TRADEWEB-MARKETS Earningcall Transcript Of Q2 of 2024
Billy Hult -- Chief Executive Officer Thanks, Ashley. Good morning, everyone and thank you for joining our second quarter earnings call. This was another outstanding quarter as Central Bank step back private sector intermediation continues to be in vogue. From evolving inflation print to snap elections across Europe and the U.K., the macro debate continues to flourish globally and our one-stop solution is resonating with our clients. At our core, we are a technology company that caters to the financial service industry. We have a simple job how can we continue to save our clients, time and money and provide them with more efficient means of trading in the financial markets. Change is constant and we are focused on being on the forefront of that change via technological, market structure or behavioral. As the markets and our clients evolve, we continue to position Tradeweb for the future. After closing our acquisitions of Yieldbroker and r8fin, we are pleased to have announced the signing of an agreement to acquire ICD in April. We are on track to close ICD shortly, which will add corporates as our fourth client channel. Diving into the second quarter, we achieved our best second quarter in our history. Specifically strong client activity, share gains and risk on environment drove 30.4% year-over-year revenue growth on a reported basis. We continue to balance investing for growth and profitability as adjusted EBITDA margins expanded by 98 basis points relative to the second quarter of 2023. Turning to slide 5. Rates and credit led the way, accounting for 61% and 29% of our revenue growth, respectively. Specifically the rates business was driven by continued organic growth across global government bonds, swaps and mortgages and was also supplemented by the addition of r8fin and Yieldbroker. Credit was led by strong U.S. and European corporate credit with record quarterly market share in electronic U.S. investment grade and aided by strong growth across municipal bonds, China bonds and credit derivatives. Money markets was led by continued growth in institutional repos, equities posted low single-digit revenue growth despite challenging industry volumes in our core ETF business. Finally, market data revenues were driven by growth in our LSEG market data contract and proprietary data products. Turning to slide 6. I will provide a brief update on two of our focus areas; U.S. treasuries and ETFs and then I will dig deeper into U.S. credit and global interest rate swaps. Starting with U.S. treasuries. Record second quarter revenues increased by 28% year over year led by records across all our client channels. Our institutional business saw record adoption of our streaming protocol and growing usage of our RFQs offering. The leading indicators of the institutional business remains strong. We gained share and achieved record quarterly market share of U.S. treasuries versus Bloomberg crossing the 50% threshold for the first time, which we have maintained. Client engagement was healthy with institutional average daily trades up 45% year over year. Automation continues to be an important theme with institutional U.S. Treasury AIX average daily trades increasing by nearly 100% year over year. Our wholesale business produced record volumes led by our streaming offering. Our other protocols also saw strong growth, particularly our CLOB which has begun to trend higher. Our recent acquisition of r8fin is off to a strong start, contributing approximately 2.3% to our overall U.S. Treasury market share, complementing our CLOB and streaming protocols. The team remains focused on onboarding more CLOB liquidity providers over the coming quarters, as they deliver on a holistic strategy across our wholesale protocols. Within equities, our ETF revenues grew mid-single digits, but faced a tough industry backdrop given lower equity market volatility. Other initiatives to expand our equity brand beyond our flagship ETF franchise continue to bear fruit with second quarter convertible bond revenues increasing by 10% year over year. Looking ahead, the client pipeline remains strong as the benefits of our electronic solutions continue to resonate. We believe, we are well-positioned to capitalize on the long-term secular ETF growth story, not just in equities, but across our fixed income business. Turning to slide 7 for a closer look at another strong quarter for credit. Strong double-digit revenue growth was driven by 33% and 29% year-over-year revenue growth across U.S. and European Credit, respectively. We also achieved strong double-digit growth across munis, China Bonds, and credit derivatives. Automation continued to surge with global credit AiEX average daily trades increasing by about 45% year over year. We set another fully electronic quarterly market share record in U.S. IG helped by record IG block market share of 9%. We also achieved our second highest fully electronic market share in U.S. high yield. Our institutional business continues to scale as clients adopt our diverse set of protocols to improve liquidity, price transparency, and efficiency. Our primary focus on growing institutional RFQ continues to pay off with average daily volumes growing 30% year over year, with strong double-digit growth across both IG and high yield. Moreover, portfolio trading average daily volume rose 100% year over year with IG portfolio trading reaching record levels. We continue to focus on leading with innovation, and this is resonating with our clients. We saw portfolio trading users grow by over 20% year over year, a record number of line items traded in the quarter, and our largest ever portfolio trade in excess of $3 billion. Retail credit revenues were up over 20% year over year as financial advisors continue to allocate investments toward credit to complement their buying of U.S. Treasuries and retail certificate of deposits. AllTrade produced a solid quarter with nearly $190 billion in volume, up over 45% year over year. Specifically, our all-to-all volumes grew over 20% year over year and our dealer-RFQ offering grew over 10% year over year. The team continues to be focused on broadening out our network and increasing the number of responders on