Marketaxess Holdings Inc (MKTX) 2004 Q4 法說會逐字稿

Welcome to the MarketAxess fourth-quarter and full-year 2004 earnings conference call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded Wednesday, February 9, 2005. I would now like to turn the conference over to your host for today's call, Mr. Eric Scro, head of investor relations at MarketAxess. Please go ahead sir.

Good morning and welcome to MarketAxess' fourth-quarter and full-year 2004 conference call. We issued a press release this morning providing results for the fourth quarter and year ended December 31, 2004. The press release is available on our Website at www.MarketAxess.com. Speakers for today's call are Jim Rucker, Chief Financial Officer, and Rick McVey. Chairman and Chief Executive Officer. First, let me start with the standard Safe Harbor statement.

I would like to remind you that we will be making forward-looking statements, including statements about the outlook and prospects for the Company and industry growth, as well as statements about the Company's future financial and operating performance. These and other statements that relate to future results and events are based on MarketAxess' current expectations. Actual results in future periods may differ materially from those currently expected or desired, because of a number of risks and uncertainties, including -- our dependence on our broker dealer clients; the level and intensity of competition in the fixed income electronic trading industry, and the pricing pressures that may result; the variability of our growth rate; our limited operating history; the level of trading volume transacted on the MarketAxess platform; the absolute level and direction of interest rates and the corresponding volatility in the corporate fixed income market; our ability to develop new products and offerings, and the market's acceptance of those products; our ability to enter into strategic alliances and to acquire other businesses, and successfully integrate them with our business; our future capital needs and our ability to obtain capital when needed -- among other factors.

The Company undertakes no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise. More information about these and other factors affecting MarketAxess' business and prospects is contained in the Company's periodic filings with the Securities and Exchange Commission, and can be accessed at www.MarketAxess.com. In addition, we have posted slides associated with this earnings call on the investor relations portion of our Website.

I would now like to turn the call over to Jim Rucker, Chief Financial Officer of MarketAxess.

Good morning, everyone, and thank you for joining our first conference call as a public company. While I will provide more complete details in a moment, let me first give the highlights.

As you can see from the release, MarketAxess turned in strong results for both the fourth quarter and full year of 2004. Revenues rose 14 percent in the fourth quarter to a record 19.7 million compared to the prior-year period. Fourth-quarter net income increased 53 percent to 2.6 million. Operating margin -- defined as pre-tax income as a percentage of total revenues -- in the fourth quarter increased to 26 percent, compared to 11 percent in the prior-year period. The Company ended the quarter with cash and short-term investments of 103.4 million. Now let me take you through some of the details. For Webcast participants, please turn to slide five on earnings performance.

As you can see from this slide, operating income for the fourth quarter was a record 5.1 million, compared to 1.9 million in the 2003 fourth quarter. We incurred a onetime non-recurring tax provision of $300,000 that increased our fourth quarter tax rate to 49 percent. This tax provision was incurred following submission of our 2003 tax returns and a resultant true-up of our deferred tax asset.

Prior to this onetime tax provision, fourth quarter pro forma earnings were $2.9 million, or 9 cents per share, compared to $1.7 million in the fourth quarter of 2003. Including this non-recurring tax provision, fourth-quarter earnings were $2.6 million, or 8 cents per share. Please now turn to slide six on the full-year earnings performance

Operating income for the full year of 2004 was $17.3 million, compared to 4.4 million for the full year in 2003. Full-year 2004 earnings were $58.6 million, compared to 4.2 million in the prior year. 2004 full-year earnings of 58.6 million translates to $1.91 cents per share. Now let's review the operating results and talk about the drivers of our business over the quarter and the year. Please turn to slide seven on revenue performance for the fourth quarter.

Total revenues for the quarter were $19.7 million, up 14 percent on the 2003 fourth quarter. Total transaction commission revenue for the quarter was $16.8 million, up 7 percent on the 2003 fourth quarter. U.S. high-grade commissions for the quarter were relatively flat at $11.4 million. The rate environment over the past few quarters has resulted in increasing volumes of trading in bonds with short maturities, reducing the average maturity of U.S. high-grade bonds traded over our platform, from 12.1 years in the fourth quarter of 2003 to 10.7 years in the fourth quarter of 2004.

As our U.S. high-grade fee schedule (indiscernible) lower fee per transactions with short maturities, this has reduced our variable transaction fee to $139 per million for the fourth quarter of 2004, from $157 per million for the 2003 fourth quarter.

