MarketAxess Holdings Inc. — FY2017 Form 10-K
Business and reporting period. MarketAxess operates an electronic fixed-income trading platform, with related market-data, technology and European post-trade services through Trax. The filing covers the fiscal year ended December 31, 2017; quarterly figures below include Q4 2017. Revenue is primarily commissions and broker-dealer distribution fees. More than 1,300 institutional investor and broker-dealer firms used the platform.
Financial performance
| Metric | FY2017 | FY2016 | Change |
|---|---|---|---|
| Revenue | $397.5 million | $369.9 million | +7.4% |
| Expenses | $195.7 million | $178.3 million | +9.8% |
| Income before taxes | $201.8 million | $191.6 million | +5.3% |
| Net income | $148.1 million | $126.2 million | +17.4% |
| Diluted EPS | $3.89 | $3.34 | +16.5% |
| Operating cash flow | $168.0 million | $89.7 million | +$78.3 million |
| Free cash flow (non-GAAP) | $159.6 million | $145.4 million | +$14.1 million |
Revenue and margins. Commissions were $355.3 million, or 89.4% of revenue, up 6.9%. Information services revenue rose 10.9% to $25.8 million; post-trade services rose 2.6% to $11.1 million. Expenses were 49.2% of revenue (48.2% in 2016); pretax and net margins were approximately 50.8% and 37.3%, respectively.
Trading activity. Total platform volume increased 11.4% to $1.458 trillion. U.S. high-grade volume rose 12.9%, with estimated market share increasing to 16.9% from 16.0%; other-credit volume rose 14.4%, while liquid-products volume fell 25.2%. Overall variable fees per million declined, partly offset by higher distribution fees and volume. Open Trading represented 15.9% of platform volume, versus 13.2% in 2016, and Open Trading trades increased 53.9% to approximately 628,000.
Q4 2017. Revenue was $99.6 million versus $94.4 million in Q4 2016; net income was $33.5 million versus $33.2 million; diluted EPS was $0.88 in both quarters.
Liquidity, capital and other key metrics
- Cash and cash equivalents were $167.0 million; investments were $239.5 million, for combined cash and investments of $406.5 million at year-end. Working capital was $411.4 million.
- Operating cash flow was $168.0 million; investing cash outflow was $53.7 million and financing cash outflow was $117.1 million. The company paid $48.9 million in dividends and repurchased $42.5 million of shares.
- No drawn borrowings are disclosed. The revolving credit facility provided up to $100 million; $0.9 million of letters of credit were outstanding and $99.1 million was available. The facility was extended to October 2018, with two possible one-year extensions, subject to conditions and covenants.
- Regulated subsidiaries held $130.5 million of net capital and financial resources above required minimums. The quarterly dividend paid in 2017 was $0.33 per share; annual dividends declared were $1.32 per share.
Material changes, outlook and risks
- Operating environment: Management characterized 2017 as challenging, citing low volatility, low credit spreads and accommodative central-bank policies. Low volatility weighed particularly on high-yield activity; emerging-markets volume benefited from demand for yield.
- Tax items: The 2017 effective tax rate was 26.6%, versus 34.1%, including $26.1 million of excess share-based-compensation tax benefits and a provisional $11.7 million Tax Act charge. The company said the final Tax Act impact could differ from its estimate.
- Costs and investment: Headcount increased to 429 from 383, and expenses grew faster than revenue. Management expected occupancy costs to rise in 2018 following the planned move to new New York headquarters; it also identified product development and geographic expansion as potential cost drivers.
- Outlook: The filing provides no specific numerical revenue or earnings guidance. Management’s strategy is to expand Open Trading, add products and clients, strengthen data and post-trade services, and pursue selected acquisitions or alliances. Management stated current resources were adequate for anticipated needs for at least 12 months.
- Principal risks: Revenue depends heavily on trading volumes and market conditions; competition, client concentration and fee changes may pressure activity or pricing. One institutional investor represented 12.2% of 2017 platform volume, although no client exceeded 10% of revenue. Other material risks include cybersecurity or system outages, matched-principal counterparty and settlement exposure, extensive regulation, MiFID II costs, Brexit-related restructuring and foreign-exchange movements.
- Commitments and contingencies: Operating lease commitments totaled $143.9 million, including $99.2 million due after five years. The company reported ordinary-course legal matters not expected to materially affect its financial position based on information then available, while noting ultimate exposure could not be determined. Internal controls over financial reporting were assessed as effective and received an unqualified audit opinion.
Investor verification priorities
- Confirm the sustainability of trading-volume growth and the effects of falling average variable fees per million and revised fee plans.
- Assess whether low-volatility market conditions, the 12.2% volume concentration and declines in liquid-products activity could pressure commissions.
- Review the final accounting and cash-tax consequences of the Tax Act, including the provisional $11.7 million charge and share-based tax benefits.
- Track MiFID II implementation costs and Brexit-related EU subsidiary, regulatory and operating requirements.
- Evaluate matched-principal counterparty controls, investment portfolio exposure, credit-facility covenant headroom and substantial long-term lease commitments.