MarketAxess(US:MKTX)2023-04-27 20:32PART I — Financial Information Item 1. Financial Statements (Unaudited) The unaudited consolidated financial statements for Q1 2023 show increased revenues, net income, and total assets, with positive cash flow from operations driven by working capital changes Consolidated Statements of Financial Condition Total assets increased slightly to $1.63 billion as of March 31, 2023, while total liabilities decreased, leading to an increase in stockholders' equity to $1.12 billion Consolidated Balance Sheet Highlights (As of March 31, 2023 vs. December 31, 2022) | Account | March 31, 2023 (In thousands) | December 31, 2022 (In thousands) | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $332,780 | $430,746 | | Receivables from broker-dealers, clearing organizations and customers | $558,254 | $476,335 | | Total assets | $1,628,462 | $1,607,775 | | Liabilities & Equity | | | | Accrued employee compensation | $24,735 | $56,302 | | Total liabilities | $506,930 | $526,682 | | Total stockholders' equity | $1,121,532 | $1,081,093 | Consolidated Statements of Operations Total revenues increased 9.2% to $203.2 million in Q1 2023, driving net income up 13.7% to $73.6 million and diluted EPS to $1.96 Q1 2023 vs. Q1 2022 Performance Summary | Metric | Three Months Ended March 31, 2023 (In thousands) | Three Months Ended March 31, 2022 (In thousands) | YoY Change | | :--- | :--- | :--- | :--- | | Total revenues | $203,169 | $186,057 | +9.2% | | Commissions | $181,991 | $166,113 | +9.6% | | Total expenses | $107,813 | $97,953 | +10.1% | | Operating income | $95,356 | $88,104 | +8.2% | | Net income | $73,628 | $64,769 | +13.7% | | Diluted EPS | $1.96 | $1.71 | +14.6% | Consolidated Statements of Cash Flows Net cash provided by operating activities significantly improved to $7.5 million in Q1 2023, while cash used in investing activities increased and cash used in financing activities decreased due to no share repurchases Cash Flow Summary (Q1 2023 vs. Q1 2022) | Cash Flow Activity | Three Months Ended March 31, 2023 (In thousands) | Three Months Ended March 31, 2022 (In thousands) | | :--- | :--- | :--- | | Net cash provided by (used in) operating activities | $7,527 | $(23,730) | | Net cash (used in) investing activities | $(32,754) | $(10,821) | | Net cash (used in) financing activities | $(48,142) | $(86,467) | | Net decrease in cash and cash equivalents | $(70,024) | $(125,374) | Notes to Consolidated Financial Statements The notes provide details on accounting policies, revenue breakdown, credit facilities, geographic revenue, and confirm the company operates as a single business segment Commission Revenue by Fee Type (Q1 2023 vs. Q1 2022) | Fee Type | Q1 2023 (In thousands) | Q1 2022 (In thousands) | | :--- | :--- | :--- | | Variable transaction fees | $147,228 | $134,873 | | Distribution fees and unused minimum fees | $34,763 | $31,240 | | Total commissions | $181,991 | $166,113 | - The company has a $500.0 million three-year revolving credit facility maturing in October 2024. As of March 31, 2023, there were no borrowings outstanding8486 - The company operates as a single business segment. For Q1 2023, revenues from the Americas were $161.6 million, Europe $36.7 million, and Asia $4.9 million102103 - The company's effective tax rate for Q1 2023 was 25.0%, down from 28.4% in Q1 2022. The prior year's rate included a $3.2 million expense related to a settlement with New York State73 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management attributes Q1 2023 revenue growth to increased trading volumes and market share, despite lower credit transaction fees, while expenses rose due to compensation and technology costs, maintaining a strong liquidity position Critical Factors Affecting Our Industry and Our Company The company's performance is shaped by economic improvements, intense competition, evolving regulatory changes like proposed SEC rules and T+1 settlement, and growing demand for automated trading solutions - Operating conditions improved in Q1 2023, with wider credit spreads and a 19.9% increase in U.S. high-grade market volumes (TRACE) compared to Q1 2022112 - The banking sector dislocation in March 2023 negatively impacted U.S. high-grade volumes as electronic trading of distressed bonds decreased112 - Proposed SEC rules are expected to require the company to operate all trading protocols in compliance with Regulation ATS and could subject parts of the business to Regulation SCI120 - Automated trading solutions