MarketAxess(MKTX) - 2022 Q1 - Quarterly Report

PART I — Financial Information Item 1. Financial Statements (Unaudited) This section presents the unaudited consolidated financial statements for MarketAxess Holdings Inc. for the quarter ended March 31, 2022, including the statements of financial condition, operations, comprehensive income, changes in stockholders' equity, and cash flows, along with detailed notes to these financial statements Consolidated Statements of Financial Condition The Consolidated Statements of Financial Condition show an increase in total assets primarily driven by higher receivables from broker-dealers, clearing organizations, and customers, while total liabilities also increased significantly due to higher payables to the same entities. Total stockholders' equity saw a slight decrease Fair Value Measurements (As of March 31, 2022, in thousands) | Metric | March 31, 2022 (in thousands) | December 31, 2021 (in thousands) | Change (in thousands) | % Change | | :------------------------------------------ | :------------------------------ | :------------------------------- | :-------------------- | :------- | | Total assets | $1,707,485 | $1,530,452 | $177,033 | 11.6% | | Total liabilities | $683,944 | $489,143 | $194,801 | 39.8% | | Total stockholders' equity | $1,023,541 | $1,041,309 | $(17,768) | -1.7% | - Receivables from broker-dealers, clearing organizations and customers increased significantly from $408.3 million at December 31, 2021, to $721.1 million at March 31, 2022[9] - Payables to broker-dealers, clearing organizations and customers increased substantially from $229.3 million at December 31, 2021, to $458.5 million at March 31, 2022[9] Consolidated Statements of Operations For the three months ended March 31, 2022, MarketAxess experienced a decrease in total revenues and net income compared to the same period in 2021, primarily driven by lower commissions, despite an increase in total expenses Metric (in thousands) | Metric (in thousands) | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | Change | % Change | | :-------------------- | :-------------------------------- | :-------------------------------- | :----- | :------- | | Total revenues | $186,057 | $195,464 | $(9,407) | -4.8% | | Total expenses | $97,953 | $91,990 | $5,963 | 6.5% | | Operating income | $88,104 | $103,474 | $(15,370)| -14.9% | | Net income | $64,769 | $80,457 | $(15,688)| -19.5% | | Basic EPS | $1.73 | $2.15 | $(0.42) | -19.5% | | Diluted EPS | $1.71 | $2.11 | $(0.40) | -19.0% | - Commissions, the largest revenue component, decreased by $9.7 million (-5.5%) from $175.8 million in Q1 2021 to $166.1 million in Q1 2022[12] - Depreciation and amortization expenses increased by $3.4 million (28.8%) from $11.8 million in Q1 2021 to $15.2 million in Q1 2022[12] Consolidated Statements of Comprehensive Income Comprehensive income for the three months ended March 31, 2022, decreased significantly to $59,718 thousand from $78,525 thousand in the prior year, primarily due to lower net income and a larger negative cumulative translation adjustment Metric (in thousands) | Metric (in thousands) | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | | :-------------------- | :-------------------------------- | :-------------------------------- | | Net income | $64,769 | $80,457 | | Cumulative translation adjustment | $(5,051) | $(1,932) | | Comprehensive income | $59,718 | $78,525 | - The cumulative translation adjustment resulted in a loss of $5.1 million in Q1 2022, compared to a loss of $1.9 million in Q1 2021, further reducing comprehensive income[15] Consolidated Statements of Changes in Stockholders' Equity Stockholders' equity decreased from $1,041,309 thousand at January 1, 2022, to $1,023,541 thousand at March 31, 2022, primarily due to common stock repurchases and cash dividends, partially offset by net income and stock-based compensation Item (in thousands) | Item (in thousands) | Three Months Ended March 31, 2022 | | :------------------ | :-------------------------------- | | Balance at January 1, 2022 | $1,041,309 | | Net income | $64,769 | | Stock-based compensation | $8,099 | | Repurchases of common stock | $(38,800) | | Cash dividend on common stock | $(26,543) | | Balance at March 31, 2022 | $1,023,541 | - Repurchases of common stock amounted to $38.8 million for the three months ended March 31, 2022[17] - Cash dividends declared per common share were $0.70 in Q1 2022, totaling $26.5 million[12][17] Consolidated Statements of Cash Flows Net cash used in operating activities remained relatively stable, while net cash used in investing activities decreased. Net cash used in financing activities significantly increased, primarily due to higher common stock repurchases and lower net short-term borrowings, leading to a substantial overall net decrease in cash and cash equivalents for the period Cash Flow Activity (in thousands) | Cash Flow Activity (in thousands) | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | Change | | :-------------------------------- | :-------------------------------- | :-------------------------------- | :----- | | Net cash (used in) operating activities | $(23,730) | $(23,159) | $(571) | | Net cash (used in) investing activities | $(10,821) | $(12,332) | $1,511 | | Net cash (used in) financing activities | $(86,467) | $(18,850) | $(67,617)| | Net decrease for the period | $(125,374) | $(55,368) | $(70,006)| - The significant increase in cash used in financing activities was driven by an increase in repurchases of common stock ($38.8 million in Q1 2022 vs. $0.5 million in Q1 2021) and a net zero impact from short-term borrowings in Q1 2022 (proceeds of $100.0 