MarketAxess Holdings Inc. — Form 10-Q Summary
Reporting period: Quarter ended September 30, 2019; comparisons are with the third quarter and first nine months of 2018. Amounts below are in U.S. dollars; financial statement amounts are converted from thousands to millions where indicated.
Business context
MarketAxess operates an electronic fixed-income trading platform used by more than 1,600 institutional investor and broker-dealer firms. It earns most revenue from trading commissions and also provides market data, technology, and post-trade services. The company reports one operating segment. Open Trading enables anonymous, all-to-all trading, with MarketAxess acting as matched-principal counterparty on certain trades.
Key financial results
| Metric | Q3 2019 | Q3 2018 | First 9 months 2019 | First 9 months 2018 |
|---|---|---|---|---|
| Revenue | $131.6m | $101.4m | $381.6m | $323.1m |
| Operating income | $66.0m | $46.4m | $190.0m | $158.6m |
| Net income | $54.0m | $38.6m | $154.6m | $127.0m |
| Diluted EPS | $1.42 | $1.02 | $4.08 | $3.36 |
| Operating margin | 50.1% | 45.7% | 49.8% | 49.1% |
| Net margin | 41.0% | 38.0% | 40.5% | 39.3% |
- Q3 revenue increased 29.7% and net income increased 39.9% year over year. Commissions rose 32.4% to $119.9m and represented 91.1% of revenue.
- Q3 platform trading volume grew 37.1% to $528.7bn; estimated U.S. high-grade market share rose to 20.2% from 17.5%. Open Trading volume increased 60.6%.
- For the first nine months, revenue grew 18.1%, operating income 19.8%, and net income 21.7%. Trading volume increased 24.4% to $1.58tn, while commissions rose 19.8%.
- Q3 expenses increased 19.3% to $65.6m, slower than revenue growth. Higher compensation, technology, professional fees, and clearing costs were partly offset by lower occupancy costs. Nine-month expenses rose 16.4%.
- The nine-month effective tax rate was 20.9%, versus 21.6%; Q3 was 19.8%, versus 19.3%. Excess tax benefits from share-based awards affected the provision.
Cash flow, liquidity, and debt
- For the first nine months, operating cash flow was $176.8m, investing cash flow was negative $15.3m, and financing cash flow was negative $86.1m. Cash and cash equivalents increased by $74.2m to $320.5m; investments were $235.6m.
- Management reported $556.2m of cash and investments and said resources were adequate for liquidity needs and capital expenditures for at least 12 months. Trailing-12-month non-GAAP free cash flow was $215.9m.
- No revolving borrowings were reported. At September 30, $99.0m of the $100.0m credit facility was available, with $1.0m in letters of credit. The company subsequently extended the facility maturity to October 2020 and was in covenant compliance.
- Total liabilities were $160.4m, including $92.0m of operating lease liabilities recognized following adoption of the lease accounting standard. The company had $694.6m of stockholders’ equity.
- Dividends declared were $0.51 per share in Q3. The board authorized a new $100m, two-year repurchase program beginning April 2019; $11.4m of shares were repurchased in the first nine months.
Outlook, risks, and unusual items
- No specific revenue, earnings, or other numeric full-year guidance is provided. Management highlights trading activity, market share, client participation, product mix, and commission rates as key business drivers, and notes that lower market volume could materially reduce revenue and profitability.
- Management described market conditions as favorable to electronic trading in Q3: U.S. high-grade and high-yield market volumes grew 10.3% and 18.8%, respectively, while volatility and credit spreads were higher than a year earlier. Longer duration on high-grade bonds also supported fee capture.
- Market and business risks include volatile fixed-income markets, competition, regulatory changes, technology needs, foreign-exchange exposure, and matched-principal counterparty/settlement risk. The company cautions that its credit-risk controls may not fully mitigate exposure. Cash and cash equivalents are primarily held at one major global bank.
- On August 12, 2019, MarketAxess agreed to acquire LiquidityEdge, a U.S. Treasury electronic trading platform, for $150m—$100m cash and $50m stock, subject to adjustments—with completion expected in Q4 2019.
- The company adopted lease accounting in January 2019, recording $79.5m of right-of-use assets and $91.2m of lease liabilities at adoption, with no material income-statement or cash-flow effect. It also signed a London office lease with $7.8m of minimum rent commitments. It remains contingently liable for $4.6m of assigned lease obligations if the counterparties default.
- Legal proceedings and regulatory examinations were described as not expected to have a material adverse impact based on currently available information; ultimate exposure cannot be determined. A New York State income tax examination covering 2010–2017 was ongoing.
Most important facts for investors to verify
- Whether strong trading-volume growth and market-share gains persist, particularly in Open Trading and other-credit products.
- How commission yield, product mix, and market conditions affect revenue and margins as trading volumes change.
- Completion, integration, and realized economics of the LiquidityEdge acquisition, including the cash and stock consideration.
- Growth in compensation, technology, clearing, and acquisition-related costs relative to revenue.
- Liquidity and capital allocation after dividends, repurchases, acquisition spending, and ongoing lease commitments; confirm credit-facility terms and covenant compliance.
- Developments in the tax examination, legal and regulatory matters, and counterparty risks associated with matched-principal trading.