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

Good morning, and thank you for joining us on short notice to discuss Tradeweb's announcement of its intent to acquire Trumid. After prepared remarks, we will open the call to Q&A. I'd like to remind you that certain statements in this presentation and during the Q&A relate to future events and expectations and as such, constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Statements related to, among other things, our 2026 credit revenue outlook, our proposed acquisition of Trumid, the anticipated timing of the proposition, the potential benefits of the proposed acquisition. The expected synergies, including expense synergies of the proposed acquisition, the estimated tax assets, our plans, objectives, expectations and intentions regarding Trumid. Our and Truman's potential future performance, including the projected true men financial information and the expected impact of the proposed acquisition on us and our growth rate and adjusted diluted EPS and the industry and markets in which we and Truman operate as well as our other expectations, beliefs, plans, strategies, objectives, prospects and assumptions and other future events are forward-looking statements. Actual results may differ materially from these forward-looking statements. Information concerning factors that could cause actual results to differ from forward-looking statements is contained in the company's investor presentation and our periodic reports filed with the SEC. In addition, on today's call, we will reference certain projected true financial information, certain non-GAAP measures as well as certain market and industry data. References to Historical trued revenue in the prepared remarks and during the Q&A are adjusted on a non-GAAP basis to exclude the impact of certain dealer equity incentive arrangements and other dealer incentives that were previously in place and no longer apply as of the first half of 2026. Important additional information regarding such projected true mid financial information, non-GAAP measures and market industry data, including sources is in the accompanying investor presentation.

Thanks, Ashley. Good morning, everyone. Today, we're announcing that Tradeweb has entered into a definitive agreement to acquire Trumid for a purchase price of approximately $1.97 billion which includes $1.75 billion for the business and approximately $220 million for tax assets being acquired. Trumid is an electronic credit platform that leads in gray markets and dealer workflows. And it is highly complementary to our business. The transaction meets the financial bar we set for every acquisition. We expect it to be accretive to adjusted earnings per share in the first full year after close without any revenue synergies related to new cross-sell opportunities and to our earnings growth rate. Sarah will walk through the terms shortly. Reflecting on our journey at the time of our IPO, we were known as a rates platform with bold ambitions and credit. Since then, we have competed and differentiated. Credit has morphed into of our most important growth engines and is on track to exceed $500 million in global revenues for the first time in 2026. We got there by staying incredibly close to our clients, understanding how they want to trade and then building a multidimensional liquid and a spectrum of protocols. As we look ahead, we believe credit will continue to remain of the largest markets with a long runway for growth. TRACE volumes have grown 10% annually since 2014. This growth has been driven by rising corporate profitability, advancing technology and an increasingly sophisticated client base. Together, these forces have combined to catalyze electronification and increased turnover velocity. Package trading, algorithmic pricing and automated execution have moved from the edges of the market to the center of it, and we see that every day in our own volumes. With that said, our biggest competitor in credit and across our markets is another platform. It's still the phone. And that tells you how much opportunity is still in front of us. Every time we make trading easier, reduce complexity or bring buyers and sellers together in a better way, we have an opportunity to move another piece of this market electronic. Gray markets are particularly interesting to us. This is where Avon's life and price discovery begins before it has been officially issued. It's a meaningful market today comprising about 5% of TRACE, but much of the workflow is still manual, running through spreadsheets, chats and voice. That's exactly the kind of market that Tradeweb has spent nearly decades helping to transform. And we think timing is compelling. With a multiyear refinancing and AI infrastructure cycle on the horizon, we believe the new issue market will remain front and center. Clients increasingly want better price discovery and more efficient execution around new issues. And as electronification and velocity increases we believe our opportunity expands. Trumid started in a way that Steels very familiar to us. Dealer saw a real market problem and funded and worked with the team to solve it. In Trumid's case, that problem was how do you find point-in-time liquidity in gray markets. Their answer was swarms, a protocol that brings a group of participants together on the same bond at the same moment throughout the day. And from there, Trumid became one of the innovative platforms in the space and expanded into dealer RFQ and attributed trading, protocols that complement our own. The other thing that really matters to us is the team. We have known and respected the Trumid team for years, and we began informal conversations early this year. As we spend more time together, it became clear that Mike and the team share our vision of the credit markets, many of them have sat in the seats of our dealer and buy-side clients, and they bring a real focus on innovation. Relationships matter in this business, and we're thrilled to welcome them to the Tradeweb family. Looking ahead, TrueMid advances our credit strategy in ways: first, it extends our offering to the full life cycle of a bond. Gray markets are where our bonds trading life begins and with Trumid, we can serve clients from those first moments of price discovery all the way through the secondary market. We have spent decades taking successful protocols into new markets, and we plan to introduce swarms across our global credit network. Second, it enhances our position with client groups that keep growing in importance. Hedge funds are at the forefront of systematic trading and credit using strategies they have run in rates and equities for years, and Trumid has built a loyal following in that community. Dealers are automating more of their flow and increasingly starting trades, not just responding to inquiries. Third, it lets us move faster we would otherwise have spent resources building and scaling these capabilities ourselves. Instead, we can put those resources toward our next frontiers in credit, emerging markets, algorithmic trading and block trading. On data, our philosophy is unchanged. We expect the privilege of access to client trading data apply the right monetization guardrails and improve execution outcomes. AI is becoming a meaningful part of how credit trades. Our Terra AI chatbot turns our data into real-time insight for clients and TrueMid smart voice automates the trades that still start on the phone. Trumid's unique data from the earliest trading in a bond will help make AI price enter sharper and our clients' execution better. We are confident in our ability to integrate TrueMid and deliver on this opportunity. With that, let me turn it over to Sarah to walk through the transaction in more detail.

Thanks, Billy, and good morning, everyone. Billy covered why Trumid fits our strategy. I will walk through the economics of this transaction and how it also meets our financial objectives, including being accretive in the first year post closing. The consideration has 2 parts: a net purchase price of approximately $1.75 billion and a tax asset valued at approximately $220 million. The $1.75 billion net purchase price represents 19.4x fully synergized 2026 adjusted EBITDA. The transaction will be financed with $1.89 billion in cash and $82 million with equity for a total purchase price of $1.97 billion. The $82 million equity component reflects Trumid's incoming management rolling the majority of their consideration into Tradeweb equity, which will be subject to an ongoing lockup that will expire 2.5 years after closing. The transaction is targeted to close in the first half of 2027, subject to regulatory approvals and customary closing conditions. Trumid has grown revenue from 2022 through 2025 at an approximately 30% CAGR. That momentum has continued in 2026. The with run rate revenue for Trumid tracking at approximately $150 million, which, if achieved, would be up more than 25% year-over-year as the platform and its protocols continue to gain traction with dealers and hedge fund clients. Profitability has improved alongside that growth, with Trumid's projected adjusted EBITDA margin improving at an average of 500 bps annually in 2025 and 2026, with margins tracking at approximately 20% for this year. The transaction clears the financial bar we have laid out. We expect the acquisition to be accretive to adjusted EPS within the first full year after closing, with the level of accretion increasing as the remaining expense synergies are realized. We are confident in our ability to complete the integration over 18 months and expect to generate $60 million in run rate expense synergies with 70% realized in the first full year after closing and 95% in year 2. Our accretion assumption is underpinned by 10% revenue growth for Trumid annually. We use this growth forecast for purposes of underwriting the deal, and it does not account for the current strong new issue and secondary volume environment. It also assumes approximately 400 basis points of stand-alone adjusted EBITDA margin expansion annually and reflects $65 million of foregone annual net interest income as we expect to fund the transaction with cash on hand. Finally, while not baked into our accretion, we clearly see the potential to generate revenue synergies by introducing Trumid's differentiated protocols across our global product and client network. Let me spend a moment on the tax asset, which we believe is a notable feature of this deal. As part of the transaction, we are acquiring tax assets worth approximately $220 million on a present value basis, representing roughly $345 million of cash tax savings expected over time. The benefit has a few components. Approximately 75% of the benefit comes from a new stepped-up tax basis in Trumid's underlying assets created by this transaction. The remainder comes from inheriting the existing tax basis of certain entities interest in Trumid, and net operating losses. Altogether, these tax benefits will offset future taxable income and are expected to reduce our cash taxes over a number of years. This will provide a meaningful benefit to free cash flow with 40% of the gross value expected to be realized within 5 years. Stepping back, we believe this is a compelling investment for Tradeweb. We believe we're acquiring a business with attractive growth prospects, significant opportunities to scale and increase profitability while creating meaningful value for shareholders through earnings accretion and stronger cash flow generation. As we look ahead, our capital allocation priorities remain unchanged. We will continue to prioritize organic investment in the business, followed by strategic acquisitions and investments, share repurchases and a growing dividend. With that, let me turn the call back over to Billy.

Thanks, Sarah. Based on our previously disclosed quarterly volumes and pricing, we believe we've produced another strong revenue and volume growth quarter and those trends have continued into October. Strong months are welcome, but we run this business for the next decade, not the next quarter. Global debt markets keep growing and remain central to funding the world economy and technology is advancing faster than at any point in our history. These 2 forces drive our opportunity. But you don't win markets simply by putting 2 companies together. We have to execute integrate thoughtfully and keep innovating. Most importantly, we have to keep earning our clients' trust and business every day. The way credit trades is changing, and we intend to lead that change. With Trumid, we can serve a bond from its first trade through the rest of its life. That brings us one step closer to a market where every trade at every stage can be done electronically. With that, I will turn it back to Ashley for your questions.

Thanks, Billy. Operator, you can now take our first question.

[Operator Instructions] Now first question coming from the line of Craig Sutent with Bank of America.

Good morning, Bill and team, congrats on the deal. So starting off with a big picture 1 from us, why is Tradeweb the right owner of this asset because Trumid was on a nice growth trajectory as of yesterday. And we're also curious on the synergies of putting swarms and attributed trading next year a leading line of protocols and also what this deal could mean for pricing over the long term to.

Question, Craig. Thank you, as always. Why are we the right owner of the asset? Why are they the right asset for us? Why is this a strategic fit? That's the right question. Why do we think that this is going to work. I think it's going to work from our perspective in a very straightforward way. To start with, I would say, because we share -- I think from my perspective, I would say, like the same ethos in mentality, you have to always ask yourself the question like what separates you as a company? What is the thing that defines you? And as you know, very well, tradable a technology company, Trumid's a technology company. But I think from an Ethos perspective for both companies, depth of knowledge, really matters. And that matters across products. I think it matters across client segments. I think it does something really important, which allows both companies to engage with clients in creative ways and doing something that is fundamentally important, which is solving problems. I think you have to be -- you have to have a sense of humility to know that you need to listen to clients and do something which is very important, which is build trust. And then the third thing, which is you have to be commercial and commercial to transform what you're hearing from your clients into something that is a viable product. That's the ethos. And so when you get into a viable product to your question, I think that transitions to something which matters a lot, which is do you believe that -- do you believe really in building tools that the full life cycle of the market find ultimate value and so from a product perspective, as you know very well, we've made our kind of innovation bones, obviously in secondary trading. You've heard a lot from us over the years, Craig, around portfolio trading, et cetera. We've gone from basically an afterthought in credit to close to $500 million in credit revenue by being innovative in secondary trading. Trumid has kind of, I think, in a super interesting way from our perspective, they've lived and created trust and they've innovated around obviously making the market in grace more available to a wider audience, making that marketplace more transparent and more efficient. And I think in a very important way, I think Tradeweb, I think, has largely defined ourselves as kind of best-in-class, as you know very well with, I think, like the asset manager base I think that's a pretty straightforward statement. And as Trumid has pursued, I think, innovation in new issue and as they've led with tools and protocols that have brought I think the systematic players into the equation in very, very strong ways, we like that combination of clients. The largest, most important asset managers in the world and these most sophisticated systematic hedge fund players. We love that combination of clients, especially, I think, when you do something that's probably critical which is when you share the mindset on understanding really bank behavior and what matters to the market makers, which I think has been -- from our perspective, I think our core strength and really a core strength of both companies. So bottom line, I would say is that we are obviously very excited about this acquisition. I will say this very clearly, we look forward to welcoming the TrueMid team closing the deal and updating you as we execute on our integration plan. And thanks for the question.

Our next question in queue coming from the line Christian Bulleit Autonomous Research.

Bill, Sarah. Store has a strong track record of successfully building businesses organically. Your current credit business is a testament to that. So I would love to understand or get a better sense of why you chose to spend almost $2 billion on Trumid rather than build this organically.

It's a good question, Christian. How are you today? Yes. as CEO, sometimes you were a bunch of different hats. I think 1 of the most important hats that I wear is obviously with the executive team pushing the company to be the most ambitious company that we can be. And so we ask ourselves those questions around build versus buy like all the time, as you can imagine. And the roots of Tradeweb, Christian, as you know very well, we've largely gotten here as builders of marketplaces. I think that's something that's core to kind of who we are. That being said, also, as you know, this is, I think, and Ashley would not for sure, I think this is our fourth acquisition since I've been CEO of the company. So I do believe very strongly that you can and need to do both. I think with this Trumid deal in the most interesting way, I think it actually -- it showcases both skills. So with this deal, obviously, we will acquire kind of like, I think, something very important, which is 2 unique protocols. Their swarm protocol and their attributed trading protocol best-in-class and unique. We will acquire, I think, something that I mentioned from Craig's question, which is deep penetration into the hedge fund community, which we view as critically important. And so therefore, we will acquire kind of scaled protocols and networks. But as we acquire these things, we're not going to lose sight of something that we are very excited about, which is what we get to build going forward with our new partners, which is things like building more insight and analytics, building the electronification framework of voice-centric flows through AI, auto spreading, AIX. Ultimately, I think, in a very, very important way, continuing to build probably the most important thing that you can do in the market, which is client trust. So we feel really good about this combination in part because I think it's allowing us to exercise the 2 most important muscles that ambitious companies need to have. So I appreciate your question, and thanks very much.

Our next question coming from Delina, Ken Worthington with JPMorgan.

Can you walk us through the accretion as accretion math and the rationale for the assumptions that you're using? So maybe first, how did you end up at the 10% growth in your forecast versus the 2% to 3% historic growth you highlighted in the prepared remarks. And then looking at the 400 basis points of margin improvement what does this contemplate for your contingent investment in TrueMid as you generate the cost synergies?

Let me take that. So I think a couple of things. The way we're thinking about it, 10% is a starting point for the stand-alone business as it exists today. So as a reminder, and we covered this in the remarks, that doesn't include any of the revenue synergies related to the new cross-selling opportunities such as Titan swarms Global, which we are extremely enthusiastic about. When we thought about it, on 1 hand, Trumid has benefited from a smaller revenue base, very strong issuance environment. And from an underwriting perspective, we don't want to underwrite this deal by simply just assuming history repeats itself, and the current environment, which is extremely strong is the go-forward long-term environment. And issuance, as you know, is very hard to predict quarter-to-quarter. So when we factored our underwriting case, even against a more muted backdrop, we still feel like tumor can grow 10% a year, and that's relative to as we've talked about 25% plus for 2026. On the other hand, the cyclical backdrop and Billy talked about this looks very strong and the issuance pipeline does look robust. Structurally, we believe in the electronification of credit markets, the turnover velocity still has a lot of room to run, particularly with systematic trading and ETFs that are continuing to proliferate. So if issuance stays strong and electronification and velocity keep moving the way we expect, none of that's really baked into that 10% assumption in our numbers, and we see real upside to both Truman's ability to compete in gray markets and grow secondary revenue, which has been an increasing source of their growth. If we -- if I try to walk down through accretion, you start with Tumi's revenue, which we talked about tracking to $150 million this year in the 10% growth rate. And then we'll work our way back down to net income. So the core EBITDA for Trumid is tracking around 20%, expanding that 400 basis points of margin a year that we talked about plus $60 million of run rate synergies, which we've talked about and 70% of that, so fairly quickly, we expect to realize in the first year. So within the first year, you can get to a pretty attractive net income number. Those synergies are on top of the core margin. The offset to that is we expect net interest income to fall by about $65 million after funding the deal from the cash portion. So that should get you to pro forma net income along with your stand-alone assumptions for Tradeweb. And clearly, it binds up to an accretive transaction pretty quickly, which only gets more accretive as those synergies get fully realized. The only other thing I'd point out is while that accretion fully factors in the cost of acquiring the tax assets, it doesn't actually include the benefit of the cash tax savings that can be an additional incremental benefit in EPS. So that tax asset, as a reminder, provides tangible cash tax savings over the future years of about $220 million, of which $135 million is in the first 5 years. So when you think about that cash savings, it accelerates our free cash flow conversion and then it can provide NII upside each year as those cash savings compound. And again, that part is not even factored in the accretion. So overall, I'd say we've built a relatively conservative set of assumptions into our expectations, and there are quite a few sources of upside, including mostly that cyclical backdrop remains as strong as we expect it to be.

Our next question coming from the line of Dan Fannon with Jefferies.

Bill, I was hoping you could expand upon your comments on why this is the right time to buy given where we are in the new issue cycle? And then can you talk about how durable Trumid's growth is away from the new issue market in other products and asset classes.

Dan, how are you? Good. As you know, it's been like almost like 1 catalyst after the next over the last few years from kind of tariffs to geopolitical acceleration of the AI hyperscalers. And we think the catalyst wave will continue going forward. So I start with -- I think we're making this bet with the credit markets in a really strong spot. And we think fundamentally, we think, and we'll make this call that the new issue market is a really good neighborhood from our perspective to invest into. If you take like a half a step back for a second, and you've heard me say this, Dan, I don't think it's by any stretch like an overstatement to say that one of the most consequential secular trends happening right now in finance is the application of technology into professional markets period. And so to your point, look, like we know this, like rates are going to kind of go up and down. By the way, that's good for our -- as you know, good for our macro business. But rates are going to be up and down. Issuance is going to have its kind of its peak moments, and there's going to be some, obviously, volatility around that. But if you believe, I think, in 2 things, which is the force of technology impact in marketplaces, plus that market will continue to grow. Our opportunity by definition, is going to compound alongside of this transformation. And that's the thing ultimately that makes us quite excited about this. And as we've kind of paid very close attention to our new partners at Trumid. Back to your question about durability. Obviously, we've been well aware of the impact that they've had in our neighborhood of secondary trading, and we feel like we are onboarding best-in-class around venue and marketplace, and we feel quite good about the durability of their business model. And thanks a lot for your question.

Thank you. Our next question coming from the line of Ben Fines with Barclays.

Sara, during your prepared remarks, you talked a little bit about the hedge fund opportunity and about revenue potential cross-sell opportunities. Curious if you could give us a bit more color on the current overlap between your customer base and theirs, I'm wondering if there are any risks of dissynergies? Are there any instances where you have a customer who's using both you and Trumid but not a separate provider, which could open up some opportunities. So any color you can give on sort of the state of the current client overlap would be helpful.

Sure, Ben. I would say with any time 2 platforms come together, some flow gets rationalized, but we've looked at that thoughtfully. And we think the overlap here is pretty given the new capabilities and differentiated client relationships between Tradeweb and Trumid. And importantly, I would say these impacts are already reflected in any of our 10% forward growth assumptions. But maybe a few components just to kind of dig into why we believe that. I'd say the first thing is the complementary nature of the client bases, which Billy just highlighted is one of the things we are most excited about. So historically, we've scaled in U.S. credit through achieving greater penetration with asset managers than hedge funds. Trumid's client base really leans the other way. They have built an incredibly loyal following against tech funds, many of which are newer to our platform and trade with us less actively. So there's not a lot of overlap there. And we feel on the buy side, we're really adding rather than seeing that overlap. On the dealer side, they're central to both platforms and Trumid's dealer RFQ and brain markets activity should deepen the liquidity that those dealers bring to our network. So RFQ is about 40% of their revenue. Trumid's RFQ is primarily anonymous. So it actually complements our RFP, which just primarily disclosed rather than overlapping. And that's been, as Billy was alluding to, a source of growth for Trumid and help, again, by their client strong hedge fund activity. So when we put it together, we're really expecting a broader client network deeper pools of liquidity, which is good for clients, particularly in gray markets among systematic hedge fund clients. And when you factor in the uniqueness of the Trumid protocols, we're really confident that any dissynergies is already factored into our assumptions.