There have been no changes to the U.S. high-grade fee schedule during this period. For fixed monthly, U.S. high-grade distribution fees for the fourth quarter amounted to $4.6 million. Revenues from European high-grade commissions for the quarter totaled 3.3 million, increasing 32 percent. The percentage of total commissions generated by our European business increased from 16 percent in the fourth quarter of 2003 to 20 percent in the fourth quarter of 2004.

Other commissions, which include emerging markets, crossovers, new issues, and U.S. Treasury securities, totaled $2 million for the quarter, increasing 14 percent. Emerging markets and new issues accounted for 88 percent, or 1.8 million, of the 2 million in other commissions, but only 60 percent of other volume. It should be noted that the Company generated only $26,000 in revenue from the U.S. Treasury product during the quarter.

Our license fee revenue for the fourth quarter of 2004 increased to $1.3 million following the addition of RBS Greenwich Capital to the U.S. high-grade platform, (indiscernible) investment securities and ING financial markets to the emerging markets platform, and DZ banks to the European platform. Please now turn to slide eight for revenue performance for the full year.

Total revenues for the full year were $75.8 million, up 30 percent. Total transaction commission revenue for the full year was $68.2 million, up 29 percent from 2003. Revenues from U.S. high-grade commissions for the full year totaled $45.5 million, representing a 13 percent increase and reflecting the introduction of the new high-grade fee plans in the third quarter of 2003.

European high-grade commissions for the year totaled $15.1 million, increasing 112 percent. Other commissions for the full year totaled $7.6 million, increasing 41 percent. Other revenue for the year totaled 7.6 million, increasing 35 percent, with the most significant increase being in information service and user access fees that increased by $1.6 million.

Turning now to operating expenses on slide nine.

For the fourth quarter, total operating expenses were $14.6 million compared to 15.4 million in the prior-year period. Increases in employee compensation and benefits and professional and consulting fees were offset by the lack of any warrant-related expense because of the end of the warrant program in the first quarter of 2004, as well as lower general and administrative expenses.

The main drivers of total operating expenses for the fourth quarter were as follows. Employee compensation benefits increased to $8.3 million in the quarter compared to 7.1 million in the prior-year period. This increase is largely due to lower capitalization of technology and development staff wages in the fourth quarter of 2004, as compared to the prior-year period, following implementation of the new U.S. high-grade platform in May of 2004.

In addition, the number of employees increased from 159 as of December 31, 2003 to 172 as of December 31, 2004. We experienced an 85.8 percent increase in our professional and consulting fees in the fourth quarter, to $2.1 million. The increase is attributable to higher audit fees and insurance expenses following our initial public offering, as well as increased technology consultant expenses.

General and administrative expenses for the fourth quarter were $900,000, below the prior-year period, which benefited from the reversal of a 500,000 provision to UK value-added tax following resolution at the potential VAT liability.

Total operating expenses for the full year were $58.5 million compared to $64.1 million in the prior year, an increase of 8 percent. As a percent of revenues, total expenses for the quarter were 74 percent, compared with 89 percent last year, reflecting the increase in our revenues over the period and highlighting the operating leverage we have in our business.

Turning now to balance sheet data on slide 10. Cash and short-term investments totaled $103.4 million as of December 31, 2004. The deferred tax asset was $41.4 million. The deferred tax asset benefits the Company's cash flow, as we will not pay cash taxes, except for certain state and local taxes, until the deferred tax asset is fully utilized.

We have no debt on the balance sheet. Total stockholders equity was $156.3 million, representing book value on a fully-diluted basis of $4.77 per share. Capital expenditures for the fourth quarter -- defined as the capitalized furniture, equipment and leasehold improvement costs, as well as the capitalized software development costs -- were approximately $900,000, a decrease of 62 percent from 2.4 million in the fourth quarter of 2003, largely due to capitalization and development costs related to the new trading platform that were incurred in the 2003 fourth quarter. For the full year, capital expenditures totaled $7 million.

Please turn now to slide 11 for volume performance for the fourth quarter. We reported record fourth-quarter volumes, total volumes of $79.3 billion, that represented a 25 percent increase over the fourth quarter of 2003 and a 6.2 percent increase over the third quarter of 2004. We're particularly pleased to be reporting record volumes on the platform in the fourth quarter, a quarter that is typically characterized by seasonal slowness around the November and December holiday periods.

