MarketAxess Holdings Inc. — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021. MarketAxess operates electronic fixed-income trading platforms and related data, technology, regulatory reporting, and post-trade services. Financial amounts below are in U.S. dollars; income-statement and cash-flow amounts are unaudited.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $162.1 million | $164.0 million | $533.9 million | $517.8 million |
| Operating income | $74.0 million | $87.8 million | $264.7 million | $283.0 million |
| Net income | $58.0 million | $67.8 million | $205.7 million | $226.4 million |
| Diluted EPS | $1.52 | $1.78 | $5.40 | $5.94 |
| Operating margin | 45.7% | 53.5% | 49.6% | 54.7% |
| Net margin | 35.8% | 41.3% | 38.5% | 43.7% |
Q3 revenue declined 1.2% year over year as commissions fell 5.2%, partly offset by information-services growth of 13.0% and post-trade-services growth of 101.4%. For the first nine months, revenue increased 3.1%, including post-trade-services growth of 129.2%; commissions were down 0.7%.
Q3 expenses rose 15.6% to $88.1 million, led by higher depreciation and amortization, professional fees, technology costs, and employee compensation. Nine-month expenses rose 14.7% to $269.2 million. Acquisitions contributed $4.6 million of Q3 revenue and $5.5 million of Q3 expenses; for the nine months, they contributed $13.5 million of revenue and $14.1 million of expenses. Higher costs compressed operating and net margins in both comparison periods.
Cash flow, liquidity, and capital
- Nine-month operating cash flow was $136.4 million, down 22.9% from $176.9 million. Investing activities used $56.3 million, compared with $103.1 million provided in 2020; financing activities used $119.6 million.
- Cash and cash equivalents were $432.7 million at September 30, 2021, versus $460.9 million at year-end 2020. Cash, cash equivalents, and investments totaled $468.5 million. The cash-flow statement’s ending cash including restricted and other specified deposits was $563.8 million.
- No borrowings were outstanding under the $500 million revolving facility at quarter-end; $499 million of capacity remained after letters of credit. A separate collateralized facility had $200 million of available capacity and no borrowings. The company reported no funded long-term debt in the provided balance sheet.
- Equity was $1.055 billion; total liabilities were $556.6 million, including $90.0 million of operating lease liabilities. The company declared dividends of $0.66 per share in each 2021 quarter and repurchased $18.2 million of shares during the first nine months.
- Management said available cash and investments, operating cash flows, and credit availability were expected to meet liquidity needs and planned capital expenditures for at least 12 months. Regulated subsidiaries’ capital and financial resources exceeded regulatory minimums by $577.3 million.
Changes, outlook, and risks
- Management attributed softer 2021 fixed-income activity to improving economic conditions, lower volatility, tighter credit spreads, and lower U.S. credit-market volumes following the unusually volatile 2020 pandemic period. U.S. high-grade and high-yield market volumes for the first nine months fell 7.0% and 8.0%, respectively.
- Q3 U.S. high-grade platform volume decreased 9.0%, with estimated market share falling to 21.4% from 22.2%. Other-credit volume increased 12.4%, and rates volume increased 22.2%. Lower average transaction fees also weighed on commissions.
- Automated trading volume reached $42.3 billion in Q3, up 39.1% year over year; algorithmic responses increased 17.4% to approximately 4.4 million. Management highlighted Open Trading, Live Markets, automation, and expansion of data and post-trade services as strategic priorities.
- MarketAxess acquired MuniBrokers in April 2021 for $17.1 million in cash plus up to $25.0 million of contingent consideration. The company also reported contingent consideration of $41.1 million at quarter-end, including amounts related to acquisitions and remeasurement.
- On October 15, 2021, after quarter-end, the company replaced its prior facility with a new $500 million revolving credit agreement maturing in October 2024, with potential lender-approved extensions.
- Key risks include dependence on bond trading volumes and market conditions; competition; regulatory change, including SEC review of electronic trading platforms and post-Brexit requirements; cybersecurity and technology risks; matched-principal counterparty and settlement exposure; and foreign-exchange exposure. The filing reported ongoing New York State and City tax examinations; outcomes and potential effects could not be estimated. Management said outstanding legal matters were not expected to have a material adverse financial impact, while noting ultimate exposure was uncertain.
- No specific financial guidance or quantified forward outlook was provided. Management cautioned that interim results may not indicate full-year results and that market activity, expenses, and internal projections can change.
Important facts for investors to verify
- Whether fixed-income trading activity, U.S. high-grade market share, and transaction fees recover or continue to pressure commission revenue.
- Whether acquisition-related revenue and expected strategic benefits justify higher amortization, integration costs, and contingent consideration.
- How operating cash flow develops as matched-principal receivables, payables, and settlement funding needs fluctuate.
- Terms and covenant compliance under the post-quarter-end 2021 credit facility, alongside liquidity and regulatory-capital constraints.
- Developments in tax examinations, regulatory requirements, cybersecurity exposure, and matched-principal counterparty risks.