UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
☑ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2017March 31, 2024
or
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number 001-34091
MARKETAXESS HOLDINGS INC.
(Exact name of registrant as specified in its charter)
Delaware | 52-2230784 | |
(State or other jurisdiction of incorporation or organization) | (IRS Employer Identification No.) | |
|
| |
(Address of principal executive offices) | (Zip Code) |
(212) 813-6000
(Registrant’s telephone number, including area code)code: (212) 813-6000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol | Name of each exchange on which registered | ||
Common Stock, $0.003 par value | MKTX | NASDAQ Global Select Market |
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes☑ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes☑ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an “emergingemerging growth company”.company. See definition of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer |
| Accelerated filer | ☐ | |||||||
Non-accelerated filer | ☐ | Smaller reporting company | ☐ | |||||||
|
|
|
| |||||||
Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑
As of October 26, 2017,May 3, 2024, the number of shares of the Registrant’s voting common stock outstanding was 37,536,939.37,896,895.
MARKETAXESS HOLDINGS INC.
FORM 10-Q FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2017MARCH 31, 2024
TABLE OF CONTENTS
Page | |||
Item 1. | 3 | ||
3 | |||
4 | |||
5 | |||
6 | |||
| |||
| |||
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
| |
Item 3. |
| ||
Item 4. |
| ||
Item 1. |
| ||
Item 1A. |
| ||
Item 2. |
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Item 3. |
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Item 4. |
| ||
Item 5. |
| ||
Item 6. |
|
2
2
PARTPART I — Financial Information
MARKETAXESS HOLDINGS INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Unaudited)
| As of |
| |||||||
| March 31, 2024 |
|
| December 31, 2023 |
| ||||
| (In thousands, except share |
| |||||||
ASSETS |
|
|
|
|
|
|
| ||
Cash and cash equivalents | $ |
| 376,679 |
|
| $ |
| 451,280 |
|
Cash segregated under federal regulations |
|
| 45,629 |
|
|
|
| 45,122 |
|
Investments, at fair value |
|
| 135,831 |
|
|
|
| 134,861 |
|
Accounts receivable, net of allowance of $638 and $577 as of |
|
| 99,878 |
|
|
|
| 89,839 |
|
Receivables from broker-dealers, clearing organizations and customers |
|
| 662,888 |
|
|
|
| 687,936 |
|
Goodwill |
|
| 236,706 |
|
|
|
| 236,706 |
|
Intangible assets, net of accumulated amortization |
|
| 113,576 |
|
|
|
| 119,108 |
|
Furniture, equipment, leasehold improvements and capitalized software, net of |
|
| 107,239 |
|
|
|
| 102,671 |
|
Operating lease right-of-use assets |
|
| 62,006 |
|
|
|
| 63,045 |
|
Prepaid expenses and other assets |
|
| 86,531 |
|
|
|
| 84,499 |
|
Total assets | $ |
| 1,926,963 |
|
| $ |
| 2,015,067 |
|
|
|
|
|
|
|
|
| ||
LIABILITIES AND STOCKHOLDERS' EQUITY |
|
|
|
|
|
|
| ||
Liabilities |
|
|
|
|
|
|
| ||
Accrued employee compensation |
|
| 28,665 |
|
|
|
| 60,124 |
|
Payables to broker-dealers, clearing organizations and customers |
|
| 465,703 |
|
|
|
| 537,398 |
|
Income and other tax liabilities |
|
| 2,931 |
|
|
|
| 7,892 |
|
Accounts payable, accrued expenses and other liabilities |
|
| 33,361 |
|
|
|
| 37,013 |
|
Operating lease liabilities |
|
| 78,070 |
|
|
|
| 79,677 |
|
Total liabilities | $ |
| 608,730 |
|
| $ |
| 722,104 |
|
|
|
|
|
|
|
|
| ||
Commitments and Contingencies (Note 13) |
|
|
|
|
|
|
| ||
|
|
|
|
|
|
|
| ||
Stockholders' equity |
|
|
|
|
|
|
| ||
Preferred stock, $0.001 par value, 4,855,000 shares authorized, no shares issued |
|
| — |
|
|
|
| — |
|
Series A Preferred Stock, $0.001 par value, 110,000 shares authorized, no shares |
|
| — |
|
|
|
| — |
|
Common stock voting, $0.003 par value, 110,000,000 shares authorized, |
|
| 123 |
|
|
|
| 123 |
|
Common stock non-voting, $0.003 par value, 10,000,000 shares authorized, no |
|
| — |
|
|
|
| — |
|
Additional paid-in capital |
|
| 327,519 |
|
|
|
| 333,292 |
|
Treasury stock – Common stock voting, at cost, 3,084,169 shares |
|
| (269,005 | ) |
|
|
| (260,298 | ) |
Retained earnings |
|
| 1,288,247 |
|
|
|
| 1,244,216 |
|
Accumulated other comprehensive loss |
|
| (28,651 | ) |
|
|
| (24,370 | ) |
Total stockholders' equity |
|
| 1,318,233 |
|
|
|
| 1,292,963 |
|
Total liabilities and stockholders' equity | $ |
| 1,926,963 |
|
| $ |
| 2,015,067 |
|
|
|
|
|
|
|
|
| ||
The accompanying notes are an integral part of these consolidated financial statements. |
|
| As of |
| |||||
| September 30, 2017 |
|
| December 31, 2016 |
| ||
| (In thousands, except share and per share amounts) |
| |||||
ASSETS |
|
|
|
|
|
|
|
Cash and cash equivalents | $ | 138,992 |
|
| $ | 168,243 |
|
Investments, at fair value |
| 237,221 |
|
|
| 194,404 |
|
Accounts receivable, net of allowance of $71 and $82 as of September 30, 2017 and December 31, 2016, respectively |
| 63,027 |
|
|
| 50,668 |
|
Goodwill and intangible assets, net of accumulated amortization |
| 63,155 |
|
|
| 63,443 |
|
Furniture, equipment, leasehold improvements and capitalized software, net of accumulated depreciation and amortization |
| 35,321 |
|
|
| 31,104 |
|
Prepaid expenses and other assets |
| 16,174 |
|
|
| 11,618 |
|
Deferred tax assets, net |
| 8,457 |
|
|
| 8,562 |
|
Total assets | $ | 562,347 |
|
| $ | 528,042 |
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY |
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
Accrued employee compensation | $ | 31,027 |
|
| $ | 34,783 |
|
Income and other tax liabilities |
| 4,507 |
|
|
| 7,582 |
|
Deferred revenue |
| 3,191 |
|
|
| 2,515 |
|
Accounts payable, accrued expenses and other liabilities |
| 12,714 |
|
|
| 15,149 |
|
Total liabilities |
| 51,439 |
|
|
| 60,029 |
|
|
|
|
|
|
|
|
|
Commitments and Contingencies (Note 10) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders' equity |
|
|
|
|
|
|
|
Preferred stock, $0.001 par value, 4,855,000 shares authorized, no shares issued and outstanding as of September 30, 2017 and December 31, 2016 |
| — |
|
|
| — |
|
Series A Preferred Stock, $0.001 par value, 110,000 shares authorized, no shares issued and outstanding as of September 30, 2017 and December 31, 2016 |
| — |
|
|
| — |
|
Common stock voting, $0.003 par value, 110,000,000 shares authorized, 40,296,774 shares and 40,106,360 shares issued and 37,547,951 shares and 37,543,775 shares outstanding as of September 30, 2017 and December 31, 2016, respectively |
| 121 |
|
|
| 120 |
|
Common stock non-voting, $0.003 par value, 10,000,000 shares authorized, no shares issued and outstanding as of September 30, 2017 and December 31, 2016 |
| — |
|
|
| — |
|
Additional paid-in capital |
| 342,113 |
|
|
| 342,311 |
|
Treasury stock - Common stock voting, at cost, 2,748,823 and 2,562,585 shares as of September 30, 2017 and December 31, 2016, respectively |
| (153,682 | ) |
|
| (117,330 | ) |
Retained earnings |
| 332,506 |
|
|
| 255,140 |
|
Accumulated other comprehensive loss |
| (10,150 | ) |
|
| (12,228 | ) |
Total stockholders' equity |
| 510,908 |
|
|
| 468,013 |
|
Total liabilities and stockholders' equity | $ | 562,347 |
|
| $ | 528,042 |
|
|
|
|
|
|
|
|
|
3
The accompanying notes are an integral part of these consolidated financial statements.
3
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
| Three Months Ended March 31, |
| |||||||
| 2024 |
|
| 2023 |
| ||||
| (In thousands, except per share amounts) |
| |||||||
Revenues |
|
|
|
|
|
|
| ||
Commissions | $ |
| 184,873 |
|
| $ |
| 181,991 |
|
Information services |
|
| 11,881 |
|
|
|
| 11,010 |
|
Post-trade services |
|
| 10,730 |
|
|
|
| 9,980 |
|
Technology services |
|
| 2,834 |
|
|
|
| 188 |
|
Total revenues |
|
| 210,318 |
|
|
|
| 203,169 |
|
|
|
|
|
|
|
|
| ||
Expenses |
|
|
|
|
|
|
| ||
Employee compensation and benefits |
|
| 61,264 |
|
|
|
| 52,315 |
|
Depreciation and amortization |
|
| 18,200 |
|
|
|
| 16,461 |
|
Technology and communications |
|
| 17,051 |
|
|
|
| 14,999 |
|
Professional and consulting fees |
|
| 6,395 |
|
|
|
| 7,127 |
|
Occupancy |
|
| 3,425 |
|
|
|
| 3,611 |
|
Marketing and advertising |
|
| 1,833 |
|
|
|
| 2,995 |
|
Clearing costs |
|
| 4,911 |
|
|
|
| 4,545 |
|
General and administrative |
|
| 4,739 |
|
|
|
| 5,760 |
|
Total expenses |
|
| 117,818 |
|
|
|
| 107,813 |
|
Operating income |
|
| 92,500 |
|
|
|
| 95,356 |
|
Other income (expense) |
|
|
|
|
|
|
| ||
Interest income |
|
| 5,973 |
|
|
|
| 4,249 |
|
Interest expense |
|
| (316 | ) |
|
|
| (130 | ) |
Equity in earnings of unconsolidated affiliate |
|
| 370 |
|
|
|
| 204 |
|
Other, net |
|
| (1,810 | ) |
|
|
| (1,484 | ) |
Total other income (expense) |
|
| 4,217 |
|
|
|
| 2,839 |
|
Income before income taxes |
|
| 96,717 |
|
|
|
| 98,195 |
|
Provision for income taxes |
|
| 24,102 |
|
|
|
| 24,567 |
|
Net income | $ |
| 72,615 |
|
| $ |
| 73,628 |
|
|
|
|
|
|
|
|
| ||
Net income per common share |
|
|
|
|
|
|
| ||
Basic | $ |
| 1.92 |
|
| $ |
| 1.96 |
|
Diluted | $ |
| 1.92 |
|
| $ |
| 1.96 |
|
|
|
|
|
|
|
|
| ||
Cash dividends declared per common share | $ |
| 0.74 |
|
| $ |
| 0.72 |
|
|
|
|
|
|
|
|
| ||
Weighted average shares outstanding |
|
|
|
|
|
|
| ||
Basic |
|
| 37,740 |
|
|
|
| 37,478 |
|
Diluted |
|
| 37,790 |
|
|
|
| 37,645 |
|
|
|
|
|
|
|
|
| ||
The accompanying notes are an integral part of these consolidated financial statements. |
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||
| 2017 |
|
| 2016 |
|
| 2017 |
|
| 2016 |
| ||||
| (In thousands, except share and per share amounts) |
| |||||||||||||
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commissions | $ | 86,270 |
|
| $ | 81,456 |
|
| $ | 267,307 |
|
| $ | 246,788 |
|
Information and post-trade services |
| 8,372 |
|
|
| 7,322 |
|
|
| 24,460 |
|
|
| 23,687 |
|
Investment income |
| 964 |
|
|
| 534 |
|
|
| 2,551 |
|
|
| 1,469 |
|
Other |
| 1,095 |
|
|
| 959 |
|
|
| 3,588 |
|
|
| 3,539 |
|
Total revenues |
| 96,701 |
|
|
| 90,271 |
|
|
| 297,906 |
|
|
| 275,483 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee compensation and benefits |
| 25,595 |
|
|
| 23,914 |
|
|
| 78,417 |
|
|
| 74,256 |
|
Depreciation and amortization |
| 4,583 |
|
|
| 4,325 |
|
|
| 14,066 |
|
|
| 13,546 |
|
Technology and communications |
| 5,035 |
|
|
| 4,245 |
|
|
| 14,442 |
|
|
| 12,826 |
|
Professional and consulting fees |
| 5,547 |
|
|
| 4,342 |
|
|
| 13,912 |
|
|
| 12,449 |
|
Occupancy |
| 1,795 |
|
|
| 1,220 |
|
|
| 4,621 |
|
|
| 3,606 |
|
Marketing and advertising |
| 2,089 |
|
|
| 2,140 |
|
|
| 6,757 |
|
|
| 5,742 |
|
Clearing costs |
| 1,476 |
|
|
| 1,035 |
|
|
| 4,320 |
|
|
| 4,754 |
|
General and administrative |
| 3,364 |
|
|
| 2,696 |
|
|
| 8,974 |
|
|
| 7,029 |
|
Total expenses |
| 49,484 |
|
|
| 43,917 |
|
|
| 145,509 |
|
|
| 134,208 |
|
Income before income taxes |
| 47,217 |
|
|
| 46,354 |
|
|
| 152,397 |
|
|
| 141,275 |
|
Provision for income taxes |
| 13,087 |
|
|
| 15,436 |
|
|
| 37,781 |
|
|
| 48,268 |
|
Net income | $ | 34,130 |
|
| $ | 30,918 |
|
| $ | 114,616 |
|
| $ | 93,007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic | $ | 0.93 |
|
| $ | 0.84 |
|
| $ | 3.11 |
|
| $ | 2.52 |
|
Diluted | $ | 0.90 |
|
| $ | 0.82 |
|
| $ | 3.01 |
|
| $ | 2.46 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends declared per common share | $ | 0.33 |
|
| $ | 0.26 |
|
| $ | 0.99 |
|
| $ | 0.78 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
| 36,865 |
|
|
| 36,889 |
|
|
| 36,856 |
|
|
| 36,847 |
|
Diluted |
| 38,019 |
|
|
| 37,792 |
|
|
| 38,069 |
|
|
| 37,738 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4
The accompanying notes are an integral part of these consolidated financial statements.
4
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
| Three Months Ended March 31, |
| |||||||
| 2024 |
|
| 2023 |
| ||||
| (In thousands) |
| |||||||
Net income | $ |
| 72,615 |
|
| $ |
| 73,628 |
|
Cumulative translation adjustment |
|
| (4,241 | ) |
|
|
| 5,755 |
|
Net unrealized (loss) on securities available-for-sale, |
|
| (40 | ) |
|
|
| (41 | ) |
Comprehensive income | $ |
| 68,334 |
|
| $ |
| 79,342 |
|
|
|
|
|
|
|
|
| ||
The accompanying notes are an integral part of these consolidated financial statements. |
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||
| 2017 |
|
| 2016 |
|
| 2017 |
|
| 2016 |
| ||||
| (In thousands) |
| |||||||||||||
Net income | $ | 34,130 |
|
| $ | 30,918 |
|
| $ | 114,616 |
|
| $ | 93,007 |
|
Net cumulative translation adjustment and foreign currency exchange hedge, net of tax of $(953), $346, $(2,586) and $4,448, respectively |
| 1,102 |
|
|
| (1,052 | ) |
|
| 2,061 |
|
|
| (5,093 | ) |
Net unrealized gain (loss) on securities available-for-sale, net of tax of $16, $(27), $10 and $109, respectively |
| 26 |
|
|
| (44 | ) |
|
| 17 |
|
|
| 177 |
|
Comprehensive income | $ | 35,258 |
|
| $ | 29,822 |
|
| $ | 116,694 |
|
| $ | 88,091 |
|
|
|
|
| �� |
|
|
|
|
|
|
|
|
|
|
|
|
|
5
The accompanying notes are an integral part of these consolidated financial statements.
5
CONSOLIDATED STATEMENTSTATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(Unaudited)
| Common |
| Additional |
| Treasury Stock - |
| Retained |
| Accumulated |
| Total | ||||||
| (In thousands, except per share amounts) | ||||||||||||||||
Balance at January 1, 2024 | $ | 123 |
| $ | 333,292 |
| $ | (260,298) |
| $ | 1,244,216 |
| $ | (24,370) |
| $ | 1,292,963 |
Net income |
| — |
|
| — |
|
| — |
|
| 72,615 |
|
| — |
|
| 72,615 |
Cumulative translation adjustment |
| — |
|
| — |
|
| — |
|
| — |
|
| (4,241) |
|
| (4,241) |
Unrealized net gain (loss) on |
| — |
|
| — |
|
| — |
|
| — |
|
| (40) |
|
| (40) |
Stock-based compensation |
| — |
|
| 7,298 |
|
| — |
|
| — |
|
| — |
|
| 7,298 |
Exercise of stock options |
| — |
|
| 1,977 |
|
| — |
|
| — |
|
| — |
|
| 1,977 |
Withholding tax payments on |
| — |
|
| (14,893) |
|
| — |
|
| — |
|
| — |
|
| (14,893) |
Reissuance of treasury stock |
| — |
|
| (155) |
|
| 1,440 |
|
| (581) |
|
| — |
|
| 704 |
Repurchases of common stock |
| — |
|
| — |
|
| (10,147) |
|
| — |
|
| — |
|
| (10,147) |
Cash dividend on common stock |
| — |
|
| — |
|
| — |
|
| (28,003) |
|
| — |
|
| (28,003) |
Balance at March 31, 2024 | $ | 123 |
| $ | 327,519 |
| $ | (269,005) |
| $ | 1,288,247 |
| $ | (28,651) |
| $ | 1,318,233 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements. |
| Common Stock Voting |
|
| Additional Paid-In Capital |
|
| Treasury Stock - Common Stock Voting |
|
| Retained Earnings |
|
| Accumulated Other Comprehensive Loss |
|
| Total Stockholders' Equity |
| ||||||
| (In thousands) |
| |||||||||||||||||||||
Balance at December 31, 2016 | $ | 120 |
|
| $ | 342,311 |
|
| $ | (117,330 | ) |
| $ | 255,140 |
|
| $ | (12,228 | ) |
| $ | 468,013 |
|
Net income |
| — |
|
|
| — |
|
|
| — |
|
|
| 114,616 |
|
|
| — |
|
|
| 114,616 |
|
Cumulative translation adjustment and foreign currency exchange hedge, net of tax |
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 2,061 |
|
|
| 2,061 |
|
Unrealized net gain on securities available-for-sale, net of tax |
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 17 |
|
|
| 17 |
|
Stock-based compensation |
| — |
|
|
| 10,989 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 10,989 |
|
Exercise of stock options |
| 1 |
|
|
| 1,639 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 1,640 |
|
Withholding tax payments on restricted stock vesting and stock option exercises |
| — |
|
|
| (12,906 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (12,906 | ) |
Repurchases of common stock |
| — |
|
|
| — |
|
|
| (36,352 | ) |
|
| — |
|
|
| — |
|
|
| (36,352 | ) |
Cumulative effect of change in accounting for employee share-based payments |
| — |
|
|
| 80 |
|
|
| — |
|
|
| (51 | ) |
|
| — |
|
|
| 29 |
|
Cash dividend on common stock |
| — |
|
|
| — |
|
|
| — |
|
|
| (37,199 | ) |
|
| — |
|
|
| (37,199 | ) |
Balance at September 30, 2017 | $ | 121 |
|
| $ | 342,113 |
|
| $ | (153,682 | ) |
| $ | 332,506 |
|
| $ | (10,150 | ) |
| $ | 510,908 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6
The accompanying notes are an integral part of these consolidated financial statements.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (CONTINUED)
(Unaudited)
| Common |
| Additional |
| Treasury Stock - |
| Retained |
| Accumulated |
| Total | ||||||
| (In thousands, except per share amounts) | ||||||||||||||||
Balance at January 1, 2023 | $ | 123 |
| $ | 345,468 |
| $ | (328,326) |
| $ | 1,101,525 |
| $ | (37,697) |
| $ | 1,081,093 |
Net income |
| — |
|
| — |
|
| — |
|
| 73,628 |
|
| — |
|
| 73,628 |
Cumulative translation adjustment |
| — |
|
| — |
|
| — |
|
| — |
|
| 5,755 |
|
| 5,755 |
Unrealized net gain (loss) on |
| — |
|
| — |
|
| — |
|
| — |
|
| (41) |
|
| (41) |
Stock-based compensation |
| — |
|
| 7,488 |
|
| — |
|
| — |
|
| — |
|
| 7,488 |
Reissuance of treasury stock |
| — |
|
| (57) |
|
| 511 |
|
| — |
|
| — |
|
| 454 |
Exercise of stock options |
| — |
|
| 707 |
|
| — |
|
| — |
|
| — |
|
| 707 |
Withholding tax payments on |
| — |
|
| (20,492) |
|
| — |
|
| — |
|
| — |
|
| (20,492) |
Cash dividend on common stock |
| — |
|
| — |
|
| — |
|
| (27,060) |
|
| — |
|
| (27,060) |
Balance at March 31, 2023 | $ | 123 |
| $ | 333,114 |
| $ | (327,815) |
| $ | 1,148,093 |
| $ | (31,983) |
| $ | 1,121,532 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements. |
7
MARKETAXESS HOLDINGS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| Three Months Ended March 31, |
| |||||
| 2024 |
|
| 2023 |
| ||
| (In thousands) |
| |||||
Cash flows from operating activities |
|
|
|
|
| ||
Net income | $ | 72,615 |
|
| $ | 73,628 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
| ||
Depreciation and amortization |
| 18,200 |
|
|
| 16,461 |
|
Amortization of operating lease right-of-use assets |
| 1,599 |
|
|
| 1,368 |
|
Stock-based compensation expense |
| 7,103 |
|
|
| 7,488 |
|
Deferred taxes |
| (1,338 | ) |
|
| (1,433 | ) |
Foreign currency transaction losses |
| 187 |
|
|
| 1,699 |
|
Other |
| 1,730 |
|
|
| (2,532 | ) |
Changes in operating assets and liabilities: |
|
|
|
|
| ||
(Increase) in accounts receivable |
| (10,491 | ) |
|
| (21,935 | ) |
Decrease/(increase) in receivables from broker-dealers, clearing organizations and customers |
| 21,735 |
|
|
| (52,549 | ) |
(Increase)/decrease in prepaid expenses and other assets |
| (1,323 | ) |
|
| 3,163 |
|
Decrease/(increase) in trading investments |
| 255 |
|
|
| (419 | ) |
(Increase) in mutual funds held in rabbi trust |
| (529 | ) |
|
| (630 | ) |
(Decrease) in accrued employee compensation |
| (29,017 | ) |
|
| (31,567 | ) |
(Decrease)/increase in payables to broker-dealers, clearing organizations and customers |
| (71,135 | ) |
|
| 12,281 |
|
(Decrease)/increase in income and other tax liabilities |
| (4,001 | ) |
|
| 10,904 |
|
(Decrease) in accounts payable, accrued expenses and other liabilities |
| (8,385 | ) |
|
| (6,838 | ) |
(Decrease) in operating lease liabilities |
| (2,154 | ) |
|
| (1,562 | ) |
Net cash (used in)/provided by operating activities |
| (4,949 | ) |
|
| 7,527 |
|
Cash flows from investing activities |
|
|
|
|
| ||
Available-for-sale investments |
|
|
|
|
| ||
Proceeds from maturities and sales |
| 4,302 |
|
|
| 1,048 |
|
Purchases |
| (4,972 | ) |
|
| (22,895 | ) |
Purchases of furniture, equipment and leasehold improvements |
| (1,197 | ) |
|
| (217 | ) |
Capitalization of software development costs |
| (13,963 | ) |
|
| (10,690 | ) |
Net cash (used in) investing activities |
| (15,830 | ) |
|
| (32,754 | ) |
Cash flows from financing activities |
|
|
|
|
| ||
Cash dividend on common stock |
| (29,480 | ) |
|
| (28,357 | ) |
Exercise of stock options |
| 1,977 |
|
|
| 707 |
|
Withholding tax payments on full value awards vesting and stock option exercises |
| (14,893 | ) |
|
| (20,492 | ) |
Repurchases of common stock |
| (10,147 | ) |
|
| — |
|
Proceeds from short-term borrowings |
| — |
|
|
| 50,000 |
|
Repayments of short-term borrowings |
| — |
|
|
| (50,000 | ) |
Net cash (used in) financing activities |
| (52,543 | ) |
|
| (48,142 | ) |
Effect of exchange rate changes on cash and cash equivalents |
| (3,186 | ) |
|
| 3,345 |
|
Cash and cash equivalents including restricted cash |
|
|
|
|
| ||
Net decrease for the period |
| (76,508 | ) |
|
| (70,024 | ) |
Beginning of period |
| 611,672 |
|
|
| 572,664 |
|
End of period | $ | 535,164 |
|
| $ | 502,640 |
|
|
|
|
|
| |||
Supplemental cash flow information |
|
|
|
|
| ||
Cash paid for income taxes | $ | 37,187 |
|
| $ | 11,660 |
|
Cash paid for interest |
| 431 |
|
|
| 187 |
|
Non-cash investing and financing activity |
|
|
|
|
| ||
Operating lease right-of-use assets obtained in exchange for operating lease liabilities |
| 630 |
|
|
| — |
|
Furniture, equipment, software and leasehold improvement additions |
| 4,825 |
|
|
| — |
|
Stock-based and accrued incentive compensation relating to capitalized |
| 921 |
|
|
| — |
|
Exercise of stock options - cashless |
| 1,735 |
|
|
| — |
|
|
|
|
|
|
| ||
The accompanying notes are an integral part of these consolidated financial statements. |
|
| Nine Months Ended September 30, |
| |||||
| 2017 |
|
| 2016 |
| ||
| (In thousands) |
| |||||
Cash flows from operating activities |
|
|
|
|
|
|
|
Net income | $ | 114,616 |
|
| $ | 93,007 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
|
Depreciation and amortization |
| 14,066 |
|
|
| 13,546 |
|
Stock-based compensation expense |
| 10,989 |
|
|
| 10,636 |
|
Deferred taxes |
| 326 |
|
|
| (1,387 | ) |
Other |
| 1,290 |
|
|
| 10,044 |
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
(Increase) in accounts receivable |
| (12,535 | ) |
|
| (16,439 | ) |
(Increase) in prepaid expenses and other assets |
| (4,503 | ) |
|
| (2,151 | ) |
Decrease (increase) in corporate debt trading investments |
| 8,338 |
|
|
| (74,535 | ) |
(Increase) in mutual funds held in rabbi trust |
| (1,730 | ) |
|
| (1,328 | ) |
(Decrease) in accrued employee compensation |
| (3,756 | ) |
|
| (750 | ) |
(Decrease) in income and other tax liabilities |
| (3,277 | ) |
|
| (843 | ) |
Increase in deferred revenue |
| 676 |
|
|
| 694 |
|
(Decrease) increase in accounts payable, accrued expenses and other liabilities |
| (2,917 | ) |
|
| 2,646 |
|
Net cash provided by operating activities |
| 121,583 |
|
|
| 33,140 |
|
Cash flows from investing activities |
|
|
|
|
|
|
|
Available-for-sale investments |
|
|
|
|
|
|
|
Proceeds from maturities and sales |
| 146,295 |
|
|
| 32,025 |
|
Purchases |
| (196,810 | ) |
|
| (42,495 | ) |
Purchases of furniture, equipment and leasehold improvements |
| (7,245 | ) |
|
| (4,754 | ) |
Capitalization of software development costs |
| (10,094 | ) |
|
| (9,058 | ) |
Other |
| (53 | ) |
|
| 383 |
|
Net cash (used in) investing activities |
| (67,907 | ) |
|
| (23,899 | ) |
Cash flows from financing activities |
|
|
|
|
|
|
|
Cash dividend on common stock |
| (36,717 | ) |
|
| (28,914 | ) |
Exercise of stock options |
| 1,640 |
|
|
| 2,172 |
|
Withholding tax payments on restricted stock vesting and stock option exercises |
| (12,906 | ) |
|
| (5,929 | ) |
Repurchases of common stock |
| (36,352 | ) |
|
| (13,874 | ) |
Net cash (used in) financing activities |
| (84,335 | ) |
|
| (46,545 | ) |
Effect of exchange rate changes on cash and cash equivalents |
| 1,408 |
|
|
| (980 | ) |
Cash and cash equivalents |
|
|
|
|
|
|
|
Net (decrease) for the period |
| (29,251 | ) |
|
| (38,284 | ) |
Beginning of period |
| 168,243 |
|
|
| 199,728 |
|
End of period | $ | 138,992 |
|
| $ | 161,444 |
|
|
|
|
|
|
|
|
|
|
|
8
The accompanying notes are an integral part of these consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Organization and Principal Business Activity
MarketAxess Holdings Inc. (the “Company” or “MarketAxess”) was incorporated in the State of Delaware on April 11, 2000. 2000.Through its subsidiaries, MarketAxess operates a leading electronic trading platform that enablesplatforms delivering expanded liquidity opportunities, improved execution quality and significant cost savings across global fixed-income market participants to efficiently trade corporate bonds and other types of fixed-income instruments using MarketAxess' patented trading technology.markets. Over 1,3002,000 institutional investor and broker-dealer firms are active users of the MarketAxessMarketAxess’ patented trading platform,technology, accessing global liquidity on its platforms in U.S. high-grade corporatebonds, U.S. high-yield bonds, emerging markets and high-yield bonds, Europeanmarket debt, Eurobonds, municipal bonds, U.S. agencygovernment bonds municipal bonds, credit default swaps and other fixed-income securities. Through its Open Trading™Trading® protocols, MarketAxess executes certain bond transactionstrades between and among institutional investor and broker-dealer clients on a matched principal basis by serving as counterparty to bothin the buyer and the seller in trades which then settle through a third-party clearing broker.leading all-to-all anonymous trading environment for corporate bonds. MarketAxess also offers a number of trading-related products and services, including: CP+™ pricing and other market data products to assist clients with trading decisions; auto-execution and other execution services for clients requiring specialized workflow solutions; connectivity solutions that facilitate straight-through processing; and technology services to optimize trading environments; and execution services for exchange-traded fund managers and other clients. Through its Trax® division, MarketAxessenvironments. The Company also offersprovides a range of pre- and post-trade services, including post-trade matching, trade matching,publication, regulatory transaction reporting and market and reference data across a range of fixed-income and other products.
