MarketAxess Holdings Inc. — Q3 2022 Form 10-Q
Business context and reporting period. MarketAxess operates electronic fixed-income trading platforms and related data and post-trade services, serving more than 1,900 institutional investor and broker-dealer firms. This unaudited filing covers the quarter and nine months ended September 30, 2022; comparisons are with the corresponding 2021 periods. Amounts below are in U.S. dollars.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $172.1 million | $162.1 million | $540.4 million | $533.9 million |
| Operating income | $76.3 million | $74.0 million | $249.2 million | $264.7 million |
| Net income | $59.3 million | $58.0 million | $191.0 million | $205.7 million |
| Diluted EPS | $1.58 | $1.52 | $5.07 | $5.40 |
| EBITDA margin (non-GAAP) | 54.8% | 54.8% | 56.5% | 56.5% |
| Cash provided by operating activities | $85.1 million | $62.8 million | $155.0 million | $136.4 million |
| Free cash flow (non-GAAP) | $69.9 million | $105.1 million | $166.7 million | $224.7 million |
Q3 operating and net margins were approximately 44.3% and 34.5%, respectively, versus 45.7% and 35.8% a year earlier. Nine-month margins were approximately 46.1% and 35.3%, versus 49.6% and 38.5%. Free cash flow is a company-defined non-GAAP measure and is not equivalent to operating cash flow.
Material changes and operating drivers
- Q3 revenue increased 6.2%, while nine-month revenue rose 1.2%. Commissions, which represented about 89% of revenue, rose 7.2% in Q3 and 1.6% for the nine-month period.
- Total trading volume increased 31.8% in Q3 and 31.7% for nine months. Q3 credit volume rose 17.6% and rates volume rose 40.9%.
- Higher volumes were partly offset by lower credit average variable transaction fees per million: down 8.7% in Q3 and 9.7% for nine months. Management cited shorter bond duration, a greater mix of lower-fee emerging-market trading, and dealer migration to fee plans with lower transaction fees.
- Q3 expenses grew 8.8%, faster than revenue; nine-month expenses grew 8.2%. Higher compensation, technology and communications, and depreciation and amortization were notable increases. Nine-month operating income declined 5.8%.
- Nine-month net income fell 7.1%, affected in part by higher taxes. The effective tax rate was 26.2% versus 21.6%; 2022 included $3.2 million of expense from a New York State tax settlement.
Cash, liquidity and balance sheet
- At September 30, 2022, cash and cash equivalents were $318.7 million, segregated cash was $50.5 million, and investments were $33.3 million. Cash, restricted cash and deposits totaled $468.8 million, down from $625.6 million at year-end 2021.
- The company reported no borrowings under its $500 million revolving credit facility, with the full capacity available; it was in compliance with its covenants. A separate, uncommitted collateralized facility provided up to $200 million, also with no borrowings outstanding.
- Total liabilities were $541.0 million, including $336.9 million of broker-dealer, clearing-organization and customer payables and $83.3 million of operating lease liabilities. The filing does not identify outstanding conventional funded debt at quarter-end.
- Operating cash flow increased year over year for the nine-month period. Cash used in investing included a $34.4 million equity-method investment in RFQ-hub. Cash used in financing included $87.5 million of share repurchases, $79.9 million of dividends and $26.2 million of contingent-consideration payments.
- Management said current resources and operating cash flow were expected to cover liquidity needs and planned capital expenditures for at least the next 12 months. Regulated subsidiaries held aggregate capital and financial resources $485.4 million above required levels.
Outlook, risks and unusual items
- No quantified revenue, earnings or margin guidance is provided. Management said it generally provides expectations quarterly and does not undertake to update forward-looking statements between quarters.
- Management described improved Q3 trading conditions, including wider credit spreads, greater volatility and higher U.S. high-grade market volume. Automated trading volume was $51.7 billion, up 22.1% year over year; algorithmic responses rose 33.5% to approximately 5.8 million.
- Key risks include market activity and interest-rate movements, bond duration and fee mix, competition, inflation-related expense pressure, cybersecurity incidents, regulatory change, foreign-exchange exposure, and counterparty or settlement failures. Management noted uncertainty around proposed SEC rules affecting trading protocols and ATS regulation, as well as costs from U.K./E.U. regulatory divergence.
- Russia-related sanctions and geopolitical uncertainty may affect markets and participants; the company reported no material losses on trades unsettled when sanctions were imposed. The filing also discusses ongoing pandemic-related workforce considerations.
- Foreign-exchange effects were significant: a stronger U.S. dollar reduced reported nine-month revenue by $8.4 million and expenses by $7.3 million. Nine-month other income included foreign-currency gains, partly offset by losses on currency forwards.
- Other items include the $34.4 million RFQ-hub minority investment, $12.2 million of remaining acquisition contingent consideration, and New York tax examinations for 2015–2017 (state) and 2016–2018 (city). Management does not expect outstanding legal matters to materially affect financial position, but says ultimate exposure cannot presently be determined.
Important facts for investors to verify
- Whether trading-volume growth can persist and offset lower credit fees per million and changes in product mix.
- Whether expense growth, especially technology, compensation and amortization, can be contained relative to revenue.
- The sustainability and composition of operating cash flow and free cash flow, given clearing-related working-capital movements and shareholder returns.
- Potential impacts of currency movements, regulatory proposals, tax examinations and acquisition-related contingent payments.
- Liquidity available for corporate use versus cash and capital subject to customer-segregation, clearing and regulatory requirements.