MarketAxess Holdings Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; unaudited. MarketAxess operates an electronic fixed-income trading platform and provides related data, post-trade, and technology services. Unless stated otherwise, amounts are in U.S. dollars.
Financial performance and liquidity
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Revenue | $76.8 million | $63.4 million | +21.1% |
| Commissions | $67.0 million | $52.0 million | +28.9% |
| Total expenses | $38.3 million | $35.7 million | +7.2% |
| Income before taxes | $38.5 million | $27.7 million | +39.0% |
| Net income | $24.6 million | $17.5 million | +40.7% |
| Diluted EPS | $0.65 | $0.46 | +41.3% |
| Net cash from operations | $10.0 million | $10.1 million | −1.1% |
- Net margin was approximately 32.0%, versus 27.6% a year earlier; pretax margin was approximately 50.2%, versus 43.7%.
- Trading volume rose 30.0% to $243.7 billion. Other credit volume increased 63.1%, U.S. high-grade increased 22.0%, and liquid products declined 8.4%.
- Cash and cash equivalents were $161.0 million and available-for-sale securities were $62.2 million at quarter-end, totaling $223.2 million. Total assets were $378.7 million; total liabilities were $34.0 million and equity was $344.7 million.
- The filing does not report a drawn debt balance. The company had $49.8 million available under its $50.0 million revolving credit facility and was in compliance with its covenants.
- Investing activities used $1.0 million and financing activities used $17.2 million. Cash declined $7.9 million, principally amid $8.9 million of share repurchases and $7.5 million of dividends paid. Twelve-month free cash flow was $95.8 million, a non-GAAP measure.
Changes and notable items
- Revenue growth was driven primarily by a $15.0 million increase in commissions, reflecting higher trading volume and higher average U.S. high-grade fees per million. Expenses grew more slowly than revenue; compensation and benefits were the largest expense increase.
- Information and post-trade revenue fell 5.0%; technology products and services revenue fell 30.3%. Other revenue declined 59.0%, partly because Q1 2014 included $0.7 million from the sale of MF Global bankruptcy claims.
- The effective tax rate decreased to 36.1% from 36.9%. Sterling exchange-rate movements reduced Q1 2015 revenue by $0.9 million and expenses by $0.9 million, according to management.
- The company repurchased 117,400 shares for $8.9 million during the quarter; approximately $53.1 million remained authorized under the program. The declared quarterly dividend was $0.20 per share.
- Matched-principal transaction revenue increased to $3.5 million from $1.1 million. The CEO received equity awards with a combined grant-date value of $8.0 million under a new employment agreement.
Outlook, risks, and contingencies
- No specific earnings or revenue guidance was provided. Management said current resources were adequate for liquidity needs and capital expenditures for at least the next 12 months; future needs may depend on product development, expansion, and business opportunities.
- Results are sensitive to fixed-income market activity and trading volumes, interest-rate and credit-market conditions, competition, and broker-dealer liquidity provision. Management described continued investment in platform functionality, Open Trading, new products, and geographic expansion.
- Regulatory developments, including U.S. derivatives rules and European MiFID II/MiFIR requirements, may affect costs, client market-making capacity, and operations. Management said the impact was uncertain.
- Matched-principal clearing agreements expose the company to counterparty and settlement losses that are not capped; no related liability was recorded at quarter-end. The company was developing additional automated risk controls. Cash deposits were concentrated primarily at one major global bank.
- Legal matters were not expected to have a material adverse financial impact based on currently available information, but ultimate exposure could not be determined. Federal tax examinations for 2011–2012 and New York state franchise tax examinations for 2007–2009 were ongoing; their outcomes were uncertain.
- Operating lease commitments totaled $25.8 million, including a new New York office lease with approximately $1.6 million of rental commitments. The company also reported contingent exposure under assigned leases and landlord letters of credit.
Key facts for investors to verify
- Whether the strong commission and trading-volume growth persists, especially in other credit and U.S. high-grade, and how average fees per million evolve.
- How matched-principal activity grows and whether new credit controls adequately limit uncapped clearing-related exposure.
- The effect of market, competitive, and regulatory changes on liquidity, trading activity, and margins.
- Cash generation after dividends and repurchases, actual credit-facility usage, and restrictions on cash held in regulated or foreign subsidiaries.
- Potential outcomes of tax examinations and legal matters, and the timing and cost of planned product and technology investment.