MarketAxess Holdings Inc. — FY2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014. The filing is an annual report, not a standalone Q4 filing; selected Q4 figures are included below. MarketAxess operates an electronic fixed-income trading platform and related data, trade-matching, reporting and technology services. Most revenue comes from trading commissions and broker-dealer distribution fees.
Financial performance and position
| Metric | FY2014 | FY2013 | Change |
|---|---|---|---|
| Revenue | $262.8 million | $238.7 million | +10.1% |
| Commissions | $221.1 million | $203.7 million | +8.6% |
| Information and post-trade services | $31.5 million | $25.4 million | +24.2% |
| Expenses | $144.2 million | $131.5 million | +9.7% |
| Income before taxes from continuing operations | $118.5 million | $107.3 million | +10.5% |
| Net income from continuing operations | $74.8 million | $68.6 million | +9.1% |
| Net income | $74.8 million | $76.0 million | -1.6% |
| Diluted EPS from continuing operations | $1.97 | $1.81 | +8.8% |
| Cash provided by operating activities | $110.0 million | $90.9 million | +21.0% |
- Commissions represented 84.2% of revenue. Total platform trading volume rose 10.6% to $767.0 billion. U.S. high-grade volume increased 8.0% to $475.4 billion; other-credit volume rose 27.5%, while liquid-products volume fell 14.1%.
- FY2014 pretax margin was approximately 45.1% and net margin approximately 28.5%, based on reported continuing-operations pretax income and net income.
- Free cash flow, a company-defined non-GAAP measure, was $95.2 million, versus $67.6 million in 2013.
- At year-end, cash and cash equivalents were $168.9 million, securities available-for-sale were $64.9 million, working capital was $227.7 million, and total assets were $379.9 million. Total liabilities were $45.7 million.
- No revolver borrowing is reported; $49.9 million was available under the $50 million credit facility. The company reported compliance with its covenants. Regulated subsidiaries held $81.1 million of aggregate regulatory capital and financial resources above required minimums.
- FY2014 dividends were $0.64 per share. The board approved a subsequent quarterly dividend of $0.20 per share, payable in February 2015. The company repurchased 646,185 shares for $38.0 million during 2014.
Fourth-quarter snapshot
Q4 2014 revenue was $70.2 million, compared with $60.4 million in Q4 2013, an increase of approximately 16.1%. Income from continuing operations was $21.6 million versus $15.5 million; diluted continuing-operations EPS was $0.57 versus $0.41. Q4 2013 net income included a $7.7 million after-tax gain on the sale of Greenline, so reported net income comparisons are affected by that item.
Material changes and unusual items
- Revenue growth reflected higher commissions, particularly in emerging markets, Eurobonds and high-yield bonds, as well as additional Xtrakter revenue months and favorable currency translation. Xtrakter was acquired in February 2013.
- U.S. high-grade trading volume and estimated market share increased, but average variable fee per million declined to $175 from $190, principally due to shorter bond duration and larger trade sizes.
- Expenses increased, led by compensation and benefits (+16.4%) and depreciation and amortization (+23.1%). Professional and consulting fees declined 21.1%.
- Net income declined despite stronger continuing operations because 2013 included the $7.6 million after-tax Greenline sale gain. Greenline was sold in October 2013.
- The 2013 comparison also includes a disclosed out-of-period software-cost capitalization adjustment: compensation expense was reduced by $2.9 million, depreciation and amortization increased by $1.3 million, and capitalized software increased by $1.6 million. Management said the adjustment was not material to prior periods or 2013.
Outlook, risks and contingencies
- No quantified revenue or earnings guidance is provided. Management said current resources were adequate for anticipated liquidity needs and capital expenditures for at least the next 12 months, while noting future needs depend on growth, product development and business opportunities.
- Management’s strategy emphasizes expanding Open Trading all-to-all protocols, products, clients, data services and European post-trade reporting. Approximately 77,000 trades used Open Trading solutions in 2014. The BlackRock alliance was expanded to European cash credit markets in January 2015.
- Key risks include trading-volume and market-liquidity variability, competition, dependence on broker-dealer participation, regulatory changes and compliance costs, technology outages and cybersecurity incidents, foreign exchange exposure, and counterparty risk from matched-principal trades. One institutional investor accounted for 14.0% of trading volume, although no client exceeded 10% of revenue.
- MiFID II/MiFIR requirements were expected to take effect in January 2017; management stated that their impact and detailed implementation requirements remained uncertain. The company’s SEF registration was temporary, and SEC rules for security-based SEFs had not been finalized.
- Legal proceedings and regulatory examinations arise in the ordinary course. The company did not expect outstanding matters to materially affect its financial position based on information then available, but said ultimate exposure could not be determined and losses could exceed reserves.
- Foreign currency forward contracts had a $32.0 million notional value at year-end. Securities available-for-sale totaled $64.9 million; management cautioned that adverse market movements could cause losses.
Investor verification priorities
- Confirm the drivers and sustainability of commission growth, trading-volume gains and the lower U.S. high-grade fee per million; review the company’s TRACE volume adjustments.
- Assess the extent to which revenue and earnings comparisons are affected by Xtrakter, foreign-exchange movements and the 2013 Greenline disposal gain.
- Monitor client concentration, particularly the institutional investor responsible for 14.0% of 2014 trading volume, and the participation and liquidity effects of Open Trading.
- Review the final regulatory requirements and implementation costs for MiFID II/MiFIR and U.S. derivatives trading, including the status of SEF registrations.
- Verify ongoing liquidity, capital expenditure, share repurchases and dividend capacity, including restrictions on transfers from regulated subsidiaries and the credit facility’s covenants.