MarketAxess Holdings Inc. — 2015 Form 10-K
Business context and reporting period. MarketAxess operates an electronic fixed-income trading platform connecting institutional investors and broker-dealers, with related market-data, post-trade, regulatory-reporting and technology services. This annual filing covers the fiscal year ended December 31, 2015; quarterly figures below are for Q4 2015. Most revenue comes from trading commissions and broker-dealer distribution fees.
Financial and operating performance
| Metric | 2015 | 2014 | Change |
|---|---|---|---|
| Total revenue | $303.1 million | $262.8 million | +15.3% |
| Commissions | $266.2 million | $221.1 million | +20.4% |
| Income before income taxes | $147.9 million | $118.5 million | +24.8% |
| Net income | $96.0 million | $74.8 million | +28.4% |
| Diluted EPS | $2.55 | $1.97 | +29.4% |
| Operating cash flow | $120.2 million | $110.0 million | +9.3% |
- Total trading volume rose 27.6% to $978.5 billion. U.S. high-grade volume increased 21.5% to $577.6 billion; other-credit volume grew 48.4% to $335.5 billion; liquid-products volume was nearly flat at $65.4 billion.
- Management-estimated adjusted U.S. high-grade market share increased to 16.8% from 14.5%. The company adjusted TRACE market volumes for reporting changes, including affiliate back-to-back trades and Rule 144A securities.
- Expenses increased 7.6% to $155.2 million, slower than revenue growth. Expenses were 51.2% of revenue, versus 54.9% in 2014; pre-tax income was 48.8% of revenue. Net margin was 31.7%.
- Free cash flow, a company-defined non-GAAP measure, was $104.8 million, compared with $95.2 million. Investing cash use was $38.0 million, mainly reflecting net purchases of available-for-sale securities; financing cash use was $51.1 million, including dividends and share repurchases.
- At year-end, cash and cash equivalents were $199.7 million, available-for-sale securities were $84.7 million, working capital was $284.9 million and total assets were $439.0 million. Total liabilities were $48.3 million and equity was $390.7 million.
- The amended revolving credit facility provides up to $100 million and matures in October 2017. After $1.1 million of letters of credit, $98.9 million was available; the filing does not report outstanding borrowings. The company was in compliance with facility covenants.
- Q4 revenue was $76.6 million and net income was $24.5 million, compared with $70.2 million and $21.6 million, respectively, in Q4 2014. Q4 diluted EPS was $0.65 versus $0.57.
Material changes versus the prior year
- Revenue growth was driven by commissions, particularly other-credit trading, whose volume rose 48.4%; variable transaction fees for other credit increased 38.7%. Overall commissions rose 20.4%.
- U.S. high-grade trading growth reflected increased adjusted estimated market share and market volume. Management reported adjusted TRACE market volume growth of 4.8%, below MarketAxess’ own segment volume growth.
- Information and post-trade revenue declined 2.7% to $30.7 million. Foreign exchange reduced this revenue by about $1.8 million; excluding that effect, information revenue rose while post-trade revenue fell. Technology-services revenue decreased 48.0%, principally as a consulting engagement wound down.
- Employee compensation rose 11.8%, with headcount increasing to 342 from 303. General and administrative expense rose 34.7%, including higher matched-principal clearing costs. Technology and communications and professional fees declined.
- The effective tax rate fell to 35.1% from 36.9%, partly due to a higher proportion of income in lower-tax jurisdictions and lower statutory foreign and state rates.
- Matched-principal trading revenue increased to $16.9 million from $7.4 million, while related clearing costs rose to $3.3 million from $1.3 million.
Outlook, commentary, risks and unusual items
- The filing provides no quantified financial guidance. Management’s stated priorities include expanding Open Trading, broadening products and clients, growing data and post-trade services, and investing in straight-through processing and technology. Open Trading completed approximately 180,000 trades in 2015, up 134% from 2014.
- Management expects MiFID II/MiFIR, currently expected to take effect in January 2018, to increase reporting and transparency requirements and demand for related services, but also to require additional compliance, technology and operating expenditure. Final rules and their net business effect remain uncertain.
- Key risks include sensitivity to fixed-income trading activity and market share; competition and continued reliance on broker-dealer liquidity; concentration in U.S. high-grade commissions (about 53% of revenue); and reliance on one institutional investor that represented 15.3% of trading volume, though no single client exceeded 10% of revenue.
- Open Trading exposes the company to counterparty, settlement, erroneous-trade and market-movement risks because it acts as matched principal in some transactions. Clearing brokers may charge the company for counterparty losses without a stated cap; no related liability was recorded at year-end.
- Other stated risks include regulation, cyber and systems disruptions, foreign-exchange movements, and potential limits on dealer market-making from regulations such as the Volcker Rule and bank capital requirements. The company held $84.7 million in available-for-sale securities, primarily corporate bonds; a hypothetical 10% value decline could cause a substantial loss.
- Legal proceedings and regulatory examinations arise in the ordinary course. Management did not expect currently outstanding matters to materially affect financial position, but said ultimate exposure could not be determined and outcomes could exceed accrued reserves.
- There were no discontinued operations in 2015. The 2013 comparison included a $7.6 million after-tax gain on the sale of Greenline. The filing also identifies a 2013 non-material out-of-period software-cost capitalization adjustment.
- The board approved a $0.26 quarterly dividend in January 2016 and a new two-year share repurchase authorization of up to $25 million. These are subject to board discretion and applicable restrictions.
Important facts for investors to verify
- Review the assumptions and reconciliation behind management’s adjusted TRACE volumes and 16.8% estimated U.S. high-grade market share.
- Track whether trading growth, especially in other credit and Open Trading, translates into sustainable commission revenue and margins as fee mix changes.
- Assess the exposure, controls and capital implications of growing matched-principal activity, including potential unsettled-trade losses and clearing-broker claims.
- Monitor implementation costs, final requirements and business effects of MiFID II/MiFIR and other U.S. and international regulations.
- Confirm credit-facility utilization, covenant compliance, liquidity availability and the company’s ability to maintain dividends and repurchases while meeting investment needs.
- Consider the stated client-volume concentration, U.S. high-grade revenue dependence, securities portfolio valuation exposure, and systems, cyber and foreign-exchange risks.