Marketaxess Holdings Inc (MKTX) 2007 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

And welcome to the MarketAxess Third Quarter 2007 Earnings Conference Call.

(OPERATOR INSTRUCTIONS)

As a reminder, this conference is being recorded Wednesday, October 31, 2007.

I would now like to turn the call over to Stephen Davidson, Head of Investor Relations at MarketAxess.

Please, go ahead, sir.

Good morning.

And welcome to the MarketAxess Third Quarter 2007 Conference Call.

For the call this morning, Rick McVey, Chairman and Chief Executive Officer of MarketAxess, will provide a strategic update for the company.

Kelley Millet, President of MarketAxess, will provide an update on our North America businesses.

And then Jim Rucker, our Chief Financial Officer, will review the financial results for the quarter.

We will then go back to Rick for closing comments before the Q&A session.

Before I turn the call over to Rick, let me remind you that today's call may include forward-looking statements.

These statements represent the company's belief regarding future events that, by their nature, are uncertain.

The company's actual results and financial condition may differ, possibility materially, from what is indicated in those forward-looking statements.

For a discussion of some of the risks and factors that could affect the company's future results, please see the description of risk factors in our annual report on form 10-K for the year ended December 31, 2006.

I would also direct you to read the forward-looking disclaimers in our quarterly earnings release that was issued earlier this morning, available on our Web site.

I would now like to turn the call over to Rick McVey.

Rick?

Good morning, and happy Halloween.

The third quarter of 2007 was one of the most challenging quarters ever for the credit markets, as the subprime contagion rippled through the market, causing a severe drop in credit market liquidity.

Despite these difficult markets, MarketAxess reported solid results for the third quarter of 2007, helped by an expanding base of fixed commission revenue, a more favorable mix of business and continued strong expense management.

For the third quarter of 2007, MarketAxess reported net income of $2.4 million, or $0.07 per share, compared to $1.3 million, or $0.04 per share, in the prior-year period.

Our pre-tax margin was 16%, well above the 11% reported during the prior year period, but down from the second-quarter low.

The drop in market liquidity clearly had an impact on electronic trading, with our estimated share of U.S.

NASD high-grade trades falling to 7.8% from 9.3% in the third quarter of '06.

We believe this was caused by extreme illiquidity in the short end of the corporate bond market, and a shift in the client mix within TRACE, away from traditional asset managers.

Kelley will further address market conditions in his comments.

On the expense front, third quarter 2007 expenses were flat compared to the third quarter of 2006, reflecting continued expense discipline.

Our financial position and strong cash generation continue to be sources of strength.

Since the end of the third quarter of 2006, when our cash balances were $124 million, we have repurchased $30 million in MarketAxess shares.

We ended the third quarter of 2007 with $128 million in cash and securities, demonstrating that our operating cash flow has fully funded our share buyback program.

In summary, we recorded $0.07 earnings per share in the extremely challenging market environment.

Our higher base of fixed revenues, ongoing expense management, and trend toward higher variable fees per million all contributed to the improvement in earnings.

We believe we are well-positioned for growth, as credit market liquidity returns to more normal levels.

Slide four provides a snapshot of our quarterly results at the beginning of '06.

In spite of the downturn in the sequential results for the third quarter, we are still showing very good progress over the prior year period.

As you can see, our business has shown a consistent improvement in profitability, driven by higher revenues and controlled expenses.

Operating margins have been growing attractively from prior year levels.

And on slide five, this momentum is clearly evident in the year-to-date numbers.

Revenue is running 16% above the prior year.

Expenses have been held steady and are less than 2% above the prior year.

And most importantly for our shareholders, net income and EPS are running about 165% above the prior year.

These results reinforce the fact that we have very attractive incremental margins in our business.

On slide six, we provide an update on some of the key credit market drivers.

The upper left hand corner shows the impact of the recent turmoil in the corporate bond market.

Liquid high-grade index spreads [widened a full] 43 basis points at their highs in September, from the end of June.

The upper right hand corner shows the benign volatility of the U.S.

corporate index spreads of the previous six quarters came to an end during the third quarter, with the rolling three-month volatility spiking at 2.7%.

In the short run, the sudden and severe re-pricing in the credit markets has led to a reduction in liquidity and trading activity in corporate bonds.

However, we believe that a return to normal market liquidity, combined with the increase in spreads and volatility will cause an increase in trading activity among traditional investment managers, our primary client base.

