MarketAxess Holdings Inc. — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014, compared with the three months ended March 31, 2013, unless otherwise noted. MarketAxess operates an electronic fixed-income trading platform and provides related data, post-trade, regulatory reporting and technology services.
Financial performance and liquidity
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Revenue | $63.4 million | $53.7 million | +18.2% |
| Commissions | $52.0 million | $47.2 million | +10.2% |
| Income before taxes from continuing operations | $27.7 million | $24.7 million | +12.3% |
| Net income from continuing operations | $17.5 million | $15.5 million | +12.4% |
| Net income | $17.5 million | $15.3 million | +14.0% |
| Diluted EPS | $0.46 | $0.41 | +12.2% |
| Operating cash flow | $10.1 million | $10.3 million | Down $0.1 million |
| Cash and cash equivalents, March 31 | $130.0 million | $125.9 million | — |
Total expenses rose 23.2% to $35.7 million, outpacing revenue growth. Expenses were 56.3% of revenue versus 54.0%; income before taxes was 43.7% of revenue versus 46.0%. The effective tax rate was 36.9%, compared with 37.0%.
Cash and available-for-sale securities totaled $193.5 million at March 31, 2014. The company reported no borrowings and had $49.9 million available under its $50 million revolving credit facility. Total liabilities were $28.1 million and stockholders’ equity was $318.3 million. Operating cash flow was largely offset by $11.9 million of financing outflows, including dividends, share repurchases and stock-related tax payments. Cash decreased $2.6 million during the quarter. Trailing 12-month free cash flow, a non-GAAP measure, was $65.4 million.
Material changes versus prior period
- Trading volume increased 16.9% to $187.4 billion. U.S. high-grade volume rose 17.7%, other credit 19.8%, and liquid products 4.9%. Management attributed U.S. high-grade volume growth to market-share gains and higher overall market volume.
- Commissions increased 10.2%; variable transaction fees grew 10.4% and distribution fees 9.8%. The company said lower average U.S. high-grade fees per million partly offset volume growth.
- Information and post-trade revenue increased 118.2% to $8.1 million, principally reflecting a full quarter of Xtrakter results in 2014; the 2013 comparison included Xtrakter only from its February acquisition. Xtrakter also contributed to higher expenses.
- Employee compensation, depreciation and amortization, and technology and communications costs increased notably. Total expenses included $6.3 million of Xtrakter operating expenses, compared with $1.7 million in the prior-year quarter.
- The prior-year period included a $0.2 million loss from discontinued Greenline operations. Greenline was sold in October 2013; the company recognized a $7.6 million after-tax gain on sale in 2013.
Outlook, commentary and risks
- No specific quarterly or annual financial guidance is provided. Management said current resources should meet liquidity needs and capital expenditure requirements for at least the next 12 months, while noting future needs depend on product development, expansion and business opportunities.
- Management’s strategy includes adding products and functionality, expanding electronic trading protocols and liquidity, developing data and post-trade services, and pursuing strategic alliances or acquisitions. Management stated that adding volume and products may provide operating leverage, but expenses may rise, particularly compensation and depreciation and amortization.
- Key business risks include fixed-income market volatility and lower trading activity, dependence on broker-dealer and institutional client participation, competition, rapid technology change, and evolving U.S. and European regulation. The filing notes that reduced dealer market-making capacity could weaken platform liquidity.
- Regulated subsidiaries held aggregate net capital and financial resources $74.2 million above required levels of $11.6 million. Regulatory rules restrict certain transfers of capital from these subsidiaries.
- Matched-principal trades expose the company to counterparty and settlement risk. A clearing broker may charge the company for losses from counterparty failures, with no stated maximum; no related liability was recorded at quarter-end.
- A former employee’s Sarbanes-Oxley whistleblower complaint remains unresolved. The company disputes the allegations; the possible loss range cannot be estimated and no accrual was recorded.
- In January 2014, the board authorized up to $35 million in share repurchases through December 31, 2015. The company bought 54,000 shares for $3.4 million during the quarter. In April, the board approved a $0.16-per-share quarterly dividend payable in May.
- The company recorded $0.7 million of income from selling MF Global bankruptcy claims in Q1 2014; Q1 2013 included a $0.8 million gain on sale of U.S. Treasury securities. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether higher trading volumes and the reported market-share improvement continue, and how changes in trading mix and fees affect commission revenue.
- The ongoing contribution of Xtrakter revenue relative to its operating costs and amortization, and the pace of expense growth versus revenue.
- Cash generation, capital spending, share repurchases and dividends, including the company’s capacity to sustain distributions while investing in growth.
- Regulatory developments affecting swap execution facilities, MiFID II and dealer market-making, as well as any impact on client activity and platform liquidity.
- Developments in the whistleblower complaint and the company’s matched-principal counterparty exposure.