the AllTrade platform. In the second quarter, the average number of responses per all- to-all A2A inquiry rose by 35% year over year. We also continue to increase our engagement and wallet share with ETF market makers. Finally, our sessions average daily volume grew over 60% year over year and produced the second highest quarterly average daily volume ever. Looking ahead, U.S. credit remains our biggest focus area and we like the way we are positioned across our three client channels. We believe we have a long runway for growth with ample opportunity to innovate alongside our clients. Our strategy is focused on expanding our network, increasing our wallet share, enhancing our pre and post-trade analytics and continuously improving our protocols and client experience. In the second quarter, we enhanced our RFQ offering with our rollout of RFQ Edge, where we're already seeing over 25% of our RFQ users utilizing RFQ Edge. RFQ Edge takes the traditional RFQ list ticket and incorporates real-time trading data, charting functionality, and execution cost analysis. We also remain very focused on chipping away at high yield, and we believe we are well positioned to replicate the success we've had in IG. Specifically, we're making progress in our Aladdin integration with the goal of improving the client experience and increasing electronification in these markets. We're still on Phase 2, which is focused on all trade and RFQ, but our teams are already out on the road meeting with respective clients and walking them through all the enhancements made to date. With our Aladdin integration closing a gap and providing a foundation for growth, we expect high yield growth from here to be driven by the expansion of our client network led by strategic sales hires, functionality enhancements and stronger penetration with ETF market makers. Beyond U.S. credit, our EM expansion efforts continue with growing adoption of our portfolio trading and RFQ offerings and early positive signs across wholesale EM. On the product side, we are focused on leveraging our diverse product expertise, enhancing our integration with FXR and continuing to build out functionality for multi-asset package trading. Moving to Slide 8. Global swaps produced record revenues driven by a combination of strong client engagement in response to the macro environment and continued market share gains. Strength here was partially offset by a 3% reduction in duration and elevated quarterly compression activity. All in global swaps revenues grew 56% year over year and market share rose to 23.6% with record share across dollar G-11 and EM-denominated currencies. Central to our ethos is our focus on helping clients by connecting the dots across fixed income products. Given the heightened market volatility across money markets, our repo clients have been increasingly referencing swap curves, when evaluating fixed-rate repo trades. Yet their process was cumbersome, and our clients asked for a better solution. During the quarter, we became the first electronic trading platform to make overnight index swap curves available during the repo trade negotiation process, helping institutional clients assess the price competitiveness of different repo rates across different currencies and maturities. Finally, we continue to make progress across emerging markets swaps and our rapidly growing RFM protocol. Our second quarter EM swaps revenues more than doubled year over year, and we believe there is still significant room to grow given the low levels of electronification. Our RFM protocol saw average daily volume rise over 115% year over year with adoption picking up. Looking ahead, we believe the long-term swaps revenue growth potential is meaningful. With the market still about 30% electronified, we believe there remains a lot we can do to help digitize our clients' manual workflows, while the global fixed income markets and broader swaps market grow. And with that, let me turn it over to Sara to discuss our financials in more detail. Sara Furber -- Chief Financial Officer Thanks, Billy, and good morning. As I go through the numbers, all comparisons will be to the prior-year period, unless otherwise noted. Slide 9 provides a summary of our quarterly earnings performance. As Billy recapped earlier, this quarter we saw record second quarter revenues of $405 million that were up 30.4% year over year on a reported basis and 30.8% on a constant-currency basis. We derived approximately 38% of our second quarter revenues from international clients, and recall that approximately 30% of our revenue base is denominated in currencies other than dollars, predominantly in euros. Our variable revenues increased by 40% and total trading revenues increased by 31%. Total fixed revenues related to our four major asset classes were up 4.2% on a reported and 4.5% on a constant-currency basis. Fixed revenue growth was primarily driven by previously disclosed dealer fee increases in credit that were instituted at the start of the third quarter of 2023. And other trading revenues were up 9%. As a reminder, this line fluctuates as it reflects revenues tied to periodic technology enhancements performed for our retail clients. Year-to-date adjusted EBITDA margin of 53.6% increased by 117 bps on a reported basis when compared to the 2023 full year margins. Moving on to fees per million on Slide 10 and a highlight of the key trends for the quarter. You can see slide 16 of the earnings presentation for additional detail regarding our fee per million performance this quarter. For cash rates products, fees per million were up 4%, primarily due to an increase in European and Australian government bond fees per million. For long-tenor swaps, fees per million were down 2% primarily due to a slight increase in compression as well as a 3% decline in duration. For cash credit average fees per million decreased 12% due to a mix shift away from munis and sessions traded. For cash equities, average fees per million were flat due to lower U.S. ETF fees per million given an increase in notional per share traded. Recall in the U.S., we charge per share and not for notional value traded. This was offset by a mix shift toward higher fee per million EU ETFs. And finally within money