U.S. high-grade volume traded over the platform for the fourth quarter of 2004 increased 12 percent to a record $49.4 billion, compared to 44 billion in the 2003 fourth quarter. We believe, based on the NASD TRACE data, that overall volumes in the U.S. high-grade corporate bond market declined over the same period. Compared to the third quarter of 2004, U.S. high-grade volumes increased by 10 percent. It's worth noting that the fourth quarter of 2004 had two fewer trading days and three more days on which the bond market association recommended an early close, as compared to the third quarter.

European high-grade volume increased 37 percent in the quarter to 16.9 billion, compared to $12.3 billion in the 2003 fourth quarter. Other volume -- which includes emerging markets, crossovers, new issues, and U.S. Treasury securities for the fourth quarter -- increased 90 percent to $12.9 billion, compared to 6.8 billion in the 2003 fourth quarter. The volume increase was largely due to the continued growth in the emerging markets product, as well as U.S. Treasury volume.

Please turn now to slide 12, volume performance for the full year. Turning to the full year, total volume of 298.1 billion was 55 percent above 2003 full year volume. U.S. high-grade volume increased 31 percent, to 183.5 billion, compared to 140.3 billion in 2003. In the 100,000 to $5 million range, a trade size category where the NASD TRACE data reports the actual volume numbers when you take into account the percentage of trades and the NASD reports was being disseminated, the overall market volume appears to have fallen from 940 billion in 2003 to 765 billion in 2004, a 19 percent decrease. During this time, MarketAxess volume in the 100,000 to $5 million range increased from 86 billion to 108 billion for a 27 percent increase. For the full year, European high-grade volume increased 141 percent to 76.5 billion compared to 31.8 billion in 2003. In 2004, other volume increased 90 percent to 38.1 billion compared to 20.1 billion in 2003.

Now I would like to discuss our reporting of monthly volumes. As you can see from today's press release, we announced our monthly volumes for January. Going forward, we will post our monthly volumes on our Company's Website on or before the tenth business day of each month. It's important to note that while we will not be issuing a press release, everyone can access our monthly volume figures at www.MarketAxess.com. The numbers will be posted on the volume statistics page within the investor section of the Website.

Please turn now to slide 13 of the January volume.

Total volumes in January rose 18 percent to a record 28.4 billion compared to 24.1 billion in the prior-year period, despite modest overall market volumes. Our monthly volume record was driven by strong performances in both U.S. high-grade and European credit. More detail concerning the January volumes is available on the Website.

Turning now to slide 14, our outlook for 2005. As I mentioned earlier, our operating margins have grown from 11 percent in the fourth quarter of 2003 to 26 percent in the fourth quarter of 2004. It is our objective to continue to improve our operating margins by investing in new products and improving the profitability of our existing products.

We expect total expenses for 2005 to increase 11 to 16 percent over full-year 2004 total operating expenses of 58.5 million. In addition to increased employee compensation and benefit costs that will enable us to actively pursue new product initiatives, the other noteworthy drivers of this increase are -- firstly, expenses associated with being a public company, such as compliance with Sarbanes-Oxley, directors and officers insurance, and increased audit and professional service fees. We anticipate these expenses will add 3 percent to our operating expenses in 2005.

Second, we have assumed that we will be required to expense employee options, in accordance with Generally Accepted Accounting Principles, beginning of July 1, and anticipate that these costs will add a further 2.5 percent to our operating expenses in 2005.

Thirdly, we're in the process of operating our disaster recovery facilities and anticipate this will contribute approximately 2.5 percent to 2005 operating expenses. We expect capital spending for 2005 to be in the range of 7 million to $9 million.

This concludes my remarks. Before we take questions, Rick will provide an update on the key initiatives that drove volumes in 2004, and provide a framework for our 2005 strategy.

Thank you Jim. Let me start by making a few comments on last year; then I will turn to our plans for 2005, giving you a sense of how we see the market developing in the months ahead; afterward, Jim and I would be happy to take your questions.

As you can see from the numbers, 2004 was a strong year on an absolute basis and an exceptional year on a relative basis for MarketAxess. We grew trading on our platform to record levels, successfully developed new products, and added new dealer and institutional investor clients to our trading system.

Importantly, this was achieved during a year in which we believe institutional investor trading volumes in the credit markets were stagnant or declining. Corporate bond spread volatility, a key driver of institutional trading activity, fell to less than 25 percent of the average of the prior 4 years. Corporate bond yield spreads to U.S. Treasuries are at the lowest levels since 1998.