2. Significant Accounting Policies
Basis of Presentation
The consolidated financial statements include the accounts of the Company and its subsidiaries. All intercompany transactions and balances have been eliminated. These consolidated financial statements are unaudited and should be read in conjunction with the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.2023. The consolidated financial information as of December 31, 20162023 has been derived from audited financial statements not included herein. These unaudited consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) and the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) with respect to Form 10-Q and reflect all adjustments that, in the opinion of management, are normal and recurring, and that are necessary for a fair statement of the results for the interim periods presented. In accordance with such rules and regulations, certain disclosures that are normally included in annual financial statements have been omitted. Interim period operating results may not be indicative of the operating results for a full year.
Accounting Pronouncements, Recently Adopted
Effective January 1, 2017, the Company adopted ASU 2016-09, “Improvements to Employee Share-Based Payment Accounting” (“ASU 2016-09”). ASU 2016-09 simplifies several aspects related to the accounting for share-based payment transactions, including the accounting for income taxes, statutory tax withholding requirements and classification on the statement of cash flows. Beginning January 1, 2017, the tax effects related to share-based payments are recorded through the income tax provision and the Company has elected to account for forfeitures as they occur. The adoption of ASU 2016-09 will cause volatility in the Company’s net income, effective tax rate and diluted earnings per share. The volatility in future periods will depend on the Company’s stock price at the vest date for restricted stock awards or exercise date for stock options and the number of awards that vest or are exercised in each period. Under the new guidance, excess tax benefits from share-based compensation are included as an operating activity in the Company’s Consolidated Statements of Cash Flows. Prior period cash flows have been adjusted to conform to the new presentation.
Accounting Pronouncements, Not Yet Adopted
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, “Revenue from Contracts with Customers” (“ASU 2014-09”) requiring an entity to recognize revenue for the transfer of goods or services equal to the amount that it expects to be entitled to receive for those goods or services. The Company intends to adopt the new guidance using the modified retrospective method beginning January 1, 2018. The Company’s implementation efforts include the identification of revenue streams within the scope of the guidance, the evaluation of certain revenue contracts underlying the revenue streams, discussions with our advisory consultants, and periodic discussions with our audit committee. The Company’s evaluation of the impact of this accounting guidance is ongoing although it does not expect this guidance to have a material effect on its Consolidated Financial Statements or disclosures.
In February 2016, the FASB issued ASU 2016-02, “Leases” (“ASU 2016-02”) requiring lessees to recognize lease assets and lease liabilities on the balance sheet for those leases previously classified as operating leases. ASU 2016-02 will be effective for the Company beginning January 1, 2019 and early adoption is permitted and should be applied prospectively. The Company is currently evaluating the potential adoption impact and expects to recognize lease assets and lease liabilities in its Consolidated Statements of Financial Condition. The Company does not expect material changes to the recognition of operating lease expense in its Consolidated Statements of Operations.
In January 2017, the FASB issued ASU 2017-04, “Intangibles-Goodwill and Other” (“ASU 2017-04”). ASU 2017-04 simplifies the testing for goodwill impairment. The guidance will be effective for the Company beginning January 1, 2020 and early adoption is permitted and should be applied prospectively. The adoption of this guidance is not expected to have a material effect on the Company’s Consolidated Financial Statements.
Cash and Cash Equivalents
Cash and cash equivalents includes cash and money market instruments that are primarily maintained at one major global bank. Given this concentration, the Company is exposed to certain credit risk in relation to its deposits at this bank. The Company defines cash equivalents as short-term interest-bearing investments with maturities at the time of purchase of three months or less.
Investments
Investments
The Company determines the appropriate classification of securities at the time of purchase which are recorded in the Consolidated Statements of Financial Condition on the trade date. Securities are classified as available-for-sale or trading. The Company’s available-for-sale investments are comprised of municipal bonds and investment grade corporate debt securities. Available-for-sale investments are carried at fair value with the unrealized gains or losses reported in accumulated other comprehensive loss in the Consolidated Statements of Financial Condition.Condition and realized gains or losses reported in other, net in the Consolidated Statements of Operations. Trading investments primarily include investment grade corporate debt securitiesU.S. Treasuries and are carried at fair value, with realized and unrealized gains or losses included in other, incomenet in the Consolidated Statements of Operations.
The Company assesses whether an other-than-temporary impairment loss on theits available-for-sale investmentsdebt securities has occurred due to declines in fair value or other market conditions. When the amortized cost basis of an available-for-sale debt security exceeds its fair value, the security is deemed to be impaired. The portion of an other-than-temporary impairment related to credit losslosses is determined by comparing the present value of cash flows expected to be collected from the security with the amortized cost basis of the security and is recorded as a charge in the Consolidated Statements of Operations. The remainder of an impairment is recognized in accumulated other comprehensive loss if the Company does not intend to sell the security and it is more likely than not that the Company will not be required to sell the security prior to recovery. No charges for other-than-temporary losses were recorded during the nine months ended September 30, 2017 and 2016.
9
MARKETAXESS HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
Fair Value Financial Instruments
Fair value is defined as “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.” A three-tiered hierarchy for determining fair value has been established that prioritizes inputs to valuation techniques used in fair value calculations. The three levels of inputs are defined as Level 1 (unadjusted quoted prices for identical assets or liabilities in active markets), Level 2 (inputs that are observable in the marketplace other than those inputs classified in Level 1) and Level 3 (inputs that are unobservable in the marketplace). The Company’s financial assets and liabilities measured at fair value on a recurring basis consist of its money market funds, trading securities, available-for-sale trading securities, and foreign currency forward contracts.contracts and contingent consideration payables associated with acquisitions. All other financial instruments are short-term in nature and the carrying amount isamounts reported on the Consolidated Statements of Financial Condition at approximate fair value.
Receivables from and Payables to Broker-dealers, Clearing Organizations and Customers
Receivables from broker-dealers, clearing organizations and customers include amounts receivable for securities not delivered by the Company to the purchaser by the settlement date (“securities failed-to-deliver”) and cash deposits held at clearing organizations and clearing brokers to facilitate the settlement and clearance of matched principal transactions. Payables to broker-dealers, clearing organizations and customers include amounts payable for securities not received by the Company from a seller by the settlement date (“securities failed-to-receive”). Securities failed-to-deliver and securities failed-to-receive for transactions executed on a matched principal basis where the Company serves as a counterparty to both the buyer and the seller are recorded on a settlement date basis. The Company presents its securities failed-to-deliver and securities failed-to-receive balances on a net-by-counterparty basis within receivables from and payables to broker-dealers, clearing organizations and customers. The difference between the Company’s trade-date receivables and payables for unsettled matched principal transactions reflects commissions earned and is recorded within accounts receivable, net on a trade date basis.
Allowance for Doubtful AccountsCredit Losses
All accounts receivable have contractual maturities of less than one year and are derived from trading-related fees and commissions and revenues from products and services. The Company continually monitors collections and payments from its customers and maintains an allowance for doubtful accounts. The allowance for doubtful accountscredit losses is based uponon the estimated expected credit losses in accounts receivable, as determined from a review of aging schedules, past due balances, historical collection experience and other specific collection issues that have been identified. Account balances are grouped for evaluation based on various risk characteristics, including billing type, legal entity, and geographic region. Additions to the allowance for doubtful accountscredit losses are charged to bad debt expense, which is included in general and administrative expense in the Company’s Consolidated Statements of Operations. Balances that are determined to be uncollectable are written off against the allowance for credit losses.
The allowance for credit losses was $0.6 million as of each of March 31, 2024 and December 31, 2023. The provision for bad debts for the three months ended March 31, 2024 and 2023 was $0.1 million and $0.2 million, respectively. Write-offs and other charges against the allowance for credit losses were immaterial for each of the three months ended March 31, 2024 and 2023.
Fixed assets are carried at cost less accumulated depreciation. The Company uses the straight-line method of depreciation over three to seven years.years. The Company amortizes leasehold improvements on a straight-line basis over the lesser of the life of the improvement or the remaining term of the lease.
Software Development Costs
The Company capitalizes certain costs associated with the development of internal use software, including, among other items, employee compensation and related benefits and third partythird-party consulting costs at the point at which the conceptual formulation, design and testing of possible software project alternatives have been completed. Once the product is ready for its intended use, such costs are amortized on a straight-line basis over three years. to five years. The Company reviews the amounts capitalized for impairment whenever events or changes in circumstances indicate that the carrying amounts of the assets may not be recoverable.
10
MARKETAXESS HOLDINGS INC.
Cash ProvidedNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
Cloud Computing Costs
The Company capitalizes certain costs associated with cloud computing arrangements, including, among other items, vendor software development costs billed to us that are part of the application development stage. These costs are recorded as Collateral
Cash is provided as collateral for broker-dealer clearing accounts. Cash provided as collateral is included ina prepaid expenses and other assets inasset on the Consolidated Statements of Financial Condition.Condition and are amortized over the period of the hosting service contract, which ranges from one to five years. The Company reviews the amounts capitalized for impairment whenever events or changes in circumstances indicate that the carrying amounts of the assets may not be recoverable.
Foreign Currency Translation and Forward Contracts
Assets and liabilities denominated in foreign currencies are translated using exchange rates at the end of the period; revenues and expenses are translated at average monthly rates. Gains and losses on foreign currency translation are a component of accumulated other comprehensive loss in the Consolidated Statements of Financial Condition. Transaction gains and losses are recorded in general and administrative expenseother, net in the Consolidated Statements of Operations.
The Company enters into foreign currency forward contracts to economically hedge its net investment in its U.K. subsidiaries. Gainsforeign currency transaction gains and losses. Realized and unrealized gains and losses on these transactionsforward contracts are included in accumulated other, comprehensive lossnet in the Consolidated Statements of Operations. The Company records the fair value of the forward contract asset in prepaid expenses and other assets or the fair value of the forward contract liability in accounts payable, accrued expenses and other liabilities in the Consolidated Statements of Financial Condition.
Revenue Recognition
The majorityCompany’s classification of revenues in the Company’sConsolidated Statements of Operations represents revenues are derived from commissionscontracts with customers disaggregated by type of revenue. The Company has four revenue streams as described below.
Commission Revenue – The Company charges its broker-dealer clients variable transaction fees for trades executed on its platformplatforms and, under certain plans, distribution fees thator monthly minimum fees to use the platforms for a particular product area. Variable transaction fees are billed to its broker-dealer clientsrecognized on a monthly basis. The Company also derives revenues from information and post-trade services, technology products and services, investment income and other income.
Commission revenue. Commissionstrade date basis, are generally calculated as a percentage of the notional dollar volume of bonds traded on the platformplatforms and vary based on the type, size, yield and maturity of the bond traded. Under the Company’s transaction fee plans, bondstraded, as well as individual client incentives. Bonds that are more actively traded or that have shorter maturities are generally chargedgenerate lower commissions, while bonds that are less actively traded or that have longer maturities generally command higher commissions. Under the Company’s disclosed trading transaction fee plans, variable transaction fees, distribution fees and unused monthly fee commitments are invoiced and recorded on a monthly basis.
For Open Trading trades that the Company executes between and among institutional investor and broker-dealer clients on a matched principal basis by serving as counterparty to both the buyer and the seller, the Company earns theits commission through the difference in price between the two trades. The commission is collected upon settlement of the trade, which typically occurs within one to two trading days after the trade date. For the majority of the Company’s U.S. Treasury matched principal trades. Fee programstrades, commissions are invoiced and recorded on a monthly basis.
As a result of its acquisition of Pragma LLC and Pragma Financial Systems LLC (collectively, “Pragma”) in the fourth quarter of 2023, the Company also earns other commissions on equities and foreign exchange products for certain products include distributionalgorithmic trading services. These fees incorporate variable transaction fees, which are recognized monthly.calculated as a percentage of the notional dollar volume traded and are billed on a monthly basis.
The following table presents commission revenue by fee type:
|
| Three Months Ended March 31, |
| ||||||
|
| 2024 |
|
|
| 2023 |
| ||
| (In thousands) |
| |||||||
Commission revenue by fee type |
|
|
|
|
|
|
| ||
Variable transaction fees |
|
|
|
|
|
|
| ||
Disclosed trading | $ |
| 94,778 |
|
| $ |
| 88,128 |
|
Open Trading – matched principal trading |
|
| 48,180 |
|
|
|
| 54,236 |
|
U.S. government bonds - matched principal trading |
|
| 3,712 |
|
|
|
| 4,864 |
|
Other |
|
| 4,849 |
|
|
|
| — |
|
Total variable transaction fees |
|
| 151,519 |
|
|
|
| 147,228 |
|
Distribution fees and unused minimum fees |
|
| 33,354 |
|
|
|
| 34,763 |
|
Total commissions | $ |
| 184,873 |
|
| $ |
| 181,991 |
|
|
|
|
|
|
|
|
|
11
MARKETAXESS HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
Information and post-trade services. The Company generates revenue from information services provided– Information services includes data licensed to ourthe Company’s broker-dealer clients, institutional investor clients and data-only subscribers. Informationsubscribers; professional and consulting services; technology software licenses; and maintenance and support services. The nature and timing of each performance obligation may vary as these contracts are either subscription-based services transferred over time, and may be net of volume-based discounts, or one-time services that are invoiced monthly, quarterly or annually. When billedtransferred at a point in advance,time. Revenues for services transferred over time are recognized ratably over the contract period as the Company’s performance obligation is met, whereas revenues are deferred and recognized monthly onfor services transferred at a straight-line basis. The Company also generates revenue from regulatory transaction reporting and trade matching services. Revenue ispoint in time are recognized in the period the services are provided.
Technology products Customers are generally billed monthly, quarterly, or annually; revenues billed in advance are deferred and services. The Company generates revenues from professional consulting services, technology software licenses and maintenance and support services. Revenue from professional consulting services is recognized as services are performed and software license subscription revenue and maintenance and support services are recognized ratably over the contract period. Technology products andThe following table presents information services revenue by timing of recognition:
| Three Months Ended March 31, |
| |||||||
| 2024 |
|
| 2023 |
| ||||
| (In thousands) |
| |||||||
Information services revenue by timing of recognition |
|
|
|
|
|
|
| ||
Services transferred over time | $ |
| 11,874 |
|
| $ |
| 10,659 |
|
Services transferred at a point in time |
|
| 7 |
|
|
|
| 351 |
|
Total information services revenues | $ |
| 11,881 |
|
| $ |
| 11,010 |
|
|
|
|
|
|
|
|
|
Post-trade services – Post-trade services revenue is reportedgenerated from regulatory transaction reporting, trade publication and post-trade matching services. Customers are generally billed monthly in arrears, and revenue is recognized in the period transactions are processed. Revenues billed in advance are deferred and recognized ratably over the contract period. The Company also generates one-time implementation fees for onboarding clients, which are invoiced and recognized in the period the implementation is completed. The following table presents post-trade services revenue by timing of recognition:
| Three Months Ended March 31, |
| |||||||
| 2024 |
|
| 2023 |
| ||||
| (In thousands) |
| |||||||
Post-trade services revenue by timing of recognition |
|
|
|
|
|
|
| ||
Services transferred over time | $ |
| 10,540 |
|
| $ |
| 9,955 |
|
Services transferred at a point in time |
|
| 190 |
|
|
|
| 25 |
|
Total post-trade services revenues | $ |
| 10,730 |
|
| $ |
| 9,980 |
|
|
|
|
|
|
|
|
|
Technology services – Technology services revenue primarily includes technology services revenue generated by Pragma and revenue from telecommunications line charges to broker-dealer clients. Customers may be billed monthly or quarterly in arrears or in advance, and revenue is recognized in the period transactions are processed. Revenues billed in advance are deferred and recognized ratably over the contract period.
The following table presents technology services revenue by timing of recognition:
| Three Months Ended March 31, |
| |||||||
| 2024 |
|
| 2023 |
| ||||
| (In thousands) |
| |||||||
Technology services revenue by timing of recognition |
|
|
|
|
|
|
| ||
Services transferred over time | $ |
| 2,830 |
|
| $ |
| 188 |
|
Services transferred at a point in time |
|
| 4 |
|
|
|
| — |
|
Total technology services revenues | $ |
| 2,834 |
|
| $ |
| 188 |
|
|
|
|
|
|
|
|
|
12
MARKETAXESS HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
Contract liabilities consist of deferred revenues that the Company records when cash payments are received or due in advance of services to be performed. Deferred revenues are included in accounts payable, accrued expenses and other income inliabilities on the Consolidated Statements of Operations.
Financial Condition. The revenue recognized from contract liabilities and the remaining balance is shown below:
|
| December 31, 2023 |
|
| Payments received in advance of services to be performed |
|
| Revenue recognized for services performed during the period |
|
| Foreign Currency Translation |
|
| March 31, 2024 |
| ||||||||||
|
|
| (In thousands) |
| |||||||||||||||||||||
Information services |
| $ |
| 3,049 |
|
| $ |
| 3,437 |
|
| $ |
| (3,544 | ) |
| $ |
| — |
|
| $ |
| 2,942 |
|
Post-trade services |
|
|
| 923 |
|
|
|
| 6,498 |
|
|
|
| (5,487 | ) |
|
|
| (7 | ) |
|
|
| 1,927 |
|
Technology services |
|
|
| 567 |
|
|
|
| 2,014 |
|
|
|
| (2,110 | ) |
|
|
| — |
|
|
|
| 471 |
|
Total deferred revenue |
| $ |
| 4,539 |
|
| $ |
| 11,949 |
|
| $ |
| (11,141 | ) |
| $ |
| (7 | ) |
| $ |
| 5,340 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The majority of the Company’s information services and post-trade services contracts are short-term in nature with durations of less than one year. For contracts with original durations extending beyond one year, the aggregate amount of the transaction price allocated to remaining performance obligations was $66.1 million as of March 31, 2024. The Company expects to recognize revenue associated with the remaining performance obligations over the next 55 months.
Stock-Based Compensation
The Company measures and recognizes compensation expense for all share-based payment awards based on their estimated fair values measured as of the grant date. These costs are recognized as an expense in the Consolidated Statements of Operations over the requisite service period, which is typically the vesting period, with an offsetting increase to additional paid-in capital. Effective upon the Company’s adoption of ASU 2016-09, the Company accounts for forfeituresForfeitures are recognized as they occur. Prior to the adoption of ASU 2016-09, expected forfeitures were included in determining share-based compensation expense.
Income Taxes
Income taxes are accounted for using the asset and liability method. Deferred income taxes reflect the net tax effects of temporary differences between the financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when such differences are expected to reverse. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is recognized against deferred tax assets if it is more likely than not that such assets will not be realized in future years. Tax benefits for uncertain tax positions are recognized when it is more likely than not that the positions will be sustained upon examination based on their technical merits. The Company recognizes interest and penalties related to unrecognized tax benefits in general and administrative expensesthe provision for income taxes in the Consolidated Statements of Operations. Effective upon the Company’s adoption of ASU 2016-09, allAll tax effects related to share-based payments are recorded through tax expensein the provision for income taxes in the periods during which the awards are exercised or vest.
Business Combinations, Goodwill and Intangible Assets
Business combinations are accounted for under the purchase method of accounting. The total cost of an acquisition is allocated to the underlying net assets based on their respective estimated fair values. The excess of the purchase price over the estimated fair values of the net assets acquired is recorded as goodwill. Determining the fair value of certain assets acquired and liabilities assumed is judgmental in naturerequires judgment and often involves the use of significant estimates and assumptions, including assumptions with respect to future cash flows, discount rates, revenue growth rates, customer attrition rates, royalty rates, obsolescence and asset lives. Intangible assets are valued using various methodologies, including the relief-from-royalty method and multi-period excess earnings method.
The Company operates as a single reporting unit. Subsequent toFollowing an acquisition, goodwill no longer retains its identification with a particular acquisition, but instead becomes identifiable with the entire reporting unit. As a result, all of the fair value of the Company is available to support the value of goodwill. An impairment review of goodwill is performed on an annual basis, at year-end, or more frequently if circumstances change. Intangible assets with definite lives, including purchased technologies, customer relationships and other intangible assets, are amortized on a straight-line basis over their estimated useful lives rangingwhich range from three to15 years.one to 15 years using either a straight-line or accelerated amortization method based on the pattern of economic benefit the Company expects to realize from such assets. Intangible assets are assessed for impairment when events or circumstances indicate the existence of a possible impairment.
13
MARKETAXESS HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
Equity Investments and Consolidation
The Company evaluates equity investments for potential consolidation under the voting-interest or variable-interest models. The Company consolidates investees over which the Company determines it has control under the voting interest model, generally greater than 50% ownership, or for which the Company is the primary beneficiary under the variable-interest model. The Company uses the equity method of accounting when it exercises significant influence over the investee, but does not have operating control, generally between 20% and 50% ownership. Under the equity method of accounting, original investments are recorded at cost in prepaid expenses and other assets on the Consolidated Statements of Financial Condition and adjusted by the Company’s proportionate share of the investees’ undistributed earnings or losses. Equity investments are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the investment may not be recoverable.
Earnings Per Share
Basic earnings per share is computed by dividing the net income attributable to common stock by the weighted-average number of shares of common stock outstanding during the period. For purposes of computing diluted earnings per share, the weighted-average shares outstanding of common stock reflects the dilutive effect that could occur if convertible securities or other contracts to issue common stock were converted into or exercised for common stock.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Recent Accounting Pronouncements
Out-of-Period Adjustments
DuringIn December 2023, the first quarter of 2016, the Company determined that it had incorrectly recorded deferredFinancial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures. The ASU requires disaggregated information about a reporting entity’s effective tax rate reconciliation and income taxes paid. The ASU is effective for the cumulative translation adjustment (“CTA”) that arises from convertingCompany’s Annual Report on Form 10-K for the local currency financial statements into U.S. dollars. Upon makingfiscal year ended December 31, 2025. The guidance may be applied on a permanent reinvestment assertion on unremitted earnings from foreign subsidiaries effective January 1, 2013, the Company should have eliminated any deferred tax balances derived from the CTA balance.prospective or retrospective basis and early adoption is permitted. The Company is currently evaluating the impact of adopting this ASU on its consolidated financial statements.
In November 2023, FASB issued ASU 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures. The ASU expands public entities’ segment disclosures by requiring disclosure of significant segment expenses that are regularly reviewed by the chief operating decision maker (“CODM”) and included within each reported measure of segment profit or loss, an amount and description of its composition for other segment items and interim disclosures of a reportable segment’s profit or loss and assets. The ASU also determined that gainsrequires the disclosure of the title and lossesposition of the CODM and an explanation of how the CODM uses the reported measure(s) of segment profit or loss in assessing segment performance and deciding how to allocate resources. All disclosure requirements under ASU 2023-07 and existing segment disclosures in ASC 280, Segment Reporting are also required for public entities with a single reportable segment. The ASU is effective for the Company’s Annual Report on Form 10-K for the foreign currency forward contracts usedfiscal year ended December 31, 2024, and subsequent interim periods, with early adoption permitted. The ASU must be applied retrospectively to hedge the net investment in certain foreign subsidiaries were not appropriately considered as taxable income or expenseall periods presented in the consolidated tax returns.financial statements. The Company assessed these errors and determined that they were not material to previous reporting periods. Therefore,is currently evaluating the Company recorded these items as out-of-period adjustments in the three months ended March 31, 2016 by decreasing deferred tax assets by $3.1 million, decreasing other comprehensive income by $2.1 million and increasing prepaid expenses and other assets by $1.0 million in the Consolidated Statementsimpact of Financial Condition.adopting this ASU on its consolidated financial statements.
