Q1 2023 Tradeweb Markets Inc Earnings Call
<unk> expenses for the first quarter increased four 5% on a reported basis and six 4% on a constant currency basis.
There.
Definitely not noise, but I do think it's important to frame what moves that number.
Biggest variables are really around business mix client channel mix.
And then within a certain product or asset classes I would say the other variables to think about is really particularly over the last year duration as being a big driver and impact on fee per million as well as the protocol stack flip into an asset class. So overall, it's just important to remember what it is and isn't a function of when you think about <unk>.
Kind of separate it a little bit into long term and short term short term maybe more episodic.
But long term trends I think there are probably three things that I think about for <unk>.
<unk> one.
It's been our retail channel I talked about client mix the retail side of our equation has proven to be quite durable and obviously, it's clearly a positive impact a lot of which we've realized already but is a positive impact and fee permanently and given the rate versus some of the other averages I would say the second thing and I alluded to this was around duration.
<unk> duration over the last year has certainly been a headwind you've seen that in credit and swaps fee per million I think we're at a stage now where that stabilizing and potentially long term actually that headwind flip to a tailwind as you think about the long term trend.
Our fee per million.
And maybe then the last thing, which is probably one of the most important things as we think about what's in our control as well some of the newer growth initiatives for long term growth initiatives that we've talked about in the prepared remarks.
Things like emerging markets and you need both of those are higher fee per million businesses for us. So when you think about the long term trend if those would be sort of the big ones that I would be paying attention to.
On the short term the short term it tends to be episodic and you've seen a lot of compression activity. Obviously, most recently in the first quarter I'd say the good news is in April from a fee per million perspective, particularly if we're just talking about swaps like that long longer tenor swap.
We're seeing some of that compression activity reduced and therefore, that's a positive for fee per million. So.
I just think it's important to separate the long term in the short term episodic pieces, but generally like we're quite constructive about where we are hopefully that helps.
Great.
Thank you.
One moment please for our next question.
Yes.
Yeah.
Our next question will come from Chris Allen of Citi.
Your line is open.
Good morning, everyone really appreciate the details on what the growth opportunities you guys provided I wanted to focus on the rates business.
Some of the growth opportunities you didn't you haven't talked too maybe if you could provide an update on the penetration of specified pools and mortgage backs and any thoughts of expansion to structured products. There and then in U S. Treasuries the off the run business for you is physically traded with a trading desk what are the keys to electronic vacation there.
And what would that translate into in terms of potential margin improvement within that business.
Okay.
Yes.
Chris how are you. So let me let me a quick second I'll start with sort of a little bit of a mortgage landscape in a specified pool and then we will transition into the <unk>.
Excellent question around off the runs in margins in voice versus because I think they are.
Really interesting points and good questions.
We've had this like leading a leading role in the in the TBA mortgage market for a very long time combination of both on the institutional side.
And the wholesale side.
Specified pool market, which kind of live side by side has always been sort of cumbersome voice oriented gets done on.
Some spreadsheets and then kind of a highly negotiated we feel like this is again the right time for us to make a meaningful push into electronic buying and digitizing that marketplace.
We got some interesting what I would describe the U S validation just around our strength.
In the marketplace and the way, we're regarded with Brooke with Blackrock in the in the financial markets Advisory Group.
On the on the behalf of the FDIC picking us.
To begin liquidating the pass through market.
For for SPD and signature bank those are important kind of industry moments.
From our perspective, I mean, a lot to work on specified pools is again going to come back to this concept that we've talked about which is like behavior change. It can it comes slowly but when it comes.
It's a very very important thing and there are aspects of the specified pool market place in terms of the way it trades and net spotting and net hedging that actually feel quite comfortable to us and feel a little bit.
Similar to how we built some protocols and credit. So this is this is a product focus for us.
To your question and I think it's a really interesting one around off the runs in margins in and our approach around this here's what I would say.
My reminder, that on the institutional side in treasuries the off the run market is.
Quite electronic <unk>.
Your point, a little bit is around the wholesale marketplace and I would say pretty sticky.
Voice brokerage usage there.
How I would how I would describe it to you I think in kind of an interesting way is.
As we've kind of moved forward around all of these businesses from our perspective, I think we've taken a pretty pragmatic approach in terms of how we built these marketplaces and we've been able to say.
Voice activity can be meaningful for a while and we are willing to get into this business understanding that there is this.
This voice activity that exists that our preferred choice and I'm going to say that like pretty clearly, we don't get into voice businesses to stay in voice businesses forever and ever we have an excellent team that manages our our wholesale business two gentlemen, who are excellent excellent.
