MarketAxess Holdings Inc. — Q2 2017 Form 10-Q
Business context and reporting period
MarketAxess operates an electronic trading platform and related data, technology, trade-matching and regulatory-reporting services for fixed-income markets. This unaudited report covers the three and six months ended June 30, 2017; comparisons are with the corresponding 2016 periods.
Financial performance and position
| Metric | Q2 2017 | Q2 2016 | First half 2017 | First half 2016 |
|---|---|---|---|---|
| Revenue | $97.3m | $96.6m | $201.2m | $185.2m |
| Income before taxes | $49.6m | $50.6m | $105.2m | $94.9m |
| Net income | $38.0m | $33.1m | $80.5m | $62.1m |
| Diluted EPS | $1.00 | $0.88 | $2.11 | $1.65 |
| Operating cash flow | — | $69.1m | $(20.1)m |
- Q2 revenue grew 0.7%; first-half revenue grew 8.6%. Commissions accounted for 89% of Q2 revenue and rose 0.9% in the quarter and 9.5% in the first half.
- Q2 pretax income declined 1.9%, while net income rose 14.8%. First-half pretax income increased 10.8% and net income 29.6%.
- Q2 pretax margin was approximately 51.0% versus 52.3% a year earlier; net margin was approximately 39.1% versus 34.3%. First-half pretax and net margins were approximately 52.3% and 40.0%, respectively, versus 51.2% and 33.5%.
- First-half trading volume increased 16.6% to $755.9bn: U.S. high-grade rose 15.2% and other credit 22.6%; liquid-products volume fell 13.4%. U.S. high-grade share was reported at 16.4% for the half, up from 15.5%.
- At June 30, cash and cash equivalents were $128.1m and investments were $237.4m, totaling $365.5m. Total liabilities were $45.8m; stockholders’ equity was $501.2m. No borrowings under the credit facility are reported; $1.0m of letters of credit were outstanding and $99.0m of capacity remained available.
- First-half cash flow from operations was $69.1m, investing cash outflow $54.3m and financing cash outflow $55.5m. Cash decreased $40.1m to $128.1m. Financing included $24.1m of share repurchases and $24.5m of dividends paid.
Material changes and unusual items
- Q2 revenue was nearly flat despite 6.9% higher trading volume. Higher volumes were offset in part by lower average transaction fees per million, especially in U.S. high-grade; Q2 commissions rose just 0.9%.
- Q2 expenses increased 3.6% to $47.7m, including higher marketing, technology and general and administrative costs. First-half expenses rose 6.4% to $96.0m, while expenses as a share of revenue declined to 47.7% from 48.8%.
- The effective tax rate fell to 23.3% in Q2 and 23.5% for the first half, versus 34.5% and 34.6%. The 2017 tax provision included share-based-payment excess tax benefits of $5.3m for Q2 and $11.0m for the first half, following adoption of new accounting guidance. These benefits contributed to net-income growth and may cause tax-rate and EPS volatility.
- First-half operating cash flow improved from the prior-year outflow, principally reflecting fewer net purchases of corporate debt trading investments and higher net income. Cash movements in investment securities affect reported cash flow.
- The company repurchased $24.1m of stock during the first half; approximately $27.0m remained authorized at June 30. The board approved a $0.33-per-share quarterly dividend in July, payable August 24, 2017.
Outlook, risks and contingencies
- Management stated that available resources should meet liquidity and capital needs for at least the next 12 months. No specific revenue, earnings or trading-volume guidance is provided in the filing.
- The $100m revolving credit agreement matures in October 2017. The company was in compliance with covenants at June 30; investors should note the impending maturity and any renewal or replacement terms.
- Management expects MiFID II and MiFIR to take effect in January 2018, potentially increasing compliance, technology and operating costs and affecting competitive positioning. Brexit could affect U.K. subsidiaries’ access to the EU market; the company had begun establishing regulated EU subsidiaries.
- Results are exposed to fixed-income market activity, competition, commission rates, interest rates and foreign-exchange movements. Sterling movements reduced reported revenue by $1.3m in Q2 and $3.2m in the first half, according to management.
- Open Trading matched-principal activity exposes the company to counterparty and settlement risk. The filing says additional automated controls have been implemented, but there is no assurance they will fully mitigate exposure. Cash deposits are primarily held at one major global bank.
- Operating lease commitments totaled $144.6m, including $126.8m remaining under leases for approximately 108,000 square feet of office space. Legal matters and regulatory examinations were not expected to have a material adverse financial impact based on information then available, though ultimate exposure could not be determined.
Important facts for investors to verify
- Whether trading-volume growth and market-share gains persist, and whether commission yield per million stabilizes.
- How much of earnings growth reflects recurring operations versus share-based-payment tax benefits, and the potential future tax-rate variability.
- The outcome and terms of the credit facility’s October 2017 maturity.
- Implementation costs and business effects of MiFID II/MiFIR and the company’s post-Brexit EU operating structure.
- Liquidity available for corporate use, considering regulated-subsidiary capital restrictions, lease commitments, repurchases and dividends.