MarketAxess Holdings Inc. — Q2 2014 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2014; comparisons are with the corresponding 2013 periods. MarketAxess operates an electronic fixed-income trading platform and also provides market data, post-trade, regulatory reporting, and technology services.
Financial performance
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Revenue | $65.0m | $63.5m | $128.4m | $117.2m |
| Income before taxes | $29.1m | $31.4m | $56.8m | $56.1m |
| Net income | $18.2m | $19.3m | $35.7m | $34.7m |
| Diluted EPS | $0.48 | $0.51 | $0.94 | $0.92 |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $36.4m | $30.2m |
- Q2 revenue grew 2.3%, but expenses rose 11.9% to $35.9m; income from continuing operations declined 5.7%. Revenue growth was led by information/post-trade services (+10.7%) and technology services (+33.8%); commissions were nearly flat (+0.2%).
- For the first half, revenue grew 9.6%, while expenses increased 17.2%. Continuing-operations net income rose 2.4%; reported net income increased 2.9%, partly reflecting a prior-period discontinued-operations loss.
- Net margin was approximately 28.0% in Q2 2014 versus 30.4% in Q2 2013, and 27.8% for the first half versus 29.6%. The 2013 comparisons include an out-of-period software-cost adjustment described below.
- First-half total trading volume increased 7.3% to $373.5bn. Q2 volume declined 0.9% to $186.0bn: other credit rose 10.7%, while U.S. high-grade fell 1.7% and liquid products fell 25.5%.
Financial position, cash flow, and capital
- At June 30, cash and cash equivalents were $133.2m and available-for-sale securities were $65.7m, totaling $198.9m. Total assets were $356.7m; liabilities were $33.7m and stockholders’ equity was $323.0m.
- The filing reports $49.9m available under the $50m revolving credit facility; it does not report a material borrowing balance. The facility is secured and subject to quarterly leverage and interest-coverage covenants.
- First-half operating cash flow was $36.4m; investing cash outflow was $7.5m and financing cash outflow was $27.5m. Cash increased $0.5m to $133.2m. Financing outflows included $13.7m of share repurchases and $12.2m of dividends paid.
- Management said current resources should meet liquidity and capital expenditure needs for at least the next 12 months. Regulated subsidiaries held $68.6m of net capital/resources above required levels of $12.5m; $22.9m of unrestricted cash was held by non-U.S. subsidiaries.
Material changes, outlook, and risks
- Q2 commission trends were mixed: U.S. high-grade variable transaction fees declined 10.3%, while other-credit fees increased 10.2%. The company attributed lower high-grade fees per million mainly to shorter-duration and larger bonds traded. Management also said reported FINRA TRACE volume was inflated by affiliate back-to-back trade reporting, affecting estimated market share.
- First-half information and post-trade revenue benefited from two additional months of Xtrakter results versus 2013 and favorable foreign-exchange movements. Xtrakter contributed $12.5m of first-half revenue and $12.7m of operating expenses in 2014.
- Employee compensation and benefits increased 24.6% in the first half, reflecting higher headcount, additional Xtrakter costs, and the prior-year adjustment. Headcount rose to 318 from 293 a year earlier. Technology and communications expense also increased 24.3%.
- The Q2 2013 comparison included an out-of-period adjustment that reduced employee compensation expense by $2.9m, increased depreciation and amortization by $1.3m, and increased capitalized software by $1.6m. Management said the item was not material to prior reporting periods or 2013 as a whole.
- No specific numerical earnings or revenue guidance was provided. Management’s strategy emphasizes new products, broader trading protocols including Open Trading, expanded liquidity, and growth in data and technology services. MiFID II/MiFIR rules were published in June 2014 and were scheduled to take effect in January 2017.
- Key risks include market-driven trading-volume declines, competition, broker-dealer participation, regulatory change, technology needs, foreign exchange and securities-market exposure, and counterparty/clearing risk. One client represented 14.9% of first-half trading volume, although no client exceeded 10% of revenue.
- A former employee’s Sarbanes-Oxley whistleblower complaint remains unresolved; the company disputes the allegations, cannot estimate a loss range, and recorded no accrual. The filing also describes uncapped potential clearing-broker charges for counterparty failures, with no liability recorded at quarter-end.
- The board increased the repurchase authorization by $65m in July 2014, bringing the program authorization to $100m; the program expires December 31, 2015. A $0.16-per-share quarterly dividend was approved for payment in August 2014.
Most important facts for investors to verify
- Whether trading-volume and market-share trends recover, particularly in U.S. high-grade and liquid products, and how TRACE reporting distortions affect comparisons.
- How much revenue growth is organic versus attributable to Xtrakter, currency movements, and fee-plan changes, and whether expense growth moderates.
- Actual use of the credit facility, covenant headroom, and the availability of cash held in regulated or foreign subsidiaries.
- Progress and costs associated with MiFID II/MiFIR, swap execution regulation, and the company’s product and platform investments.
- Developments in the whistleblower complaint and any counterparty, clearing, investment-portfolio, or other contingent exposures.