million offset by repayments of $100.0 million) compared to net proceeds of $34.3 million in Q1 2021[19] - Capitalization of software development costs increased to $9.4 million in Q1 2022 from $8.1 million in Q1 2021[19] Notes to Consolidated Financial Statements The notes provide detailed disclosures on the company's organization, significant accounting policies, regulatory capital, fair value measurements, receivables/payables, acquisitions, goodwill and intangible assets, income taxes, stock-based compensation, earnings per share, credit agreements, leases, commitments, share repurchases, segment/geographic information, and cash reconciliation Note 1. Organization and Principal Business Activity MarketAxess Holdings Inc. operates leading electronic trading platforms for global fixed-income markets, offering expanded liquidity, improved execution, and cost savings. It serves over 1,900 institutional investor and broker-dealer firms with patented trading technology across various fixed-income securities, including U.S. investment-grade, high-yield, emerging market debt, Eurobonds, municipal bonds, and U.S. government bonds. The company also provides trading-related products and services like Composite+™ pricing, auto-execution, connectivity solutions, and pre- and post-trade services - MarketAxess operates electronic trading platforms for global fixed-income markets, serving over 1,900 institutional investor and broker-dealer firms[21] - Key products include U.S. investment-grade bonds, U.S. high-yield bonds, emerging market debt, Eurobonds, municipal bonds, and U.S. government bonds[21] - The company offers Open Trading® protocols for all-to-all anonymous trading and various trading-related products and services, such as Composite+™ pricing, auto-execution, and pre/post-trade services[21] Note 2. Significant Accounting Policies The company's financial statements are prepared in accordance with U.S. GAAP and SEC rules, reflecting normal and recurring adjustments. Key policies include the consolidation of subsidiaries, classification of investments (available-for-sale or trading), fair value measurement using a three-tiered hierarchy, and specific revenue recognition criteria for commissions, information services, and post-trade services. The company also details policies for depreciation, software development, foreign currency translation, stock-based compensation, income taxes, business combinations, and earnings per share - The consolidated financial statements are unaudited and prepared in accordance with U.S. GAAP and SEC rules for Form 10-Q[22] - Revenue is disaggregated into four streams: Commissions, Information services, Post-trade services, and Other, each with specific recognition criteria[34][35][37] Commission Revenue by Fee Type (Three Months Ended March 31, in thousands) | Commission Revenue by Fee Type (in thousands) | 2022 | 2021 | | :-------------------------------------------- | :-------- | :-------- | | Variable transaction fees | $134,873 | $148,398 | | Distribution fees and unused minimum fees | $31,240 | $27,440 | | Total commissions | $166,113 | $175,838 | - The company adopted ASU 2020-04, 'Reference Rate Reform (Topic 848),' as of January 1, 2022, but determined it had no impacted contracts or hedging relationships[23] Note 3. Regulatory Capital Requirements Certain U.S. and foreign subsidiaries are subject to regulatory capital requirements (SEC, FINRA, CFTC, FCA). As of March 31, 2022, all regulated subsidiaries exceeded their minimum net capital or financial resources requirements, with an aggregate excess of $567.3 million over the required $24.2 million. The U.S. broker-dealer subsidiary also maintained a special reserve bank account of $50.2 million for customers - Company subsidiaries are subject to regulatory capital requirements from SEC, FINRA, CFTC, and FCA[46] - As of March 31, 2022, aggregate net capital and financial resources were $567.3 million in excess of the required levels of $24.2 million[46] - The U.S. broker-dealer subsidiary maintained a $50.2 million balance in its special reserve bank account for customers and had $360.9 million in excess of its $6.0 million required net capital[47] Note 4. Fair Value Measurements The company measures financial assets and liabilities at fair value using a three-tiered hierarchy. As of March 31, 2022, total assets measured at fair value were $50.2 million, primarily in Level 1 (money market funds) and Level 2 (trading securities, mutual funds in rabbi trust). Level 3 liabilities, consisting of contingent consideration payable from acquisitions, decreased to $39.1 million, reflecting a revaluation gain and foreign currency translation Fair Value Measurements (As of March 31, 2022, in thousands) | Category | Level 1 | Level 2 | Level 3 | Total | | :------- | :--------- | :--------- | :--------- | :--------- | | Assets | $14,300 | $35,875 | $— | $50,175 | | Liabilities | $— | $— | $39,119 | $39,119 | - Contingent consideration payable (Level 3 liability) decreased from $41.1 million at December 31, 2021, to $39.1 million at March 31, 2022, due to an unrealized gain of $1.6 million and a foreign currency translation impact of $0.4 million[49][51] - Significant unobservable inputs for Level 3 liabilities include client retention rates (84.0%), electronic trading volume percentages (86.0%-96.6%), and variable fees[51] Note 5. Receivables from and Payables to Broker-dealers, Clearing organizations and Customers Receivables from broker-dealers, clearing organizations, and customers significantly increased to $721.1 million as of March 31, 2022, from $408.3 million at December 31, 2021, primarily due to higher securities