The New York Stock Exchange, the only other corporate bond trading system to publish volume results, saw its full-year volume drop from 2.5 billion in 2003 to just 1.3 billion in 2004. Our ability to increase U.S. high-grade volume by 31 percent last year, to a total of 184 billion, in this sluggish trading environment, underscores the fundamentals driving our growth.

Our success in growing volume and attracting liquidity extended our leadership position in the electronic corporate bond trading space. Institutional investors and dealers continue to drive trading volume to MarketAxess in order to reduce transaction costs, improve efficiency and enhance audit trails for compliance purposes. In our opinion, these benefits increasingly make MarketAxess a must-have for regulated investment managers.

Last month, the NASD began publishing actual volume data for the overall corporate bond market. Excluding convertible bonds, investment-grade volumes totaled approximately $230 billion for the month. This total from the NASD includes inter-dealer, institutional customer, and retail customer segments. We believe that less than 10 percent of the total corporate bond market is currently trading electronically, and we are likely to see significant growth in the e-trading share over the next five years. In addition, we believe the growth in transparency and credit derivatives trading will have positive implications for corporate bond market volumes, consistent with the history in other financial markets.

Jim mentioned the strong growth in Europe during his comments, but I would like to add that in 2004 we increased the number of European broker-dealers using our platform to 18, up from 16 in 2003. Our focus on investor client acquisition in Europe has also paid off. 64 of the top 100 European fixed income asset managers, according to Institutional Investor magazine, are now active clients of MarketAxess. Our 140 percent increase in European credit volumes for the year represents growing acceptance of electronic trading in the region.

In addition to our liquidity advantage, investors and dealers consistently cite our substantial lead in technology as a key to our success. Throughout the year, market participants relied increasingly on a variety of unique features, including -- portfolio trading, which allows investors to quickly shift risk profiles by conducting up to 25 bond transactions through one electronic inquiry process; floating rate note functionality that addresses the needs of this growing market; enhanced real-time corporate bond and credit default swap data on MarketAxess BondTicker; and, enhanced order upload and straight-through processing features.

Now let's turn to the current year. As noted in a separate press release issued today, we have started to report monthly volumes. I believe this data, which will be posted on our Website each month, will be a big help to you in understanding the trends in our business. In our quarterly calls, we will give you our sense of the overall trends in the market, as well as dynamics at work in the e-trading space.

It's, of course, too early in the first quarter to draw many conclusions about this period's volume trends. January was a record month for total volume, driven primarily by good results in U.S. corporate bonds and European credit. My own experience in over 20 years in the fixed income business tells me that every period of low volatility eventually comes to an end; usually as a result of some unforeseen event. Our growing lead positions the Company well for the eventual return to more normal levels of corporate bond spread volatility, which should drive greater volumes in the overall market.

As many of you know, we recently entered the government bond trading space through a link with BrokerTec. Market adoption of this new way of trading U.S. Treasuries has been disappointing, and we currently expect to conclude our relationship with BrokerTec this quarter. As Jim mentioned, this will have no significant impact on current revenues or net income.

In our growth strategy for 2005, we are focused on three primary objectives.

First, we want to continue to build on our leading position in the U.S. corporate bond segment. We believe our success in 2004 puts us in a good position to continue to benefit from the ongoing migration from phone-based trading to e-trading in 2005 and beyond. The current regulatory environment and new technology enhancements should help to drive greater trading volumes.

Second, we seek to strengthen our position in the European high-grade market. New dealer and investor clients and our new European trading system, which offers enhanced features and greater client connectivity, should help with this goal.

Third, we plan to extend our platform into new markets and client segments where we believe we have a distinct competitive advantage and can deliver significant value to clients and our shareholders. We are especially focused on building our e-trading capability in the rapidly growing credit default swap market. We believe our technology and desktop space in the corporate bond community provide an early competitive advantage in the credit default swap market.

On the client side, we are adding resources to capture a greater share of the hedge fund activity in the credit space. Credit hedge fund assets are growing rapidly, and we believe that the economic benefits of e-trading will reach this community in 2005.

Instrumental in executing our growth strategy will be Tom Thees, our new Chief Operating Officer. Tom is a welcome addition to our management team, having spent the past 16 years at Morgan Stanley serving the last five years as managing director and head of investment-grade debt trading. He will report directly to me. And given his depth of experience and relationships, Tom will be instrumental in further expanding our client base, as well as developing new products.

