MarketAxess Holdings Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. MarketAxess operates electronic fixed-income trading platforms and related data and post-trade services. Results reflect the LiquidityEdge acquisition, completed November 1, 2019, which expanded the company into U.S. Treasuries.
Financial performance
| Metric | Q2 2020 | Q2 2019 | First half 2020 | First half 2019 |
|---|---|---|---|---|
| Revenue | $184.8 million | $125.5 million | $353.8 million | $250.0 million |
| Operating income | $104.1 million | $60.9 million | $195.2 million | $124.1 million |
| Net income | $83.9 million | $48.1 million | $158.7 million | $100.6 million |
| Diluted EPS | $2.20 | $1.27 | $4.16 | $2.66 |
| Operating margin | 56.3% | 48.5% | 55.2% | 49.6% |
| Net cash from operations | Not separately stated | Not separately stated | $225.2 million | $109.1 million |
| Free cash flow (non-GAAP) | $86.8 million | $57.3 million | $139.7 million | $86.8 million |
Q2 revenue rose 47.3% year over year, led by commissions, which increased 50.8% to $172.1 million. For the first half, revenue increased 41.5%; commissions rose 44.6%. Q2 operating income grew 71.1% and net income 74.3%. First-half diluted EPS increased 56.4%.
At June 30, cash and cash equivalents were $404.1 million and investments were $131.4 million, totaling $535.5 million. Total assets were $1.04 billion; total liabilities were $185.7 million, including $94.7 million in operating lease liabilities. The company reported no borrowings and had $99.0 million of available borrowing capacity on its $100 million revolving facility, which matures in October 2020. It was in compliance with covenants. Separately, regulated subsidiaries held $287.5 million of net capital and financial resources above required levels.
Material changes and drivers
- Management attributed the unusually strong trading environment to COVID-19-related market dislocation, volatility, elevated trading activity and increased electronic market share. Q2 U.S. high-grade and high-yield market volumes increased 35.6% and 36.9%, respectively, from Q2 2019.
- Q2 U.S. high-grade platform volume increased 56.2%, while estimated market share rose to 21.5% from 18.7%. Other-credit platform volume increased 31.7%. Open Trading volume rose 86.5% to $243.8 billion.
- Q2 expenses increased 24.8% to $80.7 million, slower than revenue growth. Employee compensation, technology costs and clearing costs rose; marketing expense declined as pandemic conditions reduced travel and entertainment. First-half expenses increased 25.9% to $158.5 million.
- LiquidityEdge contributed $3.2 million of Q2 revenue and $3.8 million of expenses; first-half contribution was $8.0 million of revenue and $8.8 million of expenses.
- First-half operating cash flow increased 106.4%. Investing cash flow was positive $12.9 million, partly reflecting lower net purchases of available-for-sale investments. Financing cash outflow was $84.0 million, including $45.7 million of dividends, $11.3 million of share repurchases and $27.8 million of withholding-tax payments on equity awards.
Outlook, risks and unusual items
- No specific revenue or earnings guidance was provided. Management expected cash, investments and operating cash generation to cover liquidity needs and planned capital expenditures for at least 12 months, and said it intended to continue hiring, capital spending and platform expansion. The company had not drawn its credit facility or changed its dividend and repurchase programs.
- Management cautioned that the pandemic’s duration and economic effects were uncertain. Strong current volumes could reverse if recession, reduced liquidity or market activity, participant failures or trading disruptions occur. Remote work and office reopening also create operational, cybersecurity and employee-productivity risks.
- Other stated risks include competition, extensive and changing regulation (including Brexit-related uncertainty), technology execution and cyberattacks, and counterparty/settlement exposure from matched-principal trading. Clearing-broker collateral deposits increased to $20.6 million from $4.1 million at year-end to support higher matched-principal activity.
- The company reported a $20.5 million Q2 tax provision and a 19.7% effective tax rate, compared with 23.5% a year earlier. The provision included $5.7 million of excess tax benefits from share-based awards; the first-half amount was $12.0 million. New York State and New York City tax examinations were ongoing, with outcome and timing unclear.
- Legal proceedings and regulatory examinations were described as ordinary-course matters not expected, based on available information, to materially adversely affect financial position; ultimate exposure could not be determined. Future lease obligations were $137.4 million, and the company remained contingently liable for $2.8 million of obligations on assigned properties.
- In July 2020, the board approved a $0.60-per-share quarterly dividend payable August 19, 2020. Q2 dividends declared were also $0.60 per share, versus $0.51 a year earlier.
Investor verification checklist
- Assess how much of the exceptional revenue and profit growth depended on pandemic-driven volumes, volatility and market-share gains, and whether those conditions persisted after quarter-end.
- Review commission trends, fee-per-million changes, and Open Trading and U.S. Treasury economics, including rising clearing costs and LiquidityEdge’s contribution.
- Confirm the October 2020 credit-facility maturity and any refinancing, renewal or replacement terms.
- Monitor cash generation and capital allocation against dividends, repurchases, technology investment and the increased restricted-cash collateral requirement.
- Track pandemic-related operational and cybersecurity risks, matched-principal counterparty exposure, tax examinations and legal contingencies.