MarketAxess Holdings Inc. — Q2 2015 Form 10-Q
Reporting period: Three and six months ended June 30, 2015; comparisons are with the corresponding 2014 periods. The filing is unaudited. MarketAxess operates an electronic fixed-income trading platform and provides related data, analytics, compliance and post-trade services.
Key financial results
| Metric | Q2 2015 | Q2 2014 | Change |
|---|---|---|---|
| Revenue | $75.5 million | $65.0 million | +16.2% |
| Commissions | $66.4 million | $54.3 million | +22.3% |
| Expenses | $38.4 million | $35.9 million | +7.1% |
| Income before taxes | $37.1 million | $29.1 million | +27.5% |
| Net income | $24.2 million | $18.2 million | +33.2% |
| Diluted EPS | $0.64 | $0.48 | +33.3% |
Q2 net margin was approximately 32.1%, versus 28.0% a year earlier; pretax margin was approximately 49.1%, versus 44.7%. The effective tax rate declined to 34.6% from 37.4%.
- First half: Revenue was $152.3 million (+18.6%); commissions were $133.4 million (+25.5%); expenses were $76.7 million (+7.1%); pretax income was $75.6 million (+33.1%); net income was $48.8 million (+36.9%); diluted EPS was $1.30 versus $0.94. Net margin was approximately 32.1%, compared with 27.8%.
- Trading activity: Q2 platform trading volume rose 31.6% to $244.7 billion. U.S. high-grade volume increased 28.1%, and other-credit volume increased 42.3%. Management attributed U.S. high-grade growth principally to estimated market-share gains: 17.0% versus 14.0% in Q2 2014, using the company’s adjusted TRACE comparison.
- Cash flow and liquidity: First-half operating cash flow was $40.6 million, up 11.5%; investing cash outflow was $10.9 million and financing cash outflow was $28.8 million. Cash and cash equivalents were $169.3 million at June 30, and available-for-sale securities were $67.5 million. Combined, these totaled $236.8 million. The company reported no material borrowings under its credit facility and $49.8 million available to borrow. It said resources were adequate for at least the next 12 months.
- Balance sheet and capital returns: Total assets were $398.9 million and total liabilities $39.1 million; stockholders’ equity was $359.9 million. First-half dividends paid were $14.9 million and share repurchases were $14.5 million. The company repurchased 180,400 shares in the first half; approximately $47.6 million remained authorized under the program, which expires December 31, 2015.
Material changes and management commentary
- Commission growth was driven mainly by higher transaction volumes. Q2 variable transaction fees rose 32.2%, while distribution fees fell 1.4%; the average total variable fee per million was broadly stable at $207 versus $206.
- Other-credit activity was particularly strong, including higher high-yield and Eurobond volumes. First-half trading volume in other credit rose 52.2%.
- Information and post-trade revenue declined 4.1% in Q2, partly reflecting unfavorable currency translation; technology products and services revenue fell 61.7%, principally because a consulting engagement wound down.
- Q2 expenses increased more slowly than revenue. Higher employee compensation, including incentive and stock-based compensation, was partly offset by lower technology/communications and professional fees. General and administrative expense increased, principally due to higher clearing and miscellaneous costs.
- Management’s strategy emphasizes platform innovation, expanding all-to-all trading through Open Trading, adding product and data capabilities, and extending services geographically. The BlackRock alliance was expanded to European cash-credit markets in January 2015.
- No numerical earnings or revenue guidance was provided. Management noted that results depend on fixed-income trading activity, market conditions, participant liquidity, competition and fee levels; it cautioned that interim results may not indicate full-year performance.
Risks, contingencies and unusual items
- Trading revenue is sensitive to bond-market volumes, interest-rate and credit-spread conditions, and broker-dealer willingness to provide liquidity. Competition and rapid technology change may pressure growth or require investment.
- Regulatory change remains a risk, including U.S. derivatives rules and European MiFID II/MiFIR, scheduled to take effect in January 2017. The filing notes uncertainty about final rules and their business effects.
- Matched-principal activity exposes the company to counterparty and settlement risk. Clearing brokers may charge it for losses on failed settlements, with no stated cap; no related liability was recorded at June 30. Management was developing additional automated controls.
- Subsidiaries held $97.1 million of net capital and financial resources above regulatory minimums of $8.6 million. Regulatory restrictions may limit transfers of funds from regulated subsidiaries. Unrestricted cash held by non-U.S. subsidiaries was $33.3 million; foreign earnings were considered indefinitely reinvested.
- Legal proceedings and regulatory examinations were described as not expected to have a material adverse effect based on currently available information, but ultimate exposure could not be determined. Federal tax examinations for 2011 and 2012 were underway.
- Matched-principal revenue was $7.4 million in the first half, compared with $2.8 million a year earlier. First-half 2014 other income included a $0.9 million gain from selling MF Global bankruptcy claims; there was no comparable current-period item disclosed.
- Cash and cash equivalents were primarily maintained at one major global bank, creating deposit-concentration risk. The company held $67.5 million of available-for-sale securities and disclosed potential loss exposure from adverse market movements.
Important facts for investors to verify
- Whether trading-volume and estimated market-share gains persist, particularly in U.S. high-grade and other-credit products.
- Whether commission growth continues despite lower fees per million in some product categories and declining distribution fees in other credit.
- Progress in Open Trading, the European BlackRock alliance and regulatory-product opportunities, together with the costs and risks of matched-principal expansion.
- Credit-facility status, cash availability at regulated and foreign subsidiaries, capital returns, and any change to the buyback authorization or dividend.
- Developments in tax examinations, legal or regulatory matters, and implementation of U.S. and European market rules.