Client demand for access to our platform's liquidity and technology remain strong. There is abundant opportunity for growth in our current products and fertile ground for moving into new and large market sectors. As we enter 2005, we are enthusiastic about the prospects for MarketAxess in both U.S. and European credit markets, where we have increased our leadership position and have good business momentum. Should volatility and volume growth return to the overall corporate bond markets, we are positioned to benefit from that trend. In the meantime, we remain focused on expanding our range of products and enhancing technology solutions on our platform.

With that, I will open up the call for your questions

(OPERATOR INSTRUCTIONS). Thank you. William Tanona, JP Morgan.

Just starting with the expense side -- obviously, we saw some movement there on the G&A as well as the professional services, and just wanted to know what is going on there and what we can expect going forward. And then more broadly, you guys gave 2005 guidance of 11 to 16 percent up year-over-year. That's on the total expense number, not excluding the money line and the warrant related expenses?

Let me answer (indiscernible) firstly, you asked about the profession consultancy and G&A expenses for the fourth quarter. There were a couple of unusual things happening on those. First of all, the professional and consultancy -- we did have a high level of profession (indiscernible) expenses in the quarter, largely as the result of additional audit and other service fee expenses. (indiscernible) following the IPO. On the general and administrative side, we did benefit there from a reversal of a potential VAT liability in the UK that at the end we did not need to keep there. So we did benefit from that.

So we should kind of think of those numbers on the G&A side as being onetime and going back to a more normalized rate. And then, professional fees -- kind of assuming that trend that we saw in the fourth quarter.

That's right. The G&A -- you should treat that as if it's a onetime item. And certainly some of those professional consultancy fees will continue on as -- they are ongoing expenses that we will incur as a public company.

In terms -- you asked about the '05 outlook. The 11 to 16 percent number does incorporate into that the warrant expense reduction, as well as the money line revenue share. So what we have got (indiscernible) we have a number of parts that are moving there.

One, as you know, are those reductions. Offsetting that though, are increases in expenses that we will incur. First of all, as a public company -- and I think I mentioned it in the prepared remarks -- expenses to comply with Sarbanes-Oxley; increased audit and service fee expenses; increased director's and officer's insurance expenses. We also have built into the numbers the assumption that we will be required to start expensing employee options beginning July 1. And we also are in the process of operating our disaster recovery facilities, and that will add additional expense during 2005. So, those are some of the main moving parts on the expenses.

So when you think about that, the guidance, what did you necessarily have budgeted in terms of volume growth for those type of assumptions for '05?

Clearly, we think the important thing here, Bill, is to keep expanding the operating margin. So, when we look out at '05, we have looked at the expense increase in light of assumptions on increasing volume and revenue. And as we expanded operating margin from '03 to '04, we would expect to see that operating margin expanding as we go forward.

Rick, in terms of you obviously mentioned you want to go into other product areas or other segments. Could you give us a sense as to what areas you think you guys could provide some added value, in terms of targeting, and also in terms of the Treasury product. I think you have mentioned before that if BrokerTec were to stop, that you guys would still be interested in offering that product, and if there's anything that you guys are doing to continue to offer the interdealer market to your clients.

Just a couple of things. I think the nice part about our business opportunity is that we do see many major sectors of fixed income that have not moved electronic at all yet. So we are carefully studying all sectors and determining where we believe we can bring technology solutions to the market that would serve our dealer and investor clients.

And as I mentioned in my prepared remarks, our primary focus on new product development is currently the credit default swap market. And as many of you are aware, that market has quickly become larger in terms of trading volumes in the underlying corporate bond market. And we believe, based on all of our work with dealers and investors, that people believe that the developments in that market make the timing right for MarketAxess to pursue electronic trading in the CDS market.

The other trend that we observed, Bill, through last year was investors' comfort with moving down the credit curve with respect to electronic trading. Jim mentioned the significant growth that we saw in emerging markets during 2004. We also saw a jump in crossover credits that were trading on the MarketAxess platform. So, we would also look for those two areas to continue to expand in 2005. And that's another area of investment for us.

With respect to the Treasury product, I think we have learned valuable lessons over the last six months or so through our launch with BrokerTec. And we are carefully reviewing and revising our Treasury strategy. And we will consider that product, along with other new product initiatives, and work closely with our client to determine the priorities for the future periods. And currently, we believe that our primary competitive advantage rests in the client to dealer space. So, as we start 2005, our primary focus remains on serving that segment of the fixed income market.

Chris Costanza, UBS.

Just a couple of quick questions. First of all, related to the CDS market, are there any major technology hurdles you feel like you need to overcome to move forward in that market? And related to that, is this a key to further penetrating the hedge fund client base?

