MarketAxess Holdings Inc. — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; comparisons are with Q1 2012 unless otherwise noted. Unaudited consolidated results. MarketAxess operates an electronic fixed-income trading platform and provides related data, technology, trade-matching and regulatory-reporting services.
Financial performance
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Revenue | $55.6 million | $50.7 million | +9.5% |
| Commissions | $47.2 million | $44.9 million | +5.1% |
| Income before income taxes | $24.3 million | $22.7 million | +6.9% |
| Net income | $15.3 million | $13.5 million | +13.6% |
| Diluted EPS | $0.41 | $0.35 | +17.1% |
| Operating cash flow | $10.3 million | $13.4 million | Down $3.1 million |
- Net margin was approximately 27.6%, compared with 26.6%; pre-tax margin was approximately 43.8%, compared with 44.8%. Total expenses increased 11.6% to $31.2 million, faster than revenue.
- Effective tax rate fell to 37.0% from 40.7%; Q1 2013 included an approximately $0.4 million benefit from 2012 tax credits enacted in 2013.
- Cash and cash equivalents were $125.9 million at March 31, 2013, versus $128.9 million at year-end. Available-for-sale securities were $17.1 million versus $51.2 million. Cash plus securities totaled $143.0 million.
- Investing cash flow was negative $5.5 million, including the $37.1 million net cash acquisition of Xtrakter, partly offset by $33.7 million of securities-sale and maturity proceeds. Financing cash flow was negative $7.9 million, principally reflecting dividends and employee equity-related withholding payments. No shares were repurchased in the quarter.
- The balance sheet reported total liabilities of $30.4 million and stockholders’ equity of $252.5 million. The filing lists no outstanding borrowings; the new revolving facility had $49.9 million available out of $50.0 million.
Material changes and notable items
- Total trading volume rose 1.5% to $160.4 billion. U.S. high-grade volume increased 3.0%, other-credit volume rose 19.2%, and liquid-products volume fell 29.6%. MarketAxess’s estimated U.S. high-grade market share increased to 12.3% from 11.4%.
- Commissions increased $2.3 million: variable transaction fees rose 12.5%, while distribution fees declined 8.3%. Higher other-credit activity and fees offset lower liquid-products activity and reduced distribution fees.
- Information and post-trade services revenue rose 97.9% to $3.7 million, including $1.9 million from Xtrakter after its February 28 acquisition. Reported revenue also included a gain on the sale of U.S. Treasuries to help fund the acquisition.
- MarketAxess acquired U.K.-based Xtrakter for $37.1 million net of acquired cash. The preliminary allocation included $26.2 million of goodwill and $13.3 million of identifiable intangible assets; the purchase-price allocation and working-capital adjustment remained subject to finalization. Xtrakter contributed $1.9 million in revenue and $0.1 million in net income after acquisition.
- Q1 expenses included approximately $1.7 million of Xtrakter operating expenses and $1.4 million of acquisition-related costs. Professional and consulting fees rose 52.1%, partly due to acquisition costs and higher IT consulting; depreciation and amortization rose 38.6%.
Liquidity, outlook and risks
- Management stated that current resources were adequate for liquidity needs and capital expenditures for at least the next 12 months. It expects to continue regular cash dividends, but future declarations are at the board’s discretion. The board approved a $0.13-per-share dividend payable May 23, 2013.
- The three-year revolving credit agreement provides up to $50.0 million, with a possible additional $50.0 million subject to conditions. It is secured by substantially all personal property of the company and certain domestic subsidiaries and includes quarterly financial covenants. No quantified revenue or earnings guidance was provided.
- Management highlighted sensitivity to fixed-income trading activity, interest-rate and credit-market conditions, competition and pricing, client participation, regulatory change, technology and cybersecurity risks, and the ability to integrate acquisitions. Dodd-Frank and European regulatory requirements may entail additional costs; the company said it expected to establish and operate a swap execution facility and/or security-based swap execution facility, subject to rulemaking.
- A former employee alleged retaliatory employment practices under Sarbanes-Oxley whistleblower provisions. The company denies the allegations and intends to defend itself; it could not estimate a reasonably possible loss and recorded no accrual.
- Other exposures include counterparty losses on riskless-principal transactions for which clearing-broker claims are not capped, and general contractual indemnities with an unknown maximum exposure; management characterized the expected indemnification loss risk as remote.
Investor items to verify
- How much of the revenue and expense growth reflects Xtrakter, and the final acquisition valuation, working-capital adjustment and integration costs.
- Whether trading volumes, market share and transaction fees sustain momentum, particularly amid the decline in liquid-products volume and lower distribution fees.
- Whether operating cash flow recovers from the year-over-year decline and how acquisition funding affects cash, securities and dividend capacity.
- Credit-facility utilization, covenant compliance and the precise covenant requirements; the filing states the interest-coverage covenant as a ratio that “not exceed” 3.5 to 1.0.
- Developments in the former employee complaint, regulatory implementation, and potential counterparty or clearing-related losses.