MarketAxess Holdings Inc. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023; comparisons are with the corresponding 2022 periods. Amounts below are in U.S. dollars. MarketAxess operates electronic fixed-income trading platforms and related data and post-trade services, serving more than 2,000 institutional investor and broker-dealer firms. It reports as one business segment.
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $179.8 million | $182.2 million | $383.0 million | $368.3 million |
| Operating income | $75.7 million | $84.8 million | $171.1 million | $172.9 million |
| Net income | $59.9 million | $66.9 million | $133.5 million | $131.7 million |
| Diluted EPS | $1.59 | $1.78 | $3.55 | $3.49 |
| Operating margin | 42.1% | 46.5% | 44.7% | 46.9% |
| Net margin | 33.3% | 36.7% | 34.9% | 35.8% |
Q2 revenue declined 1.3% as commissions fell 3.0% to $158.6 million; information-services revenue rose 24.0% to $11.7 million and post-trade revenue rose 3.0% to $9.4 million. For the first half, revenue rose 4.0%, led by 3.3% commission growth and 18.0% growth in information services.
- Trading and commissions: Q2 credit volume decreased 0.6%, and credit average variable fees per million fell 5.0% to $157.42. Credit variable fees declined 5.6%, partly offset by 11.6% growth in fixed distribution fees. Rates volume fell 32.5%, principally reflecting lower U.S. government bond activity. Total reported platform volume fell 21.4%, to $1.72 trillion. Open Trading credit volume was $225.5 billion, down 2.4%.
- Costs and earnings: Q2 expenses rose 6.9% to $104.1 million, including higher employee, technology and depreciation costs. Operating income fell 10.7% and net income fell 10.6%. Higher interest income ($5.3 million versus $0.3 million) partly cushioned operating pressure; other, net turned to a $2.3 million expense, primarily reflecting foreign-exchange losses.
- Cash flow: First-half operating cash flow was $112.9 million, versus $69.9 million. Investing cash outflow was $47.8 million and financing cash outflow was $87.7 million. Company-defined free cash flow was $90.2 million, versus $96.8 million; the measure excludes specified settlement and trading-investment cash-flow movements and deducts capital expenditures and capitalized software.
- Liquidity and obligations: At June 30, cash and cash equivalents were $396.5 million and investments were $109.0 million; management reported these together as $505.5 million. Cash, segregated cash, clearing deposits and other deposits totaled $557.3 million. The company had no credit-facility borrowings, $499.9 million of available capacity on its $500 million revolving facility, and no outstanding uncommitted settlement-bank borrowings or overdrafts. Total liabilities were $454.1 million, including $79.9 million of operating lease liabilities; the filing reports no funded debt outstanding.
- Capital returns: Dividends declared were $0.72 per share in Q2 and $1.44 for the first half. The board approved a further $0.72 quarterly dividend in July, payable August 16, 2023. No shares were repurchased under the public program in Q2; 434 shares reported as repurchased were surrendered for tax withholding. The program had approximately $100 million remaining capacity.
Material changes and management commentary
- Management attributed difficult Q2 market conditions to the regional banking crisis and uncertainty around U.S. debt-ceiling negotiations. U.S. credit market volume increased only 0.42% year over year, and lower volatility and weak market growth weighed on platform activity. Higher yields and shorter bond duration reduced average credit fees.
- For the first half, total platform volume declined 9.4%, despite 6.9% growth in credit volume, as rates volume fell 17.5%. U.S. high-grade market share was estimated at 20.3% for the first half, down from 21.5%; Q2 share was 20.7%, down from 22.3%.
- Management reported automated-protocol trading volume of $73.1 billion in Q2, up 26.8%, and 7.4 million dealer algorithmic responses, up 30.7%. A pilot of the Adaptive Auto-X client algorithm launched during the quarter.
- Management said existing resources, operating cash flow and borrowing capacity should meet liquidity needs and planned capital expenditures for at least the next 12 months. No numerical full-year revenue or earnings guidance is provided in the supplied filing text.
Risks, contingencies and unusual items
- Key business sensitivities include trading volumes, market volatility, bond duration and product mix; lower volumes could materially reduce commission revenue and profitability. Inflation may increase employee and technology costs.
- Regulatory developments include proposed SEC rules affecting alternative trading systems and communication protocols and the adopted T+1 settlement cycle effective May 2024. Management expects T+1 to reduce counterparty exposure and clearing margin needs but increase operational complexity and costs, particularly for cross-border activity.
- Matched-principal trading exposes the company to counterparty and settlement risk. It also identifies concentration of cash deposits at three major global banks, cybersecurity risks, foreign-exchange exposure and competition as relevant risks. The filing reports no material information-security breach in at least the prior three years.
- Legal proceedings and regulatory examinations are ongoing in the normal course; management does not expect currently known matters to have a material adverse financial impact, but says ultimate exposure cannot presently be determined. New York State tax examinations for 2015–2017 and New York City examinations for 2016–2018 remain open.
- The company paid $12.5 million in May 2023 to settle the final MuniBrokers earn-out; no contingent consideration remained at quarter-end. First-half reported earnings also reflect foreign-exchange losses, while the prior-year period included a $3.2 million New York tax-settlement expense and a $1.6 million contingent-consideration revaluation gain.
- Regulated subsidiaries held capital and financial resources $550 million above required levels of $29 million. Regulatory restrictions may limit transfers of capital among subsidiaries.
Important facts for investors to verify
- Whether subsequent quarters show recovery in credit trading volume, U.S. high-grade market share and average variable fees per million, especially as bond duration and yields change.
- Whether expense growth—particularly employee compensation, technology and communications—moderates relative to revenue growth and supports operating margins.
- Whether cash generation and liquidity remain adequate as self-clearing and settlement funding needs fluctuate; distinguish unrestricted cash from segregated cash and clearing deposits.
- Progress, costs and operational impacts of SEC rule changes and the May 2024 T+1 settlement transition.
- Developments in the open tax examinations, legal matters, counterparty exposures and the company’s bank-deposit concentration.
- Management’s subsequent outlook and capital-allocation decisions, including dividends and use of the remaining share-repurchase authorization.