failed-to-deliver. Correspondingly, payables to these entities also rose substantially to $458.5 million from $229.3 million, driven by increased securities failed-to-receive Receivables and Payables (in thousands) | Category | March 31, 2022 | December 31, 2021 | | :------------------------------------------ | :------------- | :---------------- | | Receivables from broker-dealers, clearing organizations and customers | $721,127 | $408,346 | | Payables to broker-dealers, clearing organizations and customers | $458,476 | $229,325 | - Securities failed-to-deliver to customers increased from $182.1 million to $418.6 million[56] - Securities failed-to-receive from broker-dealers and clearing organizations increased from $166.0 million to $268.4 million[56] Note 6. Acquisitions In April 2021, MarketAxess acquired MuniBrokers LLC for $17.1 million cash and up to $25.0 million in contingent consideration, recording $32.0 million in amortizable intangible assets and $7.4 million in goodwill. In 2022, a $1.6 million decrease in contingent consideration payable was recognized as a gain. In November 2020, the company acquired Regulatory Services GmbH for $22.5 million cash and up to $24.6 million in contingent consideration, recording $37.4 million in amortizable intangible assets - Acquired MuniBrokers LLC on April 9, 2021, for $17.1 million cash and up to $25.0 million contingent consideration[57] - MuniBrokers acquisition resulted in $32.0 million of amortizable intangible assets and $7.4 million of goodwill[57] - A $1.6 million decrease in contingent consideration payable related to MuniBrokers was recognized as a gain in Q1 2022[57] - Acquired Regulatory Services GmbH on November 30, 2020, for $22.5 million cash and up to $24.6 million contingent consideration, recording $37.4 million in amortizable intangible assets[58] Note 7. Goodwill and Intangible Assets Goodwill remained stable at $154.8 million. Amortizable intangible assets, net of accumulated amortization, decreased to $111.6 million as of March 31, 2022, from $116.4 million at December 31, 2021, primarily due to ongoing amortization. Amortization expense for Q1 2022 was $4.0 million, an increase from $2.7 million in Q1 2021 - Goodwill and intangible assets with indefinite lives remained at $154.8 million as of March 31, 2022, and December 31, 2021[59] Amortizable Intangible Assets (in thousands) | Category | March 31, 2022 Net Carrying Amount | December 31, 2021 Net Carrying Amount | | :------------------------ | :--------------------------------- | :------------------------------------ | | Customer relationships | $108,037 | $112,384 | | Technology and other intangibles | $3,583 | $3,993 | | Total | $111,620 | $116,377 | - Amortization expense for identifiable intangible assets was $4.0 million for the three months ended March 31, 2022, up from $2.7 million in the prior year[60] Note 8. Income Taxes The provision for income taxes increased to $25.7 million for Q1 2022, resulting in an effective tax rate of 28.4%, up from 21.0% in Q1 2021. This increase was primarily due to a $3.2 million expense related to a settlement with New York State tax authorities and lower excess tax benefits from share-based payments ($0.1 million in Q1 2022 vs. $4.0 million in Q1 2021) Income Tax Provision and Effective Tax Rate | Metric | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | | :------------------ | :-------------------------------- | :-------------------------------- | | Provision for income taxes | $25,650 thousand | $21,344 thousand | | Effective tax rate | 28.4% | 21.0% | - The Q1 2022 provision included $3.2 million expense for a settlement with New York State tax authorities for 2010-2014 audits[61] - Excess tax benefits on share-based payments decreased significantly from $4.0 million in Q1 2021 to $0.1 million in Q1 2022[61] Note 9. Stock-Based Compensation Plans Total stock-based compensation expense increased to $8.1 million for Q1 2022 from $7.4 million in Q1 2021. The company granted 56,548 restricted stock units, 23,904 stock options, and performance stock units with an expected payout of 22,141 shares in Q1 2022. Unrecognized compensation cost for non-vested awards totaled $58.8 million, expected to be recognized over a weighted-average period of 2.0 years Total Stock-Based Compensation Expense (in thousands) | Category | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | | :------------------ | :-------------------------------- | :-------------------------------- | | Employees | $7,642 | $7,103 | | Non-employee directors | $457 | $321 | | Total | $8,099 | $7,424 | - As of March 31, 2022, 2,476,921 shares were available for grant under the stock incentive plan[63] - Total unrecognized compensation cost related to non-vested awards was $58.8 million, with a weighted-average recognition period of 2.0 years[66] Note 10. Earnings Per Share Basic earnings per share decreased to $1.73 in Q1 2022 from $2.15 in Q1 2021, and diluted EPS decreased to $1.71 from $2.11. The weighted-average shares outstanding for both basic and diluted calculations slightly decreased, while a higher number of stock options and restricted stock were excluded from diluted EPS computation due to their antidilutive effect in Q1 2022 compared to Q1 2021 Earnings Per Share (in thousands, except per share amounts) | Metric | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | | :-------------------------------- | :-------------------------------- | :-------------------------------- | | Basic weighted average shares outstanding | 37,384 | 37,470 | | Diluted weighted average shares outstanding | 37,824 | 38,155 | | Basic earnings per share | $1.73 | $2.15 | | Diluted earnings per