MarketAxess Holdings Inc. — FY2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. This is an annual report, not a standalone fourth-quarter filing; quarterly figures below are unaudited. The company operates an electronic fixed-income trading platform and related data and post-trade services. More than 1,500 institutional investor and broker-dealer firms were active users.
Financial performance
| Metric | FY2018 | FY2017 | Change |
|---|---|---|---|
| Revenue | $435.6 million | $393.4 million | +10.7% |
| Operating income | $212.6 million | $199.6 million | +6.5% |
| Net income | $172.9 million | $148.1 million | +16.7% |
| Diluted EPS | $4.57 | $3.89 | +17.5% |
| Operating margin | 48.8% | 50.7% | Down 1.9 percentage points |
| Net margin | 39.7% | 37.6% | Up 2.1 percentage points |
| Operating cash flow | $223.9 million | $168.0 million | +$55.9 million |
| Free cash flow (company-defined, non-GAAP) | $175.5 million | $159.6 million | +9.9% |
Commissions were $390.8 million, 89.7% of revenue, up 10.0%. Information services revenue rose 9.4% to $28.2 million and post-trade services revenue rose 38.4% to $15.3 million. Total expenses increased 15.1% to $223.0 million, faster than revenue; occupancy expense more than doubled to $14.2 million, largely due to overlapping rent during the new New York headquarters build-out.
Fourth-quarter indicators
For Q4 2018, revenue was $112.4 million versus $98.6 million in Q4 2017, up 14.1%. Operating income was $54.0 million versus $48.8 million; net income was $45.8 million versus $33.5 million; diluted EPS was $1.21 versus $0.88. Q4 total trading volume was $442.3 billion, compared with $355.6 billion a year earlier.
Liquidity, capital, and debt
Cash, cash equivalents and investments totaled $486.4 million at year-end 2018, up from $406.5 million. Working capital was $477.6 million and total assets were $695.5 million. The company reported no drawn borrowings under its revolving credit facility; $98.3 million remained available after $1.7 million of letters of credit. The $100 million facility maturity was extended to October 2019. Regulated subsidiaries held $162.8 million of capital and financial resources above required minimums. Cash provided by investing activities and financing activities was negative $50.3 million and $92.7 million, respectively; financing outflows included $62.4 million of dividends and $25.2 million of share repurchases.
Material changes and management commentary
- Total platform trading volume increased 17.5% to $1.714 trillion. U.S. high-grade volume grew 12.5%, and other-credit volume grew 26.2%; liquid-products volume was nearly flat.
- Estimated U.S. high-grade market share increased to 18.1% from 16.9%; estimated U.S. high-yield share rose to 8.9% from 6.8%. Open Trading accounted for 22.0% of platform volume, up from 15.9%, and Open Trading trades increased 73.2% to approximately 1.1 million.
- Higher trading volumes supported revenue, but lower average variable fees per million—partly reflecting shorter bond duration, product mix, and fee-plan changes—dampened commission growth. Management said higher yields and a flatter yield curve reduced duration and fee capture.
- Market conditions varied: trading was less favorable during the second and third quarters, then improved in September and Q4 as spreads widened and volatility increased. U.S. high-grade market volume increased, while estimated secondary volumes in high-yield, emerging markets, and Eurobonds declined versus 2017.
- Net income benefited from a lower effective tax rate: 20.7% in 2018 versus 26.6% in 2017. The 2018 provision included $5.6 million of excess tax benefits from share-based awards; 2017 included a $11.7 million provisional Tax Act charge and $26.1 million of share-based tax benefits.
Outlook, risks, and unusual items
The filing provides no specific quantitative revenue or earnings guidance. Management’s stated priorities include expanding the client base and international presence, growing Open Trading, developing automation and pricing analytics, and extending data and post-trade services. Management believed available resources were adequate for anticipated liquidity needs and capital expenditures for at least 12 months.
- Results depend heavily on fixed-income trading activity, market volatility, market share, fee capture, and client participation; commissions remain the dominant revenue source.
- Competition from other platforms and traditional dealer channels, as well as non-exclusive client relationships, could pressure volumes and pricing. Broker-dealer market-making capacity and liquidity may be affected by regulation and industry consolidation.
- Open Trading exposes the company to counterparty, settlement, and trade-error risks because it acts as matched-principal counterparty. The company reported no losses or liabilities under clearing-broker counterparty rights in 2016–2018.
- Brexit was a significant operational and regulatory risk as of the report date. The company established EU subsidiaries, but warned that disruption, delay, or inadequate preparation could adversely affect services and results.
- Cybersecurity, system availability, third-party service providers, extensive regulation, foreign exchange exposure, and changes in economic or credit-market conditions are material risks.
- The new headquarters lease contributed to elevated occupancy expense; the company relocated in January 2019. Operating lease commitments totaled $144.1 million, including $95.5 million due after five years. Adoption of the new lease accounting standard in 2019 was expected to add approximately $80 million of right-of-use assets and $91 million of lease liabilities.
- Legal proceedings and regulatory examinations arise in the ordinary course. Management did not expect currently outstanding matters to materially affect financial position, but said ultimate exposure could not be determined with certainty.
Most important facts for investors to verify
- Whether volume growth and Open Trading adoption continue, and whether market-share gains translate into durable revenue growth.
- Whether fee-per-million trends, product mix, and duration continue to offset trading-volume growth.
- How expenses evolve after the headquarters transition and whether operating margins recover.
- Actual liquidity and credit-facility usage, regulatory capital constraints, and the effect of lease obligations.
- Progress and costs of Brexit-related EU operations, and any material changes in regulatory, cybersecurity, or matched-principal risks.
- The sustainability of earnings growth after tax benefits and other period-specific tax effects.