Tradeweb Markets Inc. (TW) Earnings Call Transcript & Summary

Good morning, everybody. Thank you for joining us. I'm Patrick O'Shaughnessy, Capital Markets technology analyst at Raymond James. And up next, we have Tradeweb. And on their behalf, we have CEO, Billy Hult. Billy, welcome.

Thank you very much.

Maybe you can kick this off by providing a 1- or 2-minute overview of the company for people in the room who are a little bit less familiar with Tradeweb.

Thanks for having me. Great to see you. So the big headline around what Tradeweb does is we are this kind of big global operator in the financial markets, mostly fixed income and derrivatives. We've been building out asset classes over the last 20 years, starting with government bonds, getting into TBA mortgages, European governments. We made huge push in the mid-2000s to get into the global derivative markets, the dollar swap market and the European swap market. And then the big lift that we've done over the last 4 or 5 years has really been a strong push for the company into credit, which is a marketplace that we identified that needed competition. And so we've been electronifying, we've been creating transparency and efficiencies in these markets that have been operated by big personalities, bond traders have very strong personalities, their own opinions on things for all these years. We've kind of come up against sort of historic resistance around creating transparency. And it's been an incredible and kind of fun ride for us as we kind of land here today. We've had, I think the stat is Sameer reminds me of this all the time 23 straight years of record volume growth. It's been incredible to sort of operate in marketplaces with high-level professionals all the way through. So at the end of the day, the business model is really how do you connect BlackRock, PIMCO, Goldman Sachs Asset Management, the largest, most important buy-side clients with their largest liquidity providers, which is Goldman Sachs, JPMorgan, Morgan Stanley and Citigroup. So it's been a fun ride, super excited about the future for the company. All of this room to still go around further electronification and efficiencies in these marketplaces, and we're having a great time doing that.

What do you think Tradeweb does better than any other company that led to that growth streak that you spoke to?

It's a good question. I think at the end of the day, what we do really well, and I'll say this with some pride, we collaborate with the marketplace really well. So I was mentioning firms like Goldman Sachs Asset Management, PIMCO and BlackRock. These are powerful organizations, complex organizations. They have incredibly important and special relationships with the banks. And at the end of the day, I wouldn't say like the secret sauce of the company, but one of the more important things that we've been able to do is to understand the real trading relationships that exist in the ecosystem between these kinds of firms and be able to sit down with both sides of the aisle, so to speak, and really collaborate around innovations and kind of figure out the right way to strike a balance and move these markets forward. I think we do that the best. I know we do it really, really well. And from my perspective, I think it's been a key ingredient to our success. So really kind of living and breathing in these complex marketplaces, understanding how technology should be applied. And at the end of the day, understanding that you're dealing around complex markets and trading relationships, I think, is an important thing to keep in mind.

And how do your client relationships and kind of helping them solve their problems? Can you maybe walk us through how that took Tradeweb do its journey from rates, into credit, into equities, into everything that you do.

Yes. It's been kind of phone and interesting kind of all the way through, right? Like so from the very beginning, I would say, in a funny way, if Tradeweb was like a golf tournament, early on, we would have been sponsored by Goldman Sachs, JPMorgan and BlackRock. We had these giant advocates and proponents of what we were doing kind of early on. And so from our perspective, it was really about kind of building out this important foothold in the rates market. That was our sort of go-to business early on. We figured obviously, that the government bond market was going to be this giant liquid and important marketplace that touched other markets. So we want it to be there first. And then it was all really about how do we use these relationships, how do we use the connectivity that we have with all of these clients to continue to build out marketplaces. So early on, we made a decision not that we were going to -- that we weren't going to settle to be into 1 marketplace or 2 marketplaces or 3 marketplaces. We wanted to expand and expand quickly. And so that was from my perspective, government bonds, European government bonds, mortgages, kind of all connected. And then quickly, it was this big interesting move that we made to get into swaps. Again, global swaps all connected under this big giant rate umbrella. And then from there, it was really like where do we go? And then I was super focused on getting us again, oriented towards credit. At the same time, I think as everyone in this room knows really well, there was all of this, I think, creativity and energy being put into the ETF market. So we were also at the same time looking to get into ETFs. So it was a constant and sort of relentless march around expanding the businesses that we are in and using the partnership that we have with all these big clients to do it.

And how would you say you're competing both against the phone as well as other electronic platforms?

