Marketaxess Holdings Inc (MKTX) 2009 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to MarketAxess first-quarter 2009 earnings conference call.

At this time, all participants are in listen-only mode.

Later, we will conduct a question-and-answer session.

(Operator Instructions) As a reminder, this conference is being recorded Wednesday, April 29, 2009.

I would now like to turn the call over to Trey Gregory, Head of Marketing and Communications at MarketAxess.

Please go ahead, sir.

Good morning and welcome to the MarketAxess first-quarter 2009 conference call.

For the call, Rick McVeigh, Chairman and Chief Executive Officer, will review the highlights for the quarter.

Kelley Millet, President, will provide an update on trends in our businesses, and then Jim Rucker, Chief Financial Officer, will review the financial results.

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 conditions may differ possibly 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 Form 10-K on -- for the year ended December 31, 2008.

I would also direct you to read the forward-looking disclaimers in our quarterly earnings release which was issued earlier this morning and is now available on our website.

Now let me turn the call over to Rick.

Good morning and thank you for joining us to discuss our first-quarter 2009 results.

First-quarter earnings per share rose to $0.08 versus $0.05 in the first quarter of 2008 as revenues grew primarily due to the new business initiatives that were implemented over the past 12 months.

Revenues of $24.6 million were up 7% from a year ago and reflect significantly higher fee capture across all three transaction categories, as well as the contribution from technology services.

We have continued to maintain expense discipline and as a result have grown our pretax operating margin to 19%, up from 13% a year ago.

The credit market showed signs of improvement in the first quarter, leading to an increase in overall US high-grade corporate bond secondary volumes.

FINRA TRACE volume was up 30% from the fourth quarter of '08 and up 21% from a year ago.

Investor engagement on the platform remains strong with total inquiry count up 57% from a year ago, demonstrating the value we deliver to investors even through extraordinary market conditions.

Our total trade volume for the quarter grew 39% from the fourth quarter but was 7% below year ago levels.

Key metrics on financial health are significantly stronger than one year ago.

EBITDA for the quarter was up 38% to $6.5 million from $4.7 million last year and our cash balance at quarter end was $137 million or $3.66 per diluted share.

We remain focused on helping our clients utilize our trading network to gain access to liquidity in what continues to be a challenging market environment.

Kelley will talk in more detail later about the progress we have made with our new initiatives including additional dealers, new Market List capabilities, and our Execution Services desk.

As you can see on slide 4, market conditions in the first quarter showed modest signs of improvement.

Significantly higher yields in the corporate bond markets are attracting renewed interest in this sector.

There were strong inflows into taxable bond funds and corporate bond ETFs during the quarter and the new issue calendar was robust.

42% of the new issue supply during the quarter was in government guaranteed bank debt.

Benchmark credit spreads as measured by the Credit Suisse LUCI Index ended the quarter at 453 basis points, 78 basis points tighter than at the end of the fourth quarter and credit spread volatility remains high.

Investor inflows, active new issuance, tighter spreads, and higher secondary volumes all points to an improvement in overall credit market conditions.

On slide 5, you can see that investor increase across the platform are at an all-time high, demonstrating that investors continue to rely on MarketAxess access as a unique channel to source liquidity in the credit markets.

Investor order count increased by 57% in the first quarter compared to a year ago.

However, the hit rate or percentage of increase resulting in trades while up from the fourth quarter remains well below precrisis levels.

This is a sign that liquidity in the credit markets continues to be negatively impacted by reduced capital for market-making among key dealers.

Primary dealer holdings of corporate bonds remain at about one-third of precrisis levels.

These current liquidity challenges in credit markets have led to our recent initiatives on expanding our trading network and adding new connectivity solutions.

Now let me turn it over to Kelley to discuss our business initiatives in more detail.

Thank you, Rick.

We have been proactive in adjusting our business model to enhance liquidity for investor clients in response to current market conditions.

On slide 6, we provide an update around three key new initiatives.

First, we continue to accelerate our regional dealer effort.

The number of investor clients who have access to the regional dealers having grown from 236 at the end of last year to 276 by the end of this quarter.

The majority of our top 100 US investor clients now have access to multiple regional dealers over the platform.

Regional dealers are providing an important source of additional liquidity particularly in the smaller size trades.

Second, our efforts around Market Lists have made good progress during the quarter.

This functionality enables institutional investors to display live inquiries to the entire MarketAxess trading community for order matching.