14
MARKETAXESS HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
Reclassifications
Certain reclassifications have been made to the prior period’s Consolidated Financial Statements in order to conform to the current year presentation. Such reclassifications had no effect on previously reported net income.
3. NetRegulatory Capital Requirements
Certain U.S. subsidiaries of the CompanyCompany’s U.S. subsidiaries are registered as a broker-dealer or swap execution facilitybroker-dealers and therefore are subject to the applicable rules and regulations of the SEC and the Commodity Futures Trading Commission.Financial Industry Regulatory Authority (“FINRA”). These rules contain minimum net capital requirements, as defined in the applicable regulations, and also may require a significant part of the registrants’ assets be kept in relatively liquid form.regulations. Certain of the Company’s foreign subsidiaries are regulated by the Financial Conduct Authority (“FCA”) in the United Kingdom (“U.K.”) or other foreign regulators and must maintain financial resources, as defined in the applicable regulations, in excess of the applicable financial resources requirement. As of September 30, 2017,March 31, 2024, each of the Company’s subsidiaries that are subject to these regulations had net capital or financial resources in excess of their minimum requirements. As of September 30, 2017,March 31, 2024, the Company’s subsidiaries maintained aggregate net capital and financial resources that was $128.2were $545.0 million in excess of the required levels of $12.6$35.7 million.
One of the Company’s U.S. broker-dealer subsidiaries is required to segregate funds in a special reserve bank account for the benefit of customers pursuant to Rule 15c3-3 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). As of March 31, 2024, this U.S. broker-dealer subsidiary had a balance of $45.6 million in its special reserve bank account. This U.S. broker-dealer subsidiary also maintained net capital that was $304.5 million in excess of the required level of $7.9 million.
Each of the Company’s U.S. and foreign regulated subsidiaries are subject to local regulations which generally prohibitlimit, or require the prior notification to or approval from such regulated entity’s principal regulator before, the repayment of borrowings from the Company or affiliates, paying cash dividends, making loans to the Company or affiliates or otherwise entering into transactions that result in a significant reduction in regulatory net capital or financial resources without prior notification to or approval from such regulated entity’s principal regulator.resources.
4. Fair Value Measurements
The following table summarizes the valuation of the Company’s assets and liabilities measured at fair value as categorized based on the hierarchy described in Note 2.2:
|
|
|
|
|
|
|
|
|
|
|
| ||||
| Level 1 |
|
| Level 2 |
|
| Level 3 |
|
| Total |
| ||||
| (In thousands) |
| |||||||||||||
As of March 31, 2024 |
|
|
|
|
|
|
|
|
|
|
| ||||
Assets |
|
|
|
|
|
|
|
|
|
|
| ||||
Money market funds | $ | 18,571 |
|
| $ | — |
|
| $ | — |
|
| $ | 18,571 |
|
Securities available-for-sale |
|
|
|
|
|
|
|
|
|
|
| ||||
Corporate debt |
| — |
|
|
| 25,389 |
|
|
| — |
|
|
| 25,389 |
|
Trading securities |
|
|
|
|
|
|
|
|
|
|
| ||||
U.S. Treasuries |
| — |
|
|
| 99,427 |
|
|
| — |
|
|
| 99,427 |
|
Mutual funds held in rabbi trust |
| — |
|
|
| 11,015 |
|
|
| — |
|
|
| 11,015 |
|
Total assets | $ | 18,571 |
|
| $ | 135,831 |
|
| $ | — |
|
| $ | 154,402 |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Liabilities |
|
|
|
|
|
|
|
|
|
|
| ||||
Foreign currency forward position |
| — |
|
|
| 196 |
|
|
| — |
|
|
| 196 |
|
Total liabilities | $ | — |
|
| $ | 196 |
|
| $ | — |
|
| $ | 196 |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
As of December 31, 2023 |
|
|
|
|
|
|
|
|
|
|
| ||||
Assets |
|
|
|
|
|
|
|
|
|
|
| ||||
Money market funds | $ | 18,634 |
|
| $ | — |
|
| $ | — |
|
| $ | 18,634 |
|
Securities available-for-sale |
|
|
|
|
|
|
|
|
|
|
| ||||
Corporate debt |
| — |
|
|
| 24,694 |
|
|
| — |
|
|
| 24,694 |
|
Trading securities |
|
|
|
|
|
|
|
|
|
|
| ||||
U.S. Treasuries |
| — |
|
|
| 99,682 |
|
|
| — |
|
|
| 99,682 |
|
Mutual funds held in rabbi trust |
| — |
|
|
| 10,485 |
|
|
| — |
|
|
| 10,485 |
|
Foreign currency forward position |
| — |
|
|
| 1,901 |
|
|
| — |
|
|
| 1,901 |
|
Total assets | $ | 18,634 |
|
| $ | 136,762 |
|
| $ | — |
|
| $ | 155,396 |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
| Level 1 |
|
| Level 2 |
|
| Level 3 |
|
| Total |
| ||||
| (In thousands) |
| |||||||||||||
As of September 30, 2017 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds | $ | 25,213 |
|
| $ | — |
|
| $ | — |
|
| $ | 25,213 |
|
Securities available-for-sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate debt |
| — |
|
|
| 168,278 |
|
|
| — |
|
|
| 168,278 |
|
Trading securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate debt |
| — |
|
|
| 65,885 |
|
|
| — |
|
|
| 65,885 |
|
Mutual funds held in rabbi trust |
| — |
|
|
| 3,058 |
|
|
| — |
|
|
| 3,058 |
|
Foreign currency forward position |
| — |
|
|
| 591 |
|
|
| — |
|
|
| 591 |
|
Total | $ | 25,213 |
|
| $ | 237,812 |
|
| $ | — |
|
| $ | 263,025 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2016 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds | $ | 58,573 |
|
| $ | — |
|
| $ | — |
|
| $ | 58,573 |
|
Securities available-for-sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate debt |
| — |
|
|
| 118,870 |
|
|
| — |
|
|
| 118,870 |
|
Trading securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate debt |
| — |
|
|
| 74,207 |
|
|
| — |
|
|
| 74,207 |
|
Mutual funds held in rabbi trust |
| — |
|
|
| 1,327 |
|
|
| — |
|
|
| 1,327 |
|
Foreign currency forward position |
| — |
|
|
| (266 | ) |
|
| — |
|
|
| (266 | ) |
Total | $ | 58,573 |
|
| $ | 194,138 |
|
| $ | — |
|
| $ | 252,711 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15
MARKETAXESS HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
Money market funds are included in cash and cash equivalents on the Consolidated Statements of Financial Condition. Securities available-for-sale and trading securities are included in investments, at fair value on the Consolidated Statements of Financial Condition. Securities classified within Level 2 were valued using a market approach utilizing prices and other relevant information generated by market transactions involving comparable assets. The foreign currency forward contracts are included in either other assets or accounts payable, accrued expenses and other liabilities on the Consolidated Statements of Financial Condition, and are classified within Level 2 as the valuation inputs are based on quoted market prices. The mutual funds held in a rabbi trust represent investments associated with the Company’s deferred cash incentive plan (see Note 14). There were noplan.
The table below presents the carrying value, fair value and fair value hierarchy category of the Company's financial assets classified withinand liabilities that are not measured at fair value on the Consolidated Statements of Financial Condition. The carrying values of the Company's financial assets and liabilities not measured at fair value categorized in the fair value hierarchy as Level 1 and Level 2 approximate fair value due to the short-term nature of the underlying assets and liabilities.
| Carrying Value |
|
| Fair Value |
|
| Level 1 |
|
| Level 2 |
|
| Level 3 |
|
| Total |
| ||||||
| (In thousands) |
| |||||||||||||||||||||
As of March 31, 2024 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Financial assets not measured at fair value: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Cash | $ | 358,108 |
|
| $ | 358,108 |
|
| $ | 358,108 |
|
| $ | — |
|
| $ | — |
|
| $ | 358,108 |
|
Cash segregated under federal regulations |
| 45,629 |
|
|
| 45,629 |
|
|
| 45,629 |
|
|
| — |
|
|
| — |
|
|
| 45,629 |
|
Accounts receivable, net of allowance |
| 99,878 |
|
|
| 99,878 |
|
|
| — |
|
|
| 99,878 |
|
|
| — |
|
|
| 99,878 |
|
Receivables from broker-dealers, clearing |
| 662,888 |
|
|
| 662,888 |
|
|
| 112,713 |
|
|
| 550,175 |
|
|
| — |
|
|
| 662,888 |
|
Total | $ | 1,166,503 |
|
| $ | 1,166,503 |
|
| $ | 516,450 |
|
| $ | 650,053 |
|
| $ | — |
|
| $ | 1,166,503 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Financial liabilities not measured at fair value: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Payables to broker-dealers, clearing | $ | 465,703 |
|
| $ | 465,703 |
|
| $ | — |
|
| $ | 465,703 |
|
| $ | — |
|
| $ | 465,703 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
As of December 31, 2023 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Financial assets not measured at fair value: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Cash | $ | 432,646 |
|
| $ | 432,646 |
|
| $ | 432,646 |
|
| $ | — |
|
| $ | — |
|
| $ | 432,646 |
|
Cash segregated under federal regulations |
| 45,122 |
|
|
| 45,122 |
|
|
| 45,122 |
|
|
| — |
|
|
| — |
|
|
| 45,122 |
|
Accounts receivable, net of allowance |
| 89,839 |
|
|
| 89,839 |
|
|
| — |
|
|
| 89,839 |
|
|
| — |
|
|
| 89,839 |
|
Receivables from broker-dealers, clearing |
| 687,936 |
|
|
| 687,936 |
|
|
| 115,151 |
|
|
| 572,785 |
|
|
| — |
|
|
| 687,936 |
|
Total | $ | 1,255,543 |
|
| $ | 1,255,543 |
|
| $ | 592,919 |
|
| $ | 662,624 |
|
| $ | — |
|
| $ | 1,255,543 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Financial liabilities not measured at fair value: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Payables to broker-dealers, clearing | $ | 537,398 |
|
| $ | 537,398 |
|
| $ | — |
|
| $ | 537,398 |
|
| $ | — |
|
| $ | 537,398 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the three months ended March 31, 2024 and 2023 there were no transfers between Level 1, Level 2 and Level 3 during the nine months ended September 30, 2017 and 2016.securities.
16
MARKETAXESS HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
The Company enters into foreign currency forward contracts toas an economic hedge the net investmentagainst certain foreign currency transaction gains and losses in the Company’s U.K. subsidiaries. The Company designates each foreign currencyConsolidated Statements of Operations. These forward contract as a hedge and assesses the risk management objective and strategy, including identification of the hedging instrument, the hedged item and the risk exposure and how effectiveness is to be assessed prospectively and retrospectively. These hedgescontracts are for a one-month periodthree-month periods and are used to limit exposure to foreign currency exchange rate fluctuations. The Company records the fair value of the asset is included in prepaid expenses and other assets andor the fair value of the liability is included in accounts payable, accrued expenses and other liabilities in the Consolidated Statements of Financial Condition. Gains orThe following table summarizes the Company’s foreign currency forward position:
| As of |
| |||||
| March 31, 2024 |
|
| December 31, 2023 |
| ||
| (In thousands) |
| |||||
Notional value | $ | 63,305 |
|
| $ | 61,858 |
|
Fair value of notional |
| 63,109 |
|
|
| 63,759 |
|
Fair value of the (liability)/asset | $ | (196 | ) |
| $ | 1,901 |
|
|
|
|
|
|
|
Realized and unrealized gains and losses on foreign currency forward contracts designated as hedgesare included in other, net in the Consolidated Statements of Operations. The Company recorded a net realized gain of $1.3 million and a net unrealized loss of $2.1 million for the three months ended March 31, 2024. The Company recorded a net realized loss of $1.7 million and a net unrealized gain of $2.5 million for the three months ended March 31, 2023. The Company records collateral deposits with its counterparty bank in prepaid expenses and other assets on the Consolidated Statements of Financial Condition. As of March 31, 2024, the Company did not maintain a collateral deposit with its counterparty bank.
The following table summarizes the Company’s investments:
| Amortized |
|
| Gross |
|
| Gross |
|
| Fair |
| ||||||||
|
| (In thousands) |
| ||||||||||||||||
As of March 31, 2024 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Securities available-for-sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Corporate debt | $ |
| 25,473 |
|
| $ |
| 25 |
|
| $ |
| (109 | ) |
| $ |
| 25,389 |
|
Trading securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
U.S. Treasuries |
|
| 99,682 |
|
|
|
| — |
|
|
|
| (255 | ) |
|
|
| 99,427 |
|
Mutual funds held in rabbi trust |
|
| 10,818 |
|
|
|
| 629 |
|
|
|
| (432 | ) |
|
|
| 11,015 |
|
Total investments | $ |
| 135,973 |
|
| $ |
| 654 |
|
| $ |
| (796 | ) |
| $ |
| 135,831 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
As of December 31, 2023 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Securities available-for-sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Corporate debt | $ |
| 24,705 |
|
| $ |
| 55 |
|
| $ |
| (66 | ) |
| $ |
| 24,694 |
|
Trading securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
U.S. Treasuries |
|
| 99,236 |
|
|
|
| 446 |
|
|
|
| — |
|
|
|
| 99,682 |
|
Mutual funds held in rabbi trust |
|
| 10,962 |
|
|
|
| 172 |
|
|
|
| (649 | ) |
|
|
| 10,485 |
|
Total investments | $ |
| 134,903 |
|
| $ |
| 673 |
|
| $ |
| (715 | ) |
| $ |
| 134,861 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of investments during the three months ended March 31, 2024 and 2023 were $5.0 million and $22.9 million, respectively. Proceeds from the sales and maturities of investments during the three months ended March 31, 2024 and 2023 were $4.3 million and $1.0 million, respectively.
17
MARKETAXESS HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
The following table summarizes the Company’s unrealized and realized gains and losses on investments:
| Three Months Ended March 31, |
| |||||||
| 2024 |
|
| 2023 |
| ||||
| (In thousands) |
| |||||||
Unrealized gains/(losses) |
|
|
|
|
|
|
| ||
Securities available-for-sale |
|
|
|
|
|
|
| ||
Corporate debt | $ |
| (73 | ) |
| $ |
| (55 | ) |
Trading securities |
|
|
|
|
|
|
| ||
U.S. Treasuries |
|
| (255 | ) |
|
|
| 420 |
|
Mutual funds held in rabbi trust |
|
| 674 |
|
|
|
| 585 |
|
Total investments | $ |
| 346 |
|
| $ |
| 950 |
|
|
|
|
|
|
|
|
| ||
Realized gains/(losses) |
|
|
|
|
|
|
| ||
Securities available-for-sale |
|
|
|
|
|
|
| ||
Corporate debt | $ |
| 2 |
|
| $ |
| (17 | ) |
Trading securities |
|
|
|
|
|
|
| ||
Mutual funds held in rabbi trust |
|
| 35 |
|
|
|
| — |
|
Total investments | $ |
| 37 |
|
| $ |
| (17 | ) |
|
|
|
|
|
|
|
|
Unrealized gains and losses on securities available-for-sale are included in accumulated other comprehensive loss inon the Consolidated Statements of Financial Condition. A summaryRealized gains and losses on securities available-for-sale and realized and unrealized gains and losses on trading securities are included in other, net on the Consolidated Statements of the Company’s foreign currency forward position is as follows:
Operations.
| As of |
| |||||
| September 30, 2017 |
|
| December 31, 2016 |
| ||
| (In thousands) |
| |||||
Notional value | $ | 89,035 |
|
| $ | 66,972 |
|
Fair value of notional |
| 88,444 |
|
|
| 67,238 |
|
Fair value of the asset (liability) | $ | 591 |
|
| $ | (266 | ) |
|
|
|
|
|
|
|
|
The following is a summary of the Company’s investments:
| Amortized cost |
|
| Gross unrealized gains |
|
| Gross unrealized losses |
|
| Estimated fair value |
| ||||
| (In thousands) |
| |||||||||||||
As of September 30, 2017 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities available-for-sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate debt | $ | 168,455 |
|
| $ | 18 |
|
| $ | (195 | ) |
| $ | 168,278 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate debt |
| 65,940 |
|
|
| 67 |
|
|
| (122 | ) |
|
| 65,885 |
|
Mutual funds held in rabbi trust |
| 2,729 |
|
|
| 329 |
|
|
| — |
|
|
| 3,058 |
|
Total trading securities |
| 68,669 |
|
|
| 396 |
|
|
| (122 | ) |
|
| 68,943 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments | $ | 237,124 |
|
| $ | 414 |
|
| $ | (317 | ) |
| $ | 237,221 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2016 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities available-for-sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate debt | $ | 119,073 |
|
| $ | 13 |
|
| $ | (216 | ) |
| $ | 118,870 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate debt |
| 74,394 |
|
|
| 47 |
|
|
| (234 | ) |
|
| 74,207 |
|
Mutual funds held in rabbi trust |
| 1,212 |
|
|
| 115 |
|
|
| — |
|
|
| 1,327 |
|
Total trading securities |
| 75,606 |
|
|
| 162 |
|
|
| (234 | ) |
|
| 75,534 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments | $ | 194,679 |
|
| $ | 175 |
|
| $ | (450 | ) |
| $ | 194,404 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes the fair value of the investments based upon the contractual maturities:
| Less than one year |
|
| Due in 1 - 5 years |
|
| Total |
| |||
| (In thousands) |
| |||||||||
As of March 31, 2024 |
|
|
|
|
|
|
|
| |||
Securities available-for-sale |
|
|
|
|
|
|
|
| |||
Corporate debt | $ | 11,480 |
|
| $ | 13,909 |
|
| $ | 25,389 |
|
Trading securities |
|
|
|
|
|
|
|
| |||
U.S. Treasuries |
| 49,757 |
|
|
| 49,670 |
|
|
| 99,427 |
|
Mutual funds held in rabbi trust |
| 11,015 |
|
|
| — |
|
|
| 11,015 |
|
Total | $ | 72,252 |
|
| $ | 63,579 |
|
| $ | 135,831 |
|
|
|
|
|
|
|
|
| ||||
As of December 31, 2023 |
|
|
|
|
|
|
|
| |||
Securities available-for-sale |
|
|
|
|
|
|
|
| |||
Corporate debt | $ | 10,727 |
|
| $ | 13,967 |
|
| $ | 24,694 |
|
Trading securities |
|
|
|
|
|
|
|
| |||
U.S. Treasuries |
| 49,756 |
|
|
| 49,926 |
|
|
| 99,682 |
|
Mutual funds held in rabbi trust |
| 10,485 |
|
|
| — |
|
|
| 10,485 |
|
Total | $ | 70,968 |
|
| $ | 63,893 |
|
| $ | 134,861 |
|
|
|
|
|
|
|
|
|
|
18
MARKETAXESS HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
| As of |
| |||||
| September 30, 2017 |
|
| December 31, 2016 |
| ||
| (In thousands) |
| |||||
Less than one year | $ | 133,207 |
|
| $ | 117,904 |
|
Due in 1 - 5 years |
| 104,014 |
|
|
| 76,500 |
|
Total | $ | 237,221 |
|
| $ | 194,404 |
|
|
|
|
|
|
|
|
|
(Unaudited)
Proceeds from the sales and maturities of investments during the nine months ended September 30, 2017 and 2016 were $170.1 million and $48.1 million, respectively.
The following table provides fair values and unrealized losses on the Company’s available-for-sale investments and by the aging of the securities’ continuous unrealized loss positionpositions:
| Less than Twelve Months |
|
| Twelve Months or More |
|
| Total |
| |||||||||||||||
| Fair value |
|
| Gross unrealized losses |
|
| Fair value |
|
| Gross unrealized losses |
|
| Fair value |
|
| Gross unrealized losses |
| ||||||
| (In thousands) |
| |||||||||||||||||||||
As of March 31, 2024 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Corporate debt | $ | 17,958 |
|
| $ | (100 | ) |
| $ | 2,043 |
|
| $ | (9 | ) |
| $ | 20,001 |
|
| $ | (109 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
As of December 31, 2023 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Corporate debt | $ | 17,658 |
|
| $ | (66 | ) |
| $ | — |
|
| $ | — |
|
| $ | 17,658 |
|
| $ | (66 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the three months ended March 31, 2024 and 2023, the Company did not recognize any credit losses on its available-for-sale securities. The unrealized losses on securities are due to changes in interest rates and market liquidity.
5. Receivables from and Payables to Broker-dealers, Clearing Organizations and Customers
Receivables from and payables to broker-dealers, clearing organizations and customers consisted of the following:
| As of |
| |||||||
| March 31, 2024 |
|
| December 31, 2023 |
| ||||
Receivables from broker-dealers, clearing organizations and customers: | (In thousands) |
| |||||||
Securities failed-to-deliver – broker-dealers and clearing organizations | $ |
| 262,239 |
|
| $ |
| 282,125 |
|
Securities failed-to-deliver – customers |
|
| 282,172 |
|
|
|
| 284,322 |
|
Deposits with clearing organizations and broker-dealers |
|
| 112,713 |
|
|
|
| 115,151 |
|
Other |
|
| 5,764 |
|
|
|
| 6,338 |
|
Total | $ |
| 662,888 |
|
| $ |
| 687,936 |
|
|
|
|
|
|
|
|
| ||
Payables to broker-dealers, clearing organizations and customers: |
|
|
|
|
|
|
| ||
Securities failed-to-receive – broker-dealers and clearing organizations | $ |
| 169,798 |
|
| $ |
| 125,022 |
|
Securities failed-to-receive – customers |
|
| 287,086 |
|
|
|
| 405,186 |
|
Other |
|
| 8,819 |
|
|
|
| 7,190 |
|
Total | $ |
| 465,703 |
|
| $ |
| 537,398 |
|
|
|
|
|
|
|
|
|
19
MARKETAXESS HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
6. Acquisitions and Equity Investments
Acquisition of Pragma
On October 2, 2023, the Company completed its acquisition (the “Pragma Acquisition”) of all of the outstanding ownership interests of Pragma LLC and Pragma Financial Systems LLC (collectively “Pragma”) pursuant to the terms and conditions of a Membership Interest Purchase Agreement entered into among the Company, Pragma Weeden Holdings LLC, Pragma Financial Systems LLC, Pragma LLC and, solely for certain limited purposes, David Mechner, Pragma’s chief executive officer, on August 5, 2023 (the “Purchase Agreement”). Following customary adjustments for cash, debt, transaction expenses and working capital, the aggregate purchase price for the Acquisition was $125.0 million, comprised of approximately $81.2 million in cash and 224,776 shares of common stock of the Company, valued at approximately $43.8 million as of September 30, 2017the closing date of the Pragma Acquisition, as described below. A portion of the stock consideration, amounting to 8,603 shares of common stock, was placed in escrow for 12 months to secure the sellers’ indemnification obligations under the Purchase Agreement. In addition, pursuant to the Purchase Agreement and Decembersubject to certain exceptions, the sellers and their affiliates are prohibited from transferring any of the Company common stock received in the Acquisition for a period of six months following the October 2, 2023 closing date. The value ascribed to the shares by the Company was discounted from the market value on the date of closing to reflect the non-marketability of such shares during the restriction period.
Pragma is a quantitative trading technology provider specializing in algorithmic and analytical services. Pragma LLC is a registered broker-dealer. The Company has performed an allocation of the purchase price to the fair value of assets acquired and liabilities assumed at the date of acquisition. The Company utilized an independent third-party to assist in determining the fair value of the acquired intangible assets. The purchase price allocation is as follows (in thousands):
Purchase price |
| $ | 125,002 |
|
Less: acquired cash |
|
| (2,685 | ) |
Purchase price, net of acquired cash |
|
| 122,317 |
|
Intangible assets |
|
| (38,900 | ) |
Accounts receivable |
|
| (2,637 | ) |
Prepaid expenses and other assets |
|
| (4,181 | ) |
Accounts payable, accrued expenses and other liabilities |
|
| 5,318 |
|
Goodwill |
| $ | 81,917 |
|
|
|
|
|
The acquired developed technology and customer relationships intangible assets were valued using the relief-from-royalty method and multi-period excess earnings method, respectively. The fair values of the intangible assets acquired are as follows (in thousands, except for useful lives):
|
| Costs |
|
| Useful Lives | |
Developed technology |
| $ | 28,500 |
|
| 7 years |
Customer relationships |
|
| 9,200 |
|
| 15 years |
Tradename - finite life |
|
| 1,200 |
|
| 15 years |
Total |
| $ | 38,900 |
|
|
|
|
|
|
|
|
|
The goodwill recognized in connection with the Pragma Acquisition is primarily attributable to the acquisition of an assembled workforce and expected future technology and synergies from the integration of the operations of Pragma into the Company's operations. All of the goodwill recognized in connection with the Pragma Acquisition is expected to be deductible for income tax purposes.
Pro forma financial information and current period results for the Pragma Acquisition were not material to the Company’s consolidated financial statements and therefore have not been presented.
20
MARKETAXESS HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
RFQ Hub LLC Equity Investment
In May 2022, the Company invested $34.4 million to acquire a minority ownership stake in RFQ–hub Holdings LLC, an entity formed with a consortium of market participants to support the growth of RFQ-hub, a multi-asset request for quote platform. The Company possesses significant influence over RFQ–hub Holdings LLC and is accounting for its investment under the equity method of accounting. As of March 31, 2016:2024, the Company’s investment is recorded at carrying value of $36.6 million within prepaid expenses and other assets on the Consolidated Statements of Financial Condition. The Company’s proportionate share of RFQ–hub Holdings LLC’s net earnings was $0.4 million and $0.2 million for the three months ended March 31, 2024 and 2023, respectively, and is recorded within equity in earnings of unconsolidated affiliate on the Consolidated Statements of Operations.
