MarketAxess Holdings Inc. — 2016 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2016; it is not a standalone fourth-quarter filing. MarketAxess operates an electronic fixed-income trading platform and related data, technology, and post-trade services. More than 1,200 institutional investor and broker-dealer firms used its platform. Commissions accounted for 89.8% of 2016 revenue.
Financial and operating performance
| Metric | 2016 | 2015 | Change |
|---|---|---|---|
| Total revenue | $369.9 million | $303.1 million | +22.0% |
| Commissions | $332.3 million | $266.2 million | +24.8% |
| Income before income taxes | $191.6 million | $147.9 million | +29.5% |
| Net income | $126.2 million | $96.0 million | +31.4% |
| Diluted earnings per share | $3.34 | $2.55 | +31.0% |
| Net cash from operating activities | $80.3 million | $120.2 million | −33.2% |
- Margins: Income before tax was 51.8% of revenue, versus 48.8% in 2015; net margin was 34.1%, versus 31.7%. Total expenses rose 14.9% to $178.3 million, slower than revenue growth.
- Trading: Total platform volume increased 33.7% to $1.309 trillion. U.S. high-grade volume rose 26.5%, and other-credit volume rose 51.0%. Estimated U.S. high-grade market share increased to 16.0% from 14.6%.
- Fourth quarter: Revenue was $94.4 million and net income was $33.2 million, compared with $76.6 million and $24.5 million, respectively, in fourth-quarter 2015. Diluted EPS was $0.88 versus $0.65.
- Cash and liquidity: Cash, cash equivalents, and investments totaled $362.6 million at year-end, up from $284.4 million. Working capital was $364.9 million. Operating cash flow declined partly because of a $74.2 million increase in corporate-debt trading investments. The company reported non-GAAP free cash flow of $136.0 million, compared with $104.8 million.
- Debt and capital: No borrowings under the revolving credit facility are reported; $99.1 million of the $100 million facility was available at year-end, with $0.9 million in letters of credit outstanding. The facility matures in October 2017. Regulated subsidiaries had aggregate net capital and financial resources $126.0 million above required levels.
- Shareholder returns: Quarterly dividends were $0.26 per share in 2016, up from $0.20 in 2015. The company repurchased $23.9 million of stock during 2016 and had approximately $51.1 million remaining under its repurchase authorization at year-end.
Material changes versus 2015
- Revenue growth was driven mainly by trading commissions: variable transaction fees increased $66.8 million, primarily from higher volumes. Other-credit fee revenue per million fell, reflecting product and protocol mix.
- Expenses increased $23.1 million. Employee compensation rose $12.9 million, professional and consulting fees $4.1 million, and marketing and advertising $2.8 million. Employee headcount increased to 383 from 342.
- The effective tax rate decreased to 34.1% from 35.1%, principally due to a higher share of income in lower-tax jurisdictions and lower statutory foreign and state tax rates.
- Open Trading represented 13.2% of platform volume, up from 9.2%; the company reported approximately 407,000 Open Trading transactions, up 130% year over year.
Outlook, commentary, risks, and unusual items
- Management described 2016 as a challenging macroeconomic environment, citing low rates and volatility for much of the year, followed by increased market volatility and a shift in rate and inflation expectations after the U.S. election. The filing gives no specific earnings or revenue guidance.
- Management plans to expand trading protocols, products, data and post-trade services, including municipal bonds and leveraged loans, and to prepare Trax for expected MiFID II requirements. MiFID II and MiFIR were expected to take effect in January 2018 and could increase compliance, technology, and operating costs; management also noted potential business opportunities.
- Key risks include dependence on trading volumes and market share, competition, reliance on broker-dealer liquidity and major institutional clients, matched-principal counterparty and settlement exposure, technology and cybersecurity disruptions, and extensive regulation. Brexit could affect U.K. subsidiaries’ access to the EU market and require new regulated entities.
- Matched-principal trading revenue increased to $37.7 million from $16.9 million; related clearing expense rose to $6.1 million from $3.3 million. The company states it is exposed to counterparty and trade-error risks, but recorded no related losses in 2016 or 2015.
- During the first quarter, the company recorded out-of-period adjustments it determined were not material to prior periods: deferred tax assets decreased $3.1 million, other comprehensive income decreased $2.1 million, and prepaid expenses and other assets increased $1.0 million.
- Legal proceedings and regulatory examinations arise in the ordinary course. The company did not expect currently outstanding matters to have a material adverse impact on financial position, while noting ultimate exposure cannot be determined and could exceed accrued reserves.
- The company expects occupancy costs to rise in 2017 and 2018 and disclosed a 15-year lease for its planned New York headquarters. Total operating lease commitments were $146.3 million at year-end.
Important facts for investors to verify
- How much future revenue growth depends on higher trading volumes and market-share gains, particularly in U.S. high-grade bonds.
- Whether Open Trading growth can be sustained while controlling matched-principal credit, settlement, and error-trade risks.
- The effect of MiFID II/MiFIR implementation and Brexit-related market-access or subsidiary requirements on costs and European revenue.
- Cash-flow comparability: 2016 operating cash flow was reduced by corporate-debt trading investments; review the company’s non-GAAP free-cash-flow definition and reconciliation.
- The October 2017 credit-facility maturity, ongoing lease commitments, and the company’s capital allocation through dividends and repurchases.
- Whether the out-of-period tax adjustments, pending tax examination, or ordinary-course legal and regulatory matters produce any material future effects.