MarketAxess Holdings Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2012. Amounts are in U.S. dollars; financial statement amounts are in millions unless otherwise noted.
Business context
MarketAxess operates an electronic multi-dealer platform for trading corporate bonds and other fixed-income instruments, alongside market data and technology services. Most revenue comes from trading commissions. At the time of the filing, it reported more than 900 active institutional investor clients and 87 broker-dealer market-maker clients.
Financial performance and liquidity
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Revenue | $48.8 | $45.8 | $99.6 | $89.4 |
| Expenses | $27.6 | $25.9 | $55.6 | $51.8 |
| Income before taxes | $21.2 | $19.9 | $43.9 | $37.6 |
| Net income | $12.6 | $11.9 | $26.1 | $22.7 |
| Diluted EPS | $0.34 | $0.30 | $0.69 | $0.58 |
- Q2 revenue grew 6.6%; net income rose 5.8%. For the first half, revenue grew 11.4% and net income increased 15.0% year over year.
- First-half pretax margin was approximately 44.1%, up from 42.0%; net margin was approximately 26.2%, up from 25.4%. Q2 pretax and net margins were approximately 43.4% and 25.9%, respectively.
- Commissions drove growth: up 9.2% in Q2 and 14.0% for the first half. Technology products and services revenue declined 19.2% and 13.6%, respectively.
- First-half operating cash flow was $25.9, versus $19.4 a year earlier. Investing activities provided $15.0, primarily reflecting net securities sales and maturities; financing activities used $80.5, including $71.1 of share repurchases and $8.3 of dividends. Cash declined $40.0 to $129.6.
- Cash and cash equivalents plus available-for-sale securities totaled $188.2 at June 30. The company reported no short- or long-term debt, apart from $0.5 of capital lease obligations, and no bank credit lines.
- Total assets were $289.7 and stockholders’ equity was $261.7 at June 30. The quarterly dividend was $0.11 per share.
Material changes versus prior comparable periods
- Q2 trading volume increased 8.9% to $144.8 billion; first-half volume increased 12.9% to $302.8 billion. U.S. high-grade volume rose 12.1% in Q2 and 13.8% for the first half. Management attributed much of the increase to market-share gains: estimated U.S. high-grade share rose to 12.4% in Q2 and 11.8% for the first half.
- Eurobond volume fell 22.1% in Q2 and 3.7% for the first half amid unfavorable European market conditions. Most European broker-dealer market makers’ monthly distribution fees were reduced effective March 1, 2012.
- Expense growth was slower than first-half revenue growth. First-half general and administrative expense increased 46.7%, partly because the comparable 2011 period included a $0.7 sales-tax reimbursement, and due to higher bad-debt provision. Marketing expense rose 43.1%, partly reflecting promotion of credit-default-swap trading capabilities.
- JPMorgan Chase sold its company shares in February 2012 and ceased to be a related party. MarketAxess repurchased 1,821,730 of JPM’s non-voting shares for $52.9; the separate secondary offering proceeds went to the selling shareholder, not the company.
Outlook, commentary, risks and contingencies
- No specific financial guidance was provided. Management stated that available resources were expected to meet liquidity needs and capital expenditure requirements for at least the next 12 months, while noting that future needs depend on product development, expansion and business opportunities.
- Management expects to continue regular dividends, subject to board discretion. It was evaluating the establishment of a swap execution facility and/or security-based swap execution facility, subject to regulatory rulemaking; such operations could require additional regulatory capital.
- Key business sensitivities include fixed-income trading volumes, interest-rate and credit-market conditions, competition, client participation, technology and cybersecurity, and evolving U.S. and international regulation, including Dodd-Frank implementation.
- Riskless-principal transactions expose the company to counterparty and clearing-broker claims; the clearing broker’s right to recover losses is not capped. No related liability was recorded at June 30. Other commitments include $18.7 of operating lease payments, $1.7 of standby letters of credit, and contingent exposure of $1.2 under an assigned lease. Management described indemnification loss risk as remote.
- There were no reported legal proceedings or material changes to the risk factors in the 2011 Form 10-K. Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether trading-volume and U.S. high-grade market-share gains continue, and whether higher transaction fees per million are sustainable.
- The persistence of weakness in Eurobond activity and the revenue effect of reduced European distribution fees.
- Whether expense growth, particularly in marketing, technology, and bad-debt provision, affects future margins.
- Cash and securities balances after substantial repurchases and dividends, and the pace of any further capital returns.
- Progress and capital requirements for any swap execution facility, alongside counterparty exposure and restricted regulatory-subsidiary capital.