Yes. So people ask the question and it's a good question. I got it last night, which was like what is Tradeweb's biggest competition. And I answered that question just unbelievably genuinely around the concept that it's the phone, right? Significant amounts of business as well as the company has done and as interesting as other companies in our space like MarketAxess are. The real competition is still the phone. It's the old way of doing business. And so I asked the question which is why does phone business in fixed income and derivatives and ETFs still get done in 2023 like it's kind of 1993. And the answer to that is kind of interesting, slightly complex. Again, understand we're dealing at the end of the day with like people and personalities and habits and all of those things, the majority of the reason why phone trades in today's day and age, like still occur, is really what I would describe as large market moving big size, big risk trades still get -- tend to get done on the phone. And then anything kind of complex, anything where there is either negotiation or an anticipation that there will be negotiation, still gets done on the phone. So we're constantly kind of focused on getting after that chunk of business. There are what I would describe as micro protocols that we still build to get after those kind of trades. I think one of the big shifts that has taken place over the past few years for sure, and I would kind of highlight to this room kind of underlined is particularly around COVID and then into the work from home moment, a big shift around usage into what I would describe to you, Patrick, as the -- as a little bit more of the algorithmic trading style. So we call it AIX at Tradeweb. And so when I describe that to the room, what I'm saying a little bit is my company's first sort of battle was all around how do I get that client, that one user who lives at Fidelity or Putnam off of the phone. And what I would say to you guys is like onto the mouse. How do I get him to stop picking up the phone, not sure where the market is calling a salesperson who's relating to a trader who is giving back the market, maybe does the trade, maybe doesn't the trade -- doesn't do the trade, but there's a lot of inefficiency and cumbersomeness around what I just described on to using Tradeweb, which is here the marketplaces with 1 click of the button, I can put 4 dealers in comp, have an electronic record of that trade and move on with my life. It's much more efficient and much more easy. The next phase of this whole thing is really around -- is really less of the mouse of it all and clicking a button and logging into Tradeweb. It's way more about accessing what I would describe to the room as algorithms smart searches. So the client base has a much more sophisticated lens around how they access and aggregate liquidity in the marketplace. So that's a big driver of volume for us going forward. I mentioned these large trades that still tend to get done on the phone. And we can talk about or understand why that is. One of the things that AIX trading does is breaks down larger trades, that $250 million block then gets broken down into more bite-size digestible trades and then get sent into the systems and finds liquidity in a more efficient way. So that's from my perspective, an absolute kind of one-way runaway train kind of trend, the marketplace, generally speaking, and part of this is obviously a little bit of the COVID, work from home effective at all, and I'm glad to -- like everyone's back and it feels so good. The lesson learned around all of that for sure was if you underserved technology, if you under source technology at that moment in time, you were really kind of behind the curve. And I think the ecosystem in my space has learned that lesson in a very strong way. So the level of sophistication has risen like dramatically. And that's -- I think that's a cool and interesting and good thing.

So you mentioned earlier, you think Tradeweb has done a good job trying to balance the needs of the dealer community versus the buy-side community. As you focus on moving larger risk trades on your platform, that's kind of the dealer's bread and butter right now. How do you manage that balance?

You have to, at the end of the day, understand that you're dealing with the biggest, most important banks in the marketplace and their most important clients. So I like to think about PIMCO and WAMCO and GSAM as my client and they are my client and they're important clients of mine, but you bet your life, they're an enormously important client of JP Morgans or Citigroups. So you sort of approach problem-solving with that, I think, important lens. And then at the end of the day, you wind up building out what I would describe to you as these interesting micro protocols that address these types of trades in a way that works for the ecosystem. So what I described to everyone here before was the concept of how Tradeweb worked, which is buy-side client goes on Tradeweb, picks 4 dealers and says, "I want to buy 10 million 5-year notes. And then within milliseconds, those 4 dealers respond back with levels where they are willing to sell. Lots of good stuff comes out of that protocol, imperfect for doing large market moving real risk trading type of trades. We launched something in the marketplace recently, which I know you and I have spoken about, we call it request for market. That's basically a protocol that allows a client to go to 1 dealer, specifically ask that dealer for a 2-sided market. If the marketplace is within a certain bid ask, there's an expectation that, that client will trade on one side of the market, it tends to be a style of trading that large important clients deal in the marketplace and the ability to replicate that behavior electronically is really important. That's an example of something that we do and how we think about it. And this kind of constant -- I think the theme that I'm trying to get across a little bit is the innovation around these marketplaces don't stop when the market begins to move electronically. In a lot of instances, actually, the innovation kind of truthfully starts once the market moves electronically. The credit market, the government bond markets, these 2 enormous marketplaces that are very different are almost like a perfect example of markets that have continued innovation in 2023 and look a lot different than they did 5 years ago.