are seeing continued growth. Auto-X RFQ trading volumes rose to $68.7 billion in Q1 2023, a 39.2% increase from Q1 2022125 Results of Operations Q1 2023 total revenues increased 9.2% to $203.2 million, driven by higher commission revenue from increased credit trading volume, while expenses rose 10.1% due to compensation and technology costs, and the effective tax rate decreased Total Trading Volume by Product (in millions) | Product | Q1 2023 | Q1 2022 | % Change | | :--- | :--- | :--- | :--- | | High-grade | $392,715 | $342,093 | +14.8% | | High-yield | $122,873 | $100,826 | +21.9% | | Emerging markets | $191,841 | $189,740 | +1.1% | | Eurobonds | $118,366 | $94,077 | +25.8% | | Total credit | $854,478 | $745,811 | +14.6% | | Total rates | $1,518,353 | $1,581,234 | -4.0% | Average Variable Transaction Fee Per Million | Product | Q1 2023 | Q1 2022 | % Change | | :--- | :--- | :--- | :--- | | Credit | $164.98 | $172.54 | -4.4% | | Rates | $4.12 | $3.92 | +5.1% | - Employee compensation and benefits increased by $4.6 million (9.5%) due to higher headcount166 - Technology and communications expenses increased by $2.8 million (23.0%), primarily due to higher software subscription and data center hosting costs168 Liquidity and Capital Resources The company maintains a strong liquidity position with $439.5 million in cash and investments, an undrawn $500 million credit facility, and $100.0 million remaining in its share repurchase program - As of March 31, 2023, the company had cash and cash equivalents and investments of $439.5 million174 - The company has a $500.0 million revolving credit facility, with no borrowings outstanding, and $450.0 million in uncommitted borrowing capacity for its U.S. broker-dealer subsidiary175176 - The company's regulated subsidiaries held aggregate net capital and financial resources of $541.0 million in excess of the required $29.0 million183 - As of March 31, 2023, $100.0 million remained available under the share repurchase program authorized in January 2022. No shares were repurchased under the program in Q1 202319099 Item 3. Quantitative and Qualitative Disclosures About Market Risk The company faces market, interest rate, foreign currency, and credit risks, with potential impacts on interest income and revenue from currency fluctuations, managed through established policies - A hypothetical 100 basis point change in interest rates would impact annual interest income by approximately $5.0 million197 - For the twelve months ended March 31, 2023, 14.7% of revenue and 26.0% of expenses were denominated in currencies other than the U.S. dollar. A hypothetical 10% change in the U.S. dollar would impact revenue by $10.8 million and operating expenses by $10.4 million201 - The company is exposed to credit risk as a matched principal trading counterparty and manages this through policies, procedures, and automated controls204205 Item 4. Controls and Procedures Management concluded that the company's disclosure controls and procedures were effective as of March 31, 2023, with no material changes to internal control over financial reporting during the quarter - The CEO and CFO concluded that as of March 31, 2023, the company's disclosure controls and procedures were effective209 - No material changes to the internal control over financial reporting were identified during the quarter ended March 31, 2023210 PART II — Other Information Item 1. Legal Proceedings The company is involved in routine legal and regulatory matters, with no expected material adverse impact on its financial position - The company states that the outcome of its outstanding legal matters is not expected to have a material adverse impact on its financial position213 Item 1A. Risk Factors No material changes to the company's risk factors have been reported since the most recent Form 10-K - No material changes to risk factors were reported since the 2022 Form 10-K214 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company did not repurchase shares under its program in Q1 2023, but repurchased shares for tax withholding, with $100.0 million remaining in the program - No shares were repurchased under the company's share repurchase program during Q1 2023216 - As of March 31, 2023, the company had $100.0 million of remaining capacity under its share repurchase program authorized in January 2022217 Item 6. Exhibits This section lists exhibits filed with the Form 10-Q, including employment agreements, credit agreement amendments, and CEO/CFO certifications