share | $1.71 | $2.11 | - 174,642 shares of stock options and restricted stock were excluded from diluted EPS in Q1 2022 due to antidilutive effect, compared to 61,089 shares in Q1 2021[68] Note 11. Credit Agreements and Short-term Financing MarketAxess replaced its 2020 Credit Agreement with a new three-year $500.0 million revolving credit facility (2021 Credit Agreement) in October 2021, maturing in October 2024. As of March 31, 2022, the company had $499.0 million in available borrowing capacity and was in compliance with all covenants. Additionally, a U.S. broker-dealer subsidiary has an uncommitted $200.0 million Collateralized Agreement with its settlement bank, with no outstanding borrowings as of March 31, 2022 - The 2021 Credit Agreement is a $500.0 million revolving credit facility, maturing October 15, 2024[71] - As of March 31, 2022, $499.0 million in borrowing capacity was available under the 2021 Credit Agreement, with $1.0 million in letters of credit outstanding[71] - A U.S. broker-dealer subsidiary has a $200.0 million uncommitted Collateralized Agreement, with no outstanding borrowings as of March 31, 2022[74] Note 12. Leases The company has operating leases for corporate offices with terms ranging from one to 15 years. Net lease cost for Q1 2022 was $3.383 million. As of March 31, 2022, the weighted average remaining lease term was 11.3 years with a weighted average discount rate of 5.9%. Total future lease payments amount to $120.058 million, with a present value of lease liabilities of $86.391 million Lease Cost (in thousands) | Lease Cost Component | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | | :------------------- | :-------------------------------- | :-------------------------------- | | Operating lease cost | $3,310 | $3,323 | | Net lease cost | $3,383 | $3,324 | - As of March 31, 2022, the weighted average remaining lease term was 11.3 years, and the weighted average discount rate was 5.9%[78] Maturity of Lease Liabilities (As of March 31, 2022, in thousands) | Period | Amount | | :---------------- | :--------- | | Remainder of 2022 | $8,108 | | 2023 | $10,747 | | 2024 | $11,209 | | 2025 | $11,015 | | 2026 | $10,913 | | 2027 and thereafter | $68,066 | | Total lease payments | $120,058 | | Less: interest | $33,667 | | Present value of lease liabilities | $86,391 | Note 13. Commitments and Contingencies The company is involved in various lawsuits, proceedings, and regulatory examinations in the normal course of business. Management assesses potential liabilities and accrues for probable and estimable losses, but currently does not expect any outstanding matters to have a material adverse impact on its financial position. The company also faces credit risk from matched principal transactions and enters into contracts with indemnification provisions, for which the maximum exposure is unknown but considered remote based on experience - The company is involved in various lawsuits, proceedings, and regulatory examinations, but does not expect a material adverse impact on its financial position from outstanding matters[80][81] - The company is exposed to credit risk in matched principal transactions where it acts as counterparty, but recorded no liabilities or losses for counterparty failures in Q1 2022 or Q1 2021[82] - The company enters into contracts with indemnification provisions, with maximum exposure unknown but risk of material loss considered remote[83] Note 14. Share Repurchase Programs In January 2022, the Board of Directors authorized a new share repurchase program for up to $150.0 million, following the exhaustion of a $100.0 million program in January 2022. For the three months ended March 31, 2022, the company repurchased 101,514 shares of common stock at a cost of $38.8 million under these programs - A new $150.0 million share repurchase program was authorized in January 2022[84] - The previous $100.0 million share repurchase program, authorized in January 2021, was exhausted in January 2022[84] - For Q1 2022, 101,514 shares were repurchased at a cost of $38.8 million[84] Note 15. Segment and Geographic Information MarketAxess operates as a single business segment due to the integrated nature of its products and services. Geographically, the Americas generated the majority of revenues ($150.6 million) and long-lived assets ($75.1 million) in Q1 2022, followed by Europe ($30.7 million revenue, $19.9 million assets). The U.K. was the only individual foreign country accounting for 10% or more of total revenues or long-lived assets - The company operates as a single business segment[85] Revenues by Geographic Area (Three Months Ended March 31, in thousands) | Geographic Area | 2022 | 2021 | | :-------------- | :-------- | :-------- | | Americas | $150,556 | $160,119 | | Europe | $30,736 | $29,544 | | Asia | $4,765 | $5,801 | | Total | $186,057 | $195,464 | Long-Lived Assets by Geographic Area (As of, in thousands) | Geographic Area | March 31, 2022 | December 31, 2021 | | :-------------- | :------------- | :---------------- | | Americas | $75,141 | $75,328 | | Europe | $19,917 | $20,547 | | Asia | $244 | $186 | | Total | $95,302 | $96,061 | Note 16. Cash and Cash Equivalents and Restricted Cash The total cash and cash equivalents, including restricted cash, decreased to $500.2 million as of March 31, 2022, from $625.6 million at December 31, 2021. This reconciliation includes cash and cash equivalents, cash segregated for regulatory purposes, deposits with clearing organizations and broker-dealers, and other deposits Cash and Cash Equivalents and Restricted Cash Reconciliation (in thousands) | Category | March 31, 2022 | December 31, 2021 | | :------------------------------------------ | :------------- | :---------------- | | Cash and cash equivalents | $364,567 | $506,735 | | Cash segregated for regulatory purposes | $50,187 | $50,159 | | Deposits with clearing organizations and broker-dealers | $85,331 | $68,565 | | Other deposits | $108 | $108 | | Total | $500,193 | $625,567 | - The total cash and cash equivalents including restricted cash decreased by $125.4 million from December 31, 2021, to March 31, 2022[88] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the company's financial condition and results of operations for the three months ended March 31, 2022, compared to the same period in 2021. It covers an executive overview, critical factors affecting the industry, business trends, detailed analysis of revenues and expenses, critical accounting estimates, liquidity and capital resources, and non-GAAP financial measures Executive Overview MarketAxess operates leading electronic trading platforms for global fixed-income markets, offering efficiency, liquidity, and cost savings to over 1,900 institutional investor and broker-dealer firms. The company leverages patented technology, including Open Trading®, and diverse trading protocols to connect participants and provide a full trading lifecycle solution, including automated trading, data products, and post-trade services. Revenue is derived from commissions, information services, post-trade services, and other sources, with a strategic focus on expanding its global electronic trading platforms - MarketAxess operates leading electronic trading platforms for global fixed-income markets, serving over 1,900 institutional investor and broker-dealer firms[90] - The Open Trading marketplace is a key feature, creating a unique liquidity pool for corporate bonds and driving transaction cost savings[90][91] - Revenue streams include commissions, information services, post-trade services, and other revenues[92] Critical Factors Affecting Our Industry and Our Company The company's business is influenced by economic, political, and market factors such as declining trading volumes in U.S. high-grade and high-yield corporate bonds, geopolitical events like the Russia-Ukraine conflict, and the ongoing impact of the COVID-19 pandemic. Competition is intense, driven by client network, liquidity, transaction costs, and platform quality. Regulatory changes, including proposed SEC rules and Brexit-related divergence, increase compliance costs but may also drive demand for electronic platforms. Technological advancements, including automated trading and cybersecurity investments, are crucial for future success - Market volumes in U.S. high-grade and U.S. high-yield corporate bonds decreased by 6.9% and 7.8% respectively in Q1 2022 compared to Q1 2021[96] - The Russia-Ukraine conflict and associated sanctions are being monitored, with no material losses expected on unsettled trades, but potential adverse effects on markets[97] - Automated trading volumes increased by 26.3% to $49.3 billion in Q1 2022, with algorithmic responses up 11.6%[110] - New SEC proposed rules expanding Regulation ATS and SCI to government securities and amending the definition of an 'exchange' are expected to impact operations and compliance costs[105] Trends in Our Business The company's revenue is primarily from commissions, which are influenced by participant numbers, price competitiveness, market availability, overall market activity, and bond duration. Trading volumes declined in Q1 2022 compared to Q1 2021. Information services and post-trade services revenues are recognized over time or at a point in time. Expenses, particularly employee compensation, depreciation, and technology, are expected to grow due to investments in new products, operational support, and geographic expansion. Other income/expense includes investment income, interest expense, and 'other, net' which captures unrealized gains/losses and foreign currency effects - Five key variables impact transaction notional value and commissions: number of participants, price competitiveness, market availability, overall market activity, and bond duration[112] - Commission revenue is generally calculated as a percentage of notional dollar volume and varies by bond type, size, yield, maturity, and client incentives[114] - Employee compensation and benefits is the most significant expense, expected to grow with headcount and investment in new products[123][130] - Other, net includes unrealized gains/losses on trading securities, foreign currency transaction gains/losses, and gains/losses on revaluations of contingent consideration payable[132] Critical Accounting Estimates The company's critical accounting estimates include stock-based compensation, particularly for performance equity awards, and contingent consideration payable related to acquisitions. For performance equity awards, a 10% change in expected final share payouts would impact compensation expense by $1.7 million. For contingent consideration, a 10% change in projected annual subscription and license fees would not materially impact the expected payable - Critical accounting estimates include stock-based compensation (performance equity awards) and contingent consideration payable[133] - A 10% change in expected final share payouts for performance equity awards would increase or decrease life-to-date compensation expense by $1.7 million[135] - A 10% change in projected annual subscription and license fees for contingent consideration payable would not have a material impact[136] Recent Accounting Pronouncements The company refers to Note 2 of the Consolidated Financial Statements for a discussion of recent accounting pronouncements - Refer to Note 2 for recent accounting pronouncements[137] Segment Results MarketAxess operates as a single business segment due to the highly integrated nature of its electronic trading platforms for fixed-income securities and related data, analytics, compliance tools, and post-trade services. Geographic or client sector results are not considered meaningful for understanding the business - The company operates as a single business segment[138] - This is due to the highly integrated nature of its products and services, financial markets, and worldwide business activities[138] Results of Operations - Three Months Ended March 31, 2022 Compared to Three Months Ended March 31, 2021 For Q1 2022, total revenues decreased by 4.8% to $186.1 million, while total expenses increased by 6.5% to $98.0 million, leading to a 14.9% decrease in operating income and a 19.5% decrease in net income. This was influenced by lower commission revenues, particularly in U.S. high-grade credit, and increased depreciation, technology, and marketing expenses, partially offset by a significant increase in 'other income (expense)' due to revaluation gains and foreign exchange Financial Results Summary (in thousands, except per share amounts) | Metric | 2022 | 2021 | $ Change | % Change | | :------------------------ | :-------- | :-------- | :-------- | :------- | | Revenues | $186,057 | $195,464 | $(9,407) | (4.8)% | | Expenses | $97,953 | $91,990 | $5,963 | 6.5% | | Operating income | $88,104 | $103,474 | $(15,370) | (14.9)% | | Net income | $64,769 | $80,457 | $(15,688) | (19.5)% | | Net income per common share – Diluted | $1.71 | $2.11 | $(0.40) | (19.0)% | - A 2.9% change in the average foreign currency exchange rates of the British pound sterling decreased revenues by $0.8 million and expenses by $0.7 million[140] - MuniBrokers contributed $1.3 million in revenue and $1.8 million in expenses (including $1.2 million amortization of acquired intangibles) in Q1 2022[139][150] Revenues Total revenues decreased by 4.8% to $186.1 million in Q1 2022, primarily due to a 5.5% decline in commissions. Information services revenue increased by 7.1%, while post-trade services revenue decreased by 3.4% Revenues by Type (in thousands) | Revenue Type | 2022 | % of Revenues | 2021 | % of Revenues | $ Change | % Change | | :------------------ | :-------- | :------------ | :-------- | :------------ | :-------- | :------- | | Commissions | $166,113 | 89.3% | $175,838 | 90.0% | $(9,725) | (5.5)% | | Information services | $9,809 | 5.3% | $9,162 | 4.7% | $647 | 7.1% | | Post-trade services | $9,912 | 5.3% | $10,261 | 5.2% | $(349) | (3.4)% | | Other | $223 | 0.1% | $203 | 0.1% | $20 | 9.9% | | Total revenues | $186,057 | 100.0% | $195,464 | 100.0% | $(9,407) | (4.8)% | Commissions Total commissions decreased by 5.5% to $166.1 million in Q1 2022. This was driven by a 19.1% decrease in U.S. high-grade variable transaction fees due to lower trading volume and average fees per million, and a 3.9% decrease in other credit variable transaction fees. Conversely, rates variable transaction fees increased by 49.4% due to higher U.S. Treasury trading volume. Distribution fees for U.S. high-grade and other credit increased by 9.8% and 27.3% respectively Commission Revenues by Product (in thousands) | Commission Type | 2022 | 2021 | $ Change | % Change | | :------------------------ | :-------- | :-------- | :-------- | :------- | | U.S. high-grade variable transaction fees | $52,878 | $65,356 | $(12,478) | (19.1)% | | Other credit variable transaction fees | $75,804 | $78,899 | $(3,095) | (3.9)% | | Rates variable transaction fees | $6,191 | $4,143 | $2,048 | 49.4% | | U.S. high-grade distribution fees | $23,026 | $20,970 | $2,056 | 9.8% | | Other credit distribution fees | $8,152 | $6,404 | $1,748 | 27.3% | | Total commissions | $166,113 | $175,838 | $(9,725) | (5.5)% | Trading Volume Data (in millions) | Trading Volume Data | 2022 | 2021 | $ Change | % Change | | :------------------ | :---------- | :---------- | :---------- | :------- | | Total U.S. high grade | $342,093 | $363,441 | $(21,348) | (5.9)% | | Other credit | $403,718 | $391,020 | $12,698 | 3.2% | | Total credit | $745,811 | $754,461 | $(8,650) | (1.1)% | | Rates | $1,581,234 | $1,120,868 | $460,366 | 41.1% | Average Variable Transaction Fee Per Million | Average Variable Transaction Fee per Million | 2022 | 2021 | $ Change | % Change | | :------------------------------------------- | :-------- | :-------- | :-------- | :------- | | Total U.S. high-grade | $154.57 | $179.83 | $(25.26) | (14.0)% | | Other credit | $187.76 | $201.78 | $(14.02) | (6.9)% | | Rates | $3.92 | $3.70 | $0.22 | 5.9% | Information Services Information services revenue increased by $0.6 million for Q1 2022, primarily driven by net new data contract revenue - Information services revenue increased by $0.6 million in Q1 2022, mainly due to net new data contract revenue[148] Post-Trade Services Post-trade services revenue decreased by $0.3 million for Q1 2022, mainly due to the negative impact of foreign exchange rates - Post-trade services revenue decreased by $0.3 million in Q1 2022, primarily due to a negative foreign exchange impact of $0.2 million[148] Expenses Total expenses increased by 6.5% to $98.0 million in Q1 2022. This was primarily driven by a $3.4 million increase in depreciation and amortization (due to acquired intangibles and software development costs) and a $2.2 million increase in technology and communications expenses (due to software subscriptions, cloud hosting, and market data). Marketing and advertising also increased by $0.6 million as pandemic-related reductions eased Expenses by Category (in