Very good questions, Chris. There are unique characteristics in any derivatives market that call for different technology solutions than cash bond markets. Client permissioning is absolutely critical because of the credit that is utilized in a derivatives trade. When it comes to credit, derivatives -- making absolutely certain of the referenced entity that is being traded -- is critical. And, I think, most importantly, the market is very focused on straight through processing solutions in the CDS space in order to increase the capacity and efficiency in that rapidly growing market.

Having said that, we have tackled tougher technology challenges before in bringing solutions to the credit markets. And we are highly confident that our product plan is achievable in addressing the needs of the CDS market.

Do you have any visibility at this point in terms of timing, when you might be able to bring a solution to the market?

We believe that we will start to show visibility that we would be prepared to share with all of you on the CDS product in the second half of this year. I'm sorry; what was the second half of your question, Chris?

I was just asking. Do you feel like that's key to penetrating the hedge fund market?

It absolutely is. The credit derivative market is really one of the primary reasons why credit hedge fund assets are growing. The corporate bond market was insufficient in liquidity and transparency to meet the needs of leveraged trading players. So the CDS market is actually one of the reasons that the capital on the credit hedge fund side is growing so rapidly. So, the CDS strategy is closely linked with our interest in attracting more of the hedge fund business in the credit market overall.

A couple of follow-ups. Are there electronic solutions currently? Number one. And number two -- is there potential synergy between having a CDS product and the corporate on the same platform, either -- both for hedge funds and for your traditional (indiscernible) only clients?

In the client to dealer space, technology solutions are at very early stages. A few dealers have put their own CDS pricing out over other platforms like Bloomberg, but the trading of CDS electronically is at very early stages.

In the interdealer market, there have been positive developments over the last year with respect to trading that's taking place, especially in London, between dealers on electronic trading platforms like Creditex. But again, that is a separate segment from the one that we are involved in, in the client to dealer space.

There are absolute synergies between the corporate bond market and the CDS market. There is rapid convergence in the dealer community of the market-making operations between CDS and corporate bonds, and we think that the desktop space that we occupy in the dealer community for corporates positions us very well to move forward with the CDS product.

The same trend is clear on the client side. Both hedge funds, as well as traditional asset managers, are increasingly taking and shifting credit risk through the CDS market. So, the investor community that is already on our platform is also increasingly active in CDS, and we think that is a prime benefit for MarketAxess moving into that space.

Final question, just a quick one. So far in 2005 on the U.S. high-grade platform, are you seeing the same trends in terms of transactions under 5 million continuing to be weak, relative to 2003, I guess?

I think we'll have to come back to you on the January numbers. We did not look at size buckets in the January numbers. As you can see from the monthly data that we have provided from the NASD, there was a bounce back in total corporate bond volume in January versus the December activity. But based on the estimates that we ran from the NASD data a year ago January, this January still shows lower volume than one year ago.

Angel Lapreceau (ph), Bear Stearns.

Just a couple of quick questions. In the original statements you spoke with regard to the current regulatory environment and how it would allow you to grow. I was wondering if you would just elaborate on the environment there, and provide us with any more information.

I would be happy to, and I think it's an important question. There are significant changes going through the regulatory climate in fixed income overall, but certainly in the credit space. There is increased emphasis on best execution on the buy side, and also, increased transparency in information on bond prices. So, there is clearly a growth in the amount of work that's being done on the buy side to be able to demonstrate that they have achieved best execution on behalf of their funds for their clients. And, with the NASD TRACE data for corporate bonds, as well as the newly released MSRB tape for municipal bonds, there is now real-time data available that displays all prices that are transacting in the overall market.

So, this is -- in my experience this is the -- a period where we have seen the most emphasis on best execution in the fixed income market. And we believe that our technology solutions -- which allow investors to canvas a broad group of dealer market-makers, and conduct price discovery and execute with the best level, and automatically preserve those audit trails electronically -- fits very well with the investment manager's desire to demonstrate best execution.

The same is true on the dealer side of the equation. Because of the price data that's available, regulators are now able to carefully monitor markups in the dealer community. So, dealers are also actively using the MarketAxess technology, both our trading system as well as BondTicker, to make sure that they are comfortably complying with markup guidelines from their regulators.