markets, average fees per million decreased 8% driven by a mix shift away from higher fee per million U.S. CDs and toward our growing institutional repo business. Slide 11 details our adjusted expenses. At a high-level, the scalability and variable nature of our expense base allows us to continue to invest for growth and grow margins. We have maintained a consistent philosophy here. Adjusted expenses for the second quarter increased 25.8% on a reported basis and 27% on a constant-currency basis. Adjusted compensation cost increased 32.2% due to increases primarily in performance-related compensation headcount and severance. Excluding $2.9 million related to severance compensation costs increased 29.4%. Technology and communication costs increased 29.6% primarily due to our previously communicated investments in data strategy and infrastructure. Adjusted professional fees increased 6% mainly due to an increase in consulting costs. We expect professional fees to continue to grow overtime, as we spend more on technology consulting to support our organic growth. General and administrative costs increased due to a pickup in travel and entertainment which on a reported basis was partially offset by FX gains year on year. Favorable movements in FX resulted in a $1.7 million gain in the second quarter of 2024 versus a $150,000 loss in the second quarter of 2023. Slide 12 details capital management and our guidance. On our cash position and capital return policy. We ended second quarter in a strong position with a $1.72 billion in cash and cash equivalents and free cash flow reached approximately $722 million for the trailing 12 months. Recall, we intend to pay $785 million in cash consideration for ICD once it closes. Our net interest income of $21 million increased due to a combination of higher cash balances and interest yields. This was primarily driven by the higher interest rate environment and more efficient management of our cash. With this quarter's earnings the board declared a quarterly dividend of $0.10 per Class A and Class B shares. Turning to updated guidance for 2024, in light of strong business momentum and the anticipated closing of ICD shortly, we are increasing our adjusted expense guidance from $805 million. We now expect to be in the $830 million to $860 million range for 2024. Including the anticipated closing of ICD, we are currently trending toward the midpoint of this range which would represent an approximate 22% increase versus our 2023 adjusted expenses. Focusing on organic growth the midpoint of this range would represent an approximately 16% increase. Bridging the gap from $805 million to the midpoint of our new range, 63% of this increase is coming from the inclusion of ICD with 30% and 7% coming from better business momentum and the recently announced management changes respectively. Provided that ICD closes shortly, revenue from ICD is expected to be approximately $40 million over the next five months. Recall, we plan to invest in technology and marketing during the first 12 months post closing which we expect may temporarily push ICD's adjusted EBITDA margin down to 47% to 49%. All in, primarily factoring in the better business momentum we now expect our 2024 adjusted EBITDA margin expansion to slightly exceed 2023 levels. At the same time we expect to capitalize on the anticipated healthy revenue environment by accelerating investments to support our current and future organic growth. This includes infrastructure-related investments such as further enhancements to our global credit tech stack, expanding our integration capabilities to allow for cloud-based Python integration and retail platform enhancements to support the growth in trading activity we've seen in recent years. We are also selectively making small investments in emerging digital technologies such as blockchain and digital assets in order to leverage and benefit from their technical expertise without having to make significant investment to experiment in-house. We now expect our capex and capitalized software development to be about $77 million to $85 million for 2024. Acquisition and Refinitiv transaction-related D&A, which we adjust out due to the increase associated with pushdown accounting, is now expected to be $158 million. We continue to expect 2024 and 2025 revenues generated under the new master data agreement with LSEG to be approximately $80 million and $90 million respectively. Now, I'll turn it back to Billy for concluding remarks. Billy Hult -- Chief Executive Officer Thanks Sara. Tradeweb thrives unchanged and we look forward to solving complex problems. Change can happen very fast or very slowly but we want to be that trusted partner that our clients look toward to drive innovation in the market. It's a great time to be in the risk intermediation business. I feel good about our future growth outlook. With a couple of important month-end trading days left in July which tend to be our strongest revenue days average daily revenue growth is trending at a high teens growth rate relative to July 2023. The diversity of our growth remains a theme. We are seeing strong volume growth across global government bonds mortgages interest rate swaps corporate credit and repos. Our IG and high-yield share are trending above 18% and 7% respectively in July. I would also like to welcome Amy Clack to the team who will be joining Tradeweb in August as chief administrative officer and as a member of the executive committee. Amy brings more than 25 years of experience and will oversee operations business integration risk and corporate services. Finally, I would like to conclude my remarks by thanking our clients for their business and partnership in the quarter and I want to thank my colleagues for their efforts that contributed to the best second quarter revenues and volumes at Tradeweb. With that, I will turn it back to Ashley for your questions. Ashley Serrao -- Head of Treasury, FP&A, and Investor Relations Thanks, Billy. As a reminder please limit yourself to one question only. Feel free to hop back in the queue and ask additional questions at the end. Q&A will end at 10:30 a.m. Eastern Time. Operator, we can now take our first question. 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