MarketAxess Holdings Inc. — Q3 2016 Form 10-Q
Business and period. MarketAxess operates an electronic fixed-income trading platform and provides market-data, technology and post-trade services. This unaudited report covers the three and nine months ended September 30, 2016; comparisons are with the corresponding 2015 periods unless noted.
Financial performance
| Metric | Q3 2016 | Q3 2015 | First nine months 2016 | First nine months 2015 |
|---|---|---|---|---|
| Revenue | $90.3 million (+21.7%) | $74.2 million | $275.5 million (+21.7%) | $226.5 million |
| Commissions | $81.5 million (+25.0%) | $65.2 million | $246.8 million (+24.3%) | $198.6 million |
| Expenses | $43.9 million (+13.1%) | $38.8 million | $134.2 million (+16.2%) | $115.5 million |
| Income before taxes | $46.4 million (+31.1%) | $35.4 million | $141.3 million (+27.4%) | $110.9 million |
| Net income | $30.9 million (+36.1%) | $22.7 million | $93.0 million (+30.0%) | $71.5 million |
| Diluted EPS | $0.82 | $0.60 | $2.46 | $1.90 |
Net margin was approximately 34.3% in Q3 versus 30.6% a year earlier, and approximately 33.8% for the nine months versus 31.6%. The nine-month effective tax rate declined to 34.2% from 35.5%; Q3 rate was 33.3% versus 35.7%.
Trading activity. Platform trading volume rose 34.4% in Q3 to $322.1 billion and 33.3% for the nine-month period to $970.4 billion. Q3 U.S. high-grade volume increased 27.4%, supported by higher estimated market share and market-wide volume; other-credit volume rose 45.6%. Commission growth was primarily volume-driven. For the first nine months, other-credit volume increased 51.9%.
Cash flow, balance sheet and capital
- At September 30, cash and cash equivalents were $161.4 million and investments were $170.7 million, totaling $332.1 million. Total assets were $502.2 million; total liabilities were $50.5 million and equity was $451.7 million.
- Nine-month operating cash flow was $24.0 million, down from $76.3 million. Management attributed the decline mainly to a $74.5 million increase in corporate debt trading investments. Investing cash outflow was $23.9 million; financing cash outflow was $37.4 million. Cash decreased $38.3 million from year-end 2015.
- Management’s non-GAAP free cash flow was $124.4 million for the 12 months ended September 30, 2016, versus $103.1 million in the prior comparable 12-month period. The measure excludes net purchases of corporate debt trading investments and deducts capital expenditures and capitalized software costs.
- No credit-facility borrowings were reported. The $100 million revolving facility matures in October 2017; $99.1 million remained available after letters of credit. The company reported compliance with covenants. Regulated subsidiaries had aggregate net capital and financial resources $107.3 million above required levels.
- Dividends declared were $0.26 per share in Q3 and $0.78 per share for the nine months. Nine-month share repurchases totaled $13.9 million. The board increased the repurchase authorization by $50 million in October 2016.
Changes, outlook and notable items
- Revenue growth outpaced expense growth, improving profitability. Employee compensation rose 18.3% year to date, reflecting higher headcount, incentive compensation and stock awards; professional fees, marketing and clearing costs also increased.
- Average GBP exchange-rate movements reduced revenue by $2.2 million in Q3 and $3.7 million year to date, while also reducing expenses. Q3 information and post-trade revenue declined 4.5%, partly because of currency effects; nine-month revenue in that category rose 3.1%.
- The filing provides no specific financial guidance. Management said current resources are adequate for liquidity needs and capital expenditures for at least the next 12 months, while noting future requirements depend on investment, product development and business opportunities.
- The company signed leases during Q3 for approximately 108,000 square feet, with aggregate minimum commitments of $127.4 million; total operating lease commitments were $147.6 million. It expects to relocate its New York headquarters to new space in late 2018.
- A Q1 2016 out-of-period adjustment, deemed immaterial to prior periods, reduced deferred tax assets by $3.1 million, reduced other comprehensive income by $2.1 million and increased prepaid assets by $1.0 million.
- Risks include dependence on fixed-income trading volumes, intense competition, regulatory change (including MiFID II/MiFIR expected in January 2018), Brexit-related uncertainty, foreign exchange and investment-value fluctuations, and matched-principal counterparty/settlement exposure. Clearing brokers may charge the company for counterparty failures, with no stated cap on losses. Legal matters were not expected by management to materially affect financial position, but ultimate exposure could not be determined.
- The company reported no material changes to the risk factors in its 2015 Form 10-K. Disclosure controls were judged effective, with no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether trading-volume and market-share gains persist, and how much commission growth reflects volume versus fee rates and product mix.
- Whether the sharp year-over-year decline in reported operating cash flow is primarily attributable to trading-investment purchases and how those investments perform.
- The economics and utilization of the new long-term office leases, and the company’s continuing capital-return plans.
- Potential exposure from matched-principal settlement failures, regulatory developments and Brexit, alongside the status of tax examinations and other legal matters.
- The basis and reconciliation for management’s non-GAAP free-cash-flow measure and its distinction from GAAP operating cash flow.