That's an interesting point about the innovation and it's only really beginning. As you think about your product set, it's pretty broad. Do you think that a lot of -- or the majority of Tradeweb's growth going forward is going to come from innovations with your existing product set? Or do you think there's still a lot of new stuff for you to introduce?

Yes, it's a good question. It's like a little bit hard to know that answer kind of like perfectly, perfectly. My instinct is there are absolute opportunities for the company where we have a small presence today. And we will have a growing and much larger presence in going forward. From my perspective, the perfect example of that would be emerging markets, where we've had a significantly successful foray into that area in that region, playing to our strengths around interest rate swaps. But the credit component of the EM market is huge. There's little competition in that market. We think that the marketplace wants competition there. And we think we have the trading protocols to create competition and the pricing model to create competition. And so we feel really good about that, that would be an example of something that we have a relatively small presence in and that we're going to be moving and I think we're going to be successful. That being said, I made a point, Patrick, that the first business that we were in was the government bond market. And I think as the room knows well, there is regulation in the mix around government bonds, which potentially adds a central clearing component to that marketplace. Tradeweb has made a very, very strong move very early on. That, yes, we were going to be in and we were going to continue to asset classics expand in all of these client dealer marketplaces that I was talking about earlier. At the same time that we were doing that, we also made a very strong move to get into what I would describe to everyone here, as the wholesale or the more kind of professional marketplaces which tend to trade anonymously on central limit order book type trading. We are very successful as we've expanded our wholesale business to mirror the different businesses that we are in on the institutional side. And so as central clearing comes to the marketplace, and regulation comes to government bonds, my instinct is that there are interesting forward opportunities for us to figure out ways that works for the community but ultimately potentially combines some behavioral usage in the client marketplace and then in the professional marketplace. So it's hard to answer it perfectly. It's interesting though to think that there are still significant opportunities in the first marketplace that Tradeweb was in with competition like Bloomberg in the late '90s, there still is all of this change happening and forward opportunity.

And you spoke about investing for those opportunities, which brings me to how does the company think about margins? Is the goal really to maximize revenue growth and margins are kind of the output from that? Or do you try to balance the two?

Definitely try to balance. I mean, I think I learned early particularly when the company was going public on the road shows and talking to investors and I kind of tried to take the approach that we're going to tell our story and hopefully, we're going to tell our story well, but we're also going to learn. We're going to listen from investors. We're going to have a good back and forth. And so learned early on, I think that it was important from an investor perspective to keep showing those growing margins. And so we've been able to do that and as a public company, shown a really good expanding margin profile. My strong statement would be, from my perspective, we feel confident that we can continue to grow revenue and expand margins. We have tremendous scale in the business and opportunities that we see front and clear where we do need to invest, but my feeling is as we make those investments to scale and the velocity of our business, we'll be able to continue to kind of margin increase as we do it. So there is a balance around that and we want to be able to in a clear way win on both.

What's your perspective on pricing power across your various businesses? It sounds like there's a ton of growth potential without necessarily having to take price. So does pricing become an obstacle to growth?

