MarketAxess Holdings Inc. — Form 10-Q Summary
Business context and reporting period
Quarter ended September 30, 2014. MarketAxess operates an electronic trading platform for fixed-income securities and provides market data, post-trade, regulatory reporting and technology services. Commissions generated approximately 85% of third-quarter revenue. The company reports as one business segment.
Financial performance and liquidity
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Revenue | $64.2 million | $61.1 million | $192.6 million | $178.3 million |
| Income before taxes | $28.3 million | $26.4 million | $85.0 million | $82.5 million |
| Net income | $17.5 million | $18.2 million | $53.2 million | $52.9 million |
| Diluted earnings per share | $0.46 | $0.48 | $1.40 | $1.40 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $68.6 million | $67.3 million |
Third-quarter pretax margin was approximately 44.0% and net margin 27.2%; nine-month pretax margin was 44.1% and net margin 27.6%. Cash and cash equivalents were $155.1 million at September 30, 2014, with $57.0 million in available-for-sale securities, totaling $212.1 million. The company reported $49.9 million available under its $50 million revolving credit facility and no outstanding borrowings disclosed. Regulated subsidiaries held $77.8 million of capital and financial resources above their $12.1 million aggregate minimum requirements.
Nine-month investing cash outflow was $1.5 million and financing cash outflow was $44.0 million, including $25.4 million in stock repurchases and $18.1 million in dividends paid. Management reported trailing-12-month free cash flow of $72.2 million, a non-GAAP measure.
Material changes versus comparable periods
- Q3 revenue rose 5.1%, led by a 5.1% increase in commissions. Total trading volume increased 4.5%; other-credit volume rose 32.8%, while U.S. high-grade volume declined 3.8% and liquid-products volume declined 10.7%.
- U.S. high-grade commissions faced lower average transaction fees per million, partly offset by higher distribution fees. The company attributed lower fees principally to changes in bond duration and nominal trade size.
- Q3 expenses increased 3.5%, less than revenue growth, and pretax income rose 7.1%. Net income nevertheless fell 4.1%, with the effective tax rate increasing to 38.1% from 30.8%. The comparison benefited from approximately $2.0 million of catch-up domestic production activities deduction tax benefits in Q3 2013.
- Nine-month revenue rose 8.0%, but expenses increased 12.3%; net income was nearly flat. Growth included two additional months of Xtrakter revenue and expenses in 2014, foreign-exchange effects, and stronger information/post-trade and technology revenue.
- Nine-month operating cash flow was slightly higher year over year. The 2013 investing outflow included the $37.8 million net cash acquisition of Xtrakter; 2014 financing outflow increased with repurchases and higher dividends.
Outlook, commentary, risks and unusual items
No quantified financial guidance was provided. Management said current resources were adequate for liquidity needs and capital expenditures for at least the next 12 months, while noting future requirements depend on product development, expansion and potential acquisitions. The board authorized an additional $65 million of repurchases in July, bringing the program authorization to $100 million through December 31, 2015. A $0.16-per-share quarterly dividend was approved in October 2014.
- Results are sensitive to fixed-income market activity, trading volume, interest-rate and credit-market conditions, commission rates, client participation and competition. Broker-dealer clients are not obligated to use the platform.
- Regulatory developments include U.S. derivatives rules and European MiFID II/MiFIR, then scheduled to take effect in January 2017. Implementation details and effects remained uncertain.
- Matched-principal trading exposes the company to counterparty and clearing-broker loss risk; potential losses under clearing agreements are not capped. Cash and money-market balances are primarily held at one major bank.
- A former employee’s whistleblower retaliation complaint remained pending. The company disputes the allegations, could not estimate a reasonably possible loss range, and recorded no accrual.
- During 2013, the company recorded an out-of-period software-cost capitalization adjustment that reduced compensation expense by $2.9 million and increased depreciation and amortization by $1.3 million. Management said it was not material to prior periods or 2013 overall.
- Federal tax examinations for 2011–2012 and New York state franchise tax examinations for 2007–2009 were underway; timing and any financial impact were not estimable.
Important facts for investors to verify
- Whether growth in other-credit trading and information services can offset weaker U.S. high-grade fees and liquid-products activity; assess the company’s adjusted TRACE-volume and market-share comparisons.
- Whether expense growth, particularly compensation, technology and depreciation, is translating into sustainable operating leverage.
- The effect of tax-rate variability, including the prior-year $2.0 million tax benefit, on reported earnings comparisons.
- Remaining repurchase capacity, dividend sustainability, and the distinction between cash held by regulated subsidiaries and freely available corporate liquidity.
- Developments in the whistleblower matter, tax examinations, regulatory implementation and matched-principal counterparty exposures.