In the lower left hand corner, the recent steepening of the yield curve has led to an increase in average maturities traded on our system and a subsequent increase in average variable fees per million.

The lower right hand corner shows high-grade new issue volumes have remained robust despite the difficult market conditions.

An active new issue calendar supports secondary trading over the long term.

On slide seven, two trends in the fixed income market are worth noting.

The left graph shows the shape of the yield curve versus the average maturity of bonds traded on the MarketAxess system.

As you can see, the dramatic flattening of the curve over the last four years caused investors to trade shorter maturity bonds.

The recent steepening of the yield curve has caused an extension of average maturities traded, leading to higher average fees per million in U.S.

corporate bonds.

The right graph shows the correlation between TRACE high-grade volumes, spreads and spread volatility.

We believe that the lack of spread volatility caused a contraction in overall corporate bond trading over the last few years.

In spite of the extreme lack of liquidity in the third quarter, as we look into 2008, we believe a case can be made that the increase in spreads and spread volatility will be a positive for corporate bond trading volumes.

On slide eight, I wanted to update you on potential uses of our substantial cash balances.

As I stated earlier, our operating cash generation continues to be well in excess of reported net income, and has fully funded our stock buyback since the third quarter of 2006.

There are three strategic options that we are actively considering for uses of cash.

First, we continue to consider acquisitions that would expand our technology capabilities in the fixed-income e-trading space.

We feel that acquisitions that support the growth of our trading, data and technology services businesses will allow us to broaden relationships with key institutions and diversify our sources of revenue.

Second, we will revisit ongoing share repurchase plans with our board when the current plan is completed.

And third, we are always looking to identify new organic opportunities that meet the needs of our institutional customers.

With that, I would like to turn the call over to Kelley for an update on North America.

Thank you, Rick.

For my North America update this morning, I will address the difficult market conditions we experienced in the third quarter.

In addition, I will review the market impact on our estimated share of NASD high-grade trades, as well as on our volumes and the mix of business.

On slide 10, you can clearly see the drop-off in trading volumes in our core U.S.

high-grade business.

Third quarter performance was degraded by the significant market dislocation we saw in August and September.

The rapid re-pricing of credit, which began in July, led to a severe liquidity squeeze in August for our dealers.

Reduced dealer liquidity and risk appetite decreased the number and quality of levels quoted by dealers and dampened investor inquiry volume over the system.

The ensuing liquidity-by-appointment environment pushed client flow business back to the phone, resulting in a decline of our estimated share during the quarter, falling from 9.3% of NASD high-grade TRACE in the third quarter of last year to 7.8% in the third quarter of this year.

FRN trading volume -- normally, the most liquid, short-duration segment of the client flow business that we address and the majority of which is issued by banks and brokers -- declined 53% to $7.3 billion during this quarter.

The fixed rate trading volume executed over our platform decreased 5% to $32.6 billion in the third quarter year-over-year.

Lower FRN and fixed rate cash trading volume was partially offset from a revenue perspective by a better mix of business over the platform.

The average weighted years to maturity for fixed maturity trade increased to 8.3 years in the third quarter of this year, up from 7.8 years in the second quarter of this year, and 6.7 years in the prior year third quarter.

This positively impacted our fees per million.

In October month-to-date of this year, we are seeing a moderate increase in our average daily volume of inquiry and the return of larger sized trades to the system, especially in FRN.

One quick note on CDS volume -- our other category was up strongly versus the third quarter of 2006.

And this was primarily due to improved CDS volumes, which grew four-fold over the prior-year period.

On slide 11, we show the trend in our share of NASD high-grade TRACE and the client flow business.

While our overall share of NASD high-grade TRACE and our share of the client flow business has dropped due to market conditions, our value proposition for dealers and clients is stronger than ever.

With the recent drop in dealer profitability, fixed income trading managers will be under even more pressure today to achieve cost savings, adhere to compliance regulations, and continue to efficiently serve their clients.

We estimate that client flow trading, as we define it, makes up approximately 57% of NASD high-grade TRACE year-to-date, a material part of which, we believe, should go electronic over time.

Finally, on slide 12, we have updated statistics on OMS-initiated trading by our investor clients.

Straight-through processing solutions increased the value of our platform to investors and raised barriers to entry for competitors.

The number of trades initiated by client order management systems messaging continues to grow.

At the end of the third quarter, 20% of our trade count and 18% of our trade volume was initiated by client OMS systems.