thousands) | Expense Category | 2022 | 2021 | $ Change | % Change | | :-------------------------- | :-------- | :-------- | :-------- | :------- | | Employee compensation and benefits | $47,756 | $48,088 | $(332) | (0.7)% | | Depreciation and amortization | $15,174 | $11,779 | $3,395 | 28.8% | | Technology and communications | $12,192 | $10,036 | $2,156 | 21.5% | | Marketing and advertising | $1,789 | $1,204 | $585 | 48.6% | | Total expenses | $97,953 | $91,990 | $5,963 | 6.5% | - Depreciation and amortization increased by $3.4 million, primarily due to $1.4 million higher amortization of acquired intangibles and $1.8 million higher amortization of software development costs[152] - Technology and communications expenses increased by $2.2 million, driven by higher software subscription costs ($1.0 million), cloud hosting costs ($0.5 million), and market data costs ($0.3 million)[153] Other Income (Expense) Total other income (expense) significantly improved, shifting from a net expense of $1.7 million in Q1 2021 to a net income of $2.3 million in Q1 2022. This $4.0 million increase was primarily driven by a $1.6 million gain on the revaluation of contingent consideration payable and higher foreign exchange gains of $1.8 million Other Income (Expense) (in thousands) | Category | 2022 | 2021 | $ Change | % Change | | :------------------------ | :-------- | :-------- | :-------- | :------- | | Investment income | $59 | $107 | $(48) | (44.9)% | | Interest expense | $(173) | $(191) | $18 | (9.4)% | | Other, net | $2,429 | $(1,589) | $4,018 | (252.9)% | | Total other income (expense) | $2,315 | $(1,673) | $3,988 | (238.4)% | - Other, net increased by $4.0 million, primarily due to a $1.6 million gain on revaluation of contingent consideration payable and $1.8 million higher foreign exchange gains[156] Provision for Income Taxes The provision for income taxes increased by 20.2% to $25.7 million in Q1 2022, resulting in an effective tax rate of 28.4%, up from 21.0% in Q1 2021. This was mainly due to a $3.2 million expense from a New York State tax settlement and significantly lower excess tax benefits from share-based compensation ($0.1 million in Q1 2022 vs. $4.0 million in Q1 2021) Income Tax Provision and Effective Tax Rate | Metric | 2022 | 2021 | $ Change | % Change | | :------------------ | :-------- | :-------- | :-------- | :-------- | | Provision for income taxes | $25,650 | $21,344 | $4,306 | 20.2% | | Effective tax rate | 28.4% | 21.0% | | | - The Q1 2022 provision included $3.2 million expense for a settlement with New York State tax authorities[157] - Excess tax benefits from share-based payments decreased from $4.0 million in Q1 2021 to $0.1 million in Q1 2022[157] Liquidity and Capital Resources MarketAxess met its Q1 2022 funding needs through cash, internally generated funds, and short-term borrowings, ending the quarter with $400.4 million in cash and investments. The company has a $500.0 million revolving credit facility (2021 Credit Agreement) with $499.0 million available and a $200.0 million uncommitted Collateralized Agreement, both with no outstanding borrowings. Regulatory capital requirements for subsidiaries were significantly exceeded. Net cash used in operating activities remained stable, while financing activities saw a substantial increase in cash usage due to share repurchases - Cash and cash equivalents and investments totaled $400.4 million as of March 31, 2022[158] - The company has $499.0 million in available borrowing capacity under its $500.0 million 2021 Credit Agreement and $200.0 million under its Collateralized Agreement, with no outstanding borrowings on either as of March 31, 2022[159][160] - Subsidiaries maintained aggregate net capital and financial resources $567.3 million in excess of the required $24.2 million[168] Cash Flows Summary (in thousands) | Cash Flow Activity | 2022 | 2021 | $ Change | % Change | | :----------------- | :-------- | :-------- | :-------- | :------- | | Net cash (used in) operating activities | $(23,730) | $(23,159) | $(571) | 2.5% | | Net cash (used in) investing activities | $(10,821) | $(12,332) | $1,511 | (12.3)% | | Net cash (used in) financing activities | $(86,467) | $(18,850) | $(67,617) | 358.7% | Other Factors Influencing Liquidity and Capital Resources The company believes current resources are adequate for short-term liquidity, but future needs depend on self-clearing operations, product development, expansion, and potential acquisitions. Regulatory restrictions prohibit subsidiaries from significantly reducing net capital without approval. The company faces credit risk from matched principal transactions but recorded no losses in Q1 2022 or Q1 2021. Operating lease commitments total $120.1 million. A new $150.0 million share repurchase program was authorized in January 2022, and a quarterly cash dividend of $0.70 per share was approved in April 2022 - Future liquidity and capital requirements depend on self-clearing operations, product development, expansion, and new business opportunities, including potential acquisitions[167] - The company has total future contractual rent payments on operating leases of $120.1 million, with $10.8 million due within the next 12 months[172] - A new $150.0 million share repurchase program was authorized in January 2022, and a quarterly cash dividend of $0.70 per share was approved in April 2022[173][174] Non-GAAP Financial Measures MarketAxess uses non-GAAP financial measures, EBITDA and free cash flow, to provide additional insights into operating results and liquidity. EBITDA decreased to $105.8 million in Q1 2022 from $113.8 million in Q1 2021. Free cash flow decreased to $34.0 million in