Business context and reporting period
MarketAxess Holdings Inc. operates an electronic trading platform for corporate bonds and other fixed-income securities, with related market data, post-trade, compliance and technology services. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2015, compared with the same 2014 periods.
Financial results and liquidity
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Revenue | $74.2 million | $64.2 million | $226.5 million | $192.6 million |
| Income before taxes | $35.4 million | $28.3 million | $110.9 million | $85.0 million |
| Net income | $22.7 million | $17.5 million | $71.5 million | $53.2 million |
| Diluted EPS | $0.60 | $0.46 | $1.90 | $1.40 |
| Operating cash flow | Not presented quarterly | Not presented quarterly | $76.3 million | $68.6 million |
- Q3 revenue rose 15.5% and net income 29.8%; nine-month revenue rose 17.6% and net income 34.6% year over year. Commissions were the principal revenue source: $65.2 million in Q3 and $198.6 million for the nine-month period.
- Approximate net margin was 30.6% in Q3 2015 versus 27.2% in Q3 2014, and 31.6% for the first nine months of 2015 versus 27.6% in 2014. Approximate pre-tax margin was 47.7% and 49.0% in the respective 2015 periods, compared with 44.0% and 44.1% in 2014.
- Trading volume increased 31.6% in Q3 and 31.1% for the nine-month period. Other-credit volume was particularly strong; Q3 U.S. high-grade volume grew 27.6%. The company attributed U.S. high-grade growth partly to market-share gains.
- At September 30, cash and cash equivalents were $160.4 million and available-for-sale securities were $95.5 million, totaling $255.9 million. Total assets were $416.3 million; total liabilities were $42.9 million and stockholders’ equity was $373.5 million.
- There was $49.9 million available under the $50 million revolving credit facility; the filing does not state a drawn balance. The company reported compliance with facility covenants. Regulated subsidiaries’ aggregate capital and financial resources exceeded required levels by $102.6 million.
- Nine-month operating cash flow was $76.3 million. Investing activities used $43.5 million, largely reflecting net purchases of securities; financing activities used $40.9 million, including dividends and share repurchases. Cash declined $8.5 million from year-end 2014. Trailing-12-month free cash flow, a non-GAAP measure, was $103.1 million versus $72.2 million.
Material changes versus prior periods
- Commission revenue growth reflected increased trading volume, partly offset by lower average variable fees per million in some categories and changes in dealer fee plans. Total commissions rose 19.7% in Q3 and 23.5% for the nine months.
- Expenses increased 8.0% in Q3 and 7.4% for the nine months, below revenue growth. Higher employee compensation was the main increase; lower technology and communications and professional fees partly offset it. General and administrative expense also rose, including higher matched-principal clearing costs.
- Information and post-trade revenue was nearly flat in Q3 but down 2.8% for the nine months, affected by foreign exchange. Technology products and services revenue fell 56.3% in Q3 and 48.7% for the nine months, mainly because a consulting engagement wound down.
- The effective tax rate declined to 35.7% in Q3 from 38.1%, and to 35.5% for the nine months from 37.5%, which the company attributed to earnings mix in lower-tax jurisdictions and lower statutory foreign and state tax rates.
- The company repurchased 238,201 shares for $20.0 million during the nine months and declared dividends of $0.60 per share for the period, compared with $0.48 a year earlier. Approximately $42.0 million remained authorized under its repurchase program at September 30.
Outlook, commentary, risks and contingencies
- No specific revenue or earnings guidance was provided. Management said current resources were adequate for liquidity needs and capital expenditure requirements for at least the next 12 months; future needs depend in part on product development, expansion and business opportunities.
- Management’s strategy includes expanding products and markets, developing all-to-all trading through Open Trading, improving workflow automation and pursuing alliances or acquisitions. It cautioned that trading volumes and results are exposed to market conditions, interest rates, competition, dealer activity, regulation and technology change.
- Matched-principal activity increased: related revenue was $11.6 million for the first nine months of 2015 versus $4.7 million in 2014. The company is exposed to counterparty and settlement risk; clearing brokers may charge it for losses, with no stated cap. No related liability was recorded at quarter-end. The company was developing additional automated risk controls.
- Available-for-sale securities totaled $95.5 million; management noted that a 10% value decline or market disruption could result in a substantial loss. Cash and cash equivalents were primarily held at one major global bank, creating deposit concentration risk.
- Legal proceedings and regulatory examinations were described as ordinary-course matters, with no expected material adverse effect based on currently available information, though ultimate exposure could exceed recorded reserves. Federal tax examinations for 2011–2012 and New York State examinations for 2010–2013 were ongoing; their timing and impact were uncertain.
- Operating leases had $25.2 million of minimum commitments. The company also had $1.3 million of standby letters of credit and contingent exposure on assigned leases. It reported no material risk-factor changes from its 2014 Form 10-K and no material control changes in the quarter.
Important facts for investors to verify
- Validate reported trading-volume and estimated market-share growth, including the company’s adjustments to FINRA TRACE comparisons, and assess whether volume gains support future commission growth.
- Monitor fee-per-million trends, dealer migration between variable-fee and distribution-fee plans, and the durability of revenue as trading mix changes.
- Track the scale and controls for matched-principal trading, including any counterparty losses, clearing-broker claims or regulatory capital effects.
- Review liquidity deployment and securities portfolio exposure, particularly given increased securities purchases and bank-deposit concentration.
- Assess ongoing tax examinations, legal contingencies, share repurchases and dividends, and the credit facility’s renewal or replacement given its stated three-year term.