We continue to upgrade the technology to assist investors in matching the public inquiries to their home order books.

Market Lists have been well received by our investor base as over 200 investor firms have made at least one list public, up from 120 at the end of last quarter.

Furthermore, 31,000 inquiries were submitted to our open order book in the first quarter, an increase of 79% over the fourth quarter of 2008.

Third, Execution Services provide an additional source of liquidity to investor clients.

The desk is essentially a hybrid electronic invoice model that seeks matches for inquiries that are not executed in the fully electronic request for quote process.

In the first quarter of 2009, there were almost 50,000 investor inquiries that did not trade.

Our Execution Services Group also provide fixed income expertise and transaction capabilities to investor clients that do not have deep corporate bond expertise or established dealer relationships.

In virtually all of these transactions, MarketAxess functions as the riskless principle for matched pairs of orders which are settled through our (inaudible) partner.

In the first full quarter of operations, Execution Services Group provided a valuable service to both investor and dealer clients and a source of new revenue to MarketAxess.

Slide 7 provides details regarding the drivers of our commission revenue growth during the quarter.

Our total commission revenue grew 6% versus the first quarter of 2008 and over 21% versus the previous quarter.

Of particular note was the strength in our variable transaction fees, which increased 52% from the fourth quarter and 39% from the first quarter of last year.

The increase in transaction fees has more than offset the decline in dealer distribution fees over the last year.

Importantly, we also saw a significant increase in our fee capture per million which was up 43% over the first quarter of 2008.

The increase in fees per million was driven by our Execution Services debt, the variable fees on regional dealer transactions, and an increase in the percentage of our volume coming from higher fee products, namely high yield.

High-yield volumes were up by 94% compared to the first quarter of 2008.

Our trading volumes in the first quarter much stronger than in the fourth quarter with increases across all product areas and an overall increase of 39% and were however still down from a year ago.

There are two primary drivers of the increased volumes.

First, the improved market conditions that are reflected in the 30% increase in the TRACE quarterly numbers.

Second, our market share ticked up modestly in US High Grade for the fourth quarter 2008.

Preliminary indications for April showed that fee capture and TRACE volume trends remain positive; however, estimated US high-grade market share is much weaker than the first-quarter average.

In addition to the normal monthly market share fluctuations, we believe this is due to the difficult time institutional investors are having buying corporate bonds.

Please turn to slide 8 for an update on our European business.

Client engagement on the European platform remains strong.

The number of clients that used the platform during the first quarter of 2009 increased 12% compared to the first quarter of last year.

And the number of client inquiries submitted across the platform increased by 147% compared to the first quarter of 2008.

The financial metrics of the European business are also favorable.

As with the US business, fee capture has grown compared to a year ago.

The 22% increase in fee capture for the European business has been largely driven by a favorable mix of business towards higher margin products.

Commission revenue has grown 24% from a year ago in local currency terms, but has been impacted by a significant decline in the UK pound compared to the US dollar.

Within European commissions, while dealer distribution fees are flat to last year, transaction fees are up 87% in local currency.

We have both overlaps and differences with the US in terms of the initiatives being pursued in Europe.

In common with the US, we are seeking to add additional dealers and we will also be rolling out Market Lists.

At a stand-alone European initiative, we are also expanding the range of products offered to include capabilities in additional non-core currencies.

So with that, let me turn the call over to Jim for a financial update.

Thank you, Kelley.

Please turn to slide 9 for our earnings performance.

Revenue grew by over 7% from a year ago, driven by higher commission revenue and a contribution from our technology services business.

Expenses were held flat and as a result, we saw a 60% increase in pretax income and an increase in operating margins from 13% to 19%.

Net income of $2.8 million was up 78% from the first quarter of 2008.

The growth in pretax income came despite the adverse impact of significantly lower yields on our investment portfolio and a decline in the value of the pound compared to the US dollar.

These two factors reduced pretax income by a combined $1.4 million compared to the first quarter of 2008.

Technology products and services revenue was up significantly from a year ago due to the acquisition of Greenline in March of 2008 but down $400,000 from Q4.

Greenline continues to build a strong sales pipeline and robust product offering which positions them well for future growth.

On slide 10, we have laid out our commission revenue, trading volumes and fees per million.

Commission revenue was up 21% from the prior quarter and 6% from the first quarter of 2008.

