MarketAxess Holdings Inc. — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021. MarketAxess operates electronic fixed-income trading platforms and related data and post-trade services. Financial amounts below are in U.S. dollars; millions unless otherwise noted.
Key financial results
| Metric | Q2 2021 | Q2 2020 | First half 2021 | First half 2020 |
|---|---|---|---|---|
| Revenue | $176.3 | $184.8 | $371.8 | $353.8 |
| Operating income | $87.2 | $104.1 | $190.7 | $195.2 |
| Net income | $67.3 | $83.9 | $147.7 | $158.7 |
| Diluted EPS | $1.77 | $2.20 | $3.87 | $4.16 |
| Operating margin | 49.4% | 56.3% | 51.3% | 55.2% |
| Net margin | 38.2% | 45.4% | 39.7% | 44.8% |
Q2 revenue declined 4.6% year over year, while first-half revenue grew 5.1%. Commissions, 88.7% of Q2 revenue, fell 9.1% in the quarter; information services rose 16.8% and post-trade services rose 142.9%, including acquired-business contributions. First-half commissions increased 1.3%, information services 11.3%, and post-trade services 145.0%.
Q2 expenses rose 10.5% to $89.2 million, including $5.1 million related to Regulatory Reporting Hub and MuniBrokers. First-half expenses increased 14.3% to $181.1 million. Higher amortization, technology costs, and professional fees contributed to expense growth; lower clearing costs partly offset it. Q2 and first-half net income declined 19.8% and 6.9%, respectively.
Cash flow, liquidity and debt
- First-half operating cash flow was $73.6 million, down from $225.2 million. The filing attributes much of the decrease to settlement-related receivables, lower net sales of trading investments, and lower net income.
- Company-defined first-half free cash flow was $119.6 million versus $139.7 million. This non-GAAP measure excludes specified investment and settlement balance changes and deducts equipment and capitalized software spending.
- Cash and cash equivalents were $413.6 million; investments were $35.8 million. Separately, $50.1 million was segregated for regulatory purposes. The company reported $449.5 million of cash and investments for liquidity purposes.
- Total assets were $1.54 billion and total liabilities $516.1 million at June 30, 2021. Liabilities included $91.3 million of operating lease liabilities. No long-term debt balance is reported.
- The $500 million revolving credit facility matures November 12, 2021; $499 million was available at quarter-end, with $1 million of letters of credit outstanding. The company reported no Credit Agreement borrowings and compliance with covenants. It also had $200 million of uncommitted collateralized financing capacity and $1 million of bank overdrafts payable.
- Management said available resources and expected operating cash flows should meet liquidity and planned capital needs for at least 12 months. Regulated subsidiaries held capital and financial resources $551 million above required levels.
Material changes and management commentary
- Management linked the softer Q2 trading environment to improving economic conditions, tighter credit spreads, lower volatility, rising interest rates, and reduced U.S. credit-market activity following the unusually volatile 2020 period. U.S. high-grade and high-yield market volumes fell 7.5% and 9.9%, respectively, in the first half versus 2020.
- Q2 U.S. high-grade platform volume declined 21.8%; estimated market share slipped to 21.1% from 21.5%. First-half high-grade volume fell 7.7%, while estimated market share was unchanged at 20.8%. Other-credit volume grew 12.0% in the first half, including strong municipal-bond growth; rates volume fell 16.3%.
- MarketAxess acquired MuniBrokers in April 2021 for $17.1 million cash plus contingent consideration of up to $25 million. The acquisition added $1.1 million of Q2 subscription revenue. The company also included results from Regulatory Reporting Hub, acquired in November 2020. First-half revenue and expenses attributed to the two acquisitions were $8.9 million and $8.7 million.
- Management cited growth in automated trading: Q2 automated volumes reached $41.5 billion, up 29.2% year over year; algorithmic responses rose 30.2% to approximately 4.6 million.
- The company expects market activity, trading volumes, fee mix, competition, technology investment, regulation, and client activity to affect results. It provided no specific numerical earnings or revenue guidance in the supplied filing text. It anticipated a broader return to U.S. offices during Q3, subject to public-health conditions.
Risks, contingencies and unusual items
- Trading-related revenue is sensitive to fixed-income market volumes, volatility, interest rates, spreads, product mix, and average fees. Competition, cybersecurity incidents, regulatory changes, and Brexit-related complexity are identified risks.
- Matched-principal settlement exposes the company to counterparty and operational risk; settlement-related receivables and payables increased substantially from year-end. No losses from counterparty failures were recorded in the first half.
- Legal proceedings and regulatory examinations are described as not expected to have a material adverse impact based on information currently available, but ultimate exposure cannot be determined. New York State tax examinations cover 2010–2017 and New York City examinations cover 2016–2018; potential impact is not yet estimable.
- Contingent acquisition consideration was $37.0 million at fair value at quarter-end, including $22.5 million recognized for MuniBrokers. The company also had $91.3 million of lease liabilities and $1.2 million of contingent exposure on subleased or assigned properties.
- The board authorized a new $100 million share-repurchase program beginning April 1, 2021. A quarterly dividend of $0.66 per share was approved in July, payable August 18, 2021.
Important facts for investors to verify
- Whether credit-market activity and MarketAxess platform volumes recover, and how market share and average fees develop.
- How much revenue growth is organic versus attributable to acquisitions, and whether acquired businesses contribute profitably after amortization and contingent consideration.
- How settlement-related working-capital movements affect operating cash flow and liquidity as self-clearing activity changes.
- Renewal or replacement of the revolving facility before its November 2021 maturity, and the timing and final amount of acquisition-related contingent payments.
- Any material outcomes from the tax examinations, legal matters, regulatory developments, or cybersecurity events.