Business context and reporting period
MarketAxess Holdings Inc. operates electronic fixed-income trading platforms and provides market data, trading technology and post-trade services. This unaudited Form 10-Q covers the three months ended March 31, 2022, compared with the same period in 2021. Amounts below are in U.S. dollars; financial statement figures are in millions unless stated otherwise.
Financial results and liquidity
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Revenue | $186.1 | $195.5 | -4.8% |
| Operating income | $88.1 | $103.5 | -14.9% |
| Net income | $64.8 | $80.5 | -19.5% |
| Diluted EPS | $1.71 | $2.11 | -19.0% |
| Operating margin | 47.4% | 52.9% | -5.5 percentage points |
| Net margin | 34.8% | 41.2% | -6.4 percentage points |
| Operating cash flow | $(23.7) | $(23.2) | Cash used in both periods |
| Free cash flow (company-defined non-GAAP) | $34.0 | $52.4 | Down $18.4 |
Commissions were $166.1 million (-5.5%) and comprised 89.3% of revenue. Information services rose 7.1% to $9.8 million; post-trade services declined 3.4% to $9.9 million. Expenses increased 6.5% to $98.0 million, notably depreciation and amortization (+28.8%) and technology and communications (+21.5%). The effective tax rate rose to 28.4% from 21.0%.
At March 31, 2022, cash and cash equivalents were $364.6 million, investments $35.9 million, and total assets $1.707 billion. Total liabilities were $683.9 million, including $86.4 million of operating lease liabilities; the filing reports no outstanding borrowings under the revolving credit facility. The company had $499.0 million of available capacity on its $500 million facility and $200 million available under an uncommitted collateralized facility. Cash and investments together were approximately $400.4 million. Cash and cash equivalents plus segregated cash totaled $414.8 million; segregated funds are not unrestricted liquidity.
Material changes versus the prior comparable period
- Revenue and earnings fell, principally as commission revenue declined. U.S. high-grade variable transaction fees fell 19.1%, reflecting lower trading volume and a lower average fee per million; total credit volume declined 1.1%.
- Rates trading volume increased 41.1%, supporting a 49.4% increase in rates variable transaction fees. Other credit volume rose 3.2%, including municipal bond activity associated with MuniBrokers.
- Operating expenses rose by $6.0 million, driven mainly by higher depreciation and amortization and technology costs. Q1 2022 included MuniBrokers revenue of $1.3 million and expenses of $1.8 million.
- Net income included a $1.6 million gain from revaluing MuniBrokers contingent consideration and higher foreign-exchange gains. The tax provision included $3.2 million of expense from settling New York State audits for 2010–2014.
- Cash and cash equivalents declined from $506.7 million at year-end to $364.6 million. The cash-flow statement reported a $125.4 million net decrease in cash, cash equivalents and restricted cash, with activity in matched-principal settlement balances a significant working-capital factor.
- The company repurchased $38.8 million of shares under its repurchase program and declared $0.70 per share in dividends, compared with $0.66 a year earlier.
Outlook, commentary, risks and contingencies
Management stated that cash, investments, operating cash generation and borrowing capacity should be sufficient for liquidity needs and planned capital expenditures for at least the next 12 months. No quantitative revenue or earnings guidance is provided in the filing. The board approved a $0.70 per-share quarterly dividend in April 2022, payable May 18, 2022, subject to the stated record date.
Management noted that Q1 U.S. high-grade and high-yield market volumes were down 6.9% and 7.8%, respectively, year over year, despite increased credit-market volatility compared with the second half of 2021. The company identifies trading activity, interest-rate and credit-market conditions, competition, regulatory change, technology execution and cybersecurity, foreign exchange, inflation-related costs, and matched-principal counterparty and settlement exposures as risks. It said it did not expect material losses on unsettled trades affected by sanctions following Russia’s invasion of Ukraine, while warning that expanded sanctions or broader market effects could adversely affect results.
Regulated subsidiaries exceeded minimum capital requirements by $567.3 million in aggregate; required levels were $24.2 million. Legal matters and regulatory examinations were not expected to have a material adverse impact based on information available, but the ultimate exposure cannot be determined. New York State and New York City tax examinations remain ongoing for specified tax years, with timing and potential impact unclear.
Important facts for investors to verify
- Whether commission trends, average transaction fees and market volumes improve or weaken in subsequent quarters.
- How recurring expenses, particularly technology costs and amortization, affect margins and earnings.
- Whether settlement-related working-capital movements continue to influence reported operating cash flow and liquidity.
- Outcomes and potential financial effects of the pending tax examinations and legal or regulatory matters.
- Future share repurchases, dividends and capital needs, including the distinction between unrestricted cash and regulated or segregated funds.