predecessor

 

 

 

Three Months Ended

 

 

Three Months Ended

 

 

 

March 31, 2019

 

 

March 31, 2018

 

 

 

 

 

 

 

 

Net Revenue:

 

 

 

 

 

 

U.S.

 

$

119,397

 

 

$

107,782

 

International

 

67,395

 

 

61,721

 

Gross revenue

 

186,792

 

 

169,503

 

Contingent consideration

 

 

 

(10,070

)

Total

 

$

186,792

 

 

$

159,433

 

 

 

 

March 31, 2019

 

December 31, 2018

 

 

 

 

 

 

 

Long-lived assets

 

 

 

 

 

U.S.

 

$

4,277,698

 

$

4,276,568

 

International

 

14,237

 

7,787

 

Total

 

$

4,291,935

 

$

4,284,355

 

 

18.                   Subsequent Events

 

On April 3, 2019, the Company paid a $100 million distribution to the then current owners of the Company (the “Original LLC Owners”).

 

Prior to the closing of the Corporation’s IPO on April 8, 2019, the Corporation, the Company and the Original LLC Owners, including those Original LLC Owners that continued to own LLC Interests immediately prior to the closing of the IPO and who received shares of the Corporation’s common stock (collectively, the “Continuing LLC Owners”), completed a series of reorganization transactions (the “Reorganization Transactions”).

 

On April 4, 2019, in connection with the IPO and the Reorganization Transactions, the LLC Agreement was amended and restated to, among other things, (i) provide for LLC Interests, a new single class of common membership interests in the Company; (ii) exchange all of the existing membership interests of the Company’s existing equityholders for LLC Interests; and (iii) appoint the Corporation as the sole manager of the Company. As the sole manager of the Company, the Corporation operates and controls all of the business and affairs of the Company and, through the Company and its subsidiaries, conducts the Corporation’s business. As a result of this control, and because, following the completion of the Reorganization Transactions, including the IPO and the application of the proceeds therefrom, the Corporation owns 64.3% of the LLC Interests, the Corporation will consolidate the financial results of the Company and report a non-controlling interest in the Corporation’s consolidated financial statements. The LLC Agreement also requires that the Company at all times maintain (i) a one-to one ratio between the number of shares of the Class A common stock and Class B common stock issued by the Corporation and the number of LLC Interests owned by the Corporation and (ii) a one-to-one ratio between the number of shares of Class C common stock and Class D common stock issued by the Corporation and the number of LLC Interests owned by the holders of such Class C common stock and Class D common stock.

 

LLC Interests are redeemable, 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 (and such holders’ shares of Class C common stock or Class D common stock, as the case may be, will be cancelled on a one-for-one basis upon any such issuance). The Corporation’s board of directors, which includes directors who hold LLC Interests or are affiliated with holders of LLC Interests and may include such directors in the future, may, at its option, instead of the foregoing redemptions of LLC Interests, cause the Corporation to make a cash payment equal to the volume weighted average market price of one share of Class A common stock for each LLC Interest redeemed (subject to customary adjustments, including for stock splits, stock dividends and reclassifications) in accordance with the terms of the LLC Agreement.

 

35


Table of Contents

 

Tradeweb Markets LLC and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

 

In addition, the Corporation assumed sponsorship of the Option Plan and the PRSU Plan formerly sponsored by the Company. Accordingly, all options and PRSUs granted under such plans were converted into economically equivalent awards of the Corporation with respect to shares of the Corporation’s Class A common stock.

 

On April 8, 2019, the Company entered into a $500 million senior secured revolving credit facility with a five-year term, which includes borrowing capacity available for letters of credit and swingline loans.

 

On May 8, 2019, the Company declared a cash distribution of $33,378,019 for the second quarter of 2019. This distribution was paid on May 15, 2019 on a pro rata basis to the equityholders of the Company as of May 9, 2019, including the Corporation, for the purpose of funding the Corporation’s cash dividend of $0.08 per share of Class A common stock and Class B common stock payable on June 15, 2019 and to fund the tax liabilities on the equityholders’ allocable share of taxable income from the Company.

 

There were no other subsequent events requiring adjustment to the consolidated financial statements or disclosure.

 

36


Table of Contents

 

ITEM 2. — MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the unaudited financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q. This discussion of our historical financial position and results of operations does not give effect to the completion of our IPO or the Reorganization Transactions, which are described in the notes to unaudited financial statements included elsewhere in this Quarterly Report on Form 10-Q. 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 section titled “Cautionary Note Regarding Forward-Looking Statements” included elsewhere in this Quarterly Report on Form 10-Q.

