MarketAxess Holdings Inc. — 2011 Form 10-K
Business context and reporting period. The filing covers the fiscal year ended December 31, 2011; fourth-quarter figures are also presented. MarketAxess operates an electronic multi-dealer fixed-income trading platform, with revenue primarily from broker-dealer commissions and distribution fees. It reported more than 850 active institutional investor clients and 87 broker-dealer market makers. The filing reports one operating segment.
Financial performance and position
| Metric | FY 2011 | FY 2010 | Change |
|---|---|---|---|
| Total revenue | $181.1 million | $146.2 million | +23.8% |
| Commissions | $155.4 million | $122.2 million | +27.2% |
| Income before taxes | $78.7 million | $50.9 million | +54.7% |
| Net income | $47.7 million | $31.4 million | +51.8% |
| Diluted EPS | $1.20 | $0.80 | +$0.40 |
| Operating cash flow | $65.5 million | $64.1 million | +$1.3 million |
- Net margin was approximately 26.3%, compared with 21.5% in 2010. Expenses rose 7.4% to $102.4 million, slower than revenue growth; expenses were 56.5% of revenue versus 65.2%.
- Total platform trading volume grew 30.5% to $525.0 billion. U.S. high-grade volume rose 32.9% to $323.6 billion, and estimated U.S. high-grade market share increased to 11.1% from 8.4%. “Other” volume rose 51.5%; Eurobond volume fell 26.5%.
- Fourth-quarter 2011 revenue was $45.1 million, up 16.9% year over year but down from $46.6 million in Q3. Q4 net income was $11.5 million, up from $8.9 million a year earlier and down from $13.4 million in Q3.
- At year-end, cash and cash equivalents were $169.6 million and available-for-sale securities were $78.1 million, totaling $247.7 million. Working capital was $253.9 million; total assets were $349.5 million and total liabilities were $37.0 million.
- The company reported no short- or long-term debt apart from a $0.6 million capital lease obligation at year-end. Operating cash flow was $65.5 million; management-defined free cash flow, a non-GAAP measure, was $58.3 million. Cash paid for income taxes increased to $10.2 million from $2.2 million.
Material changes versus prior periods
- Revenue growth was led by U.S. high-grade commissions and higher trading activity in other products. U.S. high-grade commissions rose to $108.9 million; “other” commissions rose to $28.7 million.
- Eurobond trading weakened amid European sovereign-debt concerns and competition: volume declined 26.5%, and Eurobond commissions fell 4.6% to $17.8 million. Average variable fee per million also declined across the overall platform.
- Expense growth was modest relative to revenue, although marketing and advertising rose 58.8% to $4.9 million, and professional and consulting fees increased 19.2% to $10.1 million. Higher spending included CDS-related marketing and SEF regulatory consulting.
- Deferred tax assets fell to $8.1 million from $19.8 million. The company used its unrestricted U.S. federal net operating loss carryforward during 2011 and expects higher cash tax payments in subsequent years.
- The Series B preferred stock converted into common shares in January 2011. The company repurchased $6.9 million of shares under a new $35 million program by year-end; through February 16, 2012, repurchases totaled $25.2 million.
Outlook, commentary, risks and unusual items
- No specific full-year 2012 revenue or earnings guidance is provided. Management said available resources were adequate for anticipated liquidity needs and capital expenditures for at least the next 12 months, while noting that requirements depend on growth, development and expansion plans.
- Effective March 1, 2012, the company planned to reduce European broker-dealer monthly distribution fees while leaving variable transaction fees unchanged. It expected distribution-fee revenue to decline by about $0.5 million per month and gave no assurance that lower fees would revive volumes.
- MarketAxess planned to establish and operate a swap execution facility and/or security-based swap execution facility, subject to U.S. regulatory rulemaking. The timing and final requirements remained uncertain; registration and compliance could add costs, and failure to qualify could prevent the company from supporting CDS trades.
- Key business risks include sensitivity to fixed-income trading volumes and market liquidity, intense competition, reliance on broker-dealer and institutional investor participation, and concentration in U.S. high-grade trading. One institutional investor accounted for 14.6% of platform volume in 2011, though no single client exceeded 10% of revenue.
- Other risks include European sovereign-debt stress, regulatory changes (including Dodd-Frank and the proposed Volcker Rule), technology outages and cybersecurity events, third-party service-provider dependence, and counterparty exposure on riskless-principal trades. A clearing broker may charge the company for uncapped losses from counterparty failures.
- Unusual items included a $0.9 million full allowance for receivables from MF Global after its liquidation proceeding, and a $0.6 million write-off of a minority investment. The filing reports no material legal proceedings. Management and the independent auditor concluded internal control over financial reporting was effective; the financial statements received an unqualified audit opinion.
- The board approved a quarterly dividend of $0.11 per share in January 2012, payable March 1, subject to the board’s discretion and applicable restrictions.
Investor verification checklist
- Confirm whether 2011 trading-volume and market-share gains, particularly in U.S. high-grade and other products, persisted after year-end.
- Track Eurobond activity and the realized revenue and volume effects of the March 2012 dealer-fee reduction.
- Review subsequent cash taxes following exhaustion of unrestricted federal loss carryforwards, and assess the effect on cash generation.
- Monitor CDS/SEF rulemaking, implementation costs, qualification requirements and the company’s ability to continue supporting CDS transactions.
- Assess counterparty and receivables exposure, including developments related to MF Global and the clearing broker’s loss-recovery rights.
- Verify capital returns and liquidity after the reported share repurchases and dividend, while accounting for regulatory capital limits at subsidiaries.