MarketAxess Holdings Inc. — Q2 2022 Form 10-Q
Business context and reporting period. This unaudited quarterly report covers the three and six months ended June 30, 2022. MarketAxess operates electronic fixed-income trading platforms and related data and post-trade services, serving more than 1,900 institutional investor and broker-dealer firms. It reports one operating segment.
Key financial results
Amounts are in millions of dollars, except per-share data and percentages.
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Revenue | $182.2 | $176.3 | $368.3 | $371.8 |
| Operating income | $84.8 | $87.2 | $172.9 | $190.7 |
| Net income | $66.9 | $67.3 | $131.7 | $147.7 |
| Diluted EPS | $1.78 | $1.77 | $3.49 | $3.87 |
| Operating margin | 46.5% | 49.4% | 46.9% | 51.3% |
- Q2 revenue rose 3.3%, led by commissions, up 4.5% to $163.5 million. Information services fell 4.6% and post-trade services fell 7.1%.
- Q2 operating income fell 2.7% as expenses increased 9.3% to $97.4 million. Net income declined 0.5%; diluted EPS increased slightly, partly reflecting fewer diluted weighted-average shares.
- First-half revenue declined 0.9%; operating income fell 9.3%, net income 10.9%, and diluted EPS 9.8%. The effective tax rate rose to 26.8% from 21.4%.
- Trading and commission trends: Q2 total credit volume increased 13.5% and rates volume 61.2%. However, average variable transaction fees per million fell 17.7% for U.S. high-grade and 4.4% for other credit. First-half commission revenue declined 0.8%.
- Cash flow: First-half operating cash flow was $69.9 million versus $73.6 million. Investing used $55.6 million and financing used $187.0 million. The company reported non-GAAP free cash flow of $96.8 million, down from $119.6 million.
- Liquidity and debt: June 30 cash and cash equivalents were $290.5 million; cash and investments totaled $324.8 million. There were no borrowings under the $500 million revolving credit facility, with $500 million available, and no borrowings under the separate $200 million uncommitted collateralized facility. The company reported compliance with applicable credit covenants. Operating lease liabilities were $85.6 million.
Material changes, outlook, and risks
- Management attributed Q2 market improvement to wider credit spreads, higher volatility, increased U.S. high-grade market volume, and higher estimated market share. Rising bond yields shortened the duration of bonds traded, reducing average fees per million. Management noted that market activity and bond mix can materially affect commissions.
- Q2 other income included $4.7 million of “other, net,” primarily reflecting foreign-exchange gains. For the first half, higher foreign-exchange gains and a $1.6 million gain on revaluation of acquisition-related contingent consideration contributed to the increase in other income. First-half taxes included a $3.2 million expense from settlement of New York State audits covering 2010–2014.
- The company invested $34.4 million in May for a minority equity-method interest in RFQ-hub Holdings LLC. Acquisition-related contingent consideration declined to $12.1 million at quarter-end after payments and remeasurement.
- No quantified financial guidance was provided in the supplied filing text. Management said existing resources, operating cash flows, and available borrowing capacity should meet liquidity needs and planned capital expenditures for at least the next 12 months. The board approved a $0.70-per-share quarterly dividend in July, payable in August.
- Key risks include changes in fixed-income trading activity, interest rates, bond duration and market volatility; competition; foreign-exchange exposure; cybersecurity and technology risks; regulatory changes; and counterparty/settlement risk associated with matched-principal trades. Management reported no material losses on trades unsettled when Russia-related sanctions were imposed. It said outstanding legal matters were not expected to materially affect financial position, while noting ultimate exposure could not be determined.
- The company reported $477.8 million of aggregate regulatory capital and financial resources above required levels. Self-clearing and settlement-related positions, deposits, and customer reserve balances totaled $294.2 million and may fluctuate with trading activity and volatility.
Important facts for investors to verify
- Whether trading volume and market-share gains can offset lower average transaction fees, particularly in U.S. high-grade bonds.
- How expense growth, especially compensation, technology, and depreciation and amortization, affects operating margins.
- The drivers and repeatability of foreign-exchange gains and the impact of the higher effective tax rate, including the New York tax settlement.
- Cash-flow comparability: settlement-related receivables and payables, share repurchases, dividends, investment spending, and currency movements affected reported cash flows.
- Future payments and valuation assumptions for acquisition-related contingent consideration, and the performance of the RFQ-hub investment.
- Potential effects of regulatory changes, market disruption, counterparty failures, and the company’s ability to maintain platform security and resilience.