Under a services agreement, the Company charges its equity method investee for certain reimbursable support costs incurred by the Company, including personnel compensation, and certain operational overhead costs. The amount billed for the three months ended March 31, 2024 was $0.5 million and is included within other, net on the Consolidated Statements of Operations. The receivable from the equity method investee was $1.6 million as of March 31, 2024 and is included within accounts receivable, net on the Consolidated Statements of Financial Condition.
| Less than Twelve Months |
|
| Twelve Months or More |
|
| Total |
| ||||||||||||
| Estimated fair value |
| Gross unrealized losses |
|
| Estimated fair value |
| Gross unrealized losses |
|
| Estimated fair value |
| Gross unrealized losses |
| ||||||
| (In thousands) |
| ||||||||||||||||||
As of September 30, 2017 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate debt | $ | 173,000 |
| $ | (284 | ) |
| $ | 5,426 |
| $ | (33 | ) |
| $ | 178,426 |
| $ | (317 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2016 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate debt | $ | 136,667 |
| $ | (449 | ) |
| $ | 2,000 |
| $ | (1 | ) |
| $ | 138,667 |
| $ | (450 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5.7. Goodwill and Intangible Assets
Goodwill and intangible assets with indefinite lives was $59.7were $236.7 million as of both September 30, 2017each of March 31, 2024 and December 31, 2016. 2023. Intangible assets that are subject to amortization, including the related accumulated amortization, are comprised of the following:
| September 30, 2017 |
|
| December 31, 2016 |
| ||||||||||||||||||
| Cost |
|
| Accumulated amortization |
|
| Net carrying amount |
|
| Cost |
|
| Accumulated amortization |
|
| Net carrying amount |
| ||||||
| (In thousands) |
| |||||||||||||||||||||
Technology | $ | 5,770 |
|
| $ | (5,770 | ) |
| $ | — |
|
| $ | 5,770 |
|
| $ | (5,770 | ) |
| $ | — |
|
Customer relationships |
| 5,645 |
|
|
| (2,203 | ) |
|
| 3,443 |
|
|
| 5,628 |
|
|
| (1,897 | ) |
|
| 3,731 |
|
Non-competition agreements |
| 380 |
|
|
| (380 | ) |
|
| — |
|
|
| 380 |
|
|
| (380 | ) |
|
| — |
|
Tradenames |
| 370 |
|
|
| (370 | ) |
|
| — |
|
|
| 370 |
|
|
| (370 | ) |
|
| — |
|
Total | $ | 12,165 |
|
| $ | (8,723 | ) |
| $ | 3,443 |
|
| $ | 12,148 |
|
| $ | (8,417 | ) |
| $ | 3,731 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| March 31, 2024 |
|
| December 31, 2023 |
| ||||||||||||||||||
|
| Cost |
|
| Accumulated |
|
| Net carrying |
|
| Cost |
|
| Accumulated |
|
| Net carrying |
| ||||||
|
| (In thousands) |
| |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Customer relationships |
| $ | 139,463 |
|
| $ | (54,366 | ) |
| $ | 85,097 |
|
| $ | 140,348 |
|
| $ | (50,987 | ) |
| $ | 89,361 |
|
Technology and other intangibles |
|
| 41,130 |
|
|
| (12,651 | ) |
|
| 28,479 |
|
|
| 41,130 |
|
|
| (11,383 | ) |
|
| 29,747 |
|
Total |
| $ | 180,593 |
|
| $ | (67,017 | ) |
| $ | 113,576 |
|
| $ | 181,478 |
|
| $ | (62,370 | ) |
| $ | 119,108 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization expense associated with identifiable intangible assets was $0.3$5.0 million and $0.6$4.1 million for the ninethree months ended September 30, 2017March 31, 2024 and 2016,2023, respectively. EstimatedAnnual estimated total amortization expense is $0.4$19.8 million, $16.9 million, $15.2 million, $13.8 million and $12.3 million for each year from 2017the years ended December 31, 2024 through 2021.2028, respectively.
21
MARKETAXESS HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
The Company's provision for income taxes consistsincludes U.S. federal, state and local, and foreign taxes. The Company’s effective tax rate was 24.9% and 25.0% for the three months ended March 31, 2024 and 2023, respectively. The Company’s effective tax rate can vary from period to period depending on geographic mix of our earnings, changes in tax legislation and tax rates and the following:
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||
| 2017 |
|
| 2016 |
|
| 2017 |
|
| 2016 |
| ||||
| (In thousands) |
| |||||||||||||
Current: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal | $ | 11,331 |
|
| $ | 13,273 |
|
| $ | 28,676 |
|
| $ | 30,898 |
|
State and local |
| 1,651 |
|
|
| 1,895 |
|
|
| 4,579 |
|
|
| 5,055 |
|
Foreign |
| 1,191 |
|
|
| 1,714 |
|
|
| 4,234 |
|
|
| 4,599 |
|
Total current provision |
| 14,173 |
|
|
| 16,882 |
|
|
| 37,489 |
|
|
| 40,552 |
|
Deferred: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
| (930 | ) |
|
| (918 | ) |
|
| 130 |
|
|
| 6,895 |
|
State and local |
| (158 | ) |
|
| (154 | ) |
|
| (64 | ) |
|
| 964 |
|
Foreign |
| 2 |
|
|
| (374 | ) |
|
| 226 |
|
|
| (143 | ) |
Total deferred provision |
| (1,086 | ) |
|
| (1,446 | ) |
|
| 292 |
|
|
| 7,716 |
|
Provision for income taxes | $ | 13,087 |
|
| $ | 15,436 |
|
| $ | 37,781 |
|
| $ | 48,268 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company recognizedamount and timing of excess tax benefits onrelated to share-based payments, of $3.8 million and $14.8 million through the provision for income taxes, for the three and nine months ended September 30, 2017, respectively.among other factors.
The Company or one of its subsidiaries files U.S. federal, state and foreign income tax returns. Income tax returns for U.S. Federal (through 2013), New York City (through 2003) and state (through 2009) and Connecticut state (through 2003) have been audited. An examination of the Company’sThe Company is currently under a New York State income tax returnsexamination for 2010tax years 2015 through 2013 is currently underway. The2017 and a New York City income tax examination for the tax years 2016 through 2018. At this time, the Company cannot estimate when the examinationexaminations will conclude or the impact such examinationexaminations will have on the Company’s Consolidated Financial Statements, if any.
The Generally, other than the New York City and New York State audits, the Company has determined that unremitted earnings of the Company’s foreign subsidiaries are considered indefinitely reinvested outside of the United States.is no longer subject to tax examinations by tax authorities for years prior to 2020.
7.
9. Stock-Based Compensation Plans
Stock-basedEquity Incentive Plan
The Company maintains the MarketAxess Holdings Inc. 2020 Equity Incentive Plan (the “2020 Plan”), which provides for the grant of restricted stock, restricted stock units, performance shares, performance stock units (collectively, “full value awards”), stock options and other stock-based awards as incentives to encourage employees, consultants and non-employee directors to participate in the long-term success of the Company. As of March 31, 2024, there were 2,330,396 shares available for grant under the 2020 Plan.
Total stock-based compensation expense for the three and nine months ended September 30, 2017 and 2016 was as follows:
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
|
| Three Months Ended March 31, |
| |||||||||||||||
| 2017 |
|
| 2016 |
|
| 2017 |
|
| 2016 |
|
| 2024 |
|
| 2023 |
| ||||||
| (In thousands) |
|
| (In thousands) |
| ||||||||||||||||||
Employees | $ | 3,280 |
|
| $ | 3,387 |
|
| $ | 10,273 |
|
| $ | 9,963 |
|
| $ | 6,893 |
|
| $ | 7,100 |
|
Non-employee directors |
| 241 |
|
|
| 312 |
|
|
| 716 |
|
|
| 673 |
|
|
| 405 |
|
|
| 388 |
|
Total stock-based compensation | $ | 3,521 |
|
| $ | 3,699 |
|
| $ | 10,989 |
|
| $ | 10,636 |
|
| $ | 7,298 |
|
| $ | 7,488 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company records stock-based compensation expense for employees in employee compensation and benefits and for non-employee directors in general and administrative expenses in the Consolidated Statements of Operations. Included in the stock-based compensation for employees in the table above is $0.2 million of capitalized software development costs for each of the three months ended March 31, 2024 and 2023.
During the ninethree months ended September 30, 2017,March 31, 2024, the Company granted to employees and directors a total of 65,462 shares of restricted stock or(i) 126,965 restricted stock units, performance-based shares(ii) 20,793 stock options and (iii) performance stock units with an expected pay-out at target of 22,338 shares of common stock and 54,838 options to purchase30,811 shares of common stock. The fair valuevalues of the restricted stock units and performance-based share awards wasperformance stock units were based on a weighted-average fair value per shareunit at the grant date of $156.79$220.89 and $168.89,$220.50, respectively. Based on the Black-Scholes option pricing model, the weighted-average fair value for each stock option granted was $40.08$77.16 per share.
As of September 30, 2017,March 31, 2024, the total unrecognized compensation cost related to all non-vested awards was $26.7$68.0 million. That cost is expected to be recognized over a weighted-average period of 2.1 2.4 years.
22
MARKETAXESS HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8.(Unaudited)
Employee Stock Purchase Plan
The Company maintains the MarketAxess Holdings Inc. 2022 Employee Stock Purchase Plan (the “ESPP”), pursuant to which a total of 121,221 shares of the Company’s Common Stock is available for purchase by employees. The Company issued 3,756 shares of common stock on February 15, 2024 under the ESPP. As of March 31, 2024, there were 112,810 shares available for purchase under the ESPP.
10. Earnings Per Share
The following table sets forth the computation of basic and diluted weighted average shares outstanding used to compute earnings per common share:
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| |||||||||||||||||||
| 2017 |
|
| 2016 |
|
| 2017 |
|
| 2016 |
| Three Months Ended March 31, |
| |||||||||||
| (In thousands, except per share amounts) |
| 2024 |
|
| 2023 |
| |||||||||||||||||
Net income | $ | 34,130 |
|
| $ | 30,918 |
|
| $ | 114,616 |
|
| $ | 93,007 |
| |||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (In thousands, except per share amounts) |
| |||||||
Basic weighted average shares outstanding |
| 36,865 |
|
|
| 36,889 |
|
|
| 36,856 |
|
|
| 36,847 |
|
|
| 37,740 |
|
|
| 37,478 |
| |
Dilutive effect of stock options and restricted stock |
| 1,154 |
|
|
| 903 |
|
|
| 1,213 |
|
|
| 891 |
| |||||||||
Dilutive effect of stock options and full value awards |
|
| 50 |
|
|
|
| 167 |
| |||||||||||||||
Diluted weighted average shares outstanding |
| 38,019 |
|
|
| 37,792 |
|
|
| 38,069 |
|
|
| 37,738 |
|
|
| 37,790 |
|
|
|
| 37,645 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Basic earnings per share | $ | 0.93 |
|
| $ | 0.84 |
|
| $ | 3.11 |
|
| $ | 2.52 |
| $ |
| 1.92 |
|
| $ |
| 1.96 |
|
Diluted earnings per share | $ | 0.90 |
|
| $ | 0.82 |
|
| $ | 3.01 |
|
| $ | 2.46 |
|
|
| 1.92 |
|
|
| 1.96 |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options and restricted stockfull value awards totaling 10,729571,145 shares and 6,480179,147 shares for the three months ended September 30, 2017March 31, 2024 and 2016, respectively, and 40,485 shares and 112,004 shares for the nine months ended September 30, 2017 and 2016,2023, respectively, were excluded from the computation of diluted earnings per share because their effect would have been antidilutive. The computation of diluted shares can vary among periods due, in part, to the change in the average price of the Company’s common stock.
23
MARKETAXESS HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9.(Unaudited)
11. Credit Agreements and Short-term Financing
2021 Credit Agreement
InOn October 2015,15, 2021, the Company entered into a two-year amendedthree-year revolving credit facility (the “2021 Credit Agreement”) provided by a syndicate of lenders and restatedJPMorgan Chase Bank, N.A., as administrative agent, which provided aggregate commitments totaling $500.0 million, including a revolving credit agreement (the “Credit Agreement”) that providedfacility, a $5.0 million letter of credit sub-limit for revolving loans andstandby letters of credit upand a $50.0 million sub-limit for swingline loans. The 2021 Credit Agreement was scheduled to an aggregate of $100.0 million. As of September 30, 2017,mature on October 15, 2024, but was replaced by the 2023 Credit Agreement (as defined below).
The 2021 Credit Agreement required that the Company had $0.9satisfy certain covenants, including a requirement to not exceed a maximum consolidated total leverage ratio. The Company incurred $0.1 million inof interest expense under the 2021 Credit Agreement for the three months ended March 31, 2023.
2023 Credit Agreement
On August 9, 2023, the Company replaced the 2021 Credit Agreement with a new three-year revolving credit facility (the “2023 Credit Agreement”) provided by a syndicate of lenders and JPMorgan Chase Bank, N.A., as administrative agent, which provides aggregate commitments totaling $750.0 million, including a revolving credit facility, a $5.0 million letter of credit sub-limit for standby letters of credit outstanding and $99.1a $380.0 million in available borrowing capacity under the Credit Agreement.sub-limit for swingline loans. The Company amended the2023 Credit Agreement in October 2017 and extendedwill mature on August 9, 2026, with the maturity dateCompany’s option to October 2018. The amended Credit Agreement also provides forrequest up to two additional one-year extension options364-day extensions at the discretion of each lender and modified certain borrowing terms and covenants.subject to customary conditions. Subject to satisfaction of certain specified conditions, the Company is permitted to upsize the 2023 Credit Agreement by up to $375.0 million in total. As of March 31, 2024, the Company had $0.1 million in letters of credit outstanding and $749.9 million in available borrowing capacity under the 2023 Credit Agreement by an additional $50.0 million.Agreement.
Borrowings under the 2023 Credit Agreement will bear interest at a rate per annum equal to the alternate base rate or the adjusted LIBORterm Secured Overnight Financing Rate (“SOFR”) rate, plus an applicable margin that varies with the Company’s consolidated total leverage ratio. The 2023 Credit Agreement requires that the Company satisfiessatisfy certain covenants, which includesincluding a requirement not to exceed a maximum consolidated total leverage ratios and minimum earnings before interest, tax, depreciation and amortization (“EBITDA”) requirements.ratio. The Company was in compliance with all applicable covenants at September 30, 2017 and December 31, 2016.
The Company’s existing and future domestic subsidiaries (other thandid not incur any regulated subsidiary and MarketAxess Colombia Corporation so long as its assets and revenues remain below an agreed threshold) have guaranteed the Company’s obligationsinterest expense under the Credit Agreement. Subject to customary exceptions and exclusions, the Company’s borrowings under the2023 Credit Agreement are collateralized by first priority pledges (subject to permitted liens) of substantially all offor the Company’s personal property assets and the personal property assets of the Company’s domestic subsidiaries that have guaranteed the Credit Agreement, including the equity interests of the Company’s domestic subsidiaries and the equity interests ofthree months ended March 31, 2024.
Uncommitted Collateralized Agreements
In connection with their self-clearing operations, certain of the Company’s foreignU.S. and U.K. operating subsidiaries (limited,maintain agreements with a settlement bank to allow the subsidiaries to borrow in the caseaggregate of up to $500.0 million on an uncommitted basis, collateralized by eligible securities pledged by the subsidiaries to the settlement bank, subject to certain haircuts. Borrowings under these agreements will bear interest at a base rate per annum equal to the higher of the voting equity interestsupper range of the foreign subsidiaries,Federal Funds Rate, 0.25% or one-month SOFR, plus 1.00%.
The Company did not incur any interest expense on borrowings under such agreements during the three months ended March 31, 2024, and incurred $0.1 million of interest expense during the three months ended March 31, 2023. As of March 31, 2024, the Company had no borrowings outstanding and up to a pledge of 65% of those equity interests).$500.0 million in available uncommitted borrowing capacity under such agreements.
If an event of default occurs, including failure to pay principal or interest due on the loan balance, a voluntary or involuntary proceeding seeking liquidation, change in controlShort-term Financing
Under arrangements with their settlement banks, certain of the Company’s U.S. and U.K. operating subsidiaries may receive overnight financing in the form of bank overdrafts. The Company or one or more material judgments againstincurred interest expense on such overnight financing of $0.3 million and $0.1 million during the three months ended March 31, 2024 and 2023, respectively. As of March 31, 2024, the Company in excess of $10.0 million, the lenders would be entitled to accelerate the borrowings under the Credit Agreement and take various other actions, including all actions permitted to be taken by a secured creditor. If certain bankruptcy events of default occur, the borrowings under the Credit Agreement will automatically accelerate.had no overdrafts payable outstanding.
24
MARKETAXESS HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
12. Leases
10. Commitments and Contingencies
Lease Commitments
The Company has operating leases office space under non-cancelablefor corporate offices with initial lease terms ranging from one year to 15 years. Certain leases contain options to extend the initial term at the Company’s discretion. The Company accounts for the option to extend when it is reasonably certain of being exercised. The Company’s lease agreements expiring at various dates through 2033. Office spacedo not contain any material residual value guarantees, restrictions or covenants. The Company also has operating and finance leases are subjectfor equipment with initial lease terms ranging from one-year to escalation based on certain costs incurred by5 years.
The following table presents the landlord. Minimum rental commitments ascomponents of September 30, 2017 under such operating leases were as follows (in thousands):lease expense for the three months ended March 31, 2024 and 2023:
|
|
|
|
Remainder of 2017 | $ | 1,266 |
|
2018 |
| 4,815 |
|
2019 |
| 9,464 |
|
2020 |
| 10,577 |
|
2021 |
| 10,129 |
|
2022 and thereafter |
| 108,247 |
|
| $ | 144,498 |
|
|
|
|
|
|
|
|
| Three Months Ended March 31, |
| |||||
Lease cost: |
| Classification |
| 2024 |
|
| 2023 |
| ||
|
|
|
| (In thousands) |
| |||||
Operating lease cost - office space |
| Occupancy |
| $ | 2,753 |
|
| $ | 3,111 |
|
Operating lease cost - equipment |
| Technology and communications |
|
| 98 |
|
|
| — |
|
Variable lease costs |
| Occupancy |
|
| 587 |
|
|
| 51 |
|
Total operating lease cost |
|
|
| $ | 3,438 |
|
| $ | 3,162 |
|
|
|
|
|
|
|
|
|
|
RentalFinance lease expense was $4.1 million and $3.1$0.1 million for the ninethree months ended September 30, 2017March 31, 2024.
The Company determines whether an arrangement is, or includes, a lease at contract inception. Operating lease right-of-use assets and 2016, respectively,liabilities are recognized at commencement date and is included in occupancy expense in the Consolidated Statements of Operations. Rental expense has been recordedare initially measured based on the total minimumpresent value of lease payments after giving effect to rent abatement and concessions, which are being amortized on a straight-line basis over the life ofdefined lease term. As the lease. The Company is contingently obligated for standby letters of credit amounting to $0.9 million that were issued to landlords for office space.
During 2016,Company's leases do not provide an implicit rate, the Company entered into aused its incremental borrowing rate based on the information available at the adoption date in determining the present value of lease agreement for our new global headquarters in New York City. payments.
The Company expects to relocate its headquarters to approximately 83,000 square feetweighted average remaining lease term and weighted average discount rate are as follows:
|
| As of |
| |||||
Lease Term and Discount Rate |
| March 31, 2024 |
|
| December 31, 2023 |
| ||
Weighted average remaining lease term (in years) - operating leases |
|
| 9.4 |
|
|
| 9.6 |
|
Weighted average discount rate - operating leases |
|
| 6.0 | % |
|
| 6.0 | % |
Weighted average remaining lease term (in years) - finance leases |
|
| 1.5 |
|
|
| 1.8 |
|
Weighted average discount rate - finance leases |
|
| 7.2 | % |
|
| 7.2 | % |
|
|
|
|
|
|
|
The following table presents the maturity of newly built office space at 55 Hudson Yards upon the building’s completion in late 2018. The fifteen-year lease for the new headquarters will commence when the Company receives possession of the premises, which is currently expected in the first quarter of 2018.
The Company has assigned a lease agreement on a leased property to a third party and is contingently liable should the assignee default on future lease obligations through the November 2020 lease termination date. The aggregate amount of the future lease obligation under this arrangement is approximately $0.9 millionliabilities as of September 30, 2017. March 31, 2024:
|
| Operating Leases |
|
| Finance Leases |
| ||
|
| (In thousands) |
| |||||
Remainder of 2024 |
| $ | 9,852 |
|
| $ | 88 |
|
2025 |
|
| 12,302 |
|
|
| 88 |
|
2026 |
|
| 11,730 |
|
|
| — |
|
2027 |
|
| 8,983 |
|
|
| — |
|
2028 |
|
| 8,603 |
|
|
| — |
|
2029 and thereafter |
|
| 51,242 |
|
|
| — |
|
Total lease payments |
|
| 102,712 |
|
|
| 176 |
|
Less: imputed interest |
|
| 24,642 |
|
|
| 10 |
|
Present value of lease liabilities |
| $ | 78,070 |
|
| $ | 166 |
|
|
|
|
|
|
|
|
25
MARKETAXESS HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Legal(Unaudited)
13. Commitments and Contingencies
Legal
In the normal course of business, the Company and its subsidiaries included in the consolidated financial statements may be involved in various lawsuits, proceedings and regulatory examinations. The Company assesses its liabilities and contingencies in connection with outstanding legal proceedings, if any, utilizing the latest information available. For matters where it is probable that the Company will incur a material loss and the amount can be reasonably estimated, the Company will establish an accrual for the loss. Once established, the accrual will be adjusted to reflect any relevant developments. When a loss contingency is not both probable and estimable, the Company does not establish an accrual.
Based on currently available information, the outcome of the Company’s outstanding matters is not expected to have a material adverse impact on the Company’s financial position. It is not presently possible to determine the ultimate exposure to these matters, and there is no assurance that the resolution of the outstanding matters will not significantly exceed any reserves accrued by the Company.
Other
Other
The Company, through two regulated certain of itssubsidiaries, executes certain bondsecurities transactions between and amongits institutional investor and broker-dealer clients on a matched principal basis by serving as counterparty to both the buyer and the seller in trades whichtrades. The Company’s operating subsidiaries settle such transactions pursuant to their self-clearing operations or through the use of third-party clearing brokers.brokers or settlement agents. Settlement typically occurs within one to two trading days after the trade date. Cash settlement of the transaction occurs upon receipt or delivery of the underlying instrument that was traded. ForUnder both the nine months ended September 30, 2017self-clearing and 2016, revenues from matched principal trading were approximately $34.4 million and $26.6 million, respectively. Under securitiesthe third-party clearing agreements with third party clearing brokers,models, the Company maintains collateral deposits with each clearing broker in the form of cash. As of September 30, 2017 and 2016, the amount of the collateral deposits included in prepaid expenses and other assets in the Consolidated Statements of Financial Condition was $1.2 million and $1.1 million, respectively. For the nine months ended September 30, 2017 and 2016, clearing expenses associated with matched principal transactions were $4.3 million and $4.8
million, respectively, and are classified under clearing costs on the Consolidated Statements of Operations. The Company ismay be exposed to credit risk in the event a counterparty does not fulfill its obligation to complete a transaction or if there is a miscommunication or otheran error in executing a matched principal transaction. Pursuant to the terms of the securities clearing agreements, each third-party clearing broker has the right to charge the Company for any losses they suffer resulting from a counterparty’s failure on any of the Company’s trades. The Company did not record any liabilities or losses with regard to this rightcounterparty failures for the ninethree months ended September 30, 2017March 31, 2024 and 2016.2023.
In the normal course of business, the Company enters into contracts that contain a variety of representations, warranties and general indemnifications.indemnification provisions. The Company’s maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against the Company that have not yet occurred. However, based on experience, the Company expects the risk of loss to be remote.
11. Customer Concentration
During both the nine months ended September 30, 2017 and 2016, no single client accounted for more than 10% of total revenue. One institutional investor client accounted for 12.8% and 14.6% of trading volumes during the nine months ended September 30, 2017 and 2016, respectively.
12.14. Share Repurchase ProgramPrograms
In January 2016,2022, the Board of Directors authorized a two-year share repurchase program for up to $25.0$150.0 million ofthat commenced in March 2022. During the Company’s common stock. In October 2016, the Board of Directors approved a $50.0 million increase in the size of the repurchase program. For the ninethree months ended September 30, 2017,March 31, 2024, the Company repurchased 191,39446,844 shares of common stock in connection with its share repurchase program at a cost of $36.4$10.1 million. In September 2017, the existing share repurchase plan was terminated and the Board of Directors authorized a new fifteen-month share repurchase program for up to $100 million commencing in October 2017. Shares repurchased under each program will be held in treasury for future use.
13.15. Segment and Geographic Information
The Company operates an electronic multi-party platformplatforms for the trading of fixed-income securities and provides related data, analytics, compliance tools, post-trade services and post-tradetechnology services. The Company considers its operations to constitute a single business segment because of the highly integrated nature of these productproducts and services, of the financial markets in which the Company competes and of the Company’s worldwide business activities. The Company believes that results by geographic region or client sector are not necessarily meaningful in understanding its business.
26
MARKETAXESS HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
For the three and nine months ended September 30, 2017March 31, 2024 and 2016,2023, the U.K. was the only individual foreign country in which the Company had a subsidiary that accounted for 10%10.0% or more of the total revenues or total long-lived assets of the Company.assets. Revenues and long-lived assets are attributed to a geographic area based on the location of the particular subsidiary. Long-lived assets are defined as furniture, equipment, leasehold improvements and capitalized software. Information regarding revenueRevenues for the three and nine months ended September 30, 2017March 31, 2024 and 20162023, and long-lived assets as of September 30, 2017March 31, 2024 and December 31, 2016 was2023 were as follows:
| Three Months Ended March 31, |
| |||||||
| 2024 |
|
| 2023 |
| ||||
| (In thousands) |
| |||||||
Revenues |
|
|
|
|
|
|
| ||
Americas | $ |
| 166,833 |
|
| $ |
| 161,573 |
|
Europe |
|
| 37,728 |
|
|
|
| 36,736 |
|
Asia |
|
| 5,757 |
|
|
|
| 4,860 |
|
Total | $ |
| 210,318 |
|
| $ |
| 203,169 |
|
|
|
|
|
|
|
|
|
| As of |
| |||||||
| March 31, 2024 |
|
| December 31, 2023 |
| ||||
|
| (In thousands) |
| ||||||
Long-lived assets, as defined |
|
|
|
|
|
|
| ||
Americas | $ |
| 93,153 |
|
| $ |
| 87,513 |
|
Europe |
|
| 13,724 |
|
|
|
| 14,717 |
|
Asia |
|
| 362 |
|
|
|
| 441 |
|
Total | $ |
| 107,239 |
|
| $ |
| 102,671 |
|
|
|
|
|
|
|
|
|
16. Cash and Cash Equivalents and Restricted Cash
The following table provides a reconciliation of cash and cash equivalents together with restricted or segregated cash as reported within the Consolidated Statements of Financial Condition to the sum of the same such amounts shown in the Consolidated Statements of Cash Flows:
|
|
| As of |
| |||||
| Statement of Financial Condition Location |
| March 31, 2024 |
|
| December 31, 2023 |
| ||
|
|
| (In thousands) |
| |||||
Cash and cash equivalents | Cash and cash equivalents |
| $ | 376,679 |
|
| $ | 451,280 |
|
Cash segregated for regulatory | Cash segregated under federal |
|
| 45,629 |
|
|
| 45,122 |
|
Deposits with clearing organizations | Receivables from broker-dealers, |
|
| 112,713 |
|
|
| 115,151 |
|
Other deposits | Prepaid expenses and other assets |
|
| 143 |
|
|
| 119 |
|
Total |
|
| $ | 535,164 |
|
| $ | 611,672 |
|
|
|
|
|
|
|
|
|
17. Subsequent Events
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||
| 2017 |
|
| 2016 |
|
| 2017 |
|
| 2016 |
| ||||
| (In thousands) |
| |||||||||||||
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States | $ | 82,076 |
|
| $ | 77,571 |
|
| $ | 252,485 |
|
| $ | 235,078 |
|
United Kingdom |
| 14,250 |
|
|
| 12,433 |
|
|
| 44,277 |
|
|
| 39,165 |
|
Other |
| 375 |
|
|
| 267 |
|
|
| 1,144 |
|
|
| 1,240 |
|
Total | $ | 96,701 |
|
| $ | 90,271 |
|
| $ | 297,906 |
|
| $ | 275,483 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of |
| ||||||
| September 30, 2017 |
|
| December 31, 2016 |
| ||
| (In thousands) |
| |||||
Long-lived assets, as defined |
|
|
|
|
|
|
|
United States | $ | 25,602 |
|
| $ | 23,370 |
|
United Kingdom |
| 9,700 |
|
|
| 7,713 |
|
Other |
| 19 |
|
|
| 21 |
|
Total | $ | 35,321 |
|
| $ | 31,104 |
|
|
|
|
|
|
|
|
|
14. Retirement and Deferred Compensation Plans
On April 19, 2024, the Company entered into an agreement to acquire an additional 49.0% interest in RFQ–hub Holdings LLC for approximately $37.9 million of cash consideration. The Company offers a non-qualified deferred cash incentive plan to certain officers and other employees. Under the plan, eligible employees may defer up to 100% of their annual cash incentive pay. The Company has elected to fund its deferred compensation obligations through a rabbi trust. The rabbi trustacquisition is subject to creditor claims invarious closing conditions, including the eventreceipt of insolvency but such assets are not available for general corporate purposes. Assets held incertain regulatory approvals. The acquisition is expected to close during the rabbi trust are invested in mutual funds, as selected bysecond half of 2024. Upon the participants, which are designated as trading securities and carried at fair value. As of September 30, 2017 and 2016, the fair valueclosing of the mutual fund investments and deferred compensation obligations were $3.1 million and $1.3 million, respectively. Changesacquisition, the Company will hold a 92.0% controlling stake in the fair value of securities held in the rabbi trust are recognized as trading gains and losses and included in other revenues and offsetting increases or decreases in the deferred compensation obligation will be recorded in employee compensation and benefits. For the nine months ended September 30, 2017 and 2016, the trading gains and compensation expense were $0.3 million and $0.2 million, respectively.RFQ-hub Holdings LLC.
