MarketAxess Holdings Inc. — FY 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019; filed February 18, 2020. The filing reports annual results, with quarterly data including Q4 2019. MarketAxess operates electronic fixed-income trading platforms and related data, execution and post-trade services. Commissions generated 90.7% of 2019 revenue.
Financial performance and liquidity
| Metric | FY 2019 | FY 2018 | Change |
|---|---|---|---|
| Revenue | $511.4 million | $435.6 million | +17.4% |
| Operating income | $250.9 million | $212.6 million | +18.0% |
| Net income | $204.9 million | $172.9 million | +18.5% |
| Diluted EPS | $5.40 | $4.57 | +18.2% |
| Operating margin | 49.1% | 48.8% | +0.3 percentage points |
| Net margin | 40.1% | 39.7% | +0.4 percentage points |
| Operating cash flow | $265.9 million | $223.9 million | +18.8% |
| Free cash flow, non-GAAP | $227.2 million | $175.5 million | +29.5% |
Revenue growth was led by commissions, up 18.7% to $463.9 million. Information services revenue rose 8.9% to $30.7 million; post-trade services revenue rose 2.7% to $15.8 million. Costs increased 16.8% to $260.5 million, including higher compensation, acquisition-related costs and clearing costs. The effective tax rate was 20.4%, versus 20.7% in 2018. EBITDA, a non-GAAP measure, was $284.3 million, compared with $241.2 million.
FY 2019 cash flows included $122.1 million used in investing activities, primarily reflecting the LiquidityEdge acquisition, and $118.1 million used in financing activities, including dividends, share repurchases and employee tax withholding. Cash, cash equivalents and investments totaled $500.6 million at year-end; working capital was $502.4 million and total assets were $954.9 million. Total liabilities were $184.8 million, including $98.0 million of operating lease liabilities. The filing reports no balance of borrowings; the $100 million revolving facility had $99 million available after $1 million of letters of credit. The company said resources were adequate for anticipated needs over at least 12 months.
Quarterly and operating developments
- Q4 2019 revenue was $129.8 million, compared with $112.4 million in Q4 2018; net income was $50.3 million versus $45.8 million, and diluted EPS was $1.32 versus $1.21.
- Credit trading volume increased 22.4% to $2.03 trillion. U.S. high-grade volume increased 14.0%, and estimated MarketAxess share rose to 19.0% from 18.1%. Other credit volume grew 33.1%; estimated U.S. high-yield share rose to 10.4% from 8.9%.
- Open Trading represented 26.1% of credit volume, up from 22.0% in 2018. The filing separately states Open Trading was 21.1% of credit commission revenue, compared with 16.9%.
- MarketAxess acquired LiquidityEdge on November 1, 2019 for aggregate consideration of $152.7 million, including cash and stock. The acquisition added U.S. Treasury trading; reported 2019 Treasury volume was $0.7 trillion from closing through year-end. Acquisition accounting included $87.1 million of goodwill and approximately $58.7 million of customer relationship intangible assets.
Outlook, risks and contingencies
The filing gives no specific financial guidance for 2020. Management expects rates revenue per million to decline as a full year of lower-fee U.S. Treasury volume is reflected. Priorities include expanding client participation and markets, developing automation and analytics, and broadening data and post-trade offerings. The company planned to begin self-clearing substantially all U.S. bond transactions in the first half of 2020, which could increase operational, financing, liquidity and margin risks.
Management cited market trading activity, volatility, interest rates, credit spreads and issuance as important revenue drivers. Key risks include intense competition, dependence on broker-dealer and institutional investor participation, cybersecurity and technology disruptions, regulatory change, Brexit-related operating and passporting changes, foreign-exchange exposure, and counterparty risks from matched-principal trades. The company also disclosed a New York State tax examination covering 2010–2017 and $6.8 million of unrecognized tax benefits; timing and potential outcomes were uncertain. Routine legal matters were not expected to materially affect financial position based on information then available, but ultimate exposure could not be determined. The auditor issued unqualified opinions on the financial statements and internal controls; critical audit matters included commission revenue recognition and LiquidityEdge customer-relationship valuation.
Investor verification priorities
- Check the sustainability of commission growth and market-share gains, given the company’s high reliance on transaction commissions and variable market volumes.
- Assess LiquidityEdge integration, acquisition-related costs, goodwill and intangible-asset valuation, and the contribution of Treasury trading beyond the short post-acquisition period.
- Monitor the planned self-clearing transition, including funding, collateral, operational readiness and any resulting expense or liquidity changes.
- Review the effects of Brexit and the use of Dutch-regulated entities for European services, as well as any subsequent regulatory developments.
- Track cash deployment, dividends and repurchases against the $100 million revolving facility, lease commitments and regulatory capital constraints.