And they are leading an approach where we are working on a migration from voice to ease and we've been able to launch businesses around are pretty well known suite protocol in off the runs that has been highly successful and the continued migration of off the runs from traditional.
<unk> brokerage into electronics.
It is important to us.
And the reason why it's important to US is because we know that's where it's headed and we're going to play the leadership role around where it is headed and the margins attached to it or better and work more for US which is ongoing conversation and Sarah is very happy to reminding you of that from time to time. So it's a pretty big area of focus is actually quite an astute question and.
Thanks for asking it.
Thank you.
One moment please for our next question.
Our next question will come from Daniel Fannon of Jefferies. LLC. Your line is open.
Thanks, Good morning.
Just a question on your broader M&A strategy, knowing you can't give specifics on the yield broker economics.
As you do more.
M&A it might be helpful. Just to kind of walk through the framework you guys use both strategically and financially in terms of hurdles as you think to kind of get to.
Complete those transactions.
Yes. Good question so look.
I'd say, a little bit kind of mentioned on the first question that rich asked.
We feel really good about the <unk>.
Environment that we are headed into I used the expression new equilibrium, but this concept of the higher rates deeper curve environment with more clarity around the end of rate hikes, we think that sets up really well.
For our organic businesses and that feels good to us.
That being said as we were talking about yield broke broker we mentioned the concept of more bets on the table and we are going to be putting more bets on the table going forward because we feel like this is a good opportunity to be a little bit more aggressive around M&A.
I come back to something that we've said in the past I think it's important when we think about it M&A, obviously and yield youll broker obviously fits.
Exceptionally well into this like the concept of a call.
Cultural fit matters.
Adding on a network that we have we would have a more difficult time getting into on our own matters and acquiring a piece of technology that would take a longer period of time were more expensive for us to build matters. So thats, how we kind of think about it. The other thing I would say I'm going to kind of kick this to <unk>.
There are a little bit on the on the financial framework.
Great time for us to continue to.
To expand our footprint in the macro space great Theres, so much going on in the macro world that if we can create an edge for ourselves around the leading positions that we have in global government bonds interest rates swaps mortgage backed security, we're going to lean that way. We think this is a.
That plays really well to a strong macro backdrop that we want to be strong.
I think that really well set on that on the financial framework just to kind of complement on the strategic side.
Just as a reminder to put M&A in the context, we are focused on the waterfall of how we allocate capital organic growth is always at the top and we still have a lot of organic growth initiatives.
On the financial framework I think we want to be really disciplined we have the great fortune of having a business that produces a great deal of free cash flow and quite a nice sized cash balance, but that doesn't mean, we don't want to be disciplined and so whether we're talking about yield broker or other M&A opportunities. We have a framework, where we're looking at a number of variables, but clearly.
We're focused on return on invested capital in excess of our cost of capital I think we'll kind of have a benchmark of being in excess of 10% over the medium term and we're looking for acquisitions that ultimately are going to be accretive and that complement our strategy strategic culture. All the things that Billy talked about obviously, we live but we want to evaluate.
Consistent with <unk> and the good news is if anything if you take a longer look the market environment is such that I think the targets in the acquisition ideas are becoming more and more attractive. So hopefully that gives you a sense of how we look at both sides of the equation.
Okay.
Thank you.
The next question will come from Alex Kramm of UBS.
Your line is open.
Hello, everyone.
Just maybe a little bit big picture, but obviously.
I'm asking about it because Billy you made this comment I think right at the beginning of your prepared remarks, how you saw in March obviously, some volume going back to the phone and use the word reluctantly. So I'd just love to flesh it out a little bit more first of all where did you see most of that and obviously that can happen, but then.
This is what just happened in just how we can solve it so I guess I would.
Looking for something more specific about what.
Come out of this if it was unique or maybe I'm just off of playing it.
No no youre not youre actually thinking about it really well, we got Alex we get asked a lot of questions.
The competitive landscape and we as you know really well we answer those questions like Super bluntly, you're always going to kind of hear what we think you know.
Some of that happened in the middle of March I would say, if I were going to define it for you or describe it for you really well I would say mostly happened in the credit markets, particularly in the high yield market.
If you ask yourself the question of like how in 2023 is there still this little step backwards that occurs it happens in extremely stressed market environments around trades that have <unk>.
Is there a feeling that there shouldn't be a negotiation or an actual real negotiation involved in the trade right and so one of the things that we remain extremely focused on is how do we at the end of the day capture trades that get negotiated.
Or at least at a minimum have an expectation that there is a negotiation and so we will do exactly what you would expect us to do which is roll up our sleeves spend time with clients understand why behavior occurred and then solve for that.
