MarketAxess Holdings Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2011. Unaudited consolidated results. MarketAxess operates an electronic fixed-income trading platform, with commissions as its primary revenue source.
Financial performance
- Second quarter: Revenue was $45.8 million, up 29.6% year over year; commissions rose 32.6% to $39.1 million. Pretax income was $19.9 million versus $11.9 million. Net income was $11.9 million versus $7.2 million; diluted EPS was $0.30 versus $0.18. Net margin was approximately 26.1%, compared with 20.3%.
- First six months: Revenue was $89.4 million, up 27.3%; commissions rose 30.8% to $76.9 million. Pretax income increased to $37.6 million from $22.9 million, and net income to $22.7 million from $13.9 million. Diluted EPS was $0.58 versus $0.35. Net margin was approximately 25.4%, compared with 19.8%.
- Trading volumes: First-half platform volume increased 35.8% to $268.1 billion. U.S. high-grade volume rose 38.8%, other product volume rose 64.6%, and Eurobond volume fell 25.9%. Management attributed U.S. high-grade growth partly to estimated market-share gains; it cited sovereign-debt concerns for weaker Eurobond activity.
- Cash flow: First-half operating cash flow was $19.4 million, down from $22.6 million. Investing used $6.0 million and financing used $2.1 million. Cash increased $10.8 million to $135.8 million. Trailing-12-month free cash flow, a non-GAAP measure, was $55.2 million versus $50.5 million.
- Liquidity and debt: Cash and cash equivalents plus available-for-sale securities totaled $211.5 million. The company reported no short- or long-term debt, apart from $0.8 million in equipment-related capital lease obligations. Total liabilities were $28.4 million and stockholders’ equity was $292.9 million.
- Margins and costs: First-half pretax margin was approximately 42.0%, versus 32.7% in 2010. Expenses increased 9.6% to $51.8 million, slower than revenue growth. The effective tax rate was 39.5% for the first half.
Changes and notable items
- U.S. high-grade market share was estimated at 10.4% for the first half, compared with 8.0% a year earlier. Management said overall FINRA TRACE U.S. high-grade volume rose 6.3%.
- Distribution fees increased following dealer migrations to plans combining monthly fees and transaction fees, and additions of broker-dealer market makers. Average variable fees per million declined for U.S. high-grade and Eurobonds; Eurobond pricing had been revised downward with the 2010 click-to-trade launch.
- All Series B preferred stock automatically converted into approximately 3.5 million common shares in January 2011.
- The June resignation of the company president led to cancellation of unvested awards and reversal of $1.4 million of previously recorded compensation expense.
- First-half general and administrative expense benefited from a $0.7 million sales-tax reimbursement settlement and lower bad-debt expense. Professional fees rose, including costs related to swap-execution-facility regulation.
Outlook, risks and contingencies
- No specific financial guidance was provided. Management said available resources should meet liquidity and capital needs for at least 12 months, while noting that product investment, expansion and acquisitions could affect future requirements.
- The company expected to use its remaining unrestricted U.S. net operating loss carryforward during 2011, increasing cash income-tax payments in 2011 and subsequent years. First-half cash taxes paid were $6.0 million, versus $1.1 million.
- The board approved a $0.09-per-share quarterly dividend in July 2011, payable August 25, 2011; management said it expected to continue regular dividends, subject to board discretion.
- Key risks include market-driven trading-volume declines, competition and pricing pressure, reliance on clients’ continued platform use, technology and security failures, regulation and uncertainty around Dodd-Frank implementation. MarketAxess expected to establish and operate a swap execution facility and/or security-based swap execution facility, subject to rulemaking, which could entail additional capital requirements.
- As riskless-principal intermediary, the company may face losses if a counterparty fails to perform; clearing-broker recourse for such losses is not capped. No liability was recorded for this exposure at June 30. Other disclosed commitments include $20.5 million of future operating lease payments and contingent exposure on an assigned lease of $1.6 million.
- No legal proceedings were reported, and the filing stated there were no material changes to the risk factors in the 2010 Form 10-K. Disclosure controls were deemed effective; no material change in internal control was reported.
Important facts for investors to verify
- The MD&A gives second-quarter net income as $12.2 million and growth of 69.6%, but the unaudited statements report $11.937 million versus $7.169 million, implying growth of approximately 66.5%. Confirm the correct figure and explanation.
- Assess whether first-half revenue growth and market-share gains can persist, particularly given falling Eurobond volume and lower variable fees in some products.
- Monitor the timing, regulatory requirements and capital needs associated with any swap execution facility, and the effect of expiring tax attributes on cash taxes.
- Evaluate counterparty and client concentration: one client represented 15.7% of first-half trading volume, and JPMorgan Chase was the company’s sole stockholder broker-dealer client.
- Confirm future dividend decisions and cash demands from operating leases, technology investment and other expansion plans.