 

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, money markets and equities. We are a global company serving clients in 62 countries with offices in North America, Europe and Asia. 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 37 markets across 24 currencies, and in 62 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 90 actively trading on our electronic or hybrid markets with our Dealerweb platform. This platform was launched in 2008 following the acquisition of inter-dealer broker Hilliard Farber & Co., Inc. In 2011, we acquired the brokerage assets of Rafferty Capital Markets. Today, Dealerweb actively competes across a range of rates, credit, derivatives and equity markets.

 

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 of BondDesk 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.

 

37


Table of Contents

 

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. 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 in the United States and internationally, which may expose us to significant regulatory risk and cause additional legal costs to ensure compliance. 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 in the United States may be subject to future legislative changes driven by the current presidential administration. The impact of any reform efforts on us and our operations remains uncertain. In addition, as a result of the referendum in favor of the United Kingdom’s withdrawal from the European Union (“Brexit”) in June 2016, which is currently scheduled to occur on October 31, 2019, we have incurred additional costs to address the potential effects of Brexit, including costs associated with establishing a new regulated subsidiary in the 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 increased trading volumes as a result of, and the introduction of our new Approved Publication Arrangement (“APA”) service in connection with, the implementation of Markets in Financial Instruments Directive II (“MiFID II”) in January 2018.

 

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.

 

Technology and Cybersecurity Environment

 

Our business and its success are largely impacted by the introduction of increasingly complex technology, sophisticated systems, infrastructures and new business models. Offering specialized trading venues and solutions through

 

38


Table of Contents

 

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 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 technology infrastructure initiatives and continually improve 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 the U.S. dollar. During the three months ended March 31, 2019 and 2018, approximately 30.3% and 29.1%, respectively, of our gross revenue and 15.1% and 16.1%, respectively, of our operating expenses were denominated in currencies other than the U.S. dollar, almost entirely the Euro for gross revenue and the British pound sterling for operating expenses. 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 the U.S. dollar value of revenues, earnings and cash flows we receive from non-U.S. markets, increase our operating expenses (as measured in U.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 “Quantitative and Qualitative Disclosures About Market Risk— Foreign Currency and Derivative Risk” elsewhere in this Quarterly Report on Form 10-Q.

 

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 of October 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” to the unaudited consolidated financial statements of Tradeweb Markets LLC included elsewhere in this Quarterly Report on Form 10-Q 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 on October 1, 2018, and through and including March 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, employee compensation and benefits expense, general and administrative expense, technology and communications expense or professional fees.

 

Taxation and Public Company Expenses

 

Beginning with the second quarter of 2019, we will be subject to U.S. federal, state and local income taxes with respect to our allocable share of any taxable income of TWM LLC and will be taxed at prevailing corporate tax rates. Our actual effective tax rate is impacted by our ownership share of Tradeweb Markets LLC, which will increase over time as the Continuing LLC Owners exchange their LLC Interests for shares of Class A common stock or Class B common stock, as applicable. 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 make payments that we expect to be significant. We intend to cause TWM LLC to make distributions in an amount sufficient to allow us to pay our tax obligations and operating expenses, including payments under the Tax Receivable Agreement.

 

39


Table of Contents

 

Historically, Thomson Reuters and related entities provided certain services and activities to support our business, including human resources, finance, tax and accounting services, market data services, client services, technology services, sales and customer support services and real estate and facilities support. Refinitiv will continue to provide market data services and insurance and, at least in the near term, office space and related services. We do not anticipate that we will incur any material increased expenses if we transition away from Refinitiv for these services in the future.

 

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 increase as we establish more comprehensive compliance and governance functions, establish, maintain and review internal controls over financial reporting in accordance with the Sarbanes-Oxley Act and prepare and distribute periodic reports in accordance with SEC rules. Our financial statements for future periods will reflect the impact of these expenses.

 

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 three months ended March 31, 2018, 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 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 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 seven 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

 

40


Table of Contents

 

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 Class C Shares and unvested Class P1-(C) Shares. The Class P1-(A) Shares vested on July 31, 2018 upon the achievement of specific revenue earnout milestones related to the growth of specified credit products (the “Credit Initiative Earnout”). Prior to the July 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 three months ended March 31, 2018. 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 on July 31, 2018 and we therefore no longer recognize any contra-revenue adjustments from the Credit Initiative Earnout subsequent to that date.

 

Operating Expenses

 

Employee Compensation and Benefits

 

Employee compensation and benefits expense consists of wages, employee benefits, bonuses, commissions, and stock-based compensation cost. Factors that influence employee compensation and benefits expense include revenue and earnings growth, hiring new employees, trading activity which generates broker commissions and, beginning with the second quarter of 2019, the share price of our Class A common stock. As we grow our business, we expect to hire additional employees. As a result, 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

 

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 grow as a

 

41


Table of Contents

 

result of the changes in our structure and operations that we will continue to implement as a public company. 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 in the United States and the United Kingdom. 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. 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.