<unk> gotten to this point and been able to build all of these businesses and we're going to continue with that approach and we learned some things.
In that period of time.
And some takeaways and we're going to get better as we keep building these protocols because thats.
And it's a good question.
Thank you.
One moment for our next question.
Our next question will come from Mike Cyprus of Morgan Stanley . Your line is open.
Hey, good morning, Thanks for taking the question.
Wanted to circle back to some of Tom's commentary just on the Muni business clearly early days for the asset class, but just the 12% to 15% electronic vacation as you cited I guess, just how do you think about accelerating that penetration from here, where do you see that marketplace expanding to over time and if you could speak more broadly to your overall strategy.
<unk>.
Hi, Mike Good morning.
Yes.
You highlight I did mentioned this market is about only 10% to 15% electronic side. So we're very early in that and that electronic vocation journey and quite optimistic about the growth ahead. This market.
As you know has been historically, a retail market a retail business, but.
We've seen increasing interest from institutional investors and we have expanded our offering.
Additionally, while we while we focused exclusively on tax exempt munis historically, we've now just launched.
Taxable munis as well now taxable munis trade on spread as those credits so we think that.
We'll be able to leverage our extremely effective protocols in that business specifically.
Net net spotting, which is a significant advantage for us in addition to things like portfolio trading and so we're quite confident that we'll be able to.
To develop this market electronically.
And we think munis generally will benefit from the principle of electronic trading given that it's a very fragmented market. It's a large number of issuers and theres about $1 million.
Muni bonds out there across both tax exempt to taxable.
The final.
The final point I'll make on this is that we've recently expanded our AI price offering into munis, so that will help assist clients.
This large and dispersed universe of issues out there. So overall, we're quite bullish on continued strong growth in the asset class.
We're executing on our plan to get there.
Thank you.
And one moment our next question.
The next question will come from Ken Worthington of Jpmorgan. Your line is open.
Hi, Thanks for taking my questions and squeezing me in.
Fixed income Etfs.
You need to grow we're seeing firms like Jane and flow actively driving the electronic intersection of credit via principal trading all goes in ETF market, making so maybe first.
And if so how is this evolution flowing through the benefit trade with given your capabilities in recycling risk and then I know this is totally pie in the sky, but you've built a great business on block Etfs are there more strategic things that you can do in fixed income etfs to better complement the liquidity.
We're on your platform like I think we're seeing with these market makers.
Hey, Ken good morning.
Yes look the HD ETF business is a fantastic business, it's been growing rapidly since they were introduced.
Widely expected that that strong growth will continue.
Fixed income Etfs in particular have been growing rapidly in recent years that industry is now.
$1 seven trillion.
Yes.
The recent Blackrock study points to that growing into a $5 trillion dollars market by 2030, and we're going to be we plan to be a big part of that is we already are.
It's been a success story for us.
Our own ETF revenues have grown about 20% annually over the last four years.
And yes, as you pointed out that the block trading protocol and the innovation. We've done there have been a big success clients can move large sizes, but to your question on synergies.
Market makers can also hedge their risk by trading the underlying securities on our platform either.
And either rates or credit. So so there's definitely synergies there that we're seeing.
So.
In summary, I think we're well positioned to benefit from growth here, we have a lot of focus on it there are secular growth and we're continually pushing and innovating with both traditional and non traditional dealers, including the names as you highlighted and we think for us.
This business will cross the $100 million revenue Mark.
For us in the coming quarters and continue to grow from there.
Okay.
Thank you.
And one moment please for our next question.
Yes.
Our next question will come from Craig Siegenthaler of Bank of America. Your line is open.
Good morning, everyone.
We wanted to get an update on the FX all collaboration which I think is gonna be going live in a few months.
And so how do you think about the addressable market for Mark emerging market bond hedging and also the potential pace of finance.
Hi, yes, thanks, I can take that one as well so yes I mean.
Yes.
That project is underway initially where.
Beginning with the emergent emerging market bonds again, it allows clients to execute emerging market bonds and do the FX hedge sort of one stop shopping approach.
We do think that there's opportunity to expand not only within emerging markets as we grow our emerging markets credit business, but also into the developed market space. So we are.
Focus on doing all of that and we will have further updates in the quarters ahead for you.
Thank you.
I see no further questions in the queue I would now like to turn the conference back to Billy Hult for closing remarks.
Thank you all very much for joining us. This morning, if you have any follow up questions. Please feel free to reach out to Ashley Samir and the team and everyone have a great day. Thank you very much.
This concludes today's conference call. Thank you all for participating you may now disconnect and have a pleasant day.
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