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

[indiscernible] on their behalf, we have CEO, Billy Hult. So Billy, welcome back.

Thanks very much, Patrick, for having me. Good to see you.

Terrific. So maybe just to kick this off for people in the room who are a little bit less familiar with Tradeweb, can you just provide some context of what Tradeweb is, what it does and how you've maybe evolved the business model over the last 5 years or so?

Yes, for sure. Thanks for having me. I was just kind of thinking to myself as CEO, you kind of get used to doing this. It's never like my preferred choice of kind of like telling the story of the company, but I really enjoy doing it with you. And great investors here, which from my perspective, makes this whole thing work and from our team's perspective, makes this whole thing work really well. So thanks very much. There was a time, I would say, like a long time ago, but not quite a long time ago where when PIMCO wanted to buy $25 million, 5-year notes, they would pick up the phone and ask Morgan Stanley, Goldman, maybe back in time long enough where I could say like Bear Stearns for a quote on where they would sell. And that's how business in fixed income kind of got done for ever and ever and ever. That's the story of the fixed income markets. And Tradeweb was first and ultimately the pioneer around electronifying, to start with transactions from the most important pieces of the buy-side community asset managers, hedge funds, regional dealers, mortgage originators, et cetera, and their biggest counterparties, Goldman Sachs, Morgan Stanley, JPMorgan, et cetera. And we started off probably where you'd expect, which is government bonds. And it's been a story of expansion, really and truly from the very beginning. TBA mortgages, government bonds in Europe -- European government bonds into derivatives, and then this concept of we're not just going to be settled in the client dealer network. We also want to be in wholesale, we also want to be in retail. Oh, and by the way, we see tremendous opportunity, obviously, in credit. And so that's become the focus for the company over the last few years. We went -- as you know very well, Patrick, we went public almost 5 years ago, so in April, April 5 years ago, will be our 5-year anniversary of going public. When we went public, we were kind of the rates platform and maybe even sort of worse than that, we were just like, oh, that's the government bond kind of guys. These guys are in the global market of government bonds. And I think over these past 5 years, we have really and fully, I would say, maybe not reinvented ourselves, that's probably like not the right word, we've differentiated ourselves in terms of our ability to continue to make massive progress in all of these businesses, specifically credit. We've doubled our revenue in 5 years with half of that growth coming from non-rates businesses. So it's been a big journey, but ultimately a journey around changing human behavior.

Which is never easy.

Which is never easy for sure and also comes with some kind of fun stories along the way, very nice to meet you, please don't ever do that again, I might consider calling security if I see you back here in a couple of weeks or so. There was always this kind of resistance to it, right? Because what does electronification of these markets do? The concept is it collapses bid ask and makes markets more transparent, which is harder for me to make money. And so we were always getting pretty used to this concept of like not always the most popular, there's always going to be resistance. But if we stick to our guns and we understand where these markets are headed, we're going to be able to keep applying technology in a way that works.

Terrific. So with that as the background, what would you say that investors who are newer to the story, to the Tradeweb story, don't necessarily fully appreciate in the same way that investors who are really familiar with Tradeweb understand?

A little bit maybe to what I was describing before around like this concept of resistance. I think it's like there tend to be these sort of questions or this thought process around like, let me understand the environment that all of these businesses that you are in thriving? What's the good environment? What's the bad environment? What's the neutral environment? Actually, they can be tough questions to answer because we're in so many different marketplaces. I think the way that there has been a shift in understanding has been around the concept of, in 2024, there is still sort of significant business, significant volumes in all of the marketplaces that Tradeweb is in that still gets done, I joke and say, like it's 1994. And so this concept that sort of Tradeweb's biggest competitor is the phone, right? It's the old way of doing business, which still sometimes captures these sort of larger trades or more complex trades is now becoming part of the story. And I think there's become a lot of comfort as we sort of tell the community who we are. I think there's become a growing comfort around our ability to continue to do the right things that move these markets in the direction of electronification and transparency and all these great things.

And then maybe building off of that, how do you think about -- or maybe to phrase it another way, what's impossible for competitors to try to replicate about what Tradeweb has built over the last 20 years?