27
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
This report contains certain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements may be identified by words such as “expects,” “intends,” “anticipates,” “plans,” “believes,” “seeks,” “estimates,” “will,” or words of similar meaning and include, but are not limited to, statements regarding the outlook for our future business and financial performance. Forward-looking statements are based on management’s current expectations and assumptions, which are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict. It is routine for our internal projections and expectations to change as the year or each quarter in the year progresses, and therefore it should be clearly understood that the internal projections and beliefs upon which we base our expectations may change prior to the end of each quarter or the year. Although these expectations may change, we are underundertake no obligation to revise or update any forward-looking statements contained in this report.report, except to the extent required by applicable law. Our companyCompany’s policy is generally to provide our expectations only once per quarter, and not to update that information until the next quarter. Actual future events or results may differ, perhaps materially from those contained in the projections or forward-looking statements. Factors that could cause or contribute to such differences include those discussed below and elsewhere in this report, particularly in the section captioned Part II, Item 1A, “Risk Factors.Factors,” and in our Form 10-K for the year ended December 31, 2023, including in Part I, Item 1A, “Risk Factors” and Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
Executive Overview
MarketAxess operates a leading electronic trading platform that enablesplatforms delivering greater trading efficiency, a diversified pool of liquidity and significant cost savings to our clients across the global fixed-income market participants to efficiently trade corporate bonds and other types of fixed-income instruments using our patented trading technology.markets. Over 1,3002,000 institutional investor and broker-dealer firms are active users ofuse our patented trading platform, accessing global liquidity intechnology to efficiently trade U.S. high-grade corporatebonds, U.S. high-yield bonds, emerging markets and high-yield bonds, Europeanmarket debt, Eurobonds, municipal bonds, U.S. agencygovernment bonds municipal bonds, credit default swaps and other fixed-income securities. ThroughOur award-winning Open Tradingmarketplace is widely regarded as the preferred all-to-all trading solution in the global credit markets, creating a unique liquidity pool for a broad range of credit market participants. We leverage our diverse set of trading protocols, automated and algorithmic trading solutions, intelligent data and index products and a range of post-trade services to provide an end-to-end trading solution to our robust network of platform participants.
We provide automated and algorithmic trading solutions that we believe, when combined with our integrated and actionable data offerings, will help our clients make faster, better-informed decisions on when and how to trade on our platforms. In 2023, we introduced X-Pro, our newest trading platform, to more seamlessly combine our trading protocols with our proprietary data and pre-trade analytics. We expect that our recent acquisition of Pragma, a quantitative trading technology provider specializing in algorithmic and analytical trading services, will accelerate our development of artificial intelligence driven execution algorithms across many of our key product areas.
We operate in a large and growing market that provides us with a significant opportunity for future growth, due, in part, to the relatively low levels of electronic trading in many of our largest current product areas. We offer Open Trading™ protocols, we execute tradesTrading for most of our products in certain bonds betweenorder to capitalize on this addressable market by increasing the number of potential trading counterparties and amongproviding our clients with a menu of solutions at each step in the trading process. We believe that Open Trading drives meaningful price improvement for our clients and reduces risk in fixed-income markets by creating a global, diversified pool of liquidity whereby our institutional investor, dealer and alternative liquidity provider clients can all interact on an anonymous basis. Institutional investors can also send trading inquiries directly to their traditional broker-dealer clients in an all-to-all trading environmentcounterparties on a matched principal basis. disclosed basis, while simultaneously accessing additional counterparties through our anonymous Open Trading solutions.
We also offerprovide a number of trading-related productsintegrated and services, including: marketactionable data offerings, including CP+™ and Axess All®, to assist clients with real-time pricing and trading decisions; connectivity solutions that facilitate straight-through processing; technology services to optimize trading environments;decisions and execution services for exchange-traded fund managers and other clients. Through our Trax® division, we also offertransaction cost analysis. We have a range of pre- and post-trade services, including straight-through processing, post-trade matching, trade matching,publication, regulatory transaction reporting and market and reference data across a range of fixed-income and other products.
Our platform’s innovative technology solutions are designed to increase the number of potential trading counterparties on our electronic trading platform and create a menu of solutions to address different trade sizes and bond liquidity characteristics. Our traditional request-for-quote model allows our institutional investor clients to simultaneously request competing, executable bids or offers from our broker-dealer clients and execute trades with the broker-dealer of their choice from among those that choose to respond. Our Open Trading™ protocols complement our request-for-quote model by increasing the number of potential counterparties and improving liquidity by allowing all participants to interact anonymously in an all-to-all trading environment. Our platform also provides our broker-dealer clients a solution that enables them to efficiently reach our institutional investor clients for the distribution and trading of bonds.
The majority of our revenues are derivedWe derive revenue from commissions for tradestransactions executed on our platform and distribution fees that are billed to our broker-dealer clients on a monthly basis. We also derive revenues fromplatforms, information andservices, post-trade services and technology products and services, investment income and other income.services. Our expenses consist of employee compensation and benefits, depreciation and amortization, technology and communication expenses, professional and consulting fees, occupancy, marketing and advertising, clearing costs and other general and administrative expenses.
Our objective is to provide the leading global electronic trading platformplatforms for fixed-income securities, connecting broker-dealers and institutional investors more easily and efficiently, while offering a broad array of trading information trading and technology services to market participants across the trading cycle. The key elements of our strategy are:
to innovate and efficiently add new functionality and product offerings to the MarketAxess platform that we believe will help to increase our market share with existing clients, as well as to expand our client base;
|
|
to leverage our existing technology and client relationships to deploy our electronic trading platform into additional product segments within the fixed-income securities markets and deliver fixed-income securities-related technical services and products;
|
|
to continue to increase and supplement our internal growth by entering into strategic alliances, or acquiring businesses or technologies that will enable us to enter new markets, provide new products or services, or otherwise enhance the valueare discussed in Part I, Item 1. “Business – Our Strategy” of our platform to our clients. For example, in recent years, we entered into, and expanded a strategic alliance with BlackRock, Inc. (“BlackRock”) to combine BlackRock’s order flow with our Open Trading™ solution to improveForm 10-K for the range of trading connections available to global credit market participants. In 2016, we entered into an agreement with S&P Dow Jones Indices to jointly develop indices that will track the most liquid segments of the U.S. corporate bond market.year ended December 31, 2023.
28
Critical Factors Affecting Our Industry and Our Company
Economic, Political and Market Factors
The global fixed-income securities industry is risky and volatile and is directly affected by a number of economic, political and market factors that may result in decliningimpact trading volume. These factors could have a material adverse or positive effect on our business, financial condition and results of operations. These factors include, among others, credit market conditions, the current interest rate environment, including the volatility of interest rates and investors’ forecasts of future interest rates, the duration of bonds traded, economic and political conditions in the United States, Europe and elsewhere, and the consolidation or contraction of our broker-dealer and institutional investor clients.
During the first quarter of 2024, the new issue calendar was very active across U.S. credit. U.S. high-grade and U.S. high-yield new issuance were $530.9 billion and $87.6 billion, up 34.0% and 116.5%, respectively, from the prior year. A strong new issue calendar can negatively impact our market share in the short-term, but is expected to positively impact secondary trading volumes over the long term. Strong new issuance and low levels of credit spread volatility negatively impacted our U.S. high-yield volumes and estimated market share in the first quarter of 2024. The low levels of credit spread volatility contributed to a decrease in exchange-trade fund (“ETF”) market maker activity on our platforms, and we believe our institutional investor clients decreased their secondary market trading activity in light of the increased availability of new issues during the quarter. The decrease in U.S. high-yield activity also negatively impacted our total credit average variable fee per million.
There has been increased demand for green bonds in the fixed-income markets in which we operate.
Because the majority of our assets are short-term in nature, they are not significantly affected by inflation. However, the rate of inflation impacts our expenses, such as employee compensation, technology and communications expenses, which may not be readily recoverable in the prices of our services. To the extent inflation continues to result in high interest rates or has other adverse effects on the securities markets or the economy, it may adversely affect our financial position and results of operations.
We expect that current cash and investment balances, in combination with cash flows that are generated from operations and the ability to borrow under our 2023 Credit Agreement, will be sufficient to meet our liquidity needs and planned capital expenditure requirements for at least the next twelve months. We ended the quarter with $749.9 million in available borrowing capacity under the 2023 Credit Agreement and capital significantly in excess of our regulatory requirements.
Competitive Landscape
The global fixed-income securities industry generally, and the electronic financial services markets in which we engage, in particular, are highly competitive, and we expect competition to intensify in the future. Sources of competition for us will continue to include, among others, bond trading conducted directly between broker-dealers and their institutional investor clients over the telephone or electronically and other multi-dealer or all-to-all trading platforms. Competitors, including companies in which some of our broker-dealer clients have invested, have developed or acquired electronic trading platforms or have announced their intention to explore the development of electronic platforms or information networks that may compete with us.
In general, weWe primarily compete on the basis of a number of key factors, including, among others,our client network, the liquidity provided on our platform, the level of commissions charged for trades executed on our platform, the magnitude and frequency of price improvement enabled by our platformdealer, and, to a lesser extent, institutional investor clients, the total transaction costs associated with our services, the breadth of products, protocols and services offered, as well as the quality, reliability, security and speedease of execution.use of our platforms. We believe that our ability to grow volumes and revenues will largely depend on our performance with respect to these factors.
There has been increased demand for portfolio trading workflows over the last few years, which has resulted in heightened competition among trading platforms to enhance their portfolio trading offerings and expand them across different geographies and products. During periods of relatively lower credit spread volatility, clients are beginning to use portfolio trading workflows in lieu of more established trading protocols designed to generate price competition on individual bonds. Our dealer clients have also increased their usage of matching sessions offered by competing platforms in recent periods. To the extent that our clients increase their use of portfolio trading and matching session protocols offered by other platforms, our market share in those products could decrease.
Our competitive position is also enhanced by the familiarityunique liquidity provided by our Open Trading functionalities and the integration of our broker-dealer and institutional investor clients with our electronic trading platformplatforms and other systems. We have focused on the unique aspects of the credit markets we serve in the development of our platform,platforms, working closely with our clients to provide a system that is suited to their needs.
29
Regulatory Environment
Our industry has been andbusiness is subject to continuous regulatory changes and may become subject to newextensive regulations or changes in the interpretation or enforcement of existing regulations, which could require us to incur significant costs.
Following the global financial crisis and other recent events in the financial industry, governments and regulators in both the United States and Europe called for increased regulationinternationally, which may expose us to significant regulatory risk and transparencycause additional legal costs to ensure compliance. The existing legal framework that governs the financial markets is periodically reviewed and amended, resulting in the over-the-counter markets. enactment and enforcement of new laws and regulations that apply to our business. In January 2022, the SEC proposed rules that will expand Regulation ATS and Regulation SCI to alternative trading systems (ATS) that trade government securities and amend the SEC rule regarding the definition of an “exchange” to include Communication Protocol Systems, such as our request-for-quote protocols. Based on these proposed rules, we expect that we will have to operate all of our trading protocols in compliance with Regulation ATS and we could become subject to Regulation SCI for certain parts of our business in the future. The SEC has also adopted final rule amendments that, effective May 2024, will shorten the standard settlement cycle for most broker-dealer securities transactions from two business days after the trade date (T+2) to one business day after the trade date (T+1). The shortening of the settlement cycle will lead to a reduction in the length of exposure to trading counterparties and lower margin requirements for our clearing operations, but it is also expected to increase the operational costs and complexities associated with cross border transactions conducted on our platforms. The SEC also recently adopted final rules regarding the central clearing of certain secondary market transactions involving U.S. Treasury securities. This central clearing mandate will impact certain of our participants who do not centrally clear such trades today, and some have expressed concerns about the potential impact of additional clearing costs. The impact of any of these reform efforts on us and our operations remains uncertain.
As a result the Dodd-Frank Act was signed into law in 2010 and, among other things, mandated the clearing of certain derivative instruments (“swaps”) through regulated central clearing organizations and mandatory trading of those instruments through either regulated exchanges or swap execution facilities (“SEFs”), in each case, subject to certain key exceptions.
Various rules promulgated since the financial crisis could also adversely affect our bank-affiliated broker-dealer clients’ ability to make markets in a variety of fixed-income securities, thereby negatively impacting the level of liquidity and pricing available on our trading platform. For example, while the Volcker Rule does not apply directly to us, the Volcker Rule bans proprietary trading by banks and their affiliates. In addition, enhanced leverage ratios applicable to large banking organizations in the U.S. and Europe
require such organizations to strengthen their balance sheets and may limit their ability or willingness to make markets on our trading platform. We cannot predict the extent to which these rules or any future regulatory changes may adversely affect our business and operations.
Following President Trump’s election in November 2016, he has pursued a path of financial deregulation, including by signing an executive order that requires the Treasury Department to review the provisions of the Dodd-Frank Act. As a result,U.K.’s departure from the Treasury Department has begun a process of reviewing existing U.S. capital markets regulations, and has issued a report with recommendations to improve corporate bond liquidity.
Similar to the U.S., regulatory bodiesE.U. in Europe are developing new rules for the fixed-income markets. MiFID II and MiFIR were approved in June 2014 and introduce significant changes in market structure designed to: (i) enhance pre- and post-trade transparency for fixed-income instruments with the scope of requirements calibrated for liquidity, (ii) increase and enhance post-trade reporting obligations with a requirement to submit post-trade data to Approved Reporting Mechanisms, (iii) ensure trading of certain derivatives occurs on regulated trading venues and (iv) establish a consolidated tape for trade data. MiFID II and MiFIR are expected to take effect in January 2018 and the final rules may have an adverse effect on our operations or our ability to provide our electronic trading platform in a manner that can successfully compete against other types of regulated and non-regulated venues for the fixed-income trading needs of our clients. In addition, MiFID II is expected to cause us to expend significantly more compliance, business and technology resources, incur additional operational costs and create additional regulatory exposure for our trading and post-trade businesses. While we generally believe the net impact of the rules and regulations may be positive for our businesses, unintended consequences of the rules and regulations may adversely affect us in ways yet to be determined.
In March 2017, the U.K. notified the European Council of its intention to leave the European Union2020 (commonly referred to as “Brexit”). By invoking Article 50 of, we obtained authorizations from the Lisbon Treaty, the U.K. is currently set to leave the European Union in March 2019. Depending on the terms agreed between E.U. member states and the U.K. as part of the exit negotiations,AFM for our U.K. subsidiaries may not be able to rely on the existence of a “passporting” regime that allows immediate access to the single E.U. market. Accordingly, we have begun the process of establishing one or more new regulated subsidiaries in the Netherlands in 2019. We now provide regulated services to our clients within the E.U. in orderreliance on the cross-border services passport held by our Dutch subsidiaries. Brexit has led to provide our trading platforman ongoing divergence between the U.K. and certain post-trade servicesE.U. financial regulations, which has made it more difficult and costly to clientscomply with the extensive government regulation to which we are subject. The cost and complexity of operating across increasingly divergent regulatory regimes has increased and is likely to continue to increase in the E.U. following Brexit.future.
Rapid Technological ChangesCompliance with regulations may require us to dedicate additional financial and operational resources, which may adversely affect our profitability. For example, the E.U.’s Digital Operational Resilience Act (DORA), which will become applicable to portions of our business in 2025, will require us to dedicate additional financial and operational resources to meet the significant additional information communication technologies services-related governance, risk management, resilience testing and sub-contracting requirements created by the legislation. However, we also believe new regulations may increase demand for our platforms and we believe we are well positioned to benefit from those regulatory changes that cause market participants to seek electronic trading platforms that meet the various regulatory requirements.
For further description of the regulations which govern our business, see Part1, Item I. “Business – Government Regulation” of our Form 10-K for the year ended December 31, 2023.
Technology Environment
We must continue to enhance and improve our electronic trading platform.platforms. The electronic financial services industry ismarkets in which we compete are characterized by increasingly complex protocols, systems and infrastructures and new business models.technology infrastructure requirements. Our future success will depend on our ability to enhance our existing products and services, develop and/or license new products and technologies that address the increasingly sophisticated and varied needs of our existing and prospective broker-dealer and institutional investor clients and respond to technological advances and emerging industry and regulatory standards and practices on a cost-effective and timely basis. For example, in 2023, we introduced MarketAxess X-Pro, our new trading platform, which provides traders with a flexible user experience, intuitive workflows and access to our proprietary data and pre-trade analytics. We have been issued 13 patents coveringplan to continue to focus on technology infrastructure initiatives and improving our most significantplatforms with the goal of further enhancing our leading market position.
As the overall share of electronic trading grows in global credit products, we are experiencing continued demand for, and growth in, our automated and algorithmic trading solutions. We also support a large and growing base of dealer market making algorithms. In the first quarter of 2024, trading volumes in Auto-X, one of our automated trading protocols, rose to $93.6 billion, up 36.4% from $68.7 billion in the first quarter of 2023. There were 231 active client firms using Auto-X in the first quarter of 2024, up 60.4% from the prior year. In the first quarter of 2024, there were 10.8 million dealer algorithmic responses on our platforms, up 50.2% from the first quarter of 2023.
We experience cybersecurity threats and other aspectsincidents from time to time. However, as of the date of this report, MarketAxess has not experienced a cybersecurity threat or incident that has materially affected the Company in at least the past three years. Cybersecurity incidents could impact revenue and operating income and increase costs. We therefore continue to make investments in our cybersecurity infrastructure and training of employees, which may result in increased costs, to strengthen our cybersecurity measures.
See also Part I, Item 1A. - “Risk Factors, Technology, IT Systems and Cybersecurity Risks” and Part I, Item 1C – “Cybersecurity.” of our trading system technology.Form 10-K for the year ended December 31, 2023.
30
Trends in Our Business
The majority of our revenues arerevenue is derived from commissions for transactions executed on our platformplatforms between and among our institutional investor and broker-dealer clients and monthly distribution fees. We believe that therethe following are fivethe key variables that impact the notional value of such transactions on our platformplatforms and the amount of commissions and distribution fees earned by us:
• | the number of participants on our platforms and their willingness to use our platforms instead of competitors' platforms or other execution methods; | |
• | the frequency and competitiveness of the price responses by participants on our platforms; | |
• | the number of markets that are available for our clients to trade on our platforms; | |
• | the overall level of activity in these markets; | |
• | the duration of the bonds trading on our platforms; and | |
• | the particular fee plan and protocol under which we earn commissions and distribution fees. |
the number of participants on our platform and their willingness to originate transactions through the platform;
the number of institutional investor and broker-dealer clients on the platform and the frequency and competitiveness of the price responses they provide on our platform;
the number of markets for which we make trading available to our clients;
the overall level of activity in these markets; and
the level of commissions that we collect for trades executed through the platform.
We believe that overall corporate bond market trading volume is affected by various factors including the absolute levels of interest rates, the direction of interest rate movements, the level of new issues of corporate bonds and the volatility of corporate bond spreads versus U.S. Treasury securities. Because a significant percentage of our revenue is tied directly to the volume of securities traded on our platform,platforms, it is likely that a general decline in trading volumes, regardless of the cause of such decline, would reduce our revenues and have a significant negative impact on profitability.
As further described under “— Critical Factors Affecting our Industry and our Company — Economic, Political and Market Factors” and “— Results of Operations — Three Months Ended March 31, 2024 Compared to Three Months Ended March 31, 2023,” our trading volumes and average variable transaction fee per million decreased compared to the three months ended March 31, 2023.
Components of Our Results of Operations
Commission Revenue
Commissions are recognized on a trade date basis, are generally calculated as a percentage of the notional dollar volume of bonds traded on our platformplatforms and vary based on the type, size, yield and maturity of the bond traded. Under our transaction fee plans, bondstraded, as well as individual client incentives. Bonds that are more actively traded or that have shorter maturities are generally charged lower commissions, while bonds that are less actively traded or that have longer maturities generally command higher commissions.
For Open Trading trades that we execute between and among institutional investor and broker-dealer clients on a matched principal basis by serving as counterparty to both the buyer and the seller, we earn our commission through the difference in price between the two trades. Distribution fees include any unusedFor the majority of U.S. Treasury matched principal trades, commissions are invoiced and recorded on a monthly fee commitments under our variable fee plans.basis.
Credit Commissions. Credit includes U.S. High-Grade Corporate Bond Commissions. high-grade corporate bonds, high-yield bonds, emerging markets bonds, Eurobonds, municipal bonds and leveraged loans. Our U.S. high-grade corporate bond fee plans generally incorporate variable transaction fees and fixed distribution fees billed to our broker-dealer clients on a monthly basis. Certain dealersbroker-dealers participate in fee programs that do not contain monthly distribution fees and instead incorporate additional per transaction execution fees and minimum monthly fee commitments. Under these fee plans, we electronically add the transaction fee to the spread quoted by the broker-dealer client. The U.S. high-grade transaction fee is generally designated in basis points in yield and, as a result, is subject to fluctuation depending on the duration of the bond traded.
Commissions for high-yield bonds, emerging markets bonds, Eurobonds, municipal bonds and leveraged loans generally vary based on the type of the instrument traded using standard fee schedules. Our high-yield fee plan structure is similar to our U.S. high-grade fee plans. Certain dealers participate in a high-yield fee plan that incorporates a variable transaction fee and a fixed distribution fee, while other dealers participate in a plan that does not contain monthly distribution fees and instead incorporates additional per transaction execution fees and minimum monthly fee commitments.
The average U.S. high-gradecredit fees per million may vary in the future due to changes in yield, years-to-maturity and nominal size of high-grade bonds traded on our platform.platforms and changes in product mix or trading protocols.
Other Credit distribution fees include any unused monthly fee commitments under our variable fee plans.
Rates Commissions. Other creditRates includes Eurobonds, emerging markets bonds, high-yield bondsU.S. Treasury, U.S. agency and municipalEuropean government bonds. Commissions for other creditrates products generally vary based on the type of the instrument traded using standard fee schedules. During the third quarter of 2017, we changed our high-yield fee plan structure. Similar to ourtraded. U.S. high-gradeTreasury fee plans certain dealers now participate in a high-yield fee plan that incorporates a variable transaction feeare typically volume tiered and distribution fee and other dealers participate in a plan that does not contain a monthly distribution fee and instead incorporates additional per transaction execution fees and minimum monthly fee commitments. Prior tocan vary based on the fee plan change, our high-yield fee plan options generally consisted solely of variable transaction fees. During the fourth quarter of 2016, our Eurobond fee plan structure was changed to contain standardized minimum monthly commitments and variable transaction fees. Prior to the fee plan change, our European fee plans generally incorporated some combination of monthly distribution fees and variable transaction fees.trading protocol. The average other credit feesrates fee per million may vary in the future due to changes in product mix or trading protocols.
Liquid Products Commissions. Liquid products includes U.S. agency, European government bonds and credit derivatives. Commissions for liquid products generally vary based on the type of the instrument traded using standard fee schedules.
We anticipate that average fees per million may change in the future. Consequently, past trends in commissions are not necessarily indicative of future commissions.
31
Other Commissions. Other commissions include equities and foreign exchange commissions for Pragma's algorithmic trading services. Commissions for equities and foreign exchange are volume-tiered and consist of variable transaction fees that are billed monthly.
Other Revenue
In addition to the commissions discussed above, we earn revenue from information and post-trade services, investment income and other income.Information Services
Information and post-trade services. We generate revenue from information services provideddata licensed to our broker-dealer clients, institutional investor clients and data-only subscribers. Information services are invoiced monthly, quarterly or annually. When billed in advance,subscribers; professional and consulting services; technology software licenses; and maintenance and support services. These revenues are deferredeither for subscription-based services transferred over time, and may be net of volume-based discounts, or one-time services. Revenues for services transferred over time are recognized monthly onratably over the contract period while revenues for services transferred at a straight-line basis. We also generate revenue from trade matching and regulatory transaction reporting services. Revenue ispoint in time are recognized in the period the services are provided. Customers are generally billed monthly, quarterly, or annually; revenues billed in advance are deferred and recognized ratably over the contract period.
Investment Income. Investment income consists of income earned on our investments.Post-trade Services
Other. Other revenues includeWe generate revenue from professional consultingregulatory transaction reporting, trade publication and post-trade matching services. Customers are generally billed in the current month or monthly in arrears and revenue is recognized in the period that the transactions are processed. Revenues billed in advance are deferred and recognized ratably over the contract period. We also generate one-time implementation fees for onboarding clients, which are invoiced and recognized in the period the implementation is complete.
Technology Services
Technology services includes technology software licensesservices revenue generated by Pragma and maintenance and support services, feesrevenue generated from telecommunications line charges to broker-dealer clients, initial set-up fees and other miscellaneous revenues.clients.
In the normal course of business, we incur the following expenses:
Employee Compensation and Benefits. Employee compensation and benefits is our most significant expense and includes employee salaries, stock-based compensation costs, other incentive compensation, employee benefits and payroll taxes.