Yes, It's interesting because I mentioned Bloomberg. And so Tradeweb kind of grew up competing against Bloomberg from like essentially day 1. So we were in the government bond market. Bloomberg was in the government bond market. We were in the mortgage market, Bloomberg was in the mortgage market. We were in the global swaps business and Bloomberg was in that business, right? And not that the community ever necessarily felt in the most straightforward way, that Bloomberg was like "free for trading" because even though they led with that statement from time to time, everybody kind of understood, I think, that nothing about Bloomberg has ever been free. And by the way, like a great product, obviously, but like not a free product. That being said, in our backyard as we were building out a trading business to have Bloomberg not charging, historically made us, I think, very conscious of how we were pricing all along. I think we became really good at it. And so we've figured out ways, obviously, to continue and continue to grow these businesses. But at the end of the day, price them correctly because again, we're living and breathing in the trading businesses. And if you price them incorrectly, you're opening up the door into the competitive landscape. So you have to be really, I think, pretty smart about it. My instinct is around credit, which, from our perspective, is clearly a marketplace that we were not first in. We were first in a lot of the businesses that I was describing, not all of them, but a lot of them, and we were clearly not first in credit. We were a delayed second. And so as we were going out in credit and talking about and walking through with our biggest clients, what that opportunity really was. One of the things I heard, I think, loud and clear, which is interesting was, hey, if you just do what the incumbent in the space does, which is MarketAxess, and price cheaper, you will fail, like not enough. And so early on, what I was super conscious around was yes, pricing, but really how do we build out a platform that does things differently and in certain ways with respect to what they've been able to do better than they do. And then my instinct is pricing follows, so we've been able to build out protocols and credit to compete there very quickly. We still have a long way to go. We launched, I think, innovative initiatives around bringing in the government bond market into credit trades, and creating what we call net spotting and net hedging, which is an efficiency for our clients. We've done some cool stuff around portfolio trading. We've made a mark in credit. It's not like headline, headline news like in the -- on the front page of the New York Times, but Aladdin did a partnership deal with us in credit that's a very important deal for BlackRock around integration into the Aladdin clients that matter a ton to us and a ton to BlackRock in credit. So we've arrived in credit. My instinct is from this moment on, we have some levers to pull on pricing given the fact that we are clearly the low-cost provider there, and we will pull those levers when we think it's the right time and we have enough momentum, but we're going to do it carefully, I think, Patrick and thoughtfully as we do it.

And then maybe building off of that, when you think about the entities to which you provide value, buy side and the dealers, how do you think about whether you're properly monetizing those 2 different sides of the coin?

Yes, it's a great question. It's tough. I mean, I'll say this like I've gone and spent, not surprisingly, like a ton of time with like the BlackRocks of the world, the big asset managers, the big clients of the company. And they feel like a true partnership with us around how we've built these markets, and their lives have really improved as we've created these transparencies and also created a ton of operational efficiencies for these companies. I'll say this with an absolutely straight face, monetizing that partnership in a straightforward way with those clients is not always perfectly easy. Some of that is around how they thought about their wallet and how they think about spending money. And some of that has been a little bit around what I was describing before, which is the Bloomberg effect, which is you can't make a mistake in terms of how you're charging or who you're charging or else you potentially open up the door to some market share loss. So if I think about the business model and I think about like how well we've done and how much revenue we've created, and I think about who has really and truly benefited at the highest level from what we've been able to do, I'd like to go back in time a little bit and create more ability to extract revenue from the buy-side clients as opposed to just the leading liquidity providers. There are going to be moments and opportunities to reset that again the right way, and I'm feeling actually really confident, and I think that's kind of going to be an important thing for us to do. I don't think we're like almost like alone in that. I think monetizing those kind of relationships in a direct way has always been a little bit tricky. It's part of what makes my business like a really fun business to be in is to always figuring out like who are you providing value to? And how do you extract the right amount of revenue for that value that you're providing? So those are some of my thoughts on that.

Helpful. Tradeweb had over $1.25 billion in cash on its balance sheet at the end of 2022, and the business generates very strong free cash flow. Would you anticipate being more active in deploying capital going forward?

Yes. I mean -- so the room knows, I've been at the company since 2000. I was the President of the company from 2008, and about a year ago, I was elected CEO. So I'm a new CEO of a public company. And that does -- that's actually kind of interesting because I'm able to bring from my perspective, a lot of the culture and a lot of the DNA and a lot of the partnership thoughts that I was describing before into like how Tradeweb has arrived here and in terms of building out these marketplaces. At the same time, and you guys, I think here know this really well, my responsibility is really to be like super open-minded about the future of it all and not just say like, here's how we got here and we're going to stick to that. So the way we've gotten here has been basically organic growth pretty much. We've done deals, we've done probably 4 real deals all the way through. But we've basically built our own businesses, built our own marketplaces. And for sure, one of the things that I want to do, and I will do as CEO is be more creative, a little bit more aggressive around M&A opportunities. I do think this is an interesting moment where, obviously, valuations being where they are, the ability for a company like Tradeweb to add on bolt-on that makes sense for us, I think, is kind of here and present. And so going forward, again, my instinct is, you'll be hearing more from us on the M&A side because I think this is the right time for us to be a little bit more thoughtful and aggressive around how we want to continue to add on to our incredibly important network.

Terrific. Well, I think that's a great place to wrap up. So I appreciate everybody joining us this morning. And thank you, Billy.

Thanks very much for having me. Thanks a lot.