We added 18 new STP connections with investor clients, bringing the total connections to 131, up from 113, at the end of the first quarter of this year.

Now, I'd like to turn it over to Jim for a review of the financial results.

Jim?

Thank you, Kelley.

On slide 13, we've outlined our volumes from the 2006 and 2007 third quarters.

Trading volume for the third quarter of 2007 was clearly impacted by the seizing up of liquidity in the credit markets, with total trading volume down 32% compared to the second quarter.

Trading volume of $76 billion was down 10% over the third quarter of 2006, impacted by a 20% decline in U.S.

high-grade, a 21% decline in European high-grade, offset by a 38% increase in the "Other" volume category.

The increase in the "Other" volume category was primarily driven by an increase in CDS trading volume.

Please turn to slide 14 for our earnings performance.

Despite the lower trading volumes in the third quarter, our earnings per share of $0.07 were above the third quarter of 2006, and only $0.03 below our strong second quarter results.

In short, we were able to generate $0.07 in earnings for our shareholders during some of the most challenging credit market conditions in recent memory.

Three factors contributed to this -- a full quarter's impact for the new European fee plan that we introduced in June, variable employee compensation expense that was below the second quarter level, and an increase in the high-grade variable transaction fees that Kelley referred to earlier.

Our tax provision in Q3 '07 reflected an effective tax rate for the quarter of 34%, compared to 42% in the third quarter of 2006.

The primary reason for this was a higher percentage of our earnings coming from our U.K.

subsidiary, which is currently subject to a lower tax rate than our U.S.

operations.

I anticipate the effective tax rate for the fourth quarter to be between 36% and 39%.

But in the longer term, I expect the rate to revert to approximately 40%.

Slide 15 provides you with the revenue detail.

Total commission revenue was up 8% compared to the third quarter of 2006.

U.S.

high-grade commission revenue was down only 2% on a 20% decline in trading volume, and reflects a decrease in DealerAxess monthly minimums, which was offset by increases in the client-to-dealer fixed distribution fees and the client-to-dealer variable transaction revenue.

Fees per million increased by 31% from, $77 in the third quarter of 2006 to $101 per million for the third quarter of 2007 as a result in the increase in the average maturity of trades executed over the platform.

European high-grade commission revenue was up 49% despite the declining trading volumes that I referred to earlier, clearly showing the benefits of our new European high-grade fee plan.

And I'll provide more detail on this on the next slide.

In the "Other" category, while trading volumes increased by 38%, commission revenue increased by only 2%.

The primary reason for this was an increasing contribution from the CDS product, which represented a significant portion of the volume increase year over year.

Fees per million in CDS are currently much lower than the other products in this category.

Slide 16 shows the positive impact of the first full quarter under the new European fee plan.

While European high-grade trading volume decreased 21% from the third quarter of 2006 following the implementation of the new European fee plan in June, commission revenue increased by 49% to $4.9 million from $3.3 million in the third quarter of 2006.

Due to our success in signing most of the European dealers onto the new fee plan, we now have a base of monthly dealer distribution fees that is at a similar level to the variable commissions that the dealers were paying a year ago.

But in addition, we've been able to earn the variable transaction fees that we electronically add in to the prices quoted by the dealers.

The combination of the fixed monthly distribution fees and variable transaction fees under the new plan had a substantial positive impact on revenues in the third quarter compared to the commission revenue we would have earned had we still be on the old plan.

Average variable transaction fees of $99 per million for the quarter were above the $90 we guided you to in the second quarter call.

Similar to what we saw in the U.S., we had a more favorable mix of business, which boosted up fees per million during the quarter.

Slide 17 provides you with the expense detail.

Total expenses in the third quarter of 2007 were flat to the third quarter of 2006 and down $700,000 from the second quarter, largely as a result of lower variable employee compensation due to lower operating income for the quarter.

Employee compensation and benefits as a percent of revenue was 46%, down from 50% in the third quarter of 2006.

I'm now expecting our expenses for the full year to be below the guidance range that I've previously given.

I anticipate full year 2007 expenses to be in the range of $76.2 million to $76.8 million.

On slide 18, we see the increasing coverage of our expense base by our monthly distribution fees and a non-trading rise in revenue.

Coverage of our expense base by the U.S.

and European high-grade monthly distribution fees and the non-trading-related revenue has increased from 65% of our expense base in the third quarter of 2006 to 80% in the third quarter of 2007.

The implementation of the new fee plan for the European high-grade product has been a significant contributor to this development.

