Release Date: July 25, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Tradeweb Markets Inc (TW, Financial) achieved its best second quarter in history with a 30.4% year-over-year revenue growth.
- The company saw strong client activity and share gains, particularly in rates and credit, which accounted for 61% and 29% of revenue growth, respectively.
- Adjusted EBITDA margins expanded by 98 basis points relative to the second quarter of 2023.
- The acquisition of Yieldbroker and r8fin, along with the upcoming acquisition of ICD, is expected to add corporates as a fourth client channel.
- Tradeweb Markets Inc (TW) continues to innovate with new products and protocols, such as RFQ Edge and portfolio trading, which are gaining traction among clients.
Negative Points
- Despite strong overall performance, equities posted low single-digit revenue growth due to challenging industry volumes in the core ETF business.
- Average fees per million for cash credit decreased by 12% due to a mix shift away from munis and sessions trading.
- Adjusted expenses for the second quarter increased by 25.8% on a reported basis, driven by higher performance-related compensation, headcount, and severance costs.
- The integration of ICD is expected to temporarily push its adjusted EBITDA margin down to 47% to 49% due to initial investments in technology and marketing.
- The CLOB treasury business, acquired from Nasdaq, has not performed as well as expected and requires further investment and strategic focus.
Q & A Highlights
Q: How important is Tradeweb's wide asset class offering to your sales pitch and ability to penetrate traders on the buy side? And how has multi-asset trading evolved over time?
A: (William Hult, CEO) Technology is making markets more connected, and Tradeweb is well-positioned as a one-stop platform. Historically, being in government bonds helped us enter other markets like TBA mortgages and European swaps. Today, 16% of global AUM is in multi-asset funds, up from 10% in 2018. Around 60% of our clients trade at least two products, and 30% of our traders trade three products. This interconnectedness is a significant advantage for us.
Q: Can you discuss the medium to long-term outlook for portfolio trading and how new market makers are engaging with the protocol?
A: (William Hult, CEO) Portfolio trading now represents nearly 10% of TRACE volume, up from 5% a year ago. We believe it could reach 20-25% of total TRACE volume. Initially used for rebalancing, it's now also used for tactical trades by hedge funds and asset liability management by insurance firms. Alternative market makers like Citadel and Virtu are entering the space, enhancing liquidity and technology.
Q: What has been the client response to the rollout of RFQ Edge? Is it helping with larger block trades?
A: (William Hult, CEO) The initial feedback has been positive. RFQ Edge adds real-time analytics and charting to the RFQ ticket, enhancing the client experience. Some clients use it like a portfolio trade, sending larger-sized trades to fewer dealers to minimize information leakage.
Q: What are the key growth drivers for the third-party market data business, and how do you plan to expand it?
A: (Sara Furber, CFO) Market data revenue was $29 million in Q2, with $20 million from LSEG and $9 million from third-party data. The biggest growth driver is pricing products, which constitute 60% of third-party data revenue. New products like iNAV and AI pricing are gaining traction. We see limitless potential in creating benchmarks and reference data for various asset classes.
Q: What drove the strength in the interest rate swap business in Q2, and what is the revenue growth outlook?
A: (William Hult, CEO) The strength was driven by geopolitical uncertainty and varying inflation prints. Our swaps business complements our global government bond and mortgage franchises. We've gained market share by adding new customers, building new products like EM swaps, and introducing micro trading protocols like request for market (RFM). We see continued growth potential in EM swaps, inflation swaps, and swaptions.
Q: What are your thoughts on FMX's launch and its impact on your CLOB treasury business?
A: (William Hult, CEO) We respect FMX's efforts but feel confident in our treasury business's strength. Our wholesale business continues to do well, and the r8fin acquisition has been beneficial. We are focused on improving our CLOB and streaming protocols and staying close to our clients.
Q: How do you see the election season and increased bond issuance impacting Tradeweb's business?
A: (William Hult, CEO) Geopolitical uncertainty and varying inflation prints have driven record revenue days. We believe the Fed will cut rates regardless of the election outcome, benefiting our business. We expect continued strong levels of debt issuance, leading to increased activity in markets like high yield.
Q: What are your current strengths in the high-yield market, and how does the Aladdin partnership help?
A: (William Hult, CEO) Our strengths are with long-only asset managers and ETF market makers. We aim to deepen relationships with ETF market makers and onboard the right responders through the Aladdin integration. This will enhance liquidity and support portfolio trading growth in high yield.
Q: With ICD likely to close soon, what is your appetite for incremental M&A, and what is the integration timeline for ICD?
A: (Sara Furber, CFO) We remain disciplined about M&A, focusing on executing and integrating recent acquisitions. ICD's margin is expected to be 47-49% initially due to increased investment. We plan to introduce ICD to our international client base and integrate it with our platform, starting with US Treasuries.
Q: What are your aspirations for investments in emerging technologies like blockchain?
A: (Sara Furber, CFO) We see blockchain as a way to eliminate manual reconciliations and reduce transaction costs. Investments in Canton Network and Alphaledger give us a seat at the table to explore these technologies. We see potential in applying blockchain to markets like repo and TBA for greater efficiency.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
