MarketAxess Holdings Inc. — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018; comparisons are with the corresponding 2017 periods. Amounts are in U.S. dollars unless otherwise stated.
Business context
MarketAxess operates an electronic fixed-income trading platform serving more than 1,400 institutional investors and broker-dealers. Revenue is primarily commissions, with additional information and post-trade services. The company reports one business segment.
Financial performance and liquidity
- Q2 revenue: $107.0 million, up 11.1%. Commissions rose 10.5% to $96.1 million; information services increased 6.7% to $6.9 million; post-trade services increased 45.4% to $3.6 million.
- Q2 earnings: Operating income was $52.0 million, up 6.2%; net income was $40.5 million, up 6.5%. Diluted EPS was $1.07, versus $1.00. Operating margin was approximately 48.7%, compared with 50.9%; net margin was approximately 37.9%, compared with 39.5%.
- First-half results: Revenue was $221.7 million, up 11.2%; operating income was $112.2 million, up 7.7%; net income was $88.4 million, up 9.9%. Diluted EPS was $2.33, versus $2.11. Operating margin was approximately 50.6%, versus 52.2%; net margin was approximately 39.9%, versus 40.4%.
- Cash flow: First-half operating cash flow was $85.8 million, up from $69.1 million. Investing cash outflow was $29.4 million and financing cash outflow was $51.9 million. Cash and cash equivalents increased $3.7 million to $170.7 million. Management’s non-GAAP trailing-12-month free cash flow was $169.3 million, versus $160.0 million.
- Balance sheet and funding: Cash and investments totaled $420.3 million; total assets were $617.6 million and equity was $557.4 million. No borrowings were reported. The revolving credit facility had $98.3 million available after $1.7 million of letters of credit; it matured in October 2018, with two one-year extension options. The company reported covenant compliance.
- Capital returns: First-half common-stock repurchases totaled $12.9 million. Dividends declared were $0.42 per share for Q2, versus $0.33 a year earlier. A further $0.42 quarterly dividend was approved in July 2018.
Material changes and management commentary
- Q2 trading volume increased 16.4% to $420.8 billion; first-half volume increased 17.2% to $885.8 billion. Growth was led by U.S. high-grade and other-credit activity. U.S. high-grade market share was 17.4% for Q2 and 17.7% for the first half.
- Commission growth benefited from higher volumes and distribution fees, including broker-dealer migrations to plans with monthly distribution fees. Variable transaction fees per million declined, notably in other credit, reflecting fee-plan changes, Eurobond fee reductions and product mix.
- Expense growth outpaced revenue growth: Q2 expenses rose 16.1% and first-half expenses rose 15.1%. Occupancy costs rose sharply because of duplicate rent and additional space associated with the new New York headquarters; management expected relocation to 55 Hudson Yards in late 2018.
- Post-trade revenue increased despite fewer transactions processed: 220 million in Q2 versus 252 million, and 433 million in the first half versus 523 million. Management attributed the revenue improvement to new customers and services and pricing changes.
Outlook, risks and contingencies
- No specific earnings or revenue guidance was provided. Management said existing resources were adequate for liquidity needs and capital expenditures for at least the next 12 months.
- Management cautioned that trading-volume declines could materially reduce revenue and profitability. Other risks include intense competition, changing fixed-income market conditions, interest-rate and foreign-exchange movements, technology demands and regulatory change.
- MiFID II/MiFIR implementation increased compliance, technology and operating demands. Brexit was expected to require new or additional EU-regulated subsidiaries to maintain client access if passporting rights ended.
- Open Trading matched-principal activity exposes the company to counterparty, settlement and operational risks; management noted that controls cannot assure elimination of those exposures. Cash deposits are concentrated primarily at one global bank.
- Legal proceedings and regulatory examinations were described as not expected, based on available information, to have a material adverse financial impact; ultimate exposure could not be determined. The company also has $141.1 million of future operating-lease commitments, including its long-term headquarters lease.
- The company expected adoption of the new lease standard in 2019 to materially increase reported right-of-use assets and lease liabilities. Revenue-standard adoption in 2018 had no material impact.
Important facts for investors to verify
- Whether higher trading volumes and platform market share persist, and whether lower variable fees continue to offset volume-driven commission growth.
- Whether expense growth moderates after the headquarters move and how ongoing lease costs affect margins and the balance sheet.
- The extension or refinancing status of the credit facility maturing in October 2018, and any changes to its terms or covenants.
- Progress and costs related to Brexit readiness, MiFID II/MiFIR compliance and other regulatory requirements.
- Potential effects of market, interest-rate, currency and matched-principal counterparty exposures, as well as developments in legal matters and the New York tax examination.