It's really a good question. The network -- I mean, the network that we have been able to connect with all of these years and then the marketplaces that we have plowed through all of these years. I think that's a challenging situation to really compete against. The other thing I would say -- and I mean this like in the best way, like we're a technology company. We live and breathe around technology and how technology is applied to the marketplace. I do think we bring a very healthy kind of like financial service angle to really what we do. It's not that these markets are like so complex that no one in this room could figure them out. Everyone in this room understands these businesses. But we definitely have built technology into these markets with the sort of DNA of having lived and breathed and been a part of these pretty unique type marketplaces. That's a big advantage for us. And it's, again, like not impossible to replicate. But I think a big piece of who we are, and then so when you combine this like big, big network with a company that I say proudly, I think, really understands how these markets work in a kind of first language way, it's an interesting formula.

So as you have this deep understanding of how markets work and this thought of maybe where markets need to go in the future, what's the innovation process like at Tradeweb?

I think it's good. I mean, we try to make it really good, right? We tried to sort of like really nail this evolution from being a pretty small company once to a much bigger company today, 1,200, 1,300 people in all of these markets. You definitely can't lose sort of that grasp around idea generation and around innovation. So we definitely -- at the senior levels of the firm and Sara, our CFO, a big part of this as well. It's like there is a concept of ideas win. And by the way, there are no bad ideas and we really mean it. And we really want to give ideas up and down the company full vetting and really understand them. Then there is, I think, this concept of take advantage of the network. So idea shouldn't exist just in the bubble of a conference room. They should be applied and spoken with and collaborated with like our biggest clients. We have definitely had some good ideas through the years of this company. I say that humbly, a lot of them weren't mine, but we've had some good ideas. The great ideas were always real collaborations with our most important kind of clients, the BlackRocks, the Goldmans, the JPMorgans. We've been fortunate, I think, to be a little bit of that kind of trusted partner, even though we did experience some resistance, that trusted partner along the way who you could build markets with. And from that concept, I do think you can be a little bit in the catbird seat around idea generation.

So it's interesting you talked about collaborating with clients, and I think you termed both the buy side and the sell side is clients of Tradeweb. How do you balance the needs and preferences of those 2 parties? And if ultimately, from where I sit, it would seem like, hey, the buy side decides where the flow goes, therefore, they have a lot of voice. Maybe that's not the right answer.

It's a good way to frame it, especially when you're thinking about the concept of what we were talking about, which is like idea generation. And we're not always perfect at it. but we do understand that this is a balance. And look, we are a global marketplace and PIMCO is our client and BlackRocks our client and GSMs our client. But they're also like, let's be honest, they're also Goldman's client. They're also Citi's client. They're also BMO's client. They are also Raymond James' client. So we don't lose sight of where we are in the total pool of this whole thing, right? There are absolute moments in time. And I've had a few of them myself, where you go down the elevators at PIMCO after having spent an hour with the PM, maybe having waited in the lobby for a while before you get up. But you spend that hour. And they give you a couple of good ideas. Hey Billy, I like the way you're thinking about this, but actually we'd be super supportive if you did it a little bit more this way. And it's kind of exciting, and it's pretty interesting. And then there's maybe a moment where you're coming down the elevator and getting into the lobby where you think to yourself, actually, it is kind of a good idea. The chances of it working and fitting Goldman's eye, Morgan Stanley's eye and Citi's eye is actually pretty low. I got to get this thing, right? And so we've always approached this as a bit complex. It's not to say that we're just like vanilla, middle-of-the-road people. But at the end of the day, this is a very, very important marketplace that we are in and getting the rules of the road correct in terms of what I describe as like the balance of the whole thing is everything. You get the balance off, the marketplace sort of struggles to work the way it should work. And more importantly, you pay the price for getting that balance off on newer opportunities. So that becomes the real thing that you're trying to sort of make sure you're always getting right. Again, it's like not necessarily bring science or brain surgery kind of stuff, but it is a sort of nuanced way of understanding how these markets operate and develop, and that's been a big part of this company's kind of culture for a long time.

Yes, it makes sense. It's really interesting. So maybe shifting gears a little bit. You talked to a lot of investors at events like this. You obviously have a large shareholder in LSAG?

Yes.

What do your shareholders, and the ones who really understand the business really well, what are they saying, this is kind of what we hoped for from Tradeweb. And what are they saying, don't go down this road?

