MarketAxess Holdings Inc. — FY 2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013. Although requested as 2013 Q4, this is an annual filing; quarterly figures below are unaudited. Amounts are in U.S. dollars unless stated otherwise.
Business context
MarketAxess operates an electronic fixed-income trading platform connecting institutional investors with broker-dealers, and also provides market data, post-trade matching, regulatory reporting and technology services. Revenue is primarily transaction commissions and broker-dealer distribution fees. It reported more than 1,000 active institutional investor firms and 90 broker-dealer market makers.
Financial and operating results
- Revenue: $238.7 million, up 25.1% from $190.8 million. Commissions were $203.7 million (+16.9%); information and post-trade services were $25.4 million, including $18.4 million from Xtrakter after its acquisition.
- Profit: Income from continuing operations was $68.6 million, up 11.0%; diluted continuing EPS was $1.81 versus $1.64. Net income was $76.0 million versus $60.1 million, including a $7.6 million after-tax gain from selling Greenline. Pretax income was $107.3 million.
- Margins and costs: Total expenses rose 29.5% to $131.5 million, faster than revenue growth; expenses were 55.1% of revenue versus 53.2%. Pretax margin was approximately 44.9%, compared with 46.8% in 2012. Compensation, depreciation and amortization, professional fees, and technology costs were significant increases.
- Trading activity: Platform volume totaled $693.7 billion, up 17.7%. U.S. high-grade volume increased 19.7% and other credit increased 27.1%; liquid-products volume declined 7.4%. U.S. high-grade estimated market share rose to 13.8% from 12.4%.
- Cash flow: Operating cash flow was $90.9 million versus $81.6 million. Company-defined free cash flow, a non-GAAP measure, was $67.6 million versus $71.2 million. Investing activities used $69.1 million, including the Xtrakter acquisition and higher capital expenditures.
- Liquidity and debt: Cash and cash equivalents plus available-for-sale securities were $200.4 million; working capital was $202.5 million. A $50 million revolving credit facility had $49.9 million available to borrow at year-end, with potential upsizing subject to conditions. The filing does not provide a clear drawn-debt balance in the supplied balance-sheet data.
- Other balance-sheet metrics: Total assets were $351.6 million and total liabilities were $41.2 million. Available-for-sale securities were $67.7 million.
Material changes and quarterly context
- Compared with 2012, annual revenue and trading volume grew substantially, while expenses grew faster than revenue. The prior-year tax provision included a favorable $6.7 million adjustment for previously unrecognized tax benefits; the 2013 effective tax rate was 36.1% versus 30.9%.
- Xtrakter was acquired in February 2013 for $37.8 million net of acquired cash, expanding European matching, reporting and data services. Greenline was sold in October 2013 for $11.0 million; its results are classified as discontinued operations.
- In Q4 2013, revenue was $60.4 million versus $48.6 million in Q4 2012. Continuing-operations net income was $15.5 million versus $20.9 million; Q4 2013 total net income of $23.1 million included $7.7 million of Greenline sale gain. Q4 2012 included a favorable tax adjustment.
Outlook, risks and unusual items
- No numerical revenue or earnings guidance is provided. Management’s stated priorities include expanding electronic and all-to-all trading, adding fixed-income products and data services, improving workflow integration, and pursuing selective acquisitions and alliances. In April 2013, it formed an open-trading alliance with BlackRock.
- Management says performance depends heavily on trading activity, platform market share, client participation, pricing and market liquidity. Risks include market and rate volatility, intensifying competition, dependence on broker-dealer liquidity and a major investor client, regulatory changes, technology outages and cybersecurity, and execution of international growth.
- One institutional investor accounted for 12.5% of 2013 platform trading volume, though no single client exceeded 10% of revenue. Riskless-principal trading generated approximately $6.0 million of revenue and exposes the company to counterparty and clearing-broker losses that are not capped under the described agreements.
- A former employee’s Sarbanes-Oxley whistleblower complaint seeks reinstatement and damages. The company disputes the claim; the possible loss range cannot be estimated and no accrual was recorded.
- An out-of-period software-cost capitalization adjustment reduced compensation expense by $2.9 million, increased depreciation and amortization by $1.3 million, and increased capitalized software by $1.6 million. Management said it was not material to prior or current periods.
- The company reported effective internal control over financial reporting, but Xtrakter, representing approximately 5% of assets and 8% of revenue, was excluded from management’s and the auditor’s control assessment for 2013.
Key facts for investors to verify
- How much of revenue and earnings growth reflects underlying trading growth versus Xtrakter acquisition effects and the Greenline disposal gain.
- Whether the faster growth in expenses, particularly amortization, professional fees and technology costs, moderates and supports operating leverage.
- Trading-volume trends, market-share gains, average commissions per million, and the contribution and profitability of non-U.S. high-grade and data/post-trade businesses.
- Current credit-facility borrowings, covenant headroom, and cash available at the parent versus regulated subsidiaries.
- Progress on SEF operations and regulatory requirements, integration of Xtrakter, and resolution of the employee complaint.