MarketAxess Holdings Inc. — Q1 2020 Form 10-Q
Period: Three months ended March 31, 2020; compared with Q1 2019 unless otherwise noted. MarketAxess operates electronic fixed-income trading platforms and related data and post-trade services. Results reflect the LiquidityEdge acquisition, which expanded the company into U.S. Treasuries trading, and unusual market activity during the COVID-19 disruption.
Financial highlights
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Total revenue | $169.0 million | $124.5 million | +35.7% |
| Commissions | $156.0 million | $112.8 million | +38.3% |
| Operating income | $91.1 million | $63.2 million | +44.2% |
| Net income | $74.8 million | $52.5 million | +42.4% |
| Diluted EPS | $1.96 | $1.39 | +41.2% |
| Operating margin | 53.9% | 50.8% | +3.1 percentage points |
| Net margin | 44.3% | 42.2% | +2.1 percentage points |
Revenue growth was led by commissions, as trading volumes and MarketAxess’ estimated market share rose. U.S. high-grade volume increased 19.0%, other-credit volume 40.6%, and Open Trading volume reached $208.6 billion, up 55.2%. Rates volume increased substantially with the acquired U.S. Treasuries business; its comparison with 2019 is not meaningful because the acquisition occurred in November 2019. Information-services revenue increased 17.3% to $8.6 million; post-trade revenue was $4.2 million, up 1.3%.
Total expenses rose 27.1% to $77.9 million. Notable increases included employee compensation (+26.1%), technology and communications (+41.1%), depreciation and amortization (+32.6%), and clearing costs (+113.8%). Q1 2020 included MarketAxess Rates revenue of $4.8 million and expenses of $5.0 million, including $0.6 million of acquired-intangible amortization. The effective tax rate was 18.4%, versus 19.5%; Q1 2020 tax expense included $6.3 million of excess tax benefits from share-based awards.
Cash flow, liquidity and capital
Cash provided by operations was $120.4 million, versus $39.4 million. The increase partly reflected a $56.4 million decrease in trading investments and higher net income; operating cash flow should therefore not be read as solely recurring cash generation. Company-defined free cash flow, which excludes the net change in trading investments and deducts capital expenditures and capitalized software, was $52.9 million, versus $29.5 million. Investing activities provided $24.6 million; financing activities used $49.8 million, including dividends, employee tax withholding and share repurchases.
Cash and cash equivalents were $363.8 million at quarter-end; cash and investments totaled $499.4 million. Total assets were $975.6 million, total liabilities $177.7 million and stockholders’ equity $797.9 million. The company reported no borrowings under its credit facility; $99.0 million remained available, with the facility due to mature in October 2020. It was in compliance with covenants. Regulated subsidiaries held $239.9 million in aggregate net capital and financial resources above required levels of $21.8 million. Operating lease liabilities were $96.3 million.
Material developments, outlook and risks
- Management attributed stronger trading activity and market share to pandemic-related market dislocation and volatility. It reported uninterrupted service after moving employees to work from home and said it expected to continue planned investment, while reprioritizing some technology projects.
- Management expected cash, investments and operating cash flows to meet liquidity needs and planned capital expenditures for at least 12 months. It cautioned that a prolonged downturn or recession could reduce credit-market liquidity and trading volumes. The filing gives no specific revenue or earnings guidance and says the pandemic’s financial impact cannot yet be reasonably estimated.
- In April, collateral deposits with clearing brokers rose to $20.8 million from $2.2 million at March 31, supporting higher matched-principal trading volume. The company faces counterparty and settlement risks in that business.
- The board approved a $0.60-per-share quarterly dividend in April, payable May 27, 2020. Q1 dividends declared were $0.60 per share. The company repurchased 15,500 shares under its $100 million program for $5.4 million; additional shares were surrendered by employees for tax withholding.
- The $100 million revolving credit facility matures in October 2020. The company had $1.0 million of letters of credit outstanding and disclosed no borrowings at quarter-end.
- The company disclosed ongoing New York State tax examinations for 2010–2017; their timing and possible impact are uncertain. It reported that outstanding legal matters were not expected to materially adversely affect its financial position, but ultimate exposure could not be determined.
- Other exposures include market and interest-rate movements, foreign currency (partly hedged), cybersecurity, competition, regulation and Brexit-related uncertainty. The filing identifies COVID-19 as a material risk whose effects may continue even after the outbreak subsides.
Important facts for investors to verify
- Whether the exceptional Q1 trading volumes and market-share gains persist as market volatility changes.
- How much of cash from operations and free cash flow reflects recurring operations versus movements in trading investments and working capital.
- Renewal, replacement or other arrangements for the credit facility before its October 2020 maturity.
- The effect of higher clearing collateral requirements and matched-principal counterparty exposure as trading volumes evolve.
- Future results and integration costs from MarketAxess Rates, and the continuing impact of pandemic-related market conditions.
- Any outcome or financial effect from the New York tax examinations and other legal or regulatory matters.