Depreciation and Amortization. We depreciate our computer hardware and related software, office hardware and furniture and fixtures and amortize our capitalized software development costs on a straight-line basis over three to seven years. We amortize leasehold improvements on a straight-line basis over the lesser of the life of the improvement or the remaining term of the lease. Intangible assets with definite lives, including purchased technologies, customer relationships and other intangible assets, are amortized over their estimated useful lives, rangingwhich range from threeone to 15 years.years, using either a straight-line or accelerated amortization method based on the pattern of economic benefit that we expect to realize from such assets. Intangible assets are assessed for impairment when events or circumstances indicate a possible impairment.
Technology and Communications. Technology and communications expense consists primarily of costs relating to software and licenses, maintenance on software and hardware, our internal network connections, data centercloud hosting costs, and data feeds provided by outside vendors, or service providers.U.S. government bonds technology platform licensing fees, data center hosting costs and our internal network connections. The majority of our broker-dealer clients have dedicated high-speed communication lines to our network in order to provide fast data transfer. We charge our broker-dealer clients a monthly fee for these connections, which is recovered against the relevant expenses we incur.
Professional and Consulting Fees. Professional and consulting fees consist primarily of accounting fees, legal fees and fees paid to information technology and other consultants for services provided for the maintenance of our trading platform,platforms, information and post-trade services products and other services.
Occupancy. Occupancy costs consist primarily of office and equipment rent, utilities and commercial rent tax.
Marketing and Advertising. Marketing and advertising expense consists primarily of printbranding and other advertising expenses we incur to promote our products and services. This expense also includes costs associated with attending or exhibiting at industry-sponsored seminars, conferences and conventions, and travel and entertainment expenses incurred by our sales force to promote our trading platform andplatforms, information services and post-trade services.
Clearing Costs.Clearing costs consist of fees that we are charged by third-party clearing brokers and depositories for the clearing and settlement of matched principal trades.trades, regulatory reporting fees and variable transaction fees assessed by the provider of our third-party middle office system.
General and Administrative. General and administrative expense consists primarily of general travel and entertainment, board of directors’ expenses, regulatory fees, media subscription costs, charitable contributions, provision for doubtful accounts, foreign currency transaction gains (losses) and various state franchise and U.K. value-added taxes.taxes and other miscellaneous expenses.
32
Expenses may continue to grow in the future, notably in employee compensation and benefits primarilyas we increase headcount to support investment in new products, operational support and geographic expansion, depreciation and amortization due to increased investment in new products and geographic expansion. Weenhancements to our trading platforms, and technology and communication costs. Expenses may also expect occupancygrow due to increased regulatory complexity, acquisitions or the continued effects of inflation.
Other Income (Expense)
Interest Income. Interest income consists of interest income earned on our cash and cash equivalents, restricted cash, deposits and investments.
Interest Expense. Interest expense to increaseconsists of financing charges incurred on short-term borrowings.
Equity in 2018 as a resultEarnings of Unconsolidated Affiliate. Equity in earnings of unconsolidated affiliate represents the new office space for our global headquarters in New York City. See Item 2 of the Annual Report on Form 10-K for a discussionproportionate share of our properties. However, we believe that operating leverage can be achieved by increasing volumes in existing productsequity method investee's net income.
Other, Net. Other, net consists of realized and adding new products without substantial additions to our infrastructure.unrealized gains and losses on trading security investments and foreign currency forward contracts, foreign currency transaction gains or losses, investment advisory fees, credit facility administrative fees, gains or losses on revaluations of contingent consideration payable and other miscellaneous revenues and expenses.
Critical Accounting Policies and Estimates
This Management’s Discussion and Analysis of Financial Condition and Results of Operations discusses our Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the United States, also referred to as U.S. GAAP. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the reported amounts of income and expenses during the reporting periods. We base our estimates and judgments on historical experience and on various other factors that we believe are reasonable under the circumstances. Actual results may differ from these estimates under varying assumptions or conditions. Critical accounting estimates for us include stock-based compensation.
Stock-based compensation
We maintain the 2020 Plan, which provides for the grant of full value awards, stock options and other stock-based awards to encourage employees, consultants and non-employee directors to participate in our long-term success. We make critical accounting estimates related to performance shares and performance stock units granted under the 2020 Plan.
In 2022, 2023 and 2024, annual performance stock units (the “PSUs”) were granted to the executive officers and certain senior managers. Each PSU is earned or forfeited based on our level of achievement of certain predetermined metrics, including pre-tax adjusted operating margin, U.S. credit market share and revenue growth excluding U.S. credit. The vested share pay-out ranges from zero to 200% of the PSU target. The number of PSUs that vest, if any, is determined by the level of achievement of the performance metrics during the three-year performance periods, as certified by the Compensation and Talent Committee following the conclusion of the performance period. In addition, participants must provide continued service through the vesting date, subject to death, disability and qualified retirement exceptions, as applicable. Compensation expense for the PSUs is measured using the fair value of our stock at the grant date and estimates of future performance and actual share payouts. Each period, we make estimates of the current expected share payouts and adjust the life-to-date compensation expense recognized since the grant date. As of March 31, 2024, a 10.0% change in the expected final share payouts would increase or decrease the life-to-date compensation expense by $1.7 million. The estimated final share payouts for the 2022 and 2023 awards as of March 31, 2024 decreased 9.2% compared to December 31, 2023.
Recent Accounting Pronouncements
See Note 2 for a discussion of the Notesany recent accounting pronouncements relevant to our Consolidated Financial Statements includes a summary of the significant accounting policies and methods used in the preparation of our Consolidated Financial Statements. There were no significant changes to our critical accounting policies and estimates during the nine months ended September 30, 2017, as compared to those we disclosed in Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2016.
Recent Accounting Pronouncements
See Note 2 to the Consolidated Financial Statements for a discussion on recent accounting pronouncements.
Segment Results
We operate an electronic multi-party platformplatforms for the trading of fixed-income securities and provide related data, analytics, compliance tools and post-trade services. We consider our operations to constitute a single business segment because of the highly integrated nature of these productproducts and services, of the financial markets in which we compete and of our worldwide business activities. We believe that results by geographic region or client sector are not necessarily meaningful in understanding our business. See Note 1315 to the Consolidated Financial Statements for certain geographic information about the Company’sour business required by U.S. GAAP.
33
Results of Operations
Three Months Ended September 30, 2017March 31, 2024 Compared to Three Months Ended September 30, 2016March 31, 2023
Overview
Total revenues increased by $6.4 million or 7.1% to $96.7 millionThe following table summarizes our financial results for the three months ended September 30, 2017, from $90.3March 31, 2024 and 2023:
|
| Three Months Ended March 31, | ||||||||||||||||
|
| 2024 |
|
| 2023 |
|
|
| $ |
|
| % | ||||||
|
| ($ in thousands, except per share amounts) | ||||||||||||||||
Revenues |
| $ | 210,318 |
|
| $ | 203,169 |
|
|
| $ | 7,149 |
|
|
| 3.5 |
| % |
Expenses |
|
| 117,818 |
|
|
| 107,813 |
|
|
|
| 10,005 |
|
|
| 9.3 |
|
|
Operating income |
|
| 92,500 |
|
|
| 95,356 |
|
|
|
| (2,856 | ) |
|
| (3.0 | ) |
|
Other income (expense) |
|
| 4,217 |
|
|
| 2,839 |
|
|
|
| 1,378 |
|
|
| 48.5 |
|
|
Income before income taxes |
|
| 96,717 |
|
|
| 98,195 |
|
|
|
| (1,478 | ) |
|
| (1.5 | ) |
|
Provision for income taxes |
|
| 24,102 |
|
|
| 24,567 |
|
|
|
| (465 | ) |
|
| (1.9 | ) |
|
Net income |
| $ | 72,615 |
|
| $ | 73,628 |
|
|
| $ | (1,013 | ) |
|
| (1.4 | ) | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Net income per common share – Diluted |
| $ | 1.92 |
|
| $ | 1.96 |
|
|
| $ | (0.04 | ) |
|
| (2.0 | ) | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in average foreign currency exchange rates compared to the U.S. dollar had the effect of increasing revenues and expenses by $0.8 million and $0.6 million, respectively, for the three months ended September 30, 2016. This increase in total revenues was primarily dueMarch 31, 2024 compared to higher commissions of $4.8 million and information and post-trade services revenue of $1.1 million.
Total expenses increased by $5.6 million or 12.7% to $49.5 million for the three months ended September 30, 2017, from $43.9 million for the three months ended September 30, 2016. This increase was primarily due to higher employee compensation and benefits of $1.7 million, professional and consulting fees of $1.2 million, technology and communication costs of $0.8 million, general and administrative costs of $0.7 million and occupancy costs of $0.6 million.March 31, 2023.
Income before taxes increased by $0.9 million or 1.9% to $47.2 million for the three months ended September 30, 2017, from $46.4 million for the three months ended September 30, 2016. Net income increased by $3.2 million or 10.4% to $34.1 million for the three months ended September 30, 2017, from $30.9 million for three months ended September 30, 2016.
Our revenues for the three months ended September 30, 2017March 31, 2024 and 2016,2023, and the resulting dollar and percentage changes, were as follows:
|
| Three Months Ended March 31, | |||||||||||||||||||||||||
|
| 2024 |
| 2023 |
|
|
|
|
|
|
| ||||||||||||||||
|
| ($ in thousands) | |||||||||||||||||||||||||
|
|
|
|
| % of |
|
|
|
| % of |
| $ |
|
| % | ||||||||||||
Commissions |
| $ | 184,873 |
|
|
| 87.9 |
| % |
| $ | 181,991 |
|
|
| 89.6 |
| % |
| $ | 2,882 |
|
|
| 1.6 |
| % |
Information services |
|
| 11,881 |
|
|
| 5.6 |
|
|
|
| 11,010 |
|
|
| 5.4 |
|
|
|
| 871 |
|
|
| 7.9 |
|
|
Post-trade services |
|
| 10,730 |
|
|
| 5.1 |
|
|
|
| 9,980 |
|
|
| 4.9 |
|
|
|
| 750 |
|
|
| 7.5 |
|
|
Technology services |
|
| 2,834 |
|
|
| 1.4 |
|
|
|
| 188 |
|
|
| 0.1 |
|
|
|
| 2,646 |
|
| NM |
|
| |
Total revenues |
| $ | 210,318 |
|
|
| 100.0 |
| % |
| $ | 203,169 |
|
|
| 100.0 |
| % |
| $ | 7,149 |
|
|
| 3.5 |
|
|
NM - not meaningful |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
34
| Three Months Ended September 30, | |||||||||||||||||||||||
| 2017 |
|
|
| 2016 |
|
|
|
|
|
|
|
|
|
|
| ||||||||
| ($ in thousands) | |||||||||||||||||||||||
| $ |
| % of Revenues |
| $ |
| % of Revenues |
| $ Change |
|
| % Change | ||||||||||||
Commissions | $ | 86,270 |
|
| 89.2 |
| % |
| $ | 81,456 |
|
| 90.2 |
| % |
| $ | 4,814 |
|
|
| 5.9 |
| % |
Information and post-trade services |
| 8,372 |
|
| 8.7 |
|
|
|
| 7,322 |
|
| 8.1 |
|
|
|
| 1,050 |
|
|
| 14.3 |
|
|
Investment income |
| 964 |
|
| 1.0 |
|
|
|
| 534 |
|
| 0.6 |
|
|
|
| 430 |
|
|
| 80.5 |
|
|
Other |
| 1,095 |
|
| 1.1 |
|
|
|
| 959 |
|
| 1.1 |
|
|
|
| 136 |
|
|
| 14.2 |
|
|
Total revenues | $ | 96,701 |
|
| 100.0 |
| % |
| $ | 90,271 |
|
| 100.0 |
| % |
| $ | 6,430 |
|
|
| 7.1 |
| % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commissions. Our commission revenues for the three months ended September 30, 2017March 31, 2024 and 2016,2023, and the resulting dollar and percentage changes, were as follows:
| Three Months Ended March 31, | ||||||||||||||||||
| 2024 |
|
| 2023 |
|
| $ |
|
| % | |||||||||
| ($ in thousands) | ||||||||||||||||||
Variable transaction fees |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Credit | $ |
| 141,504 |
|
| $ |
| 140,970 |
|
| $ |
| 534 |
|
|
| 0.4 |
| % |
Rates |
|
| 5,166 |
|
|
|
| 6,258 |
|
|
|
| (1,092 | ) |
|
| (17.4 | ) |
|
Other |
|
| 4,849 |
|
|
|
| — |
|
|
|
| 4,849 |
|
| NM |
|
| |
Total variable transaction fees |
|
| 151,519 |
|
|
|
| 147,228 |
|
|
|
| 4,291 |
|
|
| 2.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Fixed distribution fees |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Credit |
|
| 33,288 |
|
|
|
| 34,684 |
|
|
|
| (1,396 | ) |
|
| (4.0 | ) |
|
Rates |
|
| 66 |
|
|
|
| 79 |
|
|
|
| (13 | ) |
|
| (16.5 | ) |
|
Total fixed distribution fees |
|
| 33,354 |
|
|
|
| 34,763 |
|
|
|
| (1,409 | ) |
|
| (4.1 | ) |
|
Total commissions | $ |
| 184,873 |
|
| $ |
| 181,991 |
|
| $ |
| 2,882 |
|
|
| 1.6 |
| % |
NM - not meaningful |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended September 30, | |||||||||||||||
| 2017 |
|
| 2016 |
|
| $ Change |
|
| % Change | ||||||
| ($ in thousands) | |||||||||||||||
Variable transaction fees |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. high-grade | $ | 34,020 |
|
| $ | 33,765 |
|
| $ | 255 |
|
|
| 0.8 |
| % |
Other credit |
| 31,381 |
|
|
| 30,181 |
|
|
| 1,200 |
|
|
| 4.0 |
|
|
Liquid products |
| 545 |
|
|
| 798 |
|
|
| (253 | ) |
|
| (31.7 | ) |
|
Total variable transaction fees |
| 65,946 |
|
|
| 64,744 |
|
|
| 1,202 |
|
|
| 1.9 |
|
|
Distribution fees |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. high-grade |
| 16,305 |
|
|
| 15,077 |
|
|
| 1,228 |
|
|
| 8.1 |
|
|
Other credit |
| 3,844 |
|
|
| 1,466 |
|
|
| 2,378 |
|
|
| 162.2 |
|
|
Liquid products |
| 175 |
|
|
| 169 |
|
|
| 6 |
|
|
| 3.6 |
|
|
Total distribution fees |
| 20,324 |
|
|
| 16,712 |
|
|
| 3,612 |
|
|
| 21.6 |
|
|
Total commissions | $ | 86,270 |
|
| $ | 81,456 |
|
| $ | 4,814 |
|
|
| 5.9 |
| % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variable Transaction Fees
The following table showsCredit variable transaction fees increased $0.5 million driven by a 7.4% increase in total credit trading volume, partially offset by a 6.6% decrease in total credit average variable transaction fee per million. Open Trading credit volume totaled $269.4 billion during the extent to which the increase inthree months ended March 31, 2024, down 3.6%, and Open Trading credit variable transaction fees represented 31.5% and 36.5% of total variable transaction fees for the three months ended September 30, 2017 was attributable to changes in transaction volumesMarch 31, 2024 and 2023, respectively. Rates variable transaction fees decreased $1.1 million driven principally by a 29.0% decrease in trading volumes, partially offset by a 16.3% increase in average variable transaction fee per million:million. Other variable transaction fees include equities and foreign exchange commissions earned by Pragma.
Credit fixed distribution fees decreased $1.4 million mainly due to the consolidation of two global dealers and lower unused minimums in U.S. high-grade on increased activity, partially offset by dealer migrations to fixed fee plans.
| Change from the Three Months Ended September 30, 2016 |
| |||||||||||||
| U.S. High-Grade |
|
| Other Credit |
|
| Liquid Products |
|
| Total |
| ||||
| ($ in thousands) |
| |||||||||||||
Volume increase (decrease) | $ | 4,234 |
|
| $ | 2,687 |
|
| $ | (332 | ) |
| $ | 6,589 |
|
Variable transaction fee per million (decrease) increase |
| (3,979 | ) |
|
| (1,487 | ) |
|
| 79 |
|
|
| (5,387 | ) |
Total increase (decrease) in variable commissions | $ | 255 |
|
| $ | 1,200 |
|
| $ | (253 | ) |
| $ | 1,202 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our trading volumes for the three months ended September 30, 2017March 31, 2024 and 20162023 were as follows:
| Three Months Ended March 31, | ||||||||||||||||||
| 2024 |
|
| 2023 |
|
| $ |
|
| % | |||||||||
| ($ in millions) | ||||||||||||||||||
Trading volume data |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Credit |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
High-grade | $ |
| 455,998 |
|
| $ |
| 392,715 |
|
| $ |
| 63,283 |
|
|
| 16.1 |
| % |
High-yield |
|
| 85,379 |
|
|
|
| 122,873 |
|
|
|
| (37,494 | ) |
|
| (30.5 | ) |
|
Emerging markets |
|
| 221,427 |
|
|
|
| 191,841 |
|
|
|
| 29,586 |
|
|
| 15.4 |
|
|
Eurobonds |
|
| 128,849 |
|
|
|
| 118,366 |
|
|
|
| 10,483 |
|
|
| 8.9 |
|
|
Other credit |
|
| 26,335 |
|
|
|
| 28,683 |
|
|
|
| (2,348 | ) |
|
| (8.2 | ) |
|
Total credit |
|
| 917,988 |
|
|
|
| 854,478 |
|
|
|
| 63,510 |
|
|
| 7.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Rates |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
U.S. government bonds |
|
| 1,045,796 |
|
|
|
| 1,491,292 |
|
|
|
| (445,496 | ) |
|
| (29.9 | ) |
|
Agency and other government bonds |
|
| 31,626 |
|
|
|
| 27,061 |
|
|
|
| 4,565 |
|
|
| 16.9 |
|
|
Total rates |
|
| 1,077,422 |
|
|
|
| 1,518,353 |
|
|
|
| (440,931 | ) |
|
| (29.0 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Total trading volume | $ |
| 1,995,410 |
|
| $ |
| 2,372,831 |
|
| $ |
| (377,421 | ) |
|
| (15.9 | ) | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Number of U.S. Trading Days |
|
| 61 |
|
|
|
| 62 |
|
|
|
|
|
|
|
|
| ||
Number of U.K. Trading Days |
|
| 63 |
|
|
|
| 64 |
|
|
|
|
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended September 30, | |||||||||||||||
| 2017 |
|
| 2016 |
|
| $ Change |
|
| % Change | ||||||
| ($ in millions) | |||||||||||||||
Trading Volume Data |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. high-grade - fixed rate | $ | 192,092 |
|
| $ | 172,006 |
|
| $ | 20,086 |
|
|
| 11.7 |
| % |
U.S. high-grade - floating rate |
| 8,734 |
|
|
| 6,442 |
|
|
| 2,292 |
|
|
| 35.6 |
|
|
Total U.S. high grade |
| 200,826 |
|
|
| 178,448 |
|
|
| 22,378 |
|
|
| 12.5 |
|
|
Other credit |
| 133,757 |
|
|
| 122,821 |
|
|
| 10,936 |
|
|
| 8.9 |
|
|
Liquid products |
| 12,189 |
|
|
| 20,880 |
|
|
| (8,691 | ) |
|
| (41.6 | ) |
|
Total | $ | 346,772 |
|
| $ | 322,149 |
|
| $ | 24,623 |
|
|
| 7.6 |
| % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of U.S. Trading Days |
| 63 |
|
|
| 64 |
|
|
|
|
|
|
|
|
|
|
Number of U.K. Trading Days |
| 64 |
|
|
| 65 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35
For volume reporting purposes, transactions in foreign currencies are converted to U.S. dollars at average monthly rates.
The 12.5%16.1% increase in our U.S. high-grade volume was principally due to an increase in estimated market volumes, partially offset by a decrease in our estimated market share. Estimated U.S. high-grade market volume as reported by FINRA’s Trade Reporting and Compliance Engine (TRACE) increased by 19.3% to $2.4 trillion for the three months ended March 31, 2024 compared to the three months ended March 31, 2023. Our estimated market share of total U.S. high-grade corporate bond volume as reported by Financial Industry Regulatory Authority (“FINRA”) Trade Reporting and Compliance Engine (“TRACE”)decreased to 17.2%19.3% for the three months ended September 30, 2017March 31, 2024 from 16.0%19.9% for the three months ended September 30, 2016, coupled with an increaseMarch 31, 2023. U.S. high-yield volume decreased by 30.5% mainly due to a decrease in overallour estimated market volume as measured by TRACE.share. Lower levels of credit spread volatility drove a significant decrease in ETF market maker client activity on our platform, which negatively impacted our U.S. high-grade TRACE volume increased 4.5% to $1.2 trillion for the three months ended September 30, 2017 from $1.1 trillion for the three months ended September 30, 2016.
Other credithigh-yield market share. Emerging markets volumes increased by 8.9% for the three months ended September 30, 2017 compared to the three months ended September 30, 2016, primarily15.4%, mainly due to an increase of 21.8% in emerginglocal markets trading volumes. Eurobond volumes increased by 8.9%. Other credit volumes decreased by 8.2% due to lower estimated municipal bond volume,market volumes, partially offset by an increase in our estimated municipal bond market share. Rates trading volume decreased 29.0%, primarily due to a decrease of 7.8% in high-yield bond volume. Liquid products volume (excluding credit derivatives) decreased by 41.6% for the three months ended September 30, 2017 compared to the three months ended September 30, 2016, due mainly to a 38.4% decrease in U.S. agency bondour estimated market volume as reported by TRACE.share.
Our average variable transaction fee per million for the three months ended September 30, 2017March 31, 2024 and 20162023 was as follows:
| Three Months Ended March 31, | ||||||||||||||||||
| 2024 |
|
| 2023 |
|
|
| $ Change |
|
| % Change | ||||||||
Average variable transaction fee per million |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Credit | $ |
| 154.15 |
|
| $ |
| 164.98 |
|
|
| $ | (10.83 | ) |
|
| (6.6 | ) | % |
Rates |
|
| 4.79 |
|
|
|
| 4.12 |
|
|
|
| 0.67 |
|
|
| 16.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended September 30, |
| |||||
| 2017 |
|
| 2016 |
| ||
Average Variable Transaction fee per million |
|
|
|
|
|
|
|
U.S. high-grade - fixed rate | $ | 174 |
|
| $ | 195 |
|
U.S. high-grade - floating rate |
| 67 |
|
|
| 38 |
|
Total U.S. high-grade |
| 169 |
|
|
| 189 |
|
Other credit |
| 235 |
|
|
| 246 |
|
Liquid products |
| 45 |
|
|
| 38 |
|
Total |
| 190 |
|
|
| 201 |
|
|
|
|
|
|
|
|
|
Total U.S. high-gradeCredit average variable transaction fee per million decreased by 6.6% to $169$154.15 per million for the three months ended September 30, 2017 from $189 perMarch 31, 2024, mainly due to a decrease in the duration of U.S. high-grade bonds traded on our platforms and product mix-shift in other credit products.
Information Services. Information services revenue increased by $0.9 million for the three months ended September 30, 2016,March 31, 2024, mainly due to a decrease in durationnet new data contract revenue of bonds traded, an increase in the number of larger sized trades$0.7 million and the migrationpositive impact of certainforeign currency fluctuations of our broker-dealer clients from an all-variable fee plan to a plan that incorporates a monthly distribution fee. Other credit average variable transaction fee per million decreased to $235 per$0.2 million.
Post-Trade Services. Post-trade services revenue increased by $0.8 million for the three months ended September 30, 2017 from $246March 31, 2024, principally due to net new contract revenue of $0.6 million and the positive impact of foreign currency fluctuations of $0.2 million.
Technology Services. Technology services revenue increased by $2.6 million for the three months ended September 30, 2016, mainlyMarch 31, 2024 due to a larger percentage of trading volume in emerging market bonds that command lower fees per million, as well as a decrease in high-yield average variable fee per million as a result of the change in the structure of our high-yield fee plan options implemented in August 2017. The decrease in other credit average variable transaction fee per million was partially offset by an increase in Eurobond fees per million as a result of the change in structure of our Eurobond fee plan which was implemented in the fourth quarter of 2016.
U.S. high-grade distribution fees increased $1.2 million principally due to the migration of certain of our broker-dealer clients from an all-variable fee plan to a plan that incorporates a monthly distribution fee. The $2.4 million increase in Other credit distribution fees principally relates to a $3.3 million increase in distribution fees under the high-yield fee plan structure implemented in August 2017 that allows our broker-dealer clients to elect a plan that incorporates a monthly distribution fee. This was offset by a decline of $1.0 million relating to the change in the Eurobond fee plan implemented in the fourth quarter of 2016.
Information and Post-Trade Services. Information and post-tradetechnology services revenue increased $1.1 million for the three months ended September 30, 2017 principally due to higher data revenue of $0.8 million and an increase in post-trade services revenue of $0.3 million related to MiFID II implementation services. Our transaction reporting business processed 247 million transactions for the three months ended September 30, 2017 compared to 302 million for the three months ended September 30, 2016. generated by Pragma.
Investment Income. Investment income increased by $0.4 million primarily due to higher investment balances and an increase in interest rates in 2017.
Other. Other income was $1.1 million and $1.0 million for the three months ended September 30, 2017 and 2016, respectively.Expenses
Expenses
OurThe following table summarizes our expenses for the three months ended September 30, 2017March 31, 2024 and 2016,2023:
| Three Months Ended March 31, | |||||||||||||||||||
| 2024 |
|
|
| 2023 | $ |
|
| % | |||||||||||
|
| ($ in thousands) | ||||||||||||||||||
Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Employee compensation and benefits | $ |
| 61,264 |
|
| $ |
| 52,315 |
|
| $ |
| 8,949 |
|
|
|
| 17.1 |
| % |
Depreciation and amortization |
|
| 18,200 |
|
|
|
| 16,461 |
|
|
|
| 1,739 |
|
|
|
| 10.6 |
|
|
Technology and communications |
|
| 17,051 |
|
|
|
| 14,999 |
|
|
|
| 2,052 |
|
|
|
| 13.7 |
|
|
Professional and consulting fees |
|
| 6,395 |
|
|
|
| 7,127 |
|
|
|
| (732 | ) |
|
|
| (10.3 | ) |
|
Occupancy |
|
| 3,425 |
|
|
|
| 3,611 |
|
|
|
| (186 | ) |
|
|
| (5.2 | ) |
|
Marketing and advertising |
|
| 1,833 |
|
|
|
| 2,995 |
|
|
|
| (1,162 | ) |
|
|
| (38.8 | ) |
|
Clearing costs |
|
| 4,911 |
|
|
|
| 4,545 |
|
|
|
| 366 |
|
|
|
| 8.1 |
|
|
General and administrative |
|
| 4,739 |
|
|
|
| 5,760 |
|
|
|
| (1,021 | ) |
|
|
| (17.7 | ) |
|
Total expenses | $ |
| 117,818 |
|
| $ |
| 107,813 |
|
| $ |
| 10,005 |
|
|
|
| 9.3 |
| % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
36
Employee compensation and benefits increased by $8.9 million, primarily due to increases in salaries, taxes and benefits on higher employee headcount of $7.1 million and higher employee incentive compensation of $2.1 million.
