MarketAxess Holdings Inc. — Q2 2013 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2013; comparisons are with the corresponding 2012 periods unless noted. MarketAxess operates an electronic fixed-income trading platform and provides market data, technology, trade-matching and regulatory-reporting services. Amounts below are in U.S. dollars; financial statement amounts are in millions except per-share data.
Financial performance
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Revenue | $65.6 | $48.8 | $121.1 | $99.6 |
| Income before taxes | $31.5 | $21.2 | $55.8 | $43.9 |
| Net income | $19.3 | $12.6 | $34.7 | $26.1 |
| Diluted EPS | $0.51 | $0.34 | $0.92 | $0.69 |
| Operating expenses | $34.0 | $27.6 | $65.3 | $55.6 |
- Q2 revenue increased 34.3%; net income increased 53.2%. Six-month revenue rose 21.7%; net income rose 32.7%.
- Q2 pretax margin was approximately 48.1% versus 43.4%; net margin was 29.5% versus 25.9%. For the six-month periods, pretax margin was 46.1% versus 44.1%, and net margin was 28.6% versus 26.2%.
- Commissions remained the largest revenue source: $54.2 million in Q2 (+27.0%) and $101.4 million for six months (+15.7%). Q2 total trading volume rose 29.6% to $187.7 billion; six-month volume rose 15.0% to $348.1 billion. Growth was concentrated in U.S. high-grade and other-credit trading; liquid-products volume fell 17.2% for six months.
- Information and post-trade revenue grew sharply, largely due to Xtrakter: $7.2 million in Q2 and $10.9 million for six months. Xtrakter contributed $5.5 million and $7.4 million, respectively, since acquisition.
- Cash from operations was $30.2 million for six months, compared with $25.9 million. Investing used $12.4 million, including the acquisition, and financing used $11.4 million. Cash increased $6.6 million to $135.5 million. Company-defined free cash flow was $68.5 million for the 12 months ended June 30, 2013; this is a non-GAAP measure.
- At June 30, cash and cash equivalents were $135.5 million and available-for-sale securities were $14.5 million, totaling $149.9 million. Total liabilities were $34.8 million; the filing reports no outstanding borrowing balance, and $49.9 million was available under the $50 million revolving facility. Stockholders’ equity was $270.6 million.
Material changes and unusual items
- On February 28, 2013, MarketAxess acquired U.K.-based Xtrakter for $37.8 million net of acquired cash. The acquisition added trade matching, regulatory reporting and market-data services; preliminary purchase accounting recorded $26.2 million of goodwill. The purchase-price allocation remained subject to finalization.
- Q2 expenses included a non-material out-of-period accounting adjustment: compensation expense was reduced by $2.9 million and depreciation and amortization increased by $1.3 million, with a $1.6 million increase in capitalized software. The adjustment raised reported pretax income by a net $1.6 million for the quarter; management said it was not material to prior periods or the current year.
- Six-month expenses included approximately $7.0 million of Xtrakter operating costs and $1.6 million of acquisition-related costs. Depreciation and amortization rose substantially, reflecting acquired intangibles, software investment, data-center assets and the adjustment.
- Capital expenditures were $10.7 million for the six months, primarily for a replacement primary production data center. The company sold securities to help fund the acquisition; six-month other revenue included a $0.8 million gain on U.S. Treasury sales.
Outlook, risks and contingencies
- No numerical earnings or revenue guidance was provided. Management said current resources were adequate for liquidity and capital needs for at least the next 12 months and expected to continue regular cash dividends, subject to board discretion. A $0.13-per-share dividend was approved in July 2013.
- Management’s strategy includes expanding products and markets, improving platform functionality and pursuing alliances or acquisitions. Results remain sensitive to fixed-income trading volumes, interest-rate and credit-market conditions, competition, client participation, technology and operational performance, and changing regulation.
- MarketAxess filed to register a swap execution facility with the CFTC in July 2013; the proposed facility was expected to require about $4 million of financial resources at inception and would be subject to regulatory requirements.
- A former employee’s Sarbanes-Oxley whistleblower complaint seeks reinstatement and damages. The company disputes the allegations; it could not estimate the reasonably possible loss range and recorded no accrual.
- Riskless-principal trades expose the company to counterparty and clearing-broker claims that are not capped. No related liability was recorded at quarter-end. Additional risks include concentration of cash at one major bank, regulatory limits on transfers from regulated subsidiaries, and the possibility that market or trading-volume declines reduce revenue.
- The company disclosed a planned London office lease expected to be executed in Q3 2013, with approximately $13.8 million of aggregate payments through the final termination date; the lease includes a January 2017 break clause.
Important facts for investors to verify
- How much of reported revenue and growth is attributable to Xtrakter versus organic trading and services growth, and what final purchase accounting or integration costs emerge.
- Whether trading-volume and market-share gains persist, particularly in U.S. high-grade and other-credit products, and whether weaker liquid-products activity continues.
- The impact of the $1.6 million net favorable accounting adjustment on comparability, and the trajectory of recurring compensation, technology, consulting and amortization costs.
- Facility utilization, covenant headroom, regulatory-capital needs—including the proposed SEF—and the cash available to the parent given restrictions on regulated subsidiaries.
- Developments in the former-employee complaint, counterparty exposures, the London lease commitment and implementation of U.S. and European market regulations.