Q1 2022 from $52.4 million in Q1 2021, primarily due to lower net cash from operating activities and increased software capitalization - Non-GAAP financial measures used are EBITDA and free cash flow[176] Reconciliation of Net Income to EBITDA (in thousands) | Metric | 2022 | 2021 | | :---------------------------------------- | :-------- | :-------- | | Net income | $64,769 | $80,457 | | Earnings before interest, taxes, depreciation and amortization | $105,766 | $113,771 | Reconciliation of Cash Flow from Operating Activities to Free Cash Flow (in thousands) | Metric | 2022 | 2021 | | :---------------------------------------- | :-------- | :-------- | | Net cash (used in) operating activities | $(23,730) | $(23,159) | | Free Cash Flow | $33,991 | $52,384 | Item 3. Quantitative and Qualitative Disclosures About Market Risk MarketAxess is exposed to market risk from adverse changes in interest rates and foreign currency exchange rates, as well as credit risk from matched principal trading. A hypothetical 10% decrease in U.S. Treasuries could result in substantial loss. A 10 basis point increase in interest rates would increase interest income by approximately $0.4 million. Foreign currency fluctuations (affecting 17.5% of revenue and 30.6% of expenses) could significantly impact financial results. The company manages credit risk with policies and controls, but these may not fully mitigate exposure - The company is exposed to market risk from interest rates and foreign currency exchange rates, and credit risk from matched principal trading[180][181][186] - A hypothetical 10 basis point increase in interest rates would increase interest income by approximately $0.4 million[183] - Approximately 17.5% of revenue and 30.6% of expenses were denominated in non-U.S. dollar currencies during the twelve months ended March 31, 2022[185] - A hypothetical 10% increase or decrease in the U.S. dollar against other currencies would impact revenue by approximately $12.0 million and operating expenses by approximately $11.1 million[185] Item 4. Controls and Procedures Management, including the CEO and CFO, evaluated the effectiveness of the company's disclosure controls and procedures as of March 31, 2022, and concluded they were effective. There were no material changes in internal control over financial reporting during the quarter - Disclosure controls and procedures were evaluated as effective as of March 31, 2022[190] - No material changes in internal control over financial reporting occurred during the quarter ended March 31, 2022[191] PART II — Other Information Item 1. Legal Proceedings MarketAxess and its subsidiaries are involved in various lawsuits, proceedings, and regulatory examinations in the normal course of business. Based on current information, the outcome of these matters is not expected to have a material adverse impact on the company's financial position, although the ultimate exposure cannot be precisely determined - The company is involved in various lawsuits, proceedings, and regulatory examinations[194] - The outcome of outstanding matters is not expected to have a material adverse impact on the company's financial position[194] Item 1A. Risk Factors There have been no material changes to the risk factors previously disclosed in the company's Form 10-K for the year ended December 31, 2021 - No material changes to risk factors from the 2021 Form 10-K[195] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds MarketAxess did not have any unregistered sales of equity securities. During Q1 2022, the company repurchased a total of 157,766 shares of common stock, including 101,514 shares under its share repurchase program at a cost of $38.8 million, and 56,252 shares surrendered by employees for tax obligations. A new $150.0 million share repurchase program was authorized in January 2022 - No unregistered sales of equity securities occurred[196] Issuer Purchases of Equity Securities (Q1 2022) | Period | Total Number of Shares Purchased | Average Price Paid per Share | | :----------------------------------- | :------------------------------- | :--------------------------- | | January 1, 2022 - January 31, 2022 | 132,887 Shares | $375.74 | | February 1, 2022 - February 28, 2022 | 21,304 Shares | $377.98 | | March 1, 2022 - March 31, 2022 | 3,575 Shares | $348.09 | | Total | 157,766 Shares | $375.41 | - 101,514 shares were repurchased under the share repurchase program at a cost of $38.8 million, and 56,252 shares were surrendered by employees for tax obligations[84][197] - A new $150.0 million share repurchase program was authorized in January 2022, commencing in March 2022[198] Item 3. Defaults Upon Senior Securities There were no defaults upon senior securities during the period - No defaults upon senior securities[200] Item 4. Mine Safety Disclosures This item is not applicable to the company - Not applicable[201] Item 5. Other Information No other information is reported under this item - No other information[202] Item 6. Exhibits This section lists all exhibits filed with the Form 10-Q, including various stock incentive plan agreements, a consulting services agreement, certifications by the CEO and CFO, and Inline XBRL documents - Exhibits include various stock incentive plan agreements (e.g., Restricted Stock Unit Agreement, Performance Stock Unit Agreement, Incentive Stock Option Agreement) for executive officers[204] - Certifications by the Chief Executive Officer and Chief Financial Officer pursuant to Exchange Act Rule 13a-14(a) and 18 U.S.C. Section 1350 are filed[204] - Inline XBRL documents (Instance, Schema, Calculation, Label, Presentation, Definition Linkbase Documents) are included[204]