Quickly -- it's a good question. Quickly, there's always the concept of, you guys have grown so much. You've shown the public market that you can do that by also increasing and amplifying your margins. What's the kind of trade off? How do you guys think about trade-offs, right? And so Sara gets to answer sort of the harder questions about that, lucky for her. But that becomes the -- in some ways, I think one of the most important questions, which is like, do you see some very interesting sort of opportunities that are out there for you as a company, given all that you've accomplished. And can you keep performing on the margins side in a way that we need? And that becomes this interesting, I think, conversation. My instinct is -- and this is a little bit of a way of answering your question is, if we became shortsighted and we just ultimately ran and managed this company just for the kind of margins side of it. And we just said, "Hey, we have margins of 53% -- 52%." And we -- our goal is 60%. And we don't see opportunity in emerging markets. We don't see opportunity in Japan. We don't see opportunity to build a swaptions market that lives right next to this giant interest rate swap market that we have. We don't see opportunities to kind of like further electronify the credit market. I think people would be pretty disappointed with that vision. So it really is this kind of -- this way of continuing to be, I think, opportunistic around opportunities that exist for us and also being mature and grown up around how we execute on those opportunities. But ultimately, that's what we're here for, right, complicated trades and larger trades. Whether or not you're talking about the most simplified aspect of the government bond market or you're talking about the high-yield credit market, those kinds of trades still get done on the phone. And so when I say that and as we think about that as a company like to us, that's opportunity, right? So what we're doing a lot of and you know this really well, Patrick, is like applying sort of algorithmic technology, we call it AIX trading, the ability for data to get integrated into trade selection in a way that both -- that really solves from both of those things, incredibly sticky behavior for clients. We're like investing like a ton in that, right? A, we think it's a difference maker for us in terms of the competitive landscape, particularly in rates. And b, we think it's the sort of portal, it's the door opener to getting after this kind of stubborn activity that still exists. And so that's how we think about growth and investing into growth.

Makes sense. It's helpful. And then as you're thinking about those investments, how do you organizationally define success? Is it market share? Is it EPS? Is it -- what measures do you look at to say, "Hey, we did a good job here."

Factor in a bunch of things. Obviously, it's revenue growth. It's amplifying earnings in a way that doesn't stymie that revenue growth. I think we do a really good job. And I do think it's important. It's a really good question. Internally around, we built a pretty good machine who's really sort of a part of making a difference inside of that machine and who's kind of riding the wave of this kind of technology happening in our markets. We're pretty fine-tuned on that. And I think we have an expectation that the most important people inside of the company have to be producing differentiated results, which, to your point, goes a bit more into the sort of the market share component of it all, which matters. To make a sort of obvious point, it's not the elephant in the room at all. In credit, where there's a sort of straightforward competitor for us, we're going to be pretty market share-oriented because we know that there is this sort of straightforward competitive landscape thing happening. That being said, we don't always have to look at things in terms of -- in terms of market share, in terms of electronic market share, right? There's also this concept of peeling this phone-based business into our world. And so I say this very genuinely, our biggest competitor is the phone. The interesting thing is, I'm pretty sure market access would say it kind of the exact way. And that shows you all of this very interesting room that there still is in our business, got to get a lot of things right. The low-hanging fruit thing. I don't know if there was ever really low-hanging fruit that might be, I don't know who ever thought that. But it definitely doesn't exist now, right? That business that just got done, because who wouldn't use technology for a certain type of business. Now we're after the tougher stuff. And that's actually really cool. So now when you go into PIMCO, they're not selecting dealers randomly. They're not on Tradeweb picking out 3 dealers and you're wondering why they picked those 3 dealers, and it's just because it's alphabetical -- it's alphabetical trade ticket, right? Those days are over. Now it's really about sort of algorithms that point liquidity to the places where they're supposed to, who's the seller on the other side of the trade? How do I leave as few footprints as possible as I engage in liquidity? The sophistication level has massively changed. Part of that is just, I may be getting older, but the people in the seats are getting younger. So that's good news. I do think the pandemic -- I mean, the first time we met was almost right after sort of, I think it was 3 years ago. We passed the COVID test and came here. The pandemic obviously helped. If you're -- if you ask, that sounds weird, but it's true. If you were under-resourced around technology, specifically in fixed income at a moment in time where all that terrible stuff happened, you paid a big price is the bottom line. And so you're never going to be under-resourced that way again, right? And so that became one of the legs, I think, around big time investment in our space. And then the other thing I would say is, if we were all kind of talking here for sure, 7 or 8 years ago, and people were wondering who were the strong players on the bank side in the markets that Tradeweb is in? We would definitely be talking about the Credit Suisses, the Deutsche Banks, the Barclays, the traditional European banks played very, very strong roles in a lot of these U.S.-based markets. One of the shifts that has happened is as those banks have, for a couple of reasons, now played lesser roles in these businesses. The -- and I don't even call them alternative market makers anymore because they're really not. The Citadel securities of the world have stepped in big time, right, because they see a world where there are less counterparties than ever and more flow going through the pipes, and they're going to service this network through technology. I think they're very smart, so they're going to hire salespeople. They understand this is still a relationship business. There's always going to be that component of it all, but they're going to lead with technology. And that kind of raises the bar, I think, across the board in kind of an interesting way. And so those are the sort of big trends that are happening. Citadel Securities has gone from kind of global swaps to global government bonds to U.S. credit where they now feel like the velocity, the turnover in that market is at a pace where they can really compete with real technology. I definitely don't have their playbook, but they're probably looking -- I don't think anyone has the playbook, but they have to be looking at the TBA mortgage market, which is about to go through probably a little bit of a green light cycle of activity. And so they're formidable. So back to resistance, if you're still having that same conversation with those banks that I was describing about we don't want this thing to keep coming, it's coming. And now you're competing with Citadel who's going to take market share from you if you're asleep at the switch. And so these very well-run banks now get that joke in a huge way. This is what I would say.

