MarketAxess Holdings Inc. — 2012 Form 10-K
Reporting period: Fiscal year ended December 31, 2012; audited annual results, with fourth-quarter data identified where relevant. MarketAxess operates an electronic fixed-income trading platform connecting institutional investors and broker-dealers. Most revenue comes from commissions and distribution fees, particularly U.S. high-grade corporate bonds.
Financial performance
| Metric | FY 2012 | FY 2011 | Change |
|---|---|---|---|
| Total revenue | $198.2 million | $181.1 million | +9.4% |
| Commissions | $174.2 million | $155.4 million | +12.1% |
| Total expenses | $111.5 million | $102.4 million | +8.9% |
| Income before taxes | $86.7 million | $78.7 million | +10.1% |
| Net income | $60.1 million | $47.7 million | +25.9% |
| Diluted EPS | $1.59 | $1.20 | +32.5% |
| Operating cash flow | $81.6 million | $65.5 million | +24.6% |
| Free cash flow, company-defined non-GAAP | $71.2 million | $58.3 million | +22.1% |
Total expenses were 56.3% of revenue, versus 56.5% in 2011. Net margin was approximately 30.3%, compared with 26.3%; the 2012 result benefited from a $6.7 million favorable tax adjustment. Revenue was 87.9% commissions. The filing does not present a separate operating-income line.
- Fourth quarter: Revenue was $50.4 million, compared with $45.1 million in Q4 2011. Net income was $20.5 million versus $11.5 million, including a $6.7 million favorable tax adjustment recorded in Q4.
- Trading volume: Total platform volume rose 12.3% to $589.6 billion. U.S. high-grade volume increased 13.6% to $367.7 billion; estimated market share rose to 12.4% from 11.1%. Eurobond volume fell 6.5% to $34.5 billion, while emerging markets, high-yield and other volume rose 13.9% to $187.4 billion.
- Revenue mix and pricing: Variable transaction fees rose 25.3% to $114.9 million, while distribution fees fell 6.9% to $59.3 million. Eurobond commissions declined as volume weakened and European dealer distribution fees were reduced from March 2012. Technology products and services revenue declined 13.7% to $12.4 million, partly due to lower consulting and software license sales as the business shifted toward rental licensing.
Liquidity, capital and shareholder returns
- At year-end, cash and cash equivalents were $128.9 million and securities available-for-sale were $51.2 million, totaling $180.1 million, down from $247.7 million a year earlier. Working capital was $180.7 million; total assets were $279.8 million.
- Operating cash flow was $81.6 million; investing activities provided $15.0 million, principally reflecting securities sales and maturities, while financing activities used $136.2 million. Cash declined $40.7 million during the year.
- The company reported no debt balance in the supplied year-end balance sheet. A three-year revolving credit facility of up to $50 million, with a potential $50 million increase subject to conditions, was entered into on January 14, 2013.
- Financing outflows included $64.0 million of cash dividends and $75.1 million of common-stock repurchases. The 2012 dividend was $1.74 per share, including a $1.30 special dividend. The board later approved a quarterly dividend of $0.13 per share for February 2013.
- The pending Xtrakter acquisition is priced at £26.0 million (approximately $40.5 million), plus costs and a working-capital adjustment, funded from available cash. Regulatory approval was received in February 2013; closing was expected around February 28, 2013.
Outlook, risks and unusual items
- No numerical revenue or earnings guidance is provided. Management’s strategy is to grow platform liquidity and market share, add products and clients, expand data and technology services, and pursue selective acquisitions. The company expected to reintroduce central limit order book trading in 2013 and, subject to regulatory rulemaking, intended to establish a swap execution facility and/or security-based swap execution facility.
- Management said liquidity was adequate for anticipated needs and capital expenditures for at least the next 12 months. Results remain sensitive to fixed-income trading activity, interest-rate and credit-market conditions, client participation, transaction fees and competition. The company cautioned that quarterly results can fluctuate and that forward-looking statements are uncertain.
- Key risks include reliance on broker-dealer liquidity and a concentrated institutional investor client (13.5% of 2012 platform volume), intensifying competition, weak European market conditions, regulatory changes and compliance costs, cybersecurity or platform outages, counterparty exposure on riskless-principal trades, and foreign-exchange movements.
- Unusual items include the $6.7 million tax benefit from recognition of previously unrecognized tax benefits; $1.1 million of Xtrakter transaction costs; the special dividend and substantial repurchases; and a $0.3 million mark-to-market loss on the foreign-exchange option hedging the Xtrakter purchase price.
- A former employee filed a Sarbanes-Oxley whistleblower retaliation complaint with the Department of Labor on January 2, 2013, seeking reinstatement and damages. The company disputed the allegations; the potential loss could not be estimated and no accrual was recorded.
- The independent auditor gave unqualified opinions on the financial statements and internal control over financial reporting. Management also concluded controls were effective as of December 31, 2012.
Important facts for investors to verify
- How much of earnings growth reflects recurring operating performance versus the $6.7 million one-time tax benefit.
- Whether U.S. high-grade market-share gains and growth in emerging markets and high-yield can continue, and whether European trading and fee revenue stabilize.
- The final Xtrakter purchase price, completion, integration costs and contribution to revenue and cash flow.
- Cash deployment and liquidity after the special dividend, repurchases and acquisition; confirm whether any amounts have been drawn under the post-year-end credit facility.
- Exposure to the high-volume institutional client, counterparty settlement losses, regulatory changes affecting CDS/SEF operations, and the pending employee complaint.