Okay. I realize you guys mentioned a number of areas in which you plan to grow throughout 2005. The first question is -- in addition to that, are you guys in the market to make any potential bolt-on acquisitions, or acquisitions of technology? And then, the second question is with regard to the credit default swap. I know you elaborated on that, but could you give us any kind of sense as to where the pricing might fall in on that?

On the first question, I think one of the benefits of being a public company is having the flexibility to be nimble in looking at acquisitions. And we have had opportunities presented to us already in the early days of being a public company.

We are not currently planning on any immediate acquisitions, but of course we're always looking at opportunities that would be interesting to our shareholders in a way that we might be able to expand our product capabilities and increase the diversification of our business.

Secondly, on CDS, there are key differences between the economics and margins in index trading versus single-name credit default swaps. Index trading has become very liquid over the last year and a half, with very narrow bid/offer spreads. So we would expect that the fees per million in CDS index trading would be significantly lower than corporate bond trading.

Having said that, the ticket sizes typically are very large, and the volumes in that market are significantly larger already than corporate bond volumes. Single-name credit default swap transaction fees -- our best estimates right now is they would fall somewhere in between CDS index trading and the current corporate bond transaction fees.

You mentioned that there was a reversal of a liability within the G&A line item, I believe. Do you have a number on that?

What we were talking about there was a reversal of a UK -- sorry -- value-added tax liability. And that was $500,000.

Finally, if you could just speak a little with regard to why the pricing on the European part of your business seems to remain so stable?

There really are a couple of things that have gone on, if you compare the fourth quarter of '04 against the fourth quarter of '03, on European pricing. Part of it is due, again, to product mix within the European product. There are a number of different pieces to it that carry different fees per million, and there has been some change in that mix that has resulted in lower fees. I think overall, the fees in Europe have come down something like 4 percent between the two quarters. The other piece -- there was one small change to the European fee schedule for (indiscernible) that has also accounted for a small piece of that 4 percent reduction.

Howard Chen, Credit Suisse First Boston.

Most of my questions have been answered, but just a quick couple. How much if any of today's CapEx guidance incorporates costs related to platform extension into proposed new markets for '05?

I didn't hear the question. (indiscernible) you were asking how much of the CapEx is due to platform expansion in '05?

Correct -- into new markets.

We haven't split out the CapEx between new markets and existing products, but really the CapEx does relate both to additional hardware that we need to keep the hardware, the supporter platform, upgraded to enable us to cope with any capacity increases.

And the second piece of that is related to software development. So, capitalized software development, which covers both existing and new products. As you know, we do roll out regular upgrades to our platform, upgrades to both existing products as well as adding features for new products.

Could you provide us with any sense of pricing with regard to the new broker dealers that came on during the quarter or were signed on?

The new dealers that have come on are on the standard pricing schedules.

Thanks, Rick. One final one. You mentioned flexibility in terms of M&A activity. In the core businesses you guys are in today, is there any product capability you think you are lacking, or are there opportunities out there to join different liquidity pools? Could you help frame some of that?

In the core business, no -- we do not think we are lacking anything crucial to our business in the client to dealer credit space. I think we would be interested if there are acquisitions that expand beyond that, in terms of either the client segments that we might be able to reach, or the product capabilities that would diversify the platform beyond our current areas.

Rich Repetto, Sandler O'Neill.

First question is -- the compensation to revenue or net revenue ratio is about 42 percent this quarter, and I was just wondering have we hit -- I know we're still -- it's still a small revenue base. But what would you expect to see that going forward, because you have increased headcount year-over-year as well. Is it going to stay in the '40s or as the revenue -- are we at a fixed comp base at this point?

Rich, I think if you look back -- for instance, fourth quarter '03, and compare that to fourth quarter '04, what you will see is that compensation as a percent of revenue has come down. And as I mentioned earlier, we believe strongly that we will continue to grow operating margins. So, looking forward, we certainly expect compensation as an expense of revenue to come down further.

You did say -- you talked about the operating margin. The prior caller asked about the pricing. Overall, you've seen a pricing decline. So, I guess my question is what -- could you quantify the operating margin or the volume? Because if we have pricing coming, the trend downward, whether it's due to mix or whatever -- the incremental customer coming on at a different price point. But if we've got expenses going up and we've got pricing coming down, what is the volume that drives -- how do you expand or quantify the operating margin expansion?

We think that the important thing for us as a company is to keep growing revenue. And I think what we shouldn't be absolutely focused on is the fee per million. But, what we should ensure that we do is keep growing the revenue. If we do that and I think -- again, as we have spoken before, our expenses are relatively predictable. They don't vary (indiscernible) with the marginal trades on the platform. We will continue to grow that operating margin.

