MarketAxess Holdings Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; comparisons are with Q1 2020 unless noted. MarketAxess operates electronic fixed-income trading platforms and related data and post-trade services. Figures below are in U.S. dollars; financial statement amounts are unaudited.
Financial performance
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Total revenue | $195.5 million | $169.0 million | +15.7% |
| Operating income | $103.5 million | $91.1 million | +13.6% |
| Net income | $80.5 million | $74.8 million | +7.5% |
| Diluted EPS | $2.11 | $1.96 | +7.7% |
| Operating margin | 52.9% | 53.9% | Down about 1.0 percentage point |
| Net margin | 41.2% | 44.3% | Down about 3.1 percentage points |
| Cash and cash equivalents | $390.9 million | $460.9 million at Dec. 31, 2020 | Down $69.9 million |
Commission revenue was $175.8 million (+12.7%) and remained the principal revenue source. Post-trade services rose 147.1% to $10.3 million, principally reflecting the acquired Regulatory Reporting Hub; information services increased 6.0% to $9.2 million. Total expenses grew 18.1% to $92.0 million, faster than revenue. Notable increases included compensation (+16.7%), depreciation and amortization (+46.0%) and professional and consulting fees (+69.9%). The effective tax rate rose to 21.0% from 18.4%.
Trading volume increased 14.4% in credit, including 10.1% in U.S. high-grade and 18.6% in other credit; rates volume declined 22.4%. Management cited improving economic conditions, lower volatility, tighter credit spreads and rising interest rates. Estimated U.S. high-grade market share increased to 20.5% from 20.0%.
Cash flow, liquidity and capital
GAAP operating cash flow was negative $23.2 million, versus positive $120.4 million a year earlier. The change primarily reflected clearing-related receivables and payables as self-clearing activities affected settlement balances. Investing cash outflow was $12.3 million and financing cash outflow was $18.9 million. The company reported non-GAAP free cash flow of $52.4 million, compared with $52.9 million; this measure excludes specified trading-investment and settlement-balance movements and deducts capital expenditures and capitalized software costs.
At March 31, 2021, cash and investments totaled $415.2 million. The company had no borrowings under its $500 million revolving credit facility, with $499 million available after letters of credit, and $200 million of available capacity under an uncommitted collateralized facility. A U.K. subsidiary had $34.3 million of overnight overdrafts outstanding. Total liabilities were $557.6 million, including $92.8 million of operating lease liabilities; the filing reports no material long-term funded debt. Regulated subsidiaries’ capital and financial resources exceeded requirements by $493.5 million. Cash and cash equivalents, together with segregated and clearing-related cash, totaled $552.7 million at quarter-end.
Outlook, developments and risks
- Management said available resources, operating cash flows and borrowing capacity were expected to meet liquidity needs and planned capital expenditures for at least 12 months. No specific revenue or earnings guidance was provided.
- The board approved a new share repurchase authorization of up to $100 million, effective April 1, 2021. A quarterly dividend of $0.66 per share was approved for payment in May.
- On April 9, 2021, after quarter-end, MarketAxess acquired MuniBrokers for $17.0 million upfront, plus up to $25.0 million in contingent consideration. The November 2020 Regulatory Reporting Hub acquisition contributed $4.0 million of Q1 revenue and $3.6 million of expenses, including acquired-intangible amortization.
- Management highlighted market-volume sensitivity, competition, extensive regulatory requirements, cybersecurity threats, matched-principal counterparty and settlement risks, and foreign-exchange and interest-rate exposure. Self-clearing requirements can increase liquidity needs; the company reported $247.0 million in positions financed, deposits and customer-reserve balances associated with those activities.
- The company said the pandemic continued to affect operations, while it maintained business continuity and began voluntary office reopening where permitted. It cautioned about longer-term economic effects and reopening-related operational and employee risks. Management reported no material change in risk factors from the 2020 Form 10-K.
- New York State tax examinations for 2010–2017 and New York City examinations for 2016–2018 remained open; timing and potential financial impact could not be estimated. Legal matters were not expected to have a material adverse impact based on currently available information, though ultimate exposure was uncertain.
Most important facts for investors to verify
- Whether credit trading-volume growth and market-share gains persist, and how lower rates volume and changing market conditions affect commission revenue.
- Whether expense growth, particularly compensation, amortization and consulting costs, moderates enough to support margins.
- How self-clearing settlement balances affect operating cash flow and liquidity; distinguish GAAP cash flow from the company’s adjusted free-cash-flow measure.
- The cash, contingent consideration and integration costs associated with MuniBrokers and the Regulatory Reporting Hub.
- Developments in tax examinations, regulatory requirements, counterparty exposures and cybersecurity risks.