So as you are building out these solutions that work for the banks, they work for the buy side, and you're generating the revenue growth and the earnings growth. How are you -- how do you guys think about free cash flow in terms of the model, how it generates free cash flow and then how you deploy that free cash flow?

I mean we like free cash flow, for sure, and we're generating a lot of it. And our business is doing really well. And so it's sort of a little bit kind of embedded in your question is, how are we thinking about and leaning things a little bit maybe more towards M&A? So we haven't completely gotten here all through organic growth and organic investment and organic development. We've done deals along the way, smaller deals early on that helped us get into both the retail business and the wholesale business. One of the things I definitely wanted to do over the last couple of years with Sara is, we have momentum in our business. Let's take advantage of that momentum. One of the ways to take advantage of that momentum is to -- not to say like get more aggressive in M&A, but it's to be strategic and strong about it. And so we did 2 really good deals last year. We feel really good about it, a company called Yieldbroker and a company called r8fin. R8fin is state of the art kind of an algorithmic technology company that lives in a very important part of the government bond market. Really excited about both. And that's cool because it's like, okay, now we're showing we can do a couple of deals. We want to always make sure people see our work. So having a good track record around those deals is a good thing to do. And now we're going to get a little bit more -- maybe ambitious is the right word, and continue to be opportunistic because we think we're in a really good place. We know we're in a really good place, and we want to try to keep pushing those kinds of buttons when they work for us. The network of it all like so important, right? So how do we acquire a company? How do we do a deal that enhances our network, right? We like that kind of thought, definitely have great technologists who definitely feel they can kind of build everything all the time. No one can build everything all the time. So then there are these moments where we see these pockets of technology where we feel like we can acquire in a way that works for us, which was part of the r8fin strategy. Our instinct is some things kind of coming our way around that. And so we feel good about that.

Interesting. I think now it's a good time to pause, a couple of minutes left. Anybody in the room have a question. All right. Well, I don't see any hands, right. So maybe just building off the commentary on M&A. How do you guys think internally about returns on capital? And internal initiatives as opposed to M&A -- as opposed to share buybacks or anything else?

Thanks to both the rigor of a public company -- of being a public company and the rigor of hiring people [indiscernible] now who fit really well into a public company [indiscernible] from Sara, like we've gotten really good at that, right? And so we're rigorous around sort of what those returns should be. It's interesting, right? If you ask me what's one of the best thing, Billy, that Tradeweb has done in the last 6 or 7 years? I would say the way that we painstakingly, I think, mostly thoughtfully, and we tried really hard to become this pretty big competitive force in credit. It's hard to do that, right? So that's what my answer would be on probably the best thing we've done. If we looked at the metrics of that investment after 3 years, it might not have looked very good quite honestly, right? And so it's like how do you kind of frame that and then also really, really be patient around when you see an opportunity the right way. If you keep running into a brick wall and it's not going to happen, you don't want to be patient just to be patient. But we felt like we had an opportunity there. Now it looks -- I mean now those numbers look incredible for us. But if you looked at it over a 3-year period or 4-year period, it wouldn't have looked as good. And so that's a little bit of the back-and-forth kind of conversations that we have on it. And when we do deals, we want those deals to be accretive, and we want those deals to kind of fit us both starting with strategically, but also we have pretty strong financial parameters in terms of how we look at deals.

Terrific. Well, I think we're up against the clock. So we can end it there. But thank you, everybody, for joining us. And thank you [indiscernible].

Thank you. Thanks for having me.