MarketAxess Holdings Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023, compared with the three months ended March 31, 2022. MarketAxess operates electronic fixed-income trading platforms and related information and post-trade services. Figures below are in millions of dollars unless stated otherwise.
Financial performance
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Revenue | $203.2 | $186.1 | +9.2% |
| Operating income | $95.4 | $88.1 | +8.2% |
| Net income | $73.6 | $64.8 | +13.7% |
| Diluted EPS | $1.96 | $1.71 | +14.6% |
| Operating cash flow | $7.5 | $(23.7) | Improved |
| Free cash flow (non-GAAP) | $43.8 | $34.0 | +28.9% |
Operating margin was approximately 46.9%, versus 47.4% a year earlier. Net margin rose to 36.2% from 34.8%. The company’s recast non-GAAP EBITDA margin was 54.4%, versus 56.8%; the calculation now deducts interest income as well as adjusting for interest expense.
Commissions, 89.6% of revenue, rose 9.6% to $182.0. Information services increased 12.2% to $11.0; post-trade services were nearly flat at $10.0. Total trading volume increased 2.0% to $2.37 trillion: credit volume grew 14.6%, while rates volume fell 4.0%. Credit average variable transaction fees per million declined 4.4% to $164.98, principally reflecting shorter-duration U.S. high-grade bonds. Open Trading credit volume rose 20.7% to $279.4 billion.
Expenses grew 10.1% to $107.8, faster than revenue. Technology and communications expense increased 23.0%, employee compensation 9.5%, and general and administrative expense 66.5%; professional and consulting fees declined 25.9%. Higher interest income ($4.2 versus $0.1) supported other income, while other, net fell to a loss of $1.5, principally due to foreign-exchange losses. The effective tax rate was 25.0%, compared with 28.4%; Q1 2022 included $3.2 of expense for a New York State tax settlement.
Balance sheet, cash and capital
At March 31, 2023, total assets were $1.63 billion, total liabilities $506.9, and stockholders’ equity $1.12 billion. Cash and cash equivalents were $332.8 and investments $106.7; management reported cash and investments totaling $439.5. Cash, restricted cash and deposits totaled $502.6 for cash-flow reporting purposes. The company had no borrowings under its $500.0 revolving credit facility and reported $500.0 of available capacity; a further $450.0 of uncommitted, collateralized settlement-bank capacity was unused. It reported compliance with credit covenants and regulatory capital/resources $541.0 above required levels of $29.0.
Operating cash flow was positive versus a prior-year outflow, mainly reflecting changes in broker-dealer and customer settlement balances and higher net income. Investing used $32.8, including net purchases of available-for-sale investments; financing used $48.1, including dividends and withholding taxes on equity awards. Cash and cash equivalents declined $98.0 during the quarter, while cash, restricted cash and deposits in the cash-flow reconciliation declined $70.0. The company declared $0.72 per share in dividends for the quarter. It made no share repurchases under its public program; shares surrendered for employee tax withholding were repurchased.
Management commentary, outlook and risks
Management described operating conditions as improving year over year, citing wider credit spreads, greater volatility and higher U.S. high-grade market volumes. U.S. high-grade market volume increased 19.9%, but MarketAxess’ estimated share declined to 19.9% from 20.7%. Management said March’s banking-sector disruption, including the closures of Silicon Valley Bank and Signature Bank, negatively affected U.S. high-grade activity and highlighted broader financial-institution liquidity concerns. It expects current resources, operating cash flows and available credit to meet liquidity and planned capital expenditure needs for at least the next 12 months. No specific revenue or earnings guidance is provided in the filing.
Key exposures include trading-volume and fee variability, market and interest-rate conditions, competition, inflationary expense pressure, cybersecurity, foreign exchange, and counterparty and settlement risk from matched-principal trading. The filing discusses proposed SEC rules affecting alternative trading systems and communication protocols, and the planned move to T+1 settlement in May 2024, which could increase operating complexity and costs. The company reported no material change to risk factors from its 2022 Form 10-K and no material information-security breach in at least three years.
Legal proceedings and regulatory examinations are described as not expected, based on currently available information, to materially harm financial position; ultimate exposure cannot be determined. The company also had $12.4 of remaining contingent consideration payable related to the MuniBrokers acquisition. The $500.0 credit agreement was amended in March 2023 to replace LIBOR provisions with SOFR provisions.
Important facts for investors to verify
- Whether credit-volume growth and Open Trading adoption persist, and whether MarketAxess can stabilize or improve U.S. high-grade market share.
- How changes in bond duration, product mix and trading protocols affect average fees and commission growth.
- Whether elevated expense growth, particularly technology, compensation and general and administrative costs, moderates.
- How much quarterly operating cash flow reflects settlement-balance movements versus recurring earnings, and whether liquidity needs rise with self-clearing activity.
- Potential effects of banking-sector stress, SEC rule changes, T+1 implementation, currency movements, and unresolved legal or tax examinations.