Depreciation and amortization increased by $1.7 million, primarily due to higher amortization of software development costs of $1.0 million and higher amortization of intangibles of $0.9 million, partially offset by lower depreciation of office hardware of $0.2 million.
Technology and communications expenses increased by $2.1 million, primarily due to higher connectivity costs related to Pragma of $0.7 million, higher software subscription costs of $0.7 million, higher market data costs of $0.3 million and higher equipment lease costs of $0.2 million.
Professional and consulting fees decreased by $0.7 million, primarily due to lower IT consultant expense of $1.8 million, offset by higher audit and tax fees of $0.7 million and higher acquisition related legal and consulting costs of $0.5 million.
Marketing expenses decreased by $1.2 million, primarily due to lower advertising and public relations costs.
General and administrative expenses decreased by $1.0 million, primarily due to lower reserves related to a dispute with a vendor of $0.5 million, lower value-added taxes of $0.2 million and lower travel and entertainment costs of $0.1 million.
Other Income (Expense)
Our other income (expense) for the three months ended March 31, 2024 and 2023, and the resulting dollar and percentage changes, were as follows:
| Three Months Ended March 31, | |||||||||||||||||||
| 2024 |
|
|
| 2023 | $ |
|
| % | |||||||||||
|
| ($ in thousands) | ||||||||||||||||||
Interest income | $ |
| 5,973 |
|
| $ |
| 4,249 |
|
| $ |
| 1,724 |
|
|
|
| 40.6 |
| % |
Interest expense |
|
| (316 | ) |
|
|
| (130 | ) |
|
|
| (186 | ) |
|
|
| 143.1 |
|
|
Equity in earnings of unconsolidated affiliate |
|
| 370 |
|
|
|
| 204 |
|
|
|
| 166 |
|
|
|
| 81.4 |
|
|
Other, net |
|
| (1,810 | ) |
|
|
| (1,484 | ) |
|
|
| (326 | ) |
|
|
| 22.0 |
|
|
Total other income (expense) | $ |
| 4,217 |
|
| $ |
| 2,839 |
|
| $ |
| 1,378 |
|
|
|
| 48.5 |
| % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended September 30, | |||||||||||||||||||||||
| 2017 |
|
|
| 2016 |
|
|
|
|
|
|
|
|
|
|
| ||||||||
| ($ in thousands) | |||||||||||||||||||||||
| $ |
| % of Revenues |
|
|
| $ |
| % of Revenues |
|
|
| $ Change |
|
| % Change | ||||||||
Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee compensation and benefits | $ | 25,595 |
|
| 26.5 |
| % |
| $ | 23,914 |
|
| 26.5 |
| % |
| $ | 1,681 |
|
|
| 7.0 |
| % |
Depreciation and amortization |
| 4,583 |
|
| 4.7 |
|
|
|
| 4,325 |
|
| 4.8 |
|
|
|
| 258 |
|
|
| 6.0 |
|
|
Technology and communications |
| 5,035 |
|
| 5.2 |
|
|
|
| 4,245 |
|
| 4.7 |
|
|
|
| 790 |
|
|
| 18.6 |
|
|
Professional and consulting fees |
| 5,547 |
|
| 5.7 |
|
|
|
| 4,342 |
|
| 4.8 |
|
|
|
| 1,205 |
|
|
| 27.8 |
|
|
Occupancy |
| 1,795 |
|
| 1.9 |
|
|
|
| 1,220 |
|
| 1.4 |
|
|
|
| 575 |
|
|
| 47.1 |
|
|
Marketing and advertising |
| 2,089 |
|
| 2.2 |
|
|
|
| 2,140 |
|
| 2.4 |
|
|
|
| (51 | ) |
|
| (2.4 | ) |
|
Clearing costs |
| 1,476 |
|
| 1.5 |
|
|
|
| 1,035 |
|
| 1.1 |
|
|
|
| 441 |
|
|
| 42.6 |
|
|
General and administrative |
| 3,364 |
|
| 3.5 |
|
|
|
| 2,696 |
|
| 3.0 |
|
|
|
| 668 |
|
|
| 24.8 |
|
|
Total expenses | $ | 49,484 |
|
| 51.2 |
| % |
| $ | 43,917 |
|
| 48.7 |
| % |
| $ | 5,567 |
|
|
| 12.7 |
| % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee Compensation and Benefits. Employee compensation and benefitsInterest income increased by $1.7 million primarily due to an increase of $1.9 million in salaries and benefits, principally as a result ofdriven by higher employee headcount.interest rates.
Depreciation and Amortization. Depreciation and amortizationInterest expense increased by $0.3 million. For the three months ended September 30, 2017 and 2016, $1.5 million and $0.8 million, respectively, of equipment purchases and leasehold improvements and $3.4 million and $2.9 million, respectively, of software development costs were capitalized.
Technology and Communications. Technology and communication expenses increased by $0.8 million due to higher software subscription costs of $0.4 million and technology maintenance and support costs of $0.3 million.
Professional and Consulting Fees. Professional and consulting fees increased by $1.2 million primarily due to fees related to various regulatory initiatives of $0.8 million.
Occupancy. Occupancy increased by $0.6 million due to an increase in rent expense of $0.3 million for additional space to accommodate our increased headcount and a non-recurring lease expense of $0.3 million.
Marketing and Advertising. Marketing and advertising expenses were $2.1 million for both the three months ended September 30, 2017 and 2016.
Clearing Costs. Clearing costs increased by $0.4$0.2 million primarily due to higher trading volume. Third-party clearing costs as a percentage of matched principal trading revenue increased from 10.2% for the three months ended September 30, 2016 to 13.1% for the three months ended September 30, 2017.financing charges incurred under our short-term borrowings.
General and Administrative. General and administrative expenses increasedOther, net decreased by $0.7$0.3 million principally due to an increase in general travel and entertainment expenses of $0.3 million and employee relocation expenses of $0.3 million.higher credit facility fees.
Provision for Income Tax. Our consolidatedTaxes
The provision for income taxes and effective tax rate for the three months ended September 30, 2017 was 27.7%, compared to 33.3% for the three months ended September 30, 2016. The tax provision for the three months ended September 30, 2017 includes excess tax benefits of $3.8 million relating to a new standard for share-based payments accounting adopted effective January 1, 2017. March 31, 2024 and 2023 were as follows:
| Three Months Ended March 31, | |||||||||||||||||||
| 2024 |
|
|
| 2023 | $ |
|
| % | |||||||||||
|
| ($ in thousands) | ||||||||||||||||||
Provision for income taxes | $ |
| 24,102 |
|
| $ |
| 24,567 |
|
| $ |
| (465 | ) |
|
|
| (1.9 | ) | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Effective tax rate |
|
| 24.9 | % |
|
|
| 25.0 | % |
|
|
|
|
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
37
Our consolidated effective tax rate can vary from period to period depending on the geographic mix of our earnings, changes in tax legislation and tax rates and the amount and timing of excess tax benefits related to share-based payments, among other factors.
Nine Months Ended September 30, 2017 Compared to Nine Months Ended September 30, 2016
Overview
Total revenues increased by $22.4 million or 8.1% to $297.9 million for the nine months ended September 30, 2017, from $275.5 million for the nine months ended September 30, 2016. This increase in total revenues was primarily due to higher commissions of $20.5 million. An 8.2% change in the average foreign currency exchange rates of the British Pound Sterling compared to the U.S. dollar from the nine months ended September 30, 2016 to the nine months ended September 30, 2017 had the effect of decreasing revenues by $3.2 million.
Total expenses increased by $11.3 million or 8.4% to $145.5 million for the nine months ended September 30, 2017, from $134.2 million for the nine months ended September 30, 2016. This increase was primarily due to higher employee compensation and benefits of $4.2 million, general and administrative costs of $1.9 million, technology and communications expenses of $1.6 million, professional and consulting fees of $1.5 million, and $1.0 million in both occupancy costs and marketing and advertising costs. The change in average foreign currency exchange rates had the effect of decreasing expenses by $3.3 million in the nine months ended September 30, 2017.
Income before taxes increased by $11.1 million or 7.9% to $152.4 million for the nine months ended September 30, 2017, from $141.3 million for the nine months ended September 30, 2016. Net income increased by $21.6 million or 23.2% to $114.6 million for the nine months ended September 30, 2017, from $93.0 million for nine months ended September 30, 2016.
Revenues
Our revenues for the nine months ended September 30, 2017 and 2016, and the resulting dollar and percentage changes, were as follows:
| Nine Months Ended September 30, | |||||||||||||||||||||||
| 2017 |
|
|
| 2016 |
|
|
|
|
|
|
|
|
|
|
| ||||||||
| ($ in thousands) | |||||||||||||||||||||||
| $ |
| % of Revenues |
| $ |
| % of Revenues |
| $ Change |
|
| % Change | ||||||||||||
Commissions | $ | 267,307 |
|
| 89.7 |
| % |
| $ | 246,788 |
|
| 89.6 |
| % |
| $ | 20,519 |
|
|
| 8.3 |
| % |
Information and post-trade services |
| 24,460 |
|
| 8.2 |
|
|
|
| 23,687 |
|
| 8.6 |
|
|
|
| 773 |
|
|
| 3.3 |
|
|
Investment income |
| 2,551 |
|
| 0.9 |
|
|
|
| 1,469 |
|
| 0.5 |
|
|
|
| 1,082 |
|
|
| 73.7 |
|
|
Other |
| 3,588 |
|
| 1.2 |
|
|
|
| 3,539 |
|
| 1.3 |
|
|
|
| 49 |
|
|
| 1.4 |
|
|
Total revenues | $ | 297,906 |
|
| 100.0 |
| % |
| $ | 275,483 |
|
| 100.0 |
| % |
| $ | 22,423 |
|
|
| 8.1 |
| % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commissions. Our commission revenues for the nine months ended September 30, 2017 and 2016, and the resulting dollar and percentage changes, were as follows:
| Nine Months Ended September 30, | |||||||||||||||
| 2017 |
|
| 2016 |
|
| $ Change |
|
| % Change | ||||||
| ($ in thousands) | |||||||||||||||
Variable transaction fees |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. high-grade | $ | 102,411 |
|
| $ | 101,104 |
|
| $ | 1,307 |
|
|
| 1.3 |
| % |
Other credit |
| 110,221 |
|
|
| 94,928 |
|
|
| 15,293 |
|
|
| 16.1 |
|
|
Liquid products |
| 1,746 |
|
|
| 2,096 |
|
|
| (350 | ) |
|
| (16.7 | ) |
|
Total variable transaction fees |
| 214,378 |
|
|
| 198,128 |
|
|
| 16,250 |
|
|
| 8.2 |
|
|
Distribution fees |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. high-grade |
| 47,985 |
|
|
| 43,598 |
|
|
| 4,387 |
|
|
| 10.1 |
|
|
Other credit |
| 4,506 |
|
|
| 4,437 |
|
|
| 69 |
|
|
| 1.6 |
|
|
Liquid products |
| 438 |
|
|
| 625 |
|
|
| (187 | ) |
|
| (29.9 | ) |
|
Total distribution fees |
| 52,929 |
|
|
| 48,660 |
|
|
| 4,269 |
|
|
| 8.8 |
|
|
Total commissions | $ | 267,307 |
|
| $ | 246,788 |
|
| $ | 20,519 |
|
|
| 8.3 |
| % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variable Transaction Fees
The following table shows the extent to which the increase in variable transaction fees for the nine months ended September 30, 2017 was attributable to changes in transaction volumes and variable transaction fees per million:
| Change from the Nine Months Ended September 30, 2016 |
| |||||||||||||
| U.S. High-Grade |
|
| Other Credit |
|
| Liquid Products |
|
| Total |
| ||||
| ($ in thousands) |
| |||||||||||||
Volume increase (decrease) | $ | 14,514 |
|
| $ | 17,169 |
|
| $ | (510 | ) |
| $ | 31,173 |
|
Variable transaction fee per million (decrease) increase |
| (13,207 | ) |
|
| (1,876 | ) |
|
| 160 |
|
|
| (14,923 | ) |
Total increase (decrease) in variable commissions | $ | 1,307 |
|
| $ | 15,293 |
|
| $ | (350 | ) |
| $ | 16,250 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our trading volumes for the nine months ended September 30, 2017 and 2016 were as follows:
| Nine Months Ended September 30, | |||||||||||||||
| 2017 |
|
| 2016 |
|
| $ Change |
|
| % Change | ||||||
| ($ in millions) | |||||||||||||||
Trading Volume Data |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. high-grade - fixed rate | $ | 599,783 |
|
| $ | 525,331 |
|
| $ | 74,452 |
|
|
| 14.2 |
| % |
U.S. high-grade - floating rate |
| 24,024 |
|
|
| 20,169 |
|
|
| 3,855 |
|
|
| 19.1 |
|
|
Total U.S. high grade |
| 623,807 |
|
|
| 545,500 |
|
|
| 78,307 |
|
|
| 14.4 |
|
|
Other credit |
| 438,055 |
|
|
| 370,963 |
|
|
| 67,092 |
|
|
| 18.1 |
|
|
Liquid products |
| 40,840 |
|
|
| 53,982 |
|
|
| (13,142 | ) |
|
| (24.3 | ) |
|
Total | $ | 1,102,702 |
|
| $ | 970,445 |
|
| $ | 132,257 |
|
|
| 13.6 |
| % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of U.S. Trading Days |
| 188 |
|
|
| 189 |
|
|
|
|
|
|
|
|
|
|
Number of U.K. Trading Days |
| 189 |
|
|
| 190 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For volume reporting purposes, transactions in foreign currencies are converted to U.S. dollars at average monthly rates. The 14.4% increase in our U.S. high-grade volume was principally due to an increase in our estimated market share of total U.S. high-grade corporate bond volume as reported by TRACE to 16.7% for the nine months ended September 30, 2017 from 15.6% for the nine months ended September 30, 2016, coupled with an increase in overall market volume as measured by TRACE. U.S. high-grade TRACE volume increased 7.2% to $3.7 trillion for the nine months ended September 30, 2017 from $3.5 trillion for the nine months ended September 30, 2016.
Other credit volumes increased by 18.1% for the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016. Emerging markets bond volume increased 41.6%, while high-yield and Eurobond volume decreased by 2.8% and 0.5%, respectively. Liquid products volume (excluding credit derivatives) decreased by 24.3% for the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016, due mainly to a 30.3% decrease in U.S. agency bond market volume as reported by TRACE.
Our average variable transaction fee per million for the nine months ended September 30, 2017 and 2016 was as follows:
| Nine Months Ended September 30, |
| |||||
| 2017 |
|
| 2016 |
| ||
Average Variable Transaction fee per million |
|
|
|
|
|
|
|
U.S. high-grade - fixed rate | $ | 168 |
|
| $ | 191 |
|
U.S. high-grade - floating rate |
| 62 |
|
|
| 37 |
|
Total U.S. high-grade |
| 164 |
|
|
| 185 |
|
Other credit |
| 252 |
|
|
| 256 |
|
Liquid products |
| 43 |
|
|
| 39 |
|
Total |
| 194 |
|
|
| 204 |
|
|
|
|
|
|
|
|
|
Total U.S. high-grade average variable transaction fee per million decreased to $164 per million for the nine months ended September 30, 2017 from $185 per million for the nine months ended September 30, 2016, mainly due to a decrease in duration of bonds traded, an increase in the number of larger sized trades and the migration of certain of our broker-dealer clients from an all-variable fee plan to a plan that incorporates a monthly distribution fee. Other credit average variable transaction fee per million decreased to $252 per million for the nine months ended September 30, 2017 from $256 million for the nine months ended September 30, 2016, mainly due to a larger percentage of trading volume in emerging market bonds that command lower fees per million, as well as a decrease in high-yield fee per million as a result of the change in structure of our high-yield fee plan implemented in August 2017. The decrease in other credit average variable transaction fee per million was partially offset by an increase in Eurobond fees per million as a result of the change in structure of our Eurobond fee plan which was implemented in the fourth quarter of 2016.
Distribution Fees
U.S. high-grade distribution fees increased $4.4 million principally due to the migration of certain of our broker-dealer clients from an all-variable fee plan to a plan that incorporates a monthly distribution fee. The $0.1 million increase in Other credit distribution fees was due to a $3.3 million increase in distribution fees under the high-yield fee plan implemented during the third quarter of 2017, a $0.2 million increase in emerging markets minimum fees, partially offset by a decline of $3.5 million relating to the change in the Eurobond fee plan implemented in the fourth quarter of 2016.
Information and Post-Trade Services. Information and post-trade services revenue increased by $0.8 million for the nine months ended September 30, 2017. The negative impact of foreign exchange of $1.5 million was offset by a $2.2 million increase in data revenue from new data contracts. Our transaction reporting business processed 770 million transactions for the nine months ended September 30, 2017 compared to 892 million for the nine months ended September 30, 2016.
Investment Income. Investment income increased by $1.1 million primarily due to higher investment balances and an increase in interest rates in 2017.
Other. Other income was $3.6 million and $3.5 million for the nine months ended September 30, 2017 and 2016, respectively.
Our expenses for the nine months ended September 30, 2017 and 2016, and the resulting dollar and percentage changes, were as follows:
| Nine Months Ended September 30, | |||||||||||||||||||||||
| 2017 |
|
|
| 2016 |
|
|
|
|
|
|
|
|
|
|
| ||||||||
| ($ in thousands) | |||||||||||||||||||||||
| $ |
| % of Revenues |
|
|
| $ |
| % of Revenues |
|
|
| $ Change |
|
| % Change | ||||||||
Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee compensation and benefits | $ | 78,417 |
|
| 26.3 |
| % |
| $ | 74,256 |
|
| 27.0 |
| % |
| $ | 4,161 |
|
|
| 5.6 |
| % |
Depreciation and amortization |
| 14,066 |
|
| 4.7 |
|
|
|
| 13,546 |
|
| 4.9 |
|
|
|
| 520 |
|
|
| 3.8 |
|
|
Technology and communications |
| 14,442 |
|
| 4.8 |
|
|
|
| 12,826 |
|
| 4.7 |
|
|
|
| 1,616 |
|
|
| 12.6 |
|
|
Professional and consulting fees |
| 13,912 |
|
| 4.7 |
|
|
|
| 12,449 |
|
| 4.5 |
|
|
|
| 1,463 |
|
|
| 11.8 |
|
|
Occupancy |
| 4,621 |
|
| 1.6 |
|
|
|
| 3,606 |
|
| 1.3 |
|
|
|
| 1,015 |
|
|
| 28.1 |
|
|
Marketing and advertising |
| 6,757 |
|
| 2.3 |
|
|
|
| 5,742 |
|
| 2.1 |
|
|
|
| 1,015 |
|
|
| 17.7 |
|
|
Clearing costs |
| 4,320 |
|
| 1.5 |
|
|
|
| 4,754 |
|
| 1.7 |
|
|
|
| (434 | ) |
|
| (9.1 | ) |
|
General and administrative |
| 8,974 |
|
| 3.0 |
|
|
|
| 7,029 |
|
| 2.6 |
|
|
|
| 1,945 |
|
|
| 27.7 |
|
|
Total expenses | $ | 145,509 |
|
| 48.8 |
| % |
| $ | 134,208 |
|
| 48.7 |
| % |
| $ | 11,301 |
|
|
| 8.4 |
| % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee Compensation and Benefits. Employee compensation and benefits increased by $4.2 million, primarily due to a $3.9 million increase in salaries and benefits, principally as a result of higher employee headcount, and a $0.3 million increase in stock-based compensation.
Depreciation and Amortization. Depreciation and amortization increased by $0.5 million primarily due to a $0.6 million increase in amortization expense of leasehold improvements and higher amortization of software development costs of $0.5 million offset by a $0.4 million decrease in production hardware depreciation expense. For the nine months ended September 30, 2017 and 2016, $7.2 million and $4.8 million, respectively, of equipment purchases and leasehold improvements and $10.1 million and $9.1 million, respectively, of software development costs were capitalized.
Technology and Communications. Technology and communication expenses increased by $1.6 million due to higher software subscription costs of $0.8 million, technology maintenance and support costs of $0.3 million and market data costs of $0.3 million.
Professional and Consulting Fees. Professional and consulting fees increased by $1.5 million primarily due to fees related to various regulatory initiatives of $1.3 million and new systems implementations of $0.5 million, offset by lower risk consulting fees of $0.4 million.
Occupancy. Occupancy costs increased by $1.0 million primarily due to an increase in rent expense of $0.7 million for additional space to accommodate our increased headcount and a non-recurring lease expense of $0.3 million.
Marketing and Advertising. Marketing and advertising expenses increased by $1.0 million due to higher advertising costs of $0.4 million associated with our Open Trading™ protocols and travel and entertainment expenses related to sales activities of $0.4 million.
Clearing Costs. Clearing costs decreased by $0.4 million. During the third quarter of 2016, we amended the terms of our agreements with our third-party clearing brokers which resulted in a reduction in transaction and other clearing costs. Third-party clearing costs as a percentage of matched principal trading revenue decreased from 17.9% for the nine months ended September 30, 2016 to 12.5% for the nine months ended September 30, 2017.
General and Administrative. General and administrative expenses increased by $1.9 million principally due to a decrease in foreign currency transaction gains of $0.6 million, an increase in general travel and entertainment expenses of $0.6 million and an increase of $0.3 million in employee relocation expenses.
Provision for Income Tax. Our consolidated effective tax rate for the nine months ended September 30, 2017 was 24.8%, compared to 34.2% for the nine months ended September 30, 2016. The tax provision for the nine months ended September 30, 2017 includes excess tax benefits of $14.8 million relating to a new standard for share-based payments accounting adopted effective January 1, 2017. Our consolidated effective tax rate can vary from period to period depending on the geographic mix of our earnings,
changes in tax legislation and tax rates and the amount and timing of excess tax benefits related to share-based payments, among other factors.
Liquidity and Capital Resources
During the past three years,months ended March 31, 2024, we have met our funding requirements through cash on hand, and internally generated funds.funds and short-term borrowings. Cash and cash equivalents and investments totaled $376.2$512.5 million at September 30, 2017.as of March 31, 2024. Our investments generally consist of investment-grade corporate bonds and U.S. Treasury securities. We limit the amounts that can be invested in any single issuer and invest in short- to intermediate-term instruments whose fair values are less sensitive to interest rate changes.
In October 2015,August 2023, we entered into the 2023 Credit Agreement, which provides aggregate commitments totaling $750.0 million, including a two-year amendedrevolving credit facility, a $5.0 million letter of credit sub-limit for standby letters of credit and restated credit agreement (the “Credit Agreement”) that increaseda $380.0 million sub-limit for swingline loans. The 2023 Credit Agreement will mature on August 9, 2026, with our borrowing capacityoption to an aggregaterequest up to two additional 364-day extensions at the discretion of $100.0 million.each lender and subject to customary conditions. As of September 30, 2017,March 31, 2024, we had $0.9$0.1 million in letters of credit outstanding and $99.1$749.9 million in available borrowing capacity under the 2023 Credit Agreement. In October 2017, we amendedBorrowings under the 2023 Credit Agreement and extendedwill bear interest at a rate per annum equal to the maturity date to October 2018.alternate base rate or the adjusted term SOFR rate, plus an applicable margin that varies with our consolidated total leverage ratio. The amended2023 Credit Agreement also providesrequires that we satisfy certain covenants, including a requirement to not exceed a maximum consolidated total leverage ratio. We were in compliance with all applicable covenants at March 31, 2024. See Note 11 to the Consolidated Financial Statements for two additional one-year extension optionsa discussion of the 2023 Credit Agreement.
In connection with their self-clearing operations, certain of our operating subsidiaries maintain agreements with a settlement bank to allow the subsidiaries to borrow an aggregate of up to $500.0 million on an uncommitted basis, collateralized by eligible securities pledged by the subsidiaries to the settlement bank, subject to certain haircuts. Borrowings under these agreements will bear interest at a base rate per annum equal to the higher of the upper range of the Federal Funds Rate, 0.25% or one-month SOFR, plus 1.00%. As of March 31, 2024, the subsidiaries had no borrowings outstanding and modified certain borrowing terms and covenants. Subjectup to satisfaction of certain specified conditions, we are permitted to upsize the$500.0 million in available uncommitted borrowing capacity under such agreements. See Note 11 to the Credit Agreement by an additional $50.0Consolidated Financial Statements for a discussion of these agreements.
Under arrangements with their settlement banks, certain of our operating subsidiaries may receive overnight financing in the form of bank overdrafts. As of March 31, 2024, we had no overdrafts payable outstanding.
As a result of our self-clearing and settlement activities, we are required to finance certain transactions, maintain deposits with various clearing organizations and clearing broker-dealers and maintain a special reserve bank account for the benefit of customers pursuant to Rule 15c3-3 of the Exchange Act. As of March 31, 2024, the aggregate amount of the positions financed, deposits and customer reserve balances associated with our self-clearing and settlement activities was $244.9 million. These requirements can fluctuate based on trading activity, market volatility or other factors which may impact our liquidity or require us to use our capital resources.
Cash Flows for the Three Months Ended March 31, 2024 Compared to the Three Months Ended March 31, 2023
Our cash flows were as follows:
| Three Months Ended March 31, | |||||||||||||||
| 2024 |
|
| 2023 |
|
| $ |
|
| % | ||||||
| ($ in thousands) |
|
| |||||||||||||
Net cash (used in)/provided by operating activities | $ | (4,949 | ) |
| $ | 7,527 |
|
| $ | (12,476 | ) |
| NM |
|
| |
Net cash (used in) investing activities |
| (15,830 | ) |
|
| (32,754 | ) |
|
| 16,924 |
|
|
| (51.7 | ) | % |
Net cash (used in) financing activities |
| (52,543 | ) |
|
| (48,142 | ) |
|
| (4,401 | ) |
|
| 9.1 |
|
|
Effect of exchange rate changes on cash and |
| (3,186 | ) |
|
| 3,345 |
|
|
| (6,531 | ) |
| NM |
|
| |
Net decrease for the period | $ | (76,508 | ) |
| $ | (70,024 | ) |
| $ | (6,484 | ) |
|
| 9.3 |
| % |
NM - not meaningful |
|
|
|
|
|
|
|
|
|
|
|
|
| Nine Months Ended September 30, | |||||||||||||||
| 2017 |
|
| 2016 |
|
| $ Change |
|
| % Change | ||||||
| ($ in thousands) |
|
| |||||||||||||
Net cash provided by operating activities | $ | 121,583 |
|
| $ | 33,140 |
|
| $ | 88,443 |
|
|
| 266.9 |
| % |
Net cash (used in) investing activities |
| (67,907 | ) |
|
| (23,899 | ) |
|
| (44,008 | ) |
|
| 184.1 |
|
|
Net cash (used in) financing activities |
| (84,335 | ) |
|
| (46,545 | ) |
|
| (37,790 | ) |
|
| 81.2 |
|
|
Effect of exchange rate changes on cash and cash equivalents |
| 1,408 |
|
|
| (980 | ) |
|
| 2,388 |
|
|
| (243.7 | ) |
|
Net (decrease) for the period | $ | (29,251 | ) |
| $ | (38,284 | ) |
| $ | 9,033 |
|
|
| (23.6 | ) | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The $88.4$12.5 million increasedecrease in net cash (used in)/provided by operating activities was primarily due to an increasea change in net incomereceivables from broker-dealers, clearing organizations and customers associated with our clearing activities of $21.6$9.1 million and a decrease in net purchasesincome and other tax liabilities of corporate debt trading investments of $82.9$14.9 million, offset by an increase in working capitallower accounts receivable of $9.5$11.4 million.