 

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 will consist of interest payable on the Revolving Credit Facility, if any.

 

Income Taxes

 

TWM LLC is a multiple member limited liability company taxed as a partnership and accordingly is not required to maintain an income tax provision on its earnings. Income taxes consist of unincorporated business taxes on income earned or losses incurred by conducting business in certain state and local jurisdictions. Income taxes also includes income taxes on income earned in foreign jurisdictions on certain of our operations as well as federal and state income taxes on income earned or losses incurred, both current and deferred, from subsidiaries that are taxed as corporations for U.S. tax purposes. Beginning with the second quarter of 2019, we will also be subject to U.S. federal, state and local income taxes with respect to our allocable share of any taxable income of TWM LLC and will be taxed at prevailing corporate tax rates.

 

Results of Operations

 

Three Months Ended March 31, 2019 (Successor) and Three Months Ended March 31, 2018 (Predecessor)

 

The following table sets forth a summary of our statements of income for the three months ended March 31, 2019 and 2018:

 

 

 

Successor

 

 

Predecessor

 

 

 

Three
Months
Ended
March 31,
2019

 

 

Three
Months
Ended
March 31,
2018

 

 

 

(dollars in thousands)

 

Gross revenue

 

$

186,792

 

 

$

169,503

 

Contingent consideration

 

 

 

(10,070

)

Net revenue

 

186,792

 

 

159,433

 

Total expenses

 

140,515

 

 

112,078

 

Operating income

 

46,277

 

 

47,355

 

Net interest income

 

858

 

 

471

 

Income before taxes

 

47,135

 

 

47,826

 

Income taxes

 

(4,783

)

 

(2,518

)

Net income

 

$

42,352

 

 

$

45,308

 

 

Overview

 

During the three months ended March 31, 2019, 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.

 

Gross revenue increased by $17.3 million or 10.2% to $186.8 million for the three months ended March 31, 2019 from $169.5 million for the three months ended March 31, 2018. This increase in gross revenue was mainly due to higher trading volumes resulting in a $12.5 million increase in transaction fees and a $6.3 million increase in commissions. Net

 

42


Table of Contents

 

revenue increased by $27.4 million or 17.2% to $186.8 million for the three months ended March 31, 2019 from $159.4 million for the three months ended March 31, 2018. Non-cash contingent consideration decreased by $10.1 million for the three months ended March 31, 2019 as a result of the vesting of the Credit Initiative Earnout at July 31, 2018.

 

Total expenses for the three months ended March 31, 2019 and 2018 were $140.5 million and $112.1 million, respectively. Total expenses for the three months ended March 31, 2019 were impacted by higher employee compensation and benefits expense, higher professional fees and higher general and administrative costs, specifically foreign exchange losses. Total expenses for the three months ended March 31, 2019 were also impacted by higher depreciation and amortization expense as a result of the application of pushdown accounting.

 

Income before taxes for the three months ended March 31, 2019 and 2018 was $47.1 million and $47.8 million, respectively. Net income for the three months ended March 31, 2019 and 2018 was $42.4 million and $45.3 million, respectively. Income before taxes and net income for the three months ended March 31, 2019 were negatively impacted by higher depreciation and amortization expense as a result of the application of pushdown accounting, resulting in a $16.7 million increase in depreciation and amortization expense, partially offset by higher revenues.

 

Revenues

 

Our revenues for the three months ended March 31, 2019 and 2018, and the resulting dollar and percentage changes, were as follows:

 

 

 

Successor

 

 

Predecessor

 

 

 

 

 

 

 

Three Months
Ended March 31, 2019

 

 

Three Months
Ended March 31, 2018

 

 

 

 

 

 

 

$

 

% of Gross
Revenue

 

 

$

 

% of Gross
Revenue

 

$ Change

 

% Change

 

 

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Transaction fees

 

$

102,640

 

54.9

%

 

$

90,139

 

53.2

%

$

12,501

 

13.9

%

Subscription fees(1)

 

48,061

 

25.7

%

 

48,563

 

28.7

%

(502

)

(1.0

)%

Commissions

 

34,197

 

18.3

%

 

27,883

 

16.4

%

6,314

 

22.6

%

Other

 

1,894

 

1.0

%

 

2,918

 

1.7

%

(1,024

)

(35.1

)%

Gross revenue

 

186,792

 

100.0

%

 

169,503

 

100.0

%

17,289

 

10.2

%

Contingent consideration

 

 

 

 

 

(10,070

)

 

 

10,070

 

(100

)%

Net revenue

 

$

186,792

 

 

 

 

$

159,433

 

 

 

$

27,359

 

17.2

%

Components of gross revenue growth: