MarketAxess Holdings Inc. — FY2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020. This is an annual filing; fourth-quarter figures below are drawn from the filing’s unaudited quarterly data. Amounts are in U.S. dollars unless stated otherwise.
Business context
MarketAxess operates electronic fixed-income trading platforms and provides related market data, analytics, regulatory reporting and post-trade services. More than 1,800 institutional investor and broker-dealer firms used its platforms. Commissions accounted for 92.1% of FY2020 revenue. Open Trading represented 32.7% of credit volume, compared with 26.3% in 2019.
Financial and operating metrics
| Metric | FY2020 | FY2019 | Change |
|---|---|---|---|
| Revenue | $689.1 million | $511.4 million | +34.8% |
| Operating income | $374.7 million | $250.9 million | +49.4% |
| Operating margin | 54.4% | 49.1% | +5.3 percentage points |
| Net income | $299.4 million | $204.9 million | +46.1% |
| Diluted EPS | $7.85 | $5.40 | +45.4% |
| Net cash from operating activities | $404.5 million | $265.9 million | +52.1% |
Fourth quarter: Revenue was $171.3 million, up 32.0% from $129.8 million in Q4 2019; net income was $72.9 million, up 45.1% from $50.3 million. Q4 diluted EPS was $1.91 versus $1.32. Q4 revenue and net income were below Q3 2020, when they were $184.8 million and $83.9 million, respectively.
Revenue drivers: Commissions rose 36.8% to $634.4 million. Credit trading volume increased 29.4% to $2.63 trillion; U.S. high-grade volume grew 29.4%, and other credit volume grew 29.5%. Rates volume was $3.99 trillion, substantially reflecting the inclusion of LiquidityEdge U.S. Treasury activity. Information-services revenue increased 11.8% to $34.3 million; post-trade services revenue rose 23.5% to $19.5 million.
Margins and expenses: Total expenses rose 20.7% to $314.4 million, slower than revenue growth. Employee compensation and benefits were $156.9 million; clearing costs increased 86.1% to $21.1 million, principally from matched-principal activity and self-clearing. Net margin was 43.4%, versus 40.1% in 2019.
Cash, liquidity and debt: Cash, cash equivalents and investments totaled $489.0 million at year-end; an additional $50.1 million was segregated for regulatory purposes. Operating cash flow was $404.5 million. Company-defined free cash flow, a non-GAAP measure, was $340.2 million, versus $227.2 million. The $500 million revolving credit facility had $499.0 million available, with $1.0 million of letters of credit outstanding; the company reported no borrowings under it at year-end. A separate, uncommitted $200 million collateralized facility also had no outstanding borrowings. The filing reports $138.2 million in positions financed, deposits and customer reserve balances associated with self-clearing. Total equity was $955.1 million.
Material changes and unusual items
- FY2020 included the full-year contribution from LiquidityEdge, acquired in November 2019; its U.S. Treasury platform expanded MarketAxess’s rates business.
- MarketAxess converted a U.S. broker-dealer subsidiary to self-clearing in August 2020. The transition involved operational and technology issues and increased fail rates in the immediate period; the company said initial issues were resolved. The change increased clearing, liquidity and regulatory-capital requirements.
- The company acquired Deutsche Börse’s pan-European regulatory reporting business on November 30, 2020, for $22.5 million cash plus up to $24.6 million contingent consideration.
- The company agreed to acquire MuniBrokers for approximately $45 million plus transaction costs, including up to $25 million contingent consideration; closing was expected in the first half of 2021, subject to customary conditions.
- FY2020 income tax provision included $24.1 million of excess tax benefits from share-based compensation. The effective tax rate was 20.0%, compared with 20.4% in 2019.
Outlook, management commentary and risks
Management provided no specific numerical revenue or earnings guidance. It stated that available cash, operating cash flows and borrowing capacity were expected to meet liquidity needs and planned capital expenditures for at least the next 12 months. Management described the pandemic-driven market turmoil as contributing to increased trading activity and said credit spreads and volatility tightened toward pre-pandemic levels in the second half of 2020; it cautioned that a longer-term recession could weaken liquidity and trading volumes.
Key risks include sensitivity to fixed-income trading activity, market share and commission rates; intense competition; dependence on broker-dealer and institutional-investor participation; matched-principal counterparty and settlement exposure; self-clearing liquidity and operational demands; cybersecurity and system availability; and extensive, changing regulation. Brexit has added regulatory and operating complexity across the U.K. and E.U. The company also identified pandemic-related uncertainty and remote-work cybersecurity risks. Legal proceedings and regulatory examinations were described as not expected, based on available information, to materially adversely affect financial position, though ultimate exposure could exceed accrued reserves.
Important facts for investors to verify
- Whether 2020’s unusually active credit markets and gains in estimated market share persist, and how trading volumes and fees evolve.
- Self-clearing performance, settlement fails, clearing-related costs and the liquidity or capital tied up in related deposits and customer reserves.
- Integration and financial contribution of the Deutsche Börse reporting acquisition, and the closing, consideration and integration of MuniBrokers.
- Available borrowing capacity and regulatory capital requirements, including the distinction between the committed revolver and the uncommitted collateralized facility.
- The audited statements report effective internal control over financial reporting; PwC identified Open Trading commission revenue recognition as a critical audit matter.