MarketAxess Holdings Inc. — Q1 2019 Form 10-Q
Business context and reporting period. Unaudited results for the three months ended March 31, 2019, compared with Q1 2018. MarketAxess operates an electronic fixed-income trading platform and provides data, technology and post-trade services. It reported one operating segment.
Financial performance and liquidity
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Revenue | $124.5 million | $114.7 million | +8.5% |
| Operating income | $63.2 million | $60.2 million | +5.0% |
| Net income | $52.5 million | $47.9 million | +9.6% |
| Diluted EPS | $1.39 | $1.27 | +9.7% |
| Operating margin | 50.8% | 52.5% | Down about 1.7 percentage points |
| Net margin | 42.2% | 41.8% | Up about 0.4 percentage points |
Commissions were $112.8 million, up 9.7%, and represented 90.6% of revenue. Information services revenue rose 4.2% to $7.4 million; post-trade services revenue fell 10.4% to $4.1 million. Total expenses increased 12.4% to $61.3 million, led by employee compensation, depreciation and amortization, professional fees, and clearing costs. Investment income rose to $2.0 million from $1.2 million. The effective tax rate declined to 19.5% from 21.4%, including $3.0 million of excess share-based compensation tax benefits.
Net cash from operating activities was $39.4 million, versus $31.4 million. Investing activities provided $10.6 million, compared with $12.7 million used in Q1 2018; financing activities used $36.2 million, compared with $29.4 million. Cash and cash equivalents were $261.0 million at quarter-end; cash and investments totaled $483.4 million. The company reported no borrowings under its revolving credit agreement, with $98.3 million available after $1.7 million of letters of credit. The facility was scheduled to mature in October 2019.
Material changes and management commentary
- Trading volume increased 13.2% to $526.2 billion; variable transaction fees rose 11.7%, while average variable transaction fees per million declined 1.7%.
- Open Trading volume grew 65.6%. U.S. high-grade volume rose 10.5%, while estimated MarketAxess share of that market slipped to 17.6% from 18.0%. Other credit volume increased 17.3%, including gains in Eurobonds, high-yield and emerging markets bonds.
- Management cited lower volatility and tighter credit spreads, slightly lighter-than-normal new issuance, and investment-manager inflows that lifted secondary trading. A flattening yield curve reduced bond duration and pressured fee capture.
- The company adopted the new lease accounting standard on January 1, 2019, recognizing $78.2 million of right-of-use assets and $90.8 million of lease liabilities at March 31. Adoption did not materially affect operating results or cash flows.
- MarketAxess established regulated Netherlands subsidiaries that began operations in Q1 to support European client services after Brexit. The U.K. was then expected to leave the EU by October 31, 2019, subject to the withdrawal process.
Outlook, risks and unusual items
The filing provides no specific numerical revenue or earnings guidance. Management said available resources should meet liquidity and capital needs for at least the next 12 months. It noted that future requirements depend on product development, expansion and potential investments or acquisitions.
- Results are sensitive to fixed-income market activity, interest rates, credit spreads, bond duration, client participation, competition and commission rates; lower trading volumes could materially reduce revenue and profitability.
- Matched-principal Open Trading exposes the company to counterparty, settlement and operational risks. Management added automated controls but cautioned that risk procedures may not fully mitigate exposure.
- Regulatory change, including MiFID II/MiFIR and Brexit-related requirements, may raise costs or affect operations. The filing also cites competitive and technological change and concentration of cash deposits at one major global bank.
- Legal proceedings and regulatory examinations are described as ordinary-course matters not currently expected to materially harm financial position, but ultimate exposure cannot be determined and could exceed reserves.
- The company repurchased 23,365 shares for $5.2 million under its expiring program and authorized a new $100 million, two-year repurchase program beginning April 2019. The board approved a $0.51-per-share quarterly dividend payable in May 2019.
- Operating lease payments total $139.2 million undiscounted, including $96.3 million due in 2024 and thereafter. The company also remains contingently liable for $5.4 million of assigned lease obligations if the assignees default.
Important facts for investors to verify
- Confirm the drivers and sustainability of trading-volume growth, fee capture, and the decline in U.S. high-grade market share.
- Assess whether expense growth—particularly compensation and clearing costs—continues to outpace revenue growth.
- Review liquidity and facility renewal, including the credit agreement’s October 2019 maturity and long-dated lease commitments.
- Monitor Brexit implementation, the Netherlands subsidiaries, and any changes in regulatory or legal exposure.
- Reconcile the filing’s Open Trading revenue-share figures: its wording lists 20.4% and 13.2% for 2018 and 2019, respectively, while also reporting 65.6% volume growth; verify the intended comparison.