Business context and reporting period
MarketAxess Holdings Inc. filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2019. The company operates an electronic fixed-income trading platform and provides market data, technology and post-trade services. Its revenue is primarily commissions on trades; it reported one integrated business segment.
Financial performance
Amounts below are in millions of dollars, except per-share data and percentages.
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $125.5 | $107.0 | $250.0 | $221.7 |
| Operating income | $60.9 | $52.0 | $124.1 | $112.2 |
| Operating margin | 48.5% | 48.6% | 49.6% | 50.6% |
| Net income | $48.1 | $40.5 | $100.6 | $88.4 |
| Diluted EPS | $1.27 | $1.07 | $2.66 | $2.33 |
| Operating cash flow | Not separately reported | Not separately reported | $109.1 | $85.8 |
Q2 revenue rose 17.3% and net income 18.8% year over year; first-half revenue rose 12.8% and net income 13.8%. Commissions accounted for about 91% of Q2 revenue. First-half trading volume increased 18.9% to $1.053 trillion; Open Trading volume grew 55.3% and represented 20.5% of commission revenue, versus 14.4% a year earlier.
Liquidity, capital and financial position
At June 30, 2019, cash and cash equivalents were $286.2 million and investments were $231.9 million, totaling $518.1 million. The filing shows no funded borrowings; the $100 million revolving credit facility had $98.3 million available after $1.7 million of letters of credit. Its maturity was extended to October 2019. The company reported compliance with facility covenants. Regulated subsidiaries held $182.1 million of net capital and financial resources above required levels of $14.4 million.
First-half operating cash flow was $109.1 million; investing cash use was $10.7 million and financing cash use was $58.5 million. Financing outflows included $38.3 million of dividends and $8.7 million of share repurchases. Total assets were $812.0 million and stockholders’ equity was $661.9 million. Operating lease liabilities of $89.7 million were recognized following adoption of the new lease standard; the company said adoption did not materially affect earnings or cash flows.
Changes, outlook and risks
- Commissions increased 18.7% in Q2, primarily on 25.3% higher trading volume and a 1.2% increase in average variable fee per million. Other credit volume rose 39.9%; U.S. high-grade volume rose 15.1%.
- Expenses rose 17.6% in Q2, led by employee compensation, including higher headcount, stock compensation and incentive pay. First-half expenses increased 15.0%, faster than revenue, and first-half operating margin declined by about one percentage point.
- Management gave no specific earnings or revenue guidance. It said current resources should meet liquidity and capital needs for at least the next 12 months. Results remain sensitive to fixed-income market activity, trading volumes, competition, fee capture and market conditions.
- Management cited risks from regulatory change, including Brexit (then expected by October 31, 2019), and established regulated Netherlands subsidiaries to serve EU clients. Other noted exposures include matched-principal counterparty risk, concentrated deposits at one major global bank, interest-rate and currency movements, and potential effects of market disruption. The company reported no material changes to the risk factors in its 2018 Form 10-K.
- Legal matters and regulatory examinations were not expected to have a material adverse impact based on information available, but ultimate exposure could not be determined. A New York State income-tax examination covering 2010–2017 was ongoing.
Important facts for investors to verify
- Whether trading-volume and market-share gains persist, particularly in other credit and Open Trading, and how they affect commission rates and revenue.
- Whether expense growth, especially compensation and technology-related costs, moderates enough to support margins.
- The October 2019 credit-facility maturity and any subsequent renewal, extension or replacement; distinguish operating lease liabilities from funded debt.
- Developments affecting EU operations after Brexit, including the role and costs of the Netherlands subsidiaries.
- Outcomes of the New York State tax examination and any legal, regulatory or matched-principal credit exposures.
- The board’s future dividend and repurchase decisions. A $0.51-per-share dividend was approved in July 2019; future distributions remain discretionary.