In challenging markets such as the ones we experienced during this past quarter, we have a steady base of revenue to support our earnings, while at the same time giving us plenty of upside in variable transaction fees.

On slide 19, we show our strong free cash flow for the third quarter year-to-date.

Our year-to-date free cash flow generation was 2.2 times our reported year-to-date net income.

This translates into $18.5 million, or $0.53 per share, well above the reported $0.24 in earnings per share.

Year-to-date non-cash expenses, which include depreciation and amortization, stock-based compensation and deferred taxes, were $15.2 million.

On slide 20, we have the summary balance sheet data.

During the third quarter of 2007, we repurchased 205,000 shares at a total cost of $3.5 million.

And as of October 20, we have purchased a total of $2.2 million shares at a total cost of $30.9 million, which leaves $9.1 million remaining in the program.

Our cash balances of $128 million are just 2% below the $131 million at year end 2006.

Total stockholders' equity was $176 million, representing book value on a diluted basis of $5.10 per share, and we continue to have no debt.

Now, I'd like to turn the call back to Rick for closing comments before the Q&A.

Thank you, Jim.

In summary, no one could have expected the severity of the credit market downturn in the third quarter.

We feel good about our financial results in light of the market environment.

Our hard work on fee models and expense management served our shareholders well during the quarter.

We believe that as the market stabilizes, the trading environment will show improvement versus the benign conditions of the last few years.

We remain optimistic about the growth ahead in our core corporate bond business and the large opportunity in new products and services.

Now, I would like to open the call up to your questions.

Thank you, sir.

(OPERATOR INSTRUCTIONS)

And your first question comes from the line of Howard Chen with Credit Suisse.

Please proceed.

Good morning, everyone.

Good morning, Howard.

Hi, Howard.

Rick, I guess, first one is for you.

I was hoping to get an update on the competitive landscape during the quarter.

Here in the U.S., we saw an announcement by the broker-dealers to reinvest in TradeWeb.

And in Europe we saw the launch of LiquidityHub.

So, I guess -- could you touch on both of these and give your overall sense of the competitive environment now, compared to where we were a year ago, et cetera?

Sure.

No, I'm happy to do so.

And the reality is, within the credit space, I don't think much has changed.

TradeWeb, in particular, has been a strong competitor of MarketAxess, really, since our existence.

And during that period of time, at one point, they were 100% owned by dealers and at another point 100% owned by Thomson.

So we've been competing in various ownership structures.

And the investment that was made during the quarter that you point out brings the level of dealer ownership in TradeWeb back to about the same level as dealer ownership in MarketAxess.

So we don't view this as any significant change on the competitive front.

And the reality is, given the size of the organizations that are involved, whether it's in TradeWeb or MarketAxess, the ownership in equity in the e-trading platforms is small relative to the focus on their own business and their own P&L.

So as much as we might like to think differently, we do not believe that dealer equity is the most important component that drives their trading behavior.

And we believe that we have proven to have sustainable competitive advantages in the credit space, based on the technology that we've worked over the last seven years to build, the network that is now more entrenched in our platform than ever and the fee model, which is considered by all to be fair and equitable.

And those advantages continue to serve us well.

It's interesting that you point out LiquidityHub, because, based on the public record following the TradeWeb deal, it would certainly appear to all involved that the primary focus in terms of growth for TradeWeb is the interest rate swap market and, arguably, trying to recapture dealer support the dealer alignment that was temporarily lost to LiquidityHub.

And by all accounts, LiquidityHub is solely and exclusively focused on the interest rate swap market.

So I think the key for us is to continue to move quickly to build our credit business, as we have been doing.

We do not think there's a significant change during the quarter in the competitive environment.

And the other piece -- just to bring you up-to-date, Howard -- there was a lot of talk, obviously, about six months ago about the re-launch of corporate bond trading at the New York Stock Exchange.

And we continue to believe that that has had very little, if any, impact in the institutional credit-trading space.

Okay, great.

Thanks.

And then, second one on -- Rick, you mentioned in your remarks the challenging environment and the seizing up of the credit markets this summer, but from what we heard from some of the managements and seeing -- in the results from some of the larger CDS players, it appears liquidity did not seize up there.

I know you mentioned it was a positive contributor to the "Other" volume growth this quarter.

But, maybe, can you elaborate that on either the numbers, the contribution that it's providing, or just, qualitatively, what you're hearing from clients, and the incremental clients, on the opportunity from where you sit?