I think, Rich, the key drivers of expanding margin -- one of the biggest drivers is largely out of our control, and that is the total market volume in the products that we operate. So, we stay focused on increasing our share of that market. And as we are increasing share in a market that overall has positive trends in terms of growth, we do believe that you will continue to see operating margins expand.

Corey Gilcrest, Marshfield Capital.

Hi Rick. Congratulations on the quarter. A quick question for you on the expense side. The comments were -- 11 to 16 percent total OpEx in '05 off the 58.5 million in '04. 2.5 percent, the option expensing; 3 percent, being a public company; 2.5 percent, disaster recovery. That gives me about 8 percent. I'm backing into an underlying expense growth of 3 to 8 percent, and that includes expanding the CDS technology platform and product platform. Is that correct?

That's correct.

Is that the kind of operating leverage we can expect going forward, that kind of underlying 3 to 8 percent OpEx?

I think, Corey, that that's a reasonable level to look at. And it, I think, probably is reasonably in line with what the OpEx increase was '04 over '03.

That's great.

Corey, I think a large base of our headcount is in the technology area. And we do have the benefit now of shifting technology resources into new product opportunities as they present themselves. So part of this is really just reallocating existing resource, and then modest increases in resources, as we have seen historically, to attack new and major market sectors.

Aaron Caddell (ph), Hode (ph) Capital.

Thanks for taking the call. Just a couple of questions. Can you just kind of talk broadly about your view of how volumes could react heading out into '05, assuming continued rising rates and flattening of the yield curve on the corporate side?

It's a good question, and I will start with the disclaimer that forecasting markets and volumes is not our core business. I very much think that there are offsetting factors that work when it comes to volume. The increase in transparency and the continued growth of credit derivatives, we believe, are positive factors that will drive more volume in the underlying corporate bond market. So, that macro trend to us looks very positive.

Offsetting that is that we've had a consistent economic picture now for a few years, with positive cash flows in the corporate bond community and modest needs for issuance. So, as a result, we have had very, very stable corporate bond spreads over the last four or five quarters. And it's difficult for us to predict any immediate change to that environment.

So, we think longer-term the positive forces on transparency and credit derivatives will drive more volume in the market. And as I said earlier, history would suggest that the economic conditions will change, and we will get more corporate bond spread volatility back into the market -- it's just very difficult to predict the exact timing on that.

Thanks. Following up on the pricing pressure, or pricing outlook discussion -- how does the competitive dynamic in the corporate business change, in your view, significantly, with the recent launch of TradeWeb's product?

The recent launch from Thomson -- I guess you're referring to the first launch back in 2002, and we have been competing head-to-head with Thomson for nearly three years now. And I think you can see our volume momentum against a difficult environment. We would encourage Thomson to help all of you better understand the competitive space by reporting their corporate bond volumes, but to date, they have chosen not to do so.

So, we feel very good about our competitive position. We are absolutely convinced through all the work that we do with dealers and clients, that we have extended our leadership position over the last four quarters. And there is nothing on the competitive scene at all that gives us pause at the current time.

Justin Hughes, Philadelphia Financial.

I just wanted to talk a little bit more about the revenue per trade numbers. If we look year-over-year, I think it's down about 10 percent or so. I was wondering -- can you any quantify for us how much of that is mix and how much is really your clients hitting some of the volume breaks (technical difficulty)

(indiscernible) think you have a number of clients that pay less -- less per trade as the volumes go up. And I think you even have one that at a certain point will pay no incremental commissions. So, how much was that impacted if we look year-over-year?

I don't have the exact breakout of how much of the average fee per million reduction was due to the pricing plans (indiscernible) clients are getting lower average fees per million as volume increases. But what I can say is, if you look overall, a large part of the movement in average fees per million is due to the mix of products. Either if you go to the U.S. high-grade within the product we have the shorter maturities, or if you go into the other category where you've got a variety of products that have very different fees per million. So, as we get increasing volume in products with lower fees per million it does adjust the average. As far as your question -- most of the changes you're seeing is because of changes in the product mix.

Ladies and gentlemen, at this time we have no further time for questions. I'd like to turn it back to Mr. Rick McVey for any closing remarks.

I just wanted to thank everyone for participating in today's conference call. We appreciate your support and interest in MarketAxess, and we'll be available for the rest of the day should you have any further questions. Thank you.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude your presentation and you may now disconnect. Have a wonderful day.