The $44.0$16.9 million increasedecrease in net cash used in investing activities was primarily due to increases of $40.0 million inlower net purchases of available-for-sale investments andof $21.2 million, offset by higher capital expenditures of $3.5$4.3 million.
The $37.8$4.4 million increase in net cash used in financing activities was principally due to an increase of $22.5 million inhigher repurchases of our common stock a $7.8of $10.1 million increase in theand higher cash dividend paid on common stock and a $7.0dividends of $1.1 million, increase inoffset by lower withholding tax payments on restrictedfull value awards vesting of $5.6 million and higher exercises of stock vestingoptions of $1.3 million.
38
The $6.5 million change in the effect of exchange rate changes on cash and stock option exercises.cash equivalents was driven by changes in the cumulative translation adjustment.
Past trends of cash flows are not necessarily indicative of future cash flow levels. A decrease in cash flows may have a material adverse effect on our liquidity, business and financial condition.
Non-GAAP Financial Measures
In addition to cash flow from operating activities in accordance with GAAP, we use a non-GAAP financial measures called “Free Cash Flow”. Free Cash Flow is defined as cash flow from operating activities excluding net purchases of corporate debt trading investments less expenditures for furniture, equipment and leasehold improvements and capitalized software development costs. We believe this non-GAAP financial measure is important in gaining an understanding of our financial strength and cash flow generation.
The table set forth below presents a reconciliation of our cash flow from operating activities to Free Cash Flow, as defined, for the twelve months ended September 30, 2017 and 2016:
| Twelve months ended September 30, |
| |||||
| 2017 |
|
| 2016 |
| ||
| (In thousands) |
| |||||
Cash flow from operating activities | $ | 177,898 |
|
| $ | 67,832 |
|
Add: Net (sales) purchases of corporate debt trading investments |
| (8,678 | ) |
|
| 74,535 |
|
Add: Excess tax benefits from share-based compensation previously recorded under financing activities |
| 292 |
|
|
| 9,274 |
|
Less: Purchases of furniture, equipment and leasehold improvements |
| (8,876 | ) |
|
| (5,819 | ) |
Less: Capitalization of software development costs |
| (13,154 | ) |
|
| (12,130 | ) |
Free Cash Flow | $ | 147,482 |
|
| $ | 133,692 |
|
|
|
|
|
|
|
|
|
Other Factors Influencing Liquidity and Capital Resources
We believe that our current resources are adequate to meet our liquidity needs and requirements, including commitments for capital expenditure requirements for at leastexpenditures, in the short-term (during the next 12 months.months). However, our future liquidity and capital requirements will depend on a number of factors, including liquidity requirements associated with our self-clearing operations and expenses associated with product development and expansion and new business opportunities that are intended to further diversify our revenue stream.streams. We may also acquire or invest in technologies, business ventures or products that are complementary to our business. In the event we require any additional financing, it will take the form of equity or debt financing. Any additional equity offerings may result in dilution to our stockholders. Any debt financings, if available at all, may involve restrictive covenants with respect to dividends, issuances of additional capital and other financial and operational matters related to our business. In addition, in the long-term (beyond 12 months), we believe our liquidity needs and requirements will be affected by the factors discussed above.
Certain of our U.S. subsidiaries are registered as a broker-dealer or a SEFbroker-dealers and therefore are subject to the applicable rules and regulations of the SEC and the CFTC.FINRA. These rules contain minimum net capital requirements, as defined in the applicable regulations, and also may require a significant part of the registrants’ assets be kept in relatively liquid form.regulations. Certain of our foreign subsidiaries are regulated by the Financial Conduct AuthorityFCA in the U.K. or other foreign regulators and must maintain financial resources, as defined in the applicable regulations, in excess of the applicable financial resources requirement. As of September 30, 2017,March 31, 2024, each of our subsidiaries that are subject to these regulations had net capital or financial resources in excess of their minimum requirements. As of September 30, 2017,March 31, 2024, our subsidiaries maintained aggregate net capital and financial resources that were $128.2$545.0 million in excess of the required levels of $12.6$35.7 million.
Each of our U.S. and foreign regulated subsidiaries are subject to local regulations which generally prohibitlimit, or require the prior notification to or approval from such regulated entity’s principal regulator before, the repayment of borrowings from our affiliates, paying cash dividends, making loans to our affiliates or otherwise entering into transactions that result in a significant reduction in regulatory net capital or financial resources without prior notification to or approval from such regulated entity’s principal regulator.
resources. As of September 30, 2017,March 31, 2024, the amount of unrestricted cash held by our non-U.S. subsidiaries was $85.7$216.9 million. We have determined that unremitted earnings of our foreign subsidiaries are considered indefinitely reinvested outside of the U.S. Any repatriation of such foreign earnings by way of dividend may be subject to both U.S. federal and state income taxes, reduced by applicable foreign tax credits. However, we do not have any current needs or foreseeable plans to repatriate cash by way of dividends from our non-U.S. subsidiaries.
We execute certain bondsecurities transactions between and amongour institutional investor and broker-dealer clients on a matched principal basis by serving as counterparty to both the buyer and the seller in trades whichtrades. Our operating subsidiaries settle such transactions using their self-clearing operations or through the use of third-party clearing brokers.brokers or settlement agents. Settlement typically occurs within one to two trading days after the trade date. Cash settlement of the transaction occurs upon receipt or delivery of the underlying instrument that was traded. ForUnder both the nine months ended September 30, 2017self-clearing and 2016, revenues from matched principal trading were approximately $34.4 million and $26.6 million, respectively. Under securities clearing agreements withthe third-party clearing brokers,models, we maintain collateral deposits with each clearing broker in the form of cash. As of September 30, 2017 and 2016, the amount of the collateral deposits included in prepaid expenses and other assets in the Consolidated Statements of Financial Condition was $1.2 million and $1.1 million, respectively. For the nine months ended September 30, 2017, and 2016, clearing expenses associated with matched principal transactions were $4.3 million and $4.8 million, respectively, and are classified under clearing costs on our Consolidated Statements of Operations. We aremay be exposed to credit risk in the event a counterparty does not fulfill its obligation to complete a transaction or if there is a miscommunication or otheran error in executing a matched principal transaction.
Pursuant to the terms of the securities clearing agreements, each third-party clearing broker has the right to charge us for any losses they suffer resulting from a counterparty’s failure on any of our trades. We did not record any liabilities or losses with regard to this rightcounterparty failures for the ninethree months ended September 30, 2017March 31, 2024 and 2016.2023. Substantially all of our open securities failed-to-deliver and securities failed-to-receive transactions as of March 31, 2024 have subsequently settled at the contractual amounts.
In the normal course of business, we enter into contracts that contain a variety of representations, warranties and general indemnifications.indemnification provisions. Our maximum exposure from any claims under these arrangements is unknown, as this would involve claims that have not yet occurred. However, based
We have leases for corporate offices and equipment with initial lease terms ranging from one year to 15 years. We have total future contractual rent payments on past experience, we expectthese leases of $102.8 million, with $13.0 million due within the risknext 12 months and $89.8 million due beyond 12 months.
We enter into foreign currency forward contracts to economically hedge our exposure to variability in certain foreign currency transaction gains and losses. As of loss to be remote.March 31, 2024, the notional value of our foreign currency forward contract outstanding was $63.3 million and the fair value of the liability was $0.2 million.
In January 2016,2022, our Board of Directors authorized a two-year share repurchase program for up to $25.0$150.0 million of our common stock. In October 2016, our Board of Directors approved a $50.0 million increasethat commenced in the size of the share repurchase program. In September 2017, the existing share repurchase plan was terminated and our Board of Directors authorized a new fifteen-month share repurchase program for up to $100 million commencing in October 2017.March 2022. Shares repurchased under eachthe program will be held in treasury for future use. As of March 31, 2024, we had $89.9 million of remaining capacity under the program.
In October 2017,April 2024, our Board of Directors approved a quarterly cash dividend of $0.33$0.74 per share payable on November 22, 2017June 5, 2024 to stockholders of record as of the close of business on November 8, 2017.May 22, 2024. Any future declaration and payment of dividends will be at the sole discretion of our BoardBoard.
39
On April 19, 2024, the Company entered into an agreement to acquire an additional 49.0% interest in RFQ–hub Holdings LLC for approximately $37.9 million of Directors. Our Boardcash consideration. The acquisition is subject to various closing conditions, including the receipt of Directors may take into account such matters as general business conditions, ourcertain regulatory approvals. The acquisition is expected to close during the second half of 2024. Upon the closing of the acquisition, the Company will hold a 92.0% controlling stake in RFQ-hub Holdings LLC.
Non-GAAP Financial Measures
In addition to reporting financial results capital requirements, contractual obligations, legal,in accordance with GAAP, we use certain non-GAAP financial measures: earnings before interest, taxes, depreciation and regulatory restrictions onamortization (“EBITDA”), EBITDA margin and free cash flow. We define EBITDA margin as EBITDA divided by revenues. We define free cash flow as net cash provided by/(used in) operating activities excluding the paymentnet change in trading investments and net change in securities failed-to-deliver and securities failed-to-receive from broker-dealers, clearing organizations and customers, less expenditures for furniture, equipment and leasehold improvements and capitalized software development costs. We believe these non-GAAP financial measures, when taken into consideration with the corresponding GAAP financial measures, are important in understanding our operating results. EBITDA, EBITDA margin and free cash flow are not measures of dividendsfinancial performance or liquidity under GAAP and therefore should not be considered an alternative to net income or cash flow from operating activities as an indicator of operating performance or liquidity. We believe that these non-GAAP financial measures, when taken into consideration with the corresponding GAAP financial measures, provide additional information regarding our stockholders or by our subsidiaries to their respective parent entities,operating results because they assist both investors and any such other factors asmanagement in analyzing and evaluating the Board of Directors may deem relevant.
Effects of Inflation
Because the majorityperformance of our assets are short-term in nature, they are not significantly affected by inflation. However, the rate of inflation may affect our expenses, such as employee compensation, office leasing costs and communications expenses, which may not be readily recoverable in the pricesbusiness.
The table set forth below presents a reconciliation of our services. To the extent inflation results in rising interest ratesnet income to EBITDA and has other adverse effects on the securities markets, it may adversely affect our financial condition and results of operations.
Contractual Obligations and Commitments
As of September 30, 2017, we had the following contractual obligations and commitments:
| Payments due by period |
| |||||||||||||||||
| Total |
|
| Less than 1 year |
|
| 1 - 3 years |
|
| 3 - 5 years |
|
| More than 5 - years |
| |||||
| (In thousands) |
| |||||||||||||||||
Operating leases | $ | 144,498 |
|
| $ | 4,907 |
|
| $ | 18,571 |
|
| $ | 19,695 |
|
| $ | 101,325 |
|
Foreign currency forward contract |
| 88,444 |
|
|
| 88,444 |
|
|
| — |
|
|
| — |
|
|
| — |
|
| $ | 232,942 |
|
| $ | 93,351 |
|
| $ | 18,571 |
|
| $ | 19,695 |
|
| $ | 101,325 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During 2016, we entered into a lease agreement for our new global headquarters in New York City. We expectnet income margin to relocate our headquarters to approximately 83,000 square feet of newly built office space at 55 Hudson Yards upon the building’s completion in late 2018. The fifteen-year leaseEBITDA margin, as defined above, for the new headquarters will commence when we receive possessionthree months ended March 31, 2024 and 2023:
|
| Three Months Ended March 31, |
| ||||||
|
| 2024 |
|
|
| 2023 |
| ||
|
| ($ in thousands) |
| ||||||
Net income | $ |
| 72,615 |
|
| $ |
| 73,628 |
|
Interest income |
|
| (5,973 | ) |
|
|
| (4,249 | ) |
Interest expense |
|
| 316 |
|
|
|
| 130 |
|
Provision for income taxes |
|
| 24,102 |
|
|
|
| 24,567 |
|
Depreciation and amortization |
|
| 18,200 |
|
|
|
| 16,461 |
|
EBITDA | $ |
| 109,260 |
|
| $ |
| 110,537 |
|
|
|
|
|
|
|
|
| ||
Net income margin |
|
| 34.5 | % |
|
|
| 36.2 | % |
Interest income |
|
| (2.8 | ) |
|
|
| (2.1 | ) |
Interest expense |
|
| 0.2 |
|
|
|
| 0.1 |
|
Provision for income taxes |
|
| 11.4 |
|
|
|
| 12.1 |
|
Depreciation and amortization |
|
| 8.6 |
|
|
|
| 8.1 |
|
EBITDA margin |
|
| 51.9 | % |
|
|
| 54.4 | % |
|
|
|
|
|
|
|
|
The table set forth below presents a reconciliation of our net cash provided by operating activities to free cash flow, as defined above, for the premises, which is currently expected to occur in the first quarter of 2018.three months ended March 31, 2024 and 2023:
We enter into foreign currency forward contracts to hedge our exposure to variability in certain foreign currency cash flows resulting from the net investment in our U.K. subsidiaries. As of September 30, 2017, the notional value of the foreign currency forward contract outstanding was $88.4 million and the fair value of the asset was $0.6 million.
| Three Months Ended March 31, |
| |||||||
| 2024 |
|
| 2023 |
| ||||
|
| ($ in thousands) |
| ||||||
Net cash (used in)/provided by operating activities | $ |
| (4,949 | ) |
| $ |
| 7,527 |
|
Exclude: Net change in trading investments |
|
| (255 | ) |
|
|
| 419 |
|
Exclude: Net change in fail-to-deliver/receive from broker-dealers, clearing organizations and customers |
|
| 51,288 |
|
|
|
| 46,767 |
|
Less: Purchases of furniture, equipment and leasehold improvements |
|
| (1,197 | ) |
|
|
| (217 | ) |
Less: Capitalization of software development costs |
|
| (13,963 | ) |
|
|
| (10,690 | ) |
Free Cash Flow | $ |
| 30,924 |
|
| $ |
| 43,806 |
|
40
Item 3. Quantitative and Qualitative Disclosures aboutAbout Market Risk
Market risk is the risk of the loss resulting from adverse changes in market rates and prices, such as interest rates and foreign currency exchange rates.
Market Risk
The global financial services business is, by its nature, risky and volatile and is directly affected by many national and international factors that are beyond our control. Any one of these factors may cause a substantial decline in the U.S. and global financial services markets, resulting in reduced trading volume and revenues. These events could have a material adverse effect on our business, financial condition and results of operations.
As of September 30, 2017,March 31, 2024, we had $234.2$99.4 million of investments whichin U.S. Treasuries that were investedclassified as trading securities and $25.4 million of investments in corporate bonds andthat were classified as securities available-for-sale or trading securities.available-for-sale. Adverse movements, such as a 10% decrease in the value of these securities or a downturn or disruption in the markets for these securities, could result in a substantial loss. A 10.0% decrease in the market value of our U.S Treasuries or available-for-sale investments would result in losses of approximately $9.9 million and $2.5 million, respectively. In addition, principal gains and losses resulting from these securities could on occasion have a disproportionate effect, positive or negative, on our financial condition and results of operations for any particular reporting period.
Interest Rate Risk
Interest rate risk represents our exposure to interest rate changes with respect to our cash and cash equivalents, restricted cash and investments.deposits. As of September 30, 2017,March 31, 2024, our cash and cash equivalents, restricted cash and investmentsdeposits amounted to $376.2$535.2 million. A hypothetical five100 basis point decreasechange in short-term interest rates would increase or decrease our annual pre-tax earningsinterest income by approximately $0.2$5.4 million, assuming no change in the amount or composition of our cash and cash equivalents, restricted cash and investments.deposits.
As of September 30, 2017,March 31, 2024, a hypothetical 100 basis point increase or decrease in interest rates would decrease or increase the fair value of the available-for-sale investment portfolio by approximately $1.4$0.3 million, assuming no change in the amount or composition of the investments. The hypothetical unrealized gain (loss) of $1.4$0.3 million would be recognized in accumulated other comprehensive incomeloss on the Consolidated Statements of Financial Condition.
A similar hypothetical 100 basis point increase or decrease in interest rates would decrease or increase the fair value of the trading securities portfolio by approximately $0.8 million. The hypothetical unrealized gain (loss) of $0.8 million would be recognized in other, incomenet in the Consolidated Statements of Operations.
We do not maintain an inventory of bonds that are traded on our platform.
Foreign Currency Exchange Rate Risk
We conduct operations in several different countries outside of the U.S., most notably the U.K., and substantial portions of our revenues, expenses, assets and liabilities are generated and denominated in non U.S. dollar currencies. Since our consolidated financial statements are presented in U.S. dollars, we must translate revenues, income and expenses, as well as assets and liabilities, into U.S. dollars at exchange rates in effect during or at the end of each reporting period. Accordingly, increases or decreases in the value of the U.S. dollar against the other currencies will affect our net operating revenues, operating expenses, operating income and the value of balance sheet items denominated in foreign currencies.
During the twelve months ended September 30, 2017,March 31, 2024, approximately 12.7%15.9% of our revenuerevenues and 27.0%25.4% of our expenses were denominated in currencies other than the U.S. dollar, most notably the British Pound Sterling. Based on actual results over the past year, a hypothetical 10%10.0% increase or decrease in the U.S. dollar against all other currencies would have increased or decreased revenue by approximately $5.0$12.1 million and operating expenses by approximately $5.1$11.3 million.
41
Derivative Risk
Our limited derivative risk stems from our activities in the foreign currency forward contract market. We use this market to mitigate our U.S. dollar versus British Pound Sterling exposure that arises from the activities of our U.K. subsidiaries. As of September 30, 2017, the fair value of the notional amount of our foreign currency forward contract was $88.4 million. We do not speculate in any derivative instruments.
TwoThrough certain of our subsidiaries, MarketAxess Corporationwe execute securities transactions between our institutional investor and MarketAxess Capital Limited, act asbroker-dealer clients on a matched principal counterparty in connection with the Open Trading™ transactions that we execute between clients. We act as an intermediary in these transactionsbasis by serving as counterparty to both the buyer and the seller in trades which thentrades. Our operating subsidiaries settle such transactions using their self-clearing operations or through athe use of third-party clearing broker.brokers or settlement agents. Settlement typically occurs within one to two trading days after the trade date. Cash settlement of the transaction occurs upon receipt or delivery of the underlying instrument that was traded.
We are exposed to credit and performance risks in our role as matched principal trading counterparty to our Open Trading™ clients executing bond trades on our platform, including the risk that counterparties that owe us money or securities will not perform their obligations. These parties may default on their obligations to us due to bankruptcy, lack of liquidity, operational failure or other reasons. Adverse movements in the prices of securities that are the subject of these transactions can increase our risk. In connection with Open Trading™ or other anonymous protocols, we expect that the number of transactions in which we act as a matched principal will increase.
We have policies, procedures and proceduresautomated controls in place to identify and manage our credit risk. In connection with the recent growth of our Open Trading™ protocols, we have implemented additional automated controls to help us manage our credit risk exposure. There can be no assurance that thethese policies, procedures and automated controls we use to manage this credit risk will effectively mitigate our credit risk exposure. Some of our risk management procedures are reliant upon the evaluation of information regarding the fixed- incomefixed-income markets, our clients or other relevant matters that are publicly available or otherwise acquired from third party sources. Such information may not be accurate, complete, up-to-date or properly assessed and interpreted by us. If our risk management procedures fail, our business, financial condition and results of operations may be adversely affected. Furthermore, our insurance policies are unlikely to provide coverage for such risks.
Cash and cash equivalents includesinclude cash and money market instruments that are primarily maintained at onethree major global bank.banks. Given this concentration, we are exposed to certain credit risk in relation to our deposits at these banks.
Derivative Risk
Our limited derivative risk stems from our activities in the foreign currency forward contract market. We use this bank.market to economically hedge our foreign exchange gains and losses on the Consolidated Statements of Operations that arise from our U.S. dollar versus British Pound Sterling exposure from the activities of our U.K. subsidiaries. As of March 31, 2024, the notional amount of our foreign currency forward contract was $63.3 million. We do not hold derivative instruments for purposes other than economically hedging foreign currency risk.
42
Item 4. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures. Our management, including the Chief Executive Officer and Interim Chief Financial Officer, evaluated the effectiveness of our “disclosure controls and procedures,” as that term is defined in Rule 13a-15(e) and Rule 15d-15(e) promulgated under the Securities Exchange Act, of 1934, as amended (the “Exchange Act”), as of September 30, 2017.March 31, 2024. Based on that evaluation, the Chief Executive Officer and Interim Chief Financial Officer concluded that the disclosure controls and procedures are effective to ensure that information required to be disclosed by MarketAxess in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and to ensure that information is accumulated and communicated to our management, including the Chief Executive Officer and Interim Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
(b) Changes in Internal Control over Financial Reporting. There were no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) and Rule 15d-15(f) under the Exchange Act) during the quarter ended September 30, 2017March 31, 2024 identified in connection with the evaluation thereof by our management, including the Chief Executive Officer and Interim Chief Financial Officer, that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
43
PARTPART II — Other Information
In the normal course of business, we and our subsidiaries included in the consolidated financial statements may be involved in various lawsuits, proceedings and regulatory examinations. We assess liabilities and contingencies in connection with outstanding legal proceedings, if any, utilizing the latest information available. For matters where it is probable that we will incur a material loss and the amount can be reasonably estimated, we will establish an accrual for the loss. Once established, the accrual will be adjusted to reflect any relevant developments. When a loss contingency is not both probable and estimable, we would not establish an accrual.
Based on currently available information, the outcome of our outstanding matters is not expected to have a material adverse impact on our financial position. It is not presently possible to determine our ultimate exposure to these matters and there is no assurance that the resolution of the outstanding matters will not significantly exceed any reserves accrued by us. See Note 13 to the Consolidated Financial Statements for a discussion of our commitments and contingencies.
There have been no material changes in our risk factors from those disclosed in our most recent Form 10-K for the year ended December 31, 2016.2023. For a discussion of the risk factors affecting the Company, see “Risk Factors” in Part I, Item 1A of our 20162023 Form 10-K.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Recent Sales of Unregistered Securities
None.
Issuer Purchases of Equity Securities
During the quarter ended September 30, 2017,March 31, 2024, we repurchased the following shares of common stock:
Period |
| Total Number of Shares Purchased |
|
| Average Price Paid per Share |
|
| Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs |
|
| Approximate Dollar Value of Shares That May Yet Be Purchased Under the Plans or Programs |
| ||||
|
|
|
|
|
|
|
|
|
|
| (In thousands) |
| ||||
January 1, 2024 - January 31, 2024 |
|
| 54,206 |
|
| $ | 270.24 |
|
|
| — |
|
| $ | 100,016 |
|
February 1, 2024 - February 29, 2024 |
|
| 22,258 |
|
|
| 216.05 |
|
|
| 14,597 |
|
|
| 96,867 |
|
March 1, 2024 - March 31, 2024 |
|
| 32,814 |
|
|
| 216.94 |
|
|
| 32,247 |
|
|
| 89,869 |
|
Total |
|
| 109,278 |
|
| $ | 243.20 |
|
|
| 46,844 |
|
|
| ||
|
|
|
|
|
|
|
|
|
|
|
|
|
Period |
| Total Number of Shares Purchased |
|
| Average Price Paid per Share |
|
| Total Number of Shares Purchased as Part of Publicly Announced Plans and Programs |
|
| Dollar Value of Shares That May Yet Be Purchased Under the Plans and Programs |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| (In thousands) |
| |
July 1, 2017 - July 31, 2017 |
|
| 47,137 |
|
| $ | 200.45 |
|
|
| 20,000 |
|
| $ | 23,030 |
|
August 1, 2017 - August 31, 2017 |
|
| 22,916 |
|
|
| 197.24 |
|
|
| 22,700 |
|
|
| 18,552 |
|
September 1, 2017 - September 30, 2017 |
|
| 22,400 |
|
|
| 182.41 |
|
|
| 20,800 |
|
|
| — |
|
|
|
| 92,453 |
|
| $ | 195.28 |
|
|
| 63,500 |
|
|
|
|
|
During the three months ended September 30, 2017,March 31, 2024, we repurchased 92,453109,278 shares of common stock. The repurchases included 28,95346,844 shares repurchased in connection with our share repurchase program and 62,434 shares surrendered by employees to us to satisfy the withholding tax obligations upon the vesting of full value awards and upon the exercise of stock options and vesting of restricted shares and 63,500 shares repurchased in connection with our share repurchase program.options.
In January 2016,2022, our Board of Directors authorized a two-year share repurchase program for up to $25.0$150.0 million of our common stock. In October 2016, our Board of Directors approved a $50.0 million increasethat commenced in the size of the current share repurchase program. In September 2017, the existing share repurchase plan was terminated and our Board of Directors authorized a new fifteen-month share repurchase program for up to $100 million commencing in October 2017.March 2022. Shares repurchased under eachthis program will be held in treasury for future use. As of March 31, 2024, we had $89.9 million of remaining capacity under the program.
44
Item 3. Defaults upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
None.(c) Trading Plans
In the first quarter of 2024, no director or officer (as defined in Exchange Act Rule 16a-1(f)) of the Company adopted or terminated a Rule 10b5-1 trading arrangement or non-Rule 10b5-1 trading arrangement for the purchase or sale of securities of the Company, within the meaning of Item 408 of Regulation S-K.
45
Exhibit Listing:Index:
Number | Description | |
| ||
| ||
| ||
10.4 | ||
10.5* | ||
10.6* | ||
10.7* | ||
10.8* | ||
10.9* | ||
10.10* | ||
10.11* | ||
31.1* | ||
| ||
32.1* | ||
| ||
| Inline XBRL Instance | |
| Inline XBRL Taxonomy Extension Schema | |
| The cover page from the Company’s Quarterly report on Form 10-Q for the quarter ended March 31, 2024 has been formatted in Inline XBRL |
* | Filed herewith. | |
|
| |
|
| |
|
|
46
|
|
|
|
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
MARKETAXESS HOLDINGS INC. | ||||
Date: | By: | /s/ | ||
| ||||
Chief Executive Officer and Interim Chief Financial Officer | ||||
(principal executive | ||||
|
|
| ||
| ||||
| ||||
|
47
40