Transaction fees grew strongly and were up 52% from the fourth quarter of 2008 and 39% from a year ago, driven by the higher fee capture that Kelley spoke to earlier.

Fees per million were up across all three categories.

This was partially offset by a reduction in distribution fees following the consolidations over the past year in the dealer community as well as the exchange rate impacts I mentioned earlier.

Slide 11 provides you with the expense detail.

Total expenses decreased slightly compared to the first quarter of 2008, but include $1.6 million of incremental operating expenses related to Greenline.

Employee compensation and benefits increased by 4% primarily as a result of higher variable incentive and stock-based compensation expense.

We continue to expect our 2009 full-year expenses to be within the previously stated guidance range of $77 million to $84 million.

On slide 12 we highlight the strength of our balance sheet.

Cash, cash equivalents, and securities as of March 31 were $137 million compared to $143 million at year-end 2008 and represented $3.66 per share on a diluted basis.

Annual employee cash bonuses accrued during 2008 were paid out in January 2009.

Total shareholders equity as of December 31 was $229 million representing book value on a diluted basis of $6.11.

We continue to have no bank debt.

Now let me turn the call back to Rick for some closing comments.

In conclusion, the first quarter marked an improvement in the overall credit markets and our financial results.

Trading volumes, fee capture, and market share all improved from the fourth quarter, driving an increase in Company revenue and earnings.

Importantly, new dealers and new trading activities have created a more diversified revenue base.

Our earnings results for the quarter serve as a reminder of the attractive operating leverage in our business.

We are focused on growing revenues while controlling expenses in order to create attractive returns for our shareholders.

Now I would be happy to open the line for your questions.

(Operator Instructions) Hugh Miller, Sidoti & Co.

I was wondering if you could just first maybe start off by giving us any update on uses of cash and obviously you guys continue to look for acquisition opportunities.

But at this point whether or not you are seeing anything that looks attractive and what we should expect going forward.

Yes, here is Jim Rucker.

Good morning.

Our new -- in terms of the cash on the balance sheet, we like having the strong cash balances through the current credit market environment.

It does give us the flexibility to be able to look selectively at acquisitions that would help us to fill in the business.

Clearly if we didn't have that cash on the balance sheet in the current environment, borrowing would be both difficult and expensive.

But having said that, we also very much like the internal opportunities that we're working on and to be quite honest at this point, we don't see anything as attractive on the acquisition front as those internal organic growth opportunities.

Okay and I was wondering maybe if Kelley or someone could provide us with a little bit more insight into the up selling of some of the regional dealers to the fixed-rate platform and any impact that may have had on the first-quarter performance?

I'm happy too.

We are pleased with the progress as I said in my remarks with a growing importance of the regional dealers.

One, they provide a source of additional liquidity especially in the odd lot sized category, number one.

And they also provide based on that financial arrangement, a higher fee capture per million.

We are working with a handful of those regionals in that sort of undisclosed/nondisclosed program to step in front of the button as we call it or into a disclosed program where they would pay fixed distribution fees subject to the nature, size and type of inquiry that they see.

So we are making some progress and we feel reasonably optimistic subject to any sort of merger or other crisis events among the dealer community that we can stabilize our fixed distribution fees throughout 2009.

Okay, and were there any that stepped in front of the button during the first quarter or is this something that you are looking at more second, third quarter and so on?

There are -- without getting into too much detail, there are several that are now in the disclosed plan, but the financial impact in the first quarter from that is relatively muted.

So if we are going to see some positive impact in stabilizing the fixed distribution fees, we would expect to see that in the later quarters of this year.

Okay, great.

And obviously you saw a little bit of compression in the technology service fees relative to the fourth quarter.

I was wondering if you could just provide us with a little bit more insight as to what may have transpired during the quarter and what your thoughts are on a go-forward basis.

Yes, Hugh, the first quarter of 2008 as you can see from the numbers was a little bit more of a difficult environment in technology services and we think that was around in a budget availability amongst the client base for spending on technology services.

You know, the early indication the second quarter is that things have eased somewhat but to be quite honest, it a little bit too early in the quarter to really make any predictions on where we will end up.

Okay and one last question.

I can't remember if you guys had mentioned something.

Did you make a comment about market share in April relative to the first quarter?

And if so, what were those comments?

In fact I did.

The two positives that we are seeing in the April month-to-date results is a continued positive trend in the fee capture as well as in overall TRACE activity.

