MarketAxess Holdings Inc. — Q1 2018 Form 10-Q
Business context and period. The filing covers the unaudited quarter ended March 31, 2018, compared with Q1 2017. MarketAxess operates an electronic fixed-income trading platform and provides market information and post-trade services. It reported one business segment and more than 1,300 active institutional investor and broker-dealer firms.
Key financial results
Amounts are in millions of U.S. dollars except per-share data and percentages.
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Total revenue | $114.7 | $103.0 | +11.4% |
| Operating income | $60.2 | $55.2 | +9.1% |
| Net income | $47.9 | $42.5 | +12.9% |
| Diluted EPS | $1.27 | $1.11 | +14.4% |
| Operating margin | 52.5% | 53.6% | Down 1.1 percentage points |
| Net margin | 41.8% | 41.2% | Up 0.6 percentage points |
| Cash from operations | $31.4 | $30.5 | +2.9% |
- Revenue mix: Commissions were $102.8 million (+9.3%); information services $7.1 million (+14.2%); and post-trade services $4.6 million (+86.3%). Commissions remained the largest source, at 89.6% of revenue.
- Trading activity: Platform trading volume increased 17.9% to $465.0 billion. U.S. high-grade volume rose 14.4%, and other-credit volume rose 25.2%; liquid-products volume fell 8.0%. Variable transaction fees increased only 2.5%, as lower average fees per million offset volume growth. Distribution fees rose 42.2%, including growth under the high-yield fee plan introduced in 2017.
- Expenses: Total expenses rose 14.1% to $54.5 million, faster than revenue. Occupancy increased $1.9 million, primarily from duplicate rent during the new headquarters build-out; employee compensation rose $1.6 million and technology and communications rose $1.2 million.
- Cash and investments: At March 31, cash and cash equivalents were $156.2 million and investments were $244.3 million, totaling approximately $400.4 million. Total liabilities were $52.1 million; the filing reports no funded borrowings. The credit facility had $99.1 million available, with $0.9 million in letters of credit outstanding, and the company was covenant-compliant.
- Cash uses and distributions: Investing activities used $12.7 million and financing activities used $29.4 million. Cash dividends paid were $15.8 million; the declared dividend was $0.42 per share, versus $0.33 a year earlier. The company repurchased 30,500 shares for $6.3 million under its program; total shares repurchased or surrendered, including employee tax withholding, were 71,728.
Material changes, outlook and risks
- Revenue growth reflected higher commissions and post-trade services, with a $1.7 million favorable revenue effect from the stronger British pound. Management also attributed revenue growth to higher platform volumes and gains in market share in U.S. high-grade bonds.
- The effective tax rate was 21.4%, compared with 23.6% in Q1 2017. The 2018 provision included $1.8 million of excess tax benefits from share-based awards; the prior period included $5.8 million. Management said the final accounting for the 2017 Tax Act could differ from its provisional estimate.
- Management said current resources were adequate for liquidity needs and capital expenditures for at least the next 12 months. It expected occupancy expense to increase in 2018 and planned to relocate to its approximately 83,000-square-foot New York headquarters in late 2018. No specific full-year revenue or earnings guidance was provided.
- Operating lease commitments totaled $142.9 million, including $97.1 million due after five years. The new headquarters lease is for 15 years. Management adopted the new revenue-recognition standard on January 1, 2018; adoption had no material financial-statement impact. The lease accounting standard was expected to add lease assets and liabilities beginning in 2019.
- Key business risks include fixed-income market activity and volatility, competition, regulatory change, technology execution, foreign-exchange exposure and counterparty credit risk on matched-principal trades. MiFID II/MiFIR implementation increased compliance, technology and operating demands. Brexit could affect U.K. subsidiaries’ access to EU markets; the company was preparing to establish regulated EU subsidiaries.
- The company reported ongoing lawsuits, proceedings and regulatory examinations, but said currently available information did not indicate a material adverse financial impact; ultimate exposure could not be determined. It also noted concentration of cash deposits at one major global bank and risks from potential counterparty failures in matched-principal trading. No material risk-factor changes from the prior annual report were reported.
Important facts for investors to verify
- Whether platform volume and market-share gains continue, and whether they translate into commission growth despite declining average fees per million.
- How much of post-trade revenue growth is recurring, given the reported decline in transaction-reporting volume from 270 million to 213 million transactions.
- The impact of higher occupancy and technology costs on margins after the headquarters move, and the company’s longer-term lease commitments.
- The final tax accounting under the Tax Act and future variability in tax benefits from stock awards.
- Progress on EU regulatory arrangements ahead of Brexit, and any effect of MiFID II/MiFIR on costs or business volumes.
- The filing’s market-risk discussion cites cash and investments of $396.1 million in one interest-rate sensitivity section, while balance-sheet cash plus investments total approximately $400.4 million; verify the basis of that sensitivity figure.