Howard, good morning.

It's Kelley.

First, I think, I would preface my remarks by again repeating that client-to-dealer trading in CDS is in its very, very early days.

We continue to think our opportunity is to focus on two clear needs as we have seen and discovered across our customer base.

First is a more efficient means of execution.

And the second is a more efficient post-trade processing and settlement aspect to the trade.

We are making solid progress in the client-to-dealer space, especially in the index product within the inter-dealer space.

We are reasonably pleased with our progress to date in CDS, especially in EM.

And again, as Rick said earlier, we are strong believers in our value proposition that we deliver to our customer base.

And I continue to believe that the pace of client-to-dealer trading will accelerate in CDS.

It was a more liquid market in certain parts of the CDS market, as you point out, versus the cash market.

But, quite frankly, Howard, that's been the case even in a more normal market.

So I think, in summary, we're pleased to date, but I'd like to preface that with the fact that we're in very, very early days in the trading of CDS electronically, especially client-to-dealer.

Great.

Thanks.

And then, while I have you on the line, Kelley, last quarter, the company benefited from something of a development contract with one of the broker-dealers -- I think you mentioned in last quarter's results.

Any color on the pipeline?

Is that a business that you continue to want to be in and grow over time?

Or should we think of that contribution last quarter as somewhat of a [one-of]?

We continue to believe that we deliver world-class technology and connectivity to our customer base.

We've invested substantially over the years in that.

And in addition to the technology itself, we also believe strongly we have world-class talent as well.

Not surprising in the third quarter, Howard, a lot of the technology and business focus turned internally.

We are very pleased with the portfolio of opportunities, however, that we currently have on our plate.

And we continue to strongly believe that tech services will provide a modest diversification and further integrate us into the infrastructure and the technology of our most important customers.

Great.

Thanks.

And then, Jim, maybe, a final one for you -- at the revised mid-point of your expense guidance, it looks like expenses will be [something up] -- 2% year-over-year.

Maybe this is jumping ahead a quarter to next quarter's results and your guidance there, but any thoughts -- with a $76.5 million expense base on a full year basis, does that provide you enough to both kind of run the business, invest in the places that you want to invest, given the current environment and, maybe, even a potential improvement in terms of volumes?

I mean, is this a good operating-expense level that we're at now?

Howard, I think if you look back over a little bit of a longer term, rather than just over the past nine months, and look back over two or three years, what you'll see is our growth in operating expenses has been somewhere in the high single digits.

And that's during a period when we built out two significant new products, namely CDS and DealerAxess.

So I think we continue to believe that expense growth rates somewhere in that range -- either high single digits -- is what we need to continue to fuel growth in our products.

Great.

That's helpful.

Thanks so much, everyone.

Thank you.

(OPERATOR INSTRUCTIONS)

And your next question comes from the line of Daniel Harris with Goldman Sachs.

Please proceed.

Good morning.

Good morning, Daniel.

Hi, Daniel.

I appreciate the commentary on the longer term potential trade volumes in the next year, or maybe further out than that.

But more near term, given that volatility has somewhat stabilized even though spreads are still wide, how do you guys think about industry volumes over the next quarter to -- especially, as I sit here and look at October volumes looking like they're down somewhere between 10% or 15% year-over-year?

The -- just quickly, on the TRACE front, Daniel -- the October average daily volume is off a little bit further from September, but not materially so.

And we obviously have more trading days.

So there's not a significant change in the current market environment as we start the fourth quarter.

And Kelley has a few comments with respect to the outlook going forward.

Good morning, Daniel.

It's Kelley.

We are, as I said in my prepared remarks, seeing modest improvement increase in average daily volume of inquiry on the system.

We are seeing the quality and quantity of dealer responses improve as well.

And we are also seeing the return of large-sized trade, i.e., in excess of $100 million, return back to the platform as well, really concentrated, not surprisingly in FRNs.

That being said, we continue to monitor more closely with our customers.

And it's been, as you know, a challenging three or four months.

And there are weeks like this week, where their attention turns away from the e-trading market to critical risk-management issues -- the Fed today, the payroll numbers on Friday.

I spend 24 years in the dealer community, and I've gone through a number of these cycles.

And one of the first orders of businesses, as you go through this cycle as things begin to stabilize, is that you critically assess your staff, which, at times, can be more than half your expense base.

You critically assess your efficiency -- and that is mid-office and back office.

