MarketAxess Holdings Inc. — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018. MarketAxess operates an electronic fixed-income trading platform and related information and post-trade services, serving more than 1,400 institutional investor and broker-dealer firms. Unless otherwise noted, amounts below are in millions of dollars.
Financial performance
| Metric | Q3 2018 | Q3 2017 | First 9 months 2018 | First 9 months 2017 |
|---|---|---|---|---|
| Revenue | $101.4 | $95.6 | $323.1 | $294.9 |
| Operating income | $46.4 | $46.6 | $158.6 | $150.8 |
| Net income | $38.6 | $34.1 | $127.0 | $114.6 |
| Diluted EPS | $1.02 | $0.90 | $3.36 | $3.01 |
| Operating margin | 45.7% | 48.8% | 49.1% | 51.1% |
| Net margin | 38.1% | 35.7% | 39.3% | 38.9% |
Q3 revenue grew 6.1%; commissions rose 4.9%, information services 13.3%, and post-trade services 29.8%. For the first nine months, revenue grew 9.6%, with commissions up 8.3%, information services up 11.3%, and post-trade services up 53.1%. Commissions accounted for about 90% of year-to-date revenue.
Trading volume increased 11.2% in Q3 and 15.3% year to date. Other-credit volume grew 24.8% in Q3 and 24.3% year to date; U.S. high-grade volume grew 2.6% and 10.2%, respectively. Variable transaction fees per million declined, offsetting part of the volume gains; distribution fees increased, partly reflecting client migration to plans with monthly fees.
Operating expenses increased 12.4% in Q3 and 14.2% year to date, faster than revenue. Occupancy was a major contributor, rising $1.7 million in Q3 and $5.7 million year to date, largely due to overlapping rent during the new headquarters build-out. Depreciation and amortization, technology costs, and marketing also rose. Q3 operating income was slightly lower year over year despite higher revenue; lower tax expense contributed to the increase in net income. Effective tax rates were 19.3% in Q3 and 21.6% year to date, versus 27.7% and 24.8%, respectively, in 2017.
Cash flow, balance sheet and capital
- Operating cash flow for the first nine months was $153.8 million, up from $121.6 million. Investing cash outflow was $37.0 million and financing cash outflow was $72.4 million. Cash increased $43.1 million to $210.1 million.
- Cash and investments totaled approximately $446.2 million at September 30, 2018. Total assets were $646.1 million; total liabilities were $67.5 million and stockholders’ equity was $578.6 million. The filing reports no borrowings outstanding under the credit facility.
- The $100 million revolving credit facility had $98.3 million of available capacity after $1.7 million of letters of credit. In October 2018, the company extended its maturity to October 2019. It was in covenant compliance at September 30.
- Year-to-date capital spending included $23.8 million for equipment and leasehold improvements and $9.2 million for capitalized software. The company paid $46.9 million in dividends and repurchased $19.0 million of shares. The declared dividend was $0.42 per share for Q3.
- Operating lease commitments totaled $139.8 million, including $92.4 million due after five years. The company expects to move to its approximately 83,000-square-foot Hudson Yards headquarters in December 2018.
Outlook, risks and unusual items
The filing provides no specific revenue or earnings guidance. Management stated that current resources were adequate for liquidity needs and capital expenditure requirements for at least the next 12 months. It noted that future requirements depend on product development, expansion, and potential acquisitions or investments.
- Management highlighted sensitivity to fixed-income trading volumes, market conditions, interest rates, competition, client consolidation, and regulatory change. A general decline in trading volume could reduce revenue and profitability.
- MiFID II implementation increased compliance, technology, and operating demands. Brexit was expected to affect U.K. firms’ access to the EU market; the company was establishing EU-regulated subsidiaries ahead of the anticipated March 2019 departure.
- Open Trading matched-principal activity exposes the company to counterparty and settlement risk. The company reported no related losses in the first nine months, but stated its controls cannot assure that exposures will be fully mitigated. Cash deposits are concentrated primarily at one major global bank.
- The company held $236.1 million of investments, principally corporate debt securities, and disclosed sensitivity to interest-rate and market-value changes. Foreign-currency exposure is partly hedged; foreign exchange movements affected reported revenue and expenses.
- The Tax Act accounting remained provisional; a $0.4 million reduction to the provisional tax charge was recorded in Q3, and the final impact could differ. A New York State income-tax examination covering 2010–2015 was ongoing.
- Management said outstanding legal matters were not expected to materially adversely affect financial position, while noting ultimate exposure could not be determined. No material changes to previously disclosed risk factors were reported.
- The company adopted the new revenue-recognition standard in January 2018 without material financial-statement impact. It expected the new lease standard, effective January 1, 2019, to materially increase reported assets and liabilities.
Most important facts for investors to verify
- Whether the strong trading-volume growth continues and offsets lower transaction fees per million.
- Whether higher occupancy and technology-related costs moderate after the headquarters move, and how operating margins develop.
- Cash generation, investment portfolio value and liquidity, including the credit facility’s extension and covenant terms.
- The effects of Brexit, EU subsidiary establishment, MiFID II, and other regulatory changes on trading and post-trade services.
- Final Tax Act accounting, the New York State tax examination, and the balance-sheet effect of lease-standard adoption.