We are seeing a lower market share number for April versus the average share for the first quarter.

As I look at that, Hugh, we have seen a real dramatic change over the past six months.

In our conversations as you probably recall, go back six months, our investors were looking for bids across the system and were unable to get those bids for a number of reasons including reduced inventory that Rick referenced as well as really lack of risk-taking in the broad dealer community.

We find ourselves almost in a polar opposite position reflecting in April, where again, the buy side now is looking to go one way, which is [off or wanted] from the dealer community.

Again, given the lack of inventory and our assessment, which is a qualitative assessment that the Street is net short, they are having difficulty in sourcing those bonds on an at risk or in a sense the dealers taking balance sheet risk to short those bonds to the investors.

We are seeing therefore as we look into the TRACE data and continue trend of bonds crossing on a risk list basis in the old-fashioned way of sourcing bonds and selling those bonds without using the balance sheet.

And obviously that's one element or new initiative in trading in Execution Services, which is really an extension of our core RFQ business.

Okay, I will step back in the queue and let others ask some questions.

(Operator Instructions) Howard Chen, Credit Suisse.

Good morning, everyone.

First question, curious with you on the new issuance chart you put up -- you broke it out with the unguaranteed issuance and a government guarantee issuance.

Curious when you think about those two buckets and particularly the government guaranteed issuance, are you seeing anything interesting in terms of trends on the MarketAxess system with respect to those guaranteed bonds?

We have introduced full functionality in trading the FDIC and government guaranteed bonds on our system.

You should be aware that the dealer counterparties are trading for the most part those FDIC bonds off of their agency debt, Howard, and not their corporate credit debt.

It is safe therefore to assume that we have a slightly lower market share in that business as we obviously have just launched that initiative over the past let's say six to eight weeks.

One of the things to think about and at least Rick and I think about this is that assuming that over time markets stabilize and the percentage of total new issues as reflected by the graph that shows 42% being FDIC, had that declined, we would expect that to have a positive impact on TRACE overall.

As banks and other TARP-related entities fund beyond the FDIC guarantee, that should provide significantly more liquidity in the investment-grade, non-FDIC secondary market.

So we see that as a positive sign over time, as I said earlier, assuming some stability in the overall market conditions.

Thanks, Kelley.

That's helpful.

And then historically, and maybe this is for Rick or you, Kelley, you have talked about clearly you have had a very strong presence in the dealer-to-dealer in the United States.

You brought them into the interdealer business and management has spoken about the retail opportunity historically.

Where -- what do you think about that today?

What's going on in the retail market in your mind?

How do you -- how alluring do you see that opportunity?

I think, Howard, it continues to be of interest.

As you know, retail flows have grown quite significantly in fixed income over the last three or four quarters.

We continue to look at ways to participate in the retail business both organically and through acquisitions.

And quite honestly, even the expansion into the regional dealer community is a step in that direction as those dealers are operating primarily in odd lots on the system and sourcing product from MarketAxess that has been distributed out to retail.

So we continue to be interested in expanding our network into new client segments including the retail space and it is something that we are focused on.

Great, thanks.

And then one for Jim on the numbers.

Jim, you touched a little bit on -- and Kelley as well -- on the drivers of the resilience of the revenue capture trends this quarter -- sorry -- on the drivers of the strength and the revenue capture this quarter.

But any sense as to the resilience of that as we walk through the year in terms of either customer product mix?

Yes, you know, I think, Howard, as Kelley mentioned, things that were driving the higher fees per million was the new business areas, the regional dealers, the Execution Services desk, as well as a favorable mix and primarily in the high-yield business.

And all three of those things are sustainable, ongoing parts of the business.

So we definitely think that the fee capture trends are sustainable.

I guess the only caveat I would put in there, if we got a return to more normal credit markets and we started to see a return of the shorter duration of floating rate note business, that may well come with a reduction in the overall fees per million.

But the extra revenue we got from getting back that business will be additive.

That's really helpful.

Thanks so much, Jim.

Thanks for taking my questions.

(Operator Instructions) At this time, I show no questions in queue.

I would now like to turn the call back over to Mr.

Rick McVey, Chairman and CEO, for closing remarks.

Thank you for joining us this morning and we look forward to talking to you next quarter.

Thank you for your participation in today's conference.

This concludes your presentation.

You may now disconnect.

Good day, everyone.