And as a result of that, I am more convinced about our value proposition, and not just in the long term.

But as people look at their budget process and their own prospects for '08, I think we can be an important part to contributing to a more efficient, low-cost execution of trades as the dealer community serves their most important customers.

Thanks, Kelley.

Actually, that's a really interesting point.

So as we've obviously seen the dislocation in the credit markets having an impact, potentially, on staffing at the investment banks and the dealers, how do you see that changing in terms of how clients interact with the system?

Do you think that the dealers are doing more automated quotes back to clients as, potentially, they've moved people off the desk for these low-margin products?

As I said in my prepared remarks, we do believe that some 57% of trades year-to-date is in that sort of flow category and low margin business.

And our connectivity, which I highlighted on the client buy side -- there is also significant work going on with the dealers via their communication and transactions with us through the APIs.

I do believe that this market environment will pressure dealers to critically assess their business model.

And our job is to provide both a fee plan in the U.S.

and Europe which is fixed to the dealers, which we think is attractive in reducing their average trade costs as they increase their volumes through the system, and ensure that we're providing the right technology.

Each dealer has a different interaction model with their various segments of clients -- some traditional, some automated with some intervention, and then some, quite frankly, fully automated.

We think the trend toward interaction via API will continue.

And we are optimistic that as the community assesses their expenses or overall level of margins, that there will be a continued move, especially in the flow business, to the platform.

Okay.

I think, by way of reminder, Daniel, those trends were clearly evident in the first half of this year.

And I think we felt better than ever before in our business history with the acceleration of share gains taking place electronically on MarketAxess during the first six months of '07.

And as you look at the detailed numbers from the third quarter that we provided this morning, it's clear that the extreme dislocation in the short end of the market was primarily responsible for the drop that we had in market share.

We believe that this will be a temporary change in the electronic market, and the long-term trends that we are observing in the first half of this year will return on a medium to long term basis.

Thanks for that, Rick and Kelley.

And I just, actually, want to turn over to the other side of the business, from the client perspective.

You guys -- thanks for the disclosure.

You talked about the OMS impact from volumes.

And so if you guys are currently getting around 20% of your total trades through an OMX -- an OMS -- I'm sorry -- can you give us more color on what percent of clients are actively using an OMS with you guys?

And so what I'm trying to get at is, of the clients using the OMS trading more than those that don't today?

And then, how long does it take to get slotted into a client's OMS platform?

Yes.

The important thing to remember is that the clients that we have integrated with on the order management systems tend to be the larger fixed income investors.

And as we've said before, we think, given the concentration of assets in the fixed income investment management industry, the top 200 or 250 investors in each region account for a large majority of the institutional trading volume.

So we are pleased with the progress that we're making, because most of those connections are going in to large investors.

The time that it takes really depends on what type of order management system that they have used.

We have partnership deals with five or six of the leading order management system providers.

And once the client upgrades to the latest version that includes the connectivity to MarketAxess, then the work is done for them and their electronic access to the system is immediate.

We think almost half of the U.S.

investors are operating on their own order management solution, and that can take us a little bit more time to complete the connectivity work, but we've been successful in virtually every case where the client has been ready to make the investment in connecting to us.

Okay, great.

That's helpful.

And then, Jim, just lastly -- on -- a little bit of cleanup here -- I think you mentioned that you see the tax rate moving back to 40% longer term.

I mean, obviously, we saw a big change this quarter, given the Europe strength versus the U.S., but is -- do you think that that change back to 40% happens because the U.S.

will grow faster than Europe, or for another reason?

There are really two factors deriving my view on the long term tax rate, Daniel.

And just to be clear, for this quarter, the issue was all about the percentage of our net income that came from the European business as compared to the U.S.

business.

Part of my view is that mix changing to a slightly normal level, and they're also -- without getting into too much detail -- some issues with the U.K.

taxes -- that the all-in rate that we pay on net income in the U.K.

will increase a little bit.

So it's the combination of those two factors that drives my view that next year, we will revert to a more normal tax rate of somewhere around 40%.

Great.

I appreciate the color, Jim.

Thanks a lot.

Thank you, Daniel.

(OPERATOR INSTRUCTIONS)

And there are no additional questions at this time.

I would now like to turn the call back over to management for closing remarks.

Thank you for joining us this morning.

And we look forward to catching up with you again next quarter.

Thank you for joining in today's conference.

You may now disconnect.

And have a wonderful day.

Happy Halloween.