Marketaxess Holdings Inc (MKTX) 2009 Q4 法說會逐字稿

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  • Operator

  • Ladies and gentlemen, thank you for standing by.

  • 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 3, 2010.

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

  • Please go ahead, sir.

  • Trey Gregory - IR

  • Good morning, and welcome to the MarketAxess fourth-quarter 2009 conference call.

  • For the call, Rick McVey, 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 beliefs regarding future events that by their nature are uncertain.

  • The Company's actual results and financial condition 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 the risk factors in our annual report on Form 10-K 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.

  • Rick McVey - Chairman and CEO

  • Good morning, and thank you for joining us to discuss our fourth-quarter and full-year 2009 results.

  • The fourth quarter was the strongest in the Company's history with record revenues of $34 million, driven by higher commission revenue across all product areas.

  • Quarterly income before taxes grew 267% to reach a record $11 million.

  • Operating margin for the quarter climbed to 32.5% due to the attractive incremental margins in our business.

  • Our adjusted earnings per share for the quarter were $0.17, up from $0.05 a year ago and $0.12 in the third quarter.

  • The adjusted EPS excludes a non-cash income tax charge of $1.3 million or $0.03 per share.

  • We expect lower state and local tax rates to apply to future periods, which will be favorable to future earnings, but causes a GAAP reduction in the book value of our deferred tax asset.

  • Jim will talk in more detail about this later.

  • Our GAAP earnings per share were $0.14 for the quarter.

  • We continue to add new dealers to the trading system, resulting in higher distribution fees, improved trading liquidity and higher transaction volumes.

  • Total trading volume of $92 billion was 113% above a year ago and the highest since pre-credit crisis levels in the second quarter of 2007.

  • Variable transaction fees are the largest contributor to revenue growth and were up 141% from a year ago due to higher volumes and improved fee capture per million traded.

  • Free cash flow remains well above reported net income, leading to year-end cash and securities balances of $174 million or $4.50 per share.

  • This morning, we also announced our January 2010 trading volumes that show average daily trading volumes above the fourth-quarter average and estimated high-grade market share a touch below the fourth-quarter average.

  • Overall market volumes reported by trace remain robust and our market share trends are positive.

  • Slide 4 provides some perspective on our full-year results.

  • The results for the full year show strong growth when compared to 2008 and highlight the operating leverage in our business.

  • Revenue was up 23%.

  • Pretax income income was up 134% and our operating margin increased from 14% to 26%.

  • More than $0.80 of every additional revenue dollar we earned in 2009 versus 2008 fell directly to pretax income.

  • Sequential growth was especially strong throughout the year, creating attractive momentum as we begin 2010.

  • Some of our highlights for 2009 include investor client inquiries up 56%; our dealer community grew by 14 market makers in the US and five in Europe; total trading volumes were up 32% for the year; variable fee captured per million traded was up 37%.

  • In addition, we received approval for two more patents, bringing our total to five.

  • These patents protect our innovative trading protocols for electronic execution in OTC credit markets.

  • And, the Company initiated its first regular quarterly dividend in the fourth quarter of 2009.

  • We exit 2009 with a much stronger and broader business, better positioned than ever to capitalize on the growth of electronic trading of credit products.

  • Slide 5 provides an update on market conditions.

  • As you can see, credit market conditions continued to normalize with lower credit spreads and lower credit spread volatility.

  • Credit spreads, as measured by the Credit Suisse LUCI index, of 133 basis points are now below the levels at the beginning of 2008.

  • Flows in the taxable bond funds and corporate bond ETF's remain robust compared to historical levels, although the pace of inflows slowed somewhat in the fourth quarter.

  • Investment-grade new issue volumes were strong during the fourth quarter but showed the usual seasonal decline in December.

  • New issue volume picked up again in January and was particularly strong in the first half of the month.

  • We expect favorable credit trading conditions to continue in 2010.

  • Now let me turn the call over to Kelley for more detail regarding our fourth-quarter business results.

  • Kelley Millet - President

  • Thank you, Rick.

  • On slide 6, we provide details on our volumes, which demonstrated consistent growth across all product categories.

  • We are pleased with the increase in US hybrid volumes, which are up 116% year over year and up sequentially from the third quarter by 18%.

  • Our share continues to improve as inquiry climbs and dealer hit rates normalize.

  • We have seen continued progress in Europe with year-over-year growth of 151% and sequential growth over the third quarter despite the usual seasonality impact in December.

  • Our other category was boosted by increased agencies was flows, as well as from improved emerging markets trading volumes.

  • Slide 7 shows the impact of the new dealers on our business.

  • The bulk of our dealer expansion is nearly complete in the US, but there is still much work to be done to increase the number of quarters seen by the new dealers.

  • While the number has increased from the third quarter, new dealers on average saw only 22% of orders by count, while existing dealers on average saw 79%.

  • So we continue to believe there is more upside to this initiative as we increase the approvals between the new dealers and our institutional investor clients.

  • Such dealer expansion is important in two ways.

  • First, many of the new dealers are major firms who have balance sheet and add both to our distribution fees, as well as liquidity to our platform.

  • And second, the regional dealers are important in continuing to drive our success in odd lots and are important contributors to our higher fees per million.

  • Although primary dealer corporate bond holdings are growing, the addition of non-primary dealers has been an important factor in our increased hit rates, improved market share and higher volumes.

  • The bottom right chart shows that although hit rates have improved significantly over the past two quarters, they are not yet back to pre-credit crisis levels of approximately 8%.

  • Slide 8 provides detail on our commission revenue growth.

  • The most significant drivers of our record revenue in the fourth quarter were a 141% increase in variable transaction fees resulting from the higher volumes in both US and Europe and increased fee capture per million compared to a year ago.

  • We are pleased with the growth in global distribution fees to $12.1 million from $10 million a year ago.

  • This reflects our success in bringing new dealers onto the platform after the reductions that took place in the dealer community at the end of 2008 and in early 2009.

  • As mentioned earlier, we expect the number of new dealers to grow only modestly in 2010.

  • But, by increasing the inquiry flow they see and given our expectation that the regional dealer performance should also continue to improve, they will be important contributors to further improvements and hit rates and growth in trading volumes.

  • It will be the continued growth in our variable transaction fees that will be the largest driver of our growth in the coming quarters and shows the real leverage in our business.

  • Our fee capture per million is driven by multiple factors, including our execution services business, the impact of the regional dealer fee plan and odd lot growth, as well as improvement in our EM and high yield performance.

  • Slide 9 illustrates that investor activity continues to increase.

  • Investor inquiry continues to be robust with some moderation in the fourth quarter, given seasonal factors.

  • We are pleased with the number of unique clients that traded in the quarter improved across all of our major business segments.

  • The stabilization of market conditions has allowed us to focus on and grow the relationship between our investor clients and dealers.

  • We currently have 730 active investor firms on the platform globally.

  • 210 investor firms have integrated their own message systems with MarketAxess.

  • And better dealer response rates have led to an improved user experience over the system, helping to drive increased volume and market share.

  • Our global trading network has never been stronger, and we are focused on the opportunity to accelerate e-trading adoption beyond pre-crisis levels.

  • Now let me turn the call over to Jim to discuss our financial results.

  • Jim Rucker - CFO

  • Thank you, Kelley.

  • Please turn to slide 10 for our earnings performance.

  • Record revenues of $34 million were 56% above the fourth quarter of 2008, driven primarily by the increased commission revenue which I will talk more about shortly.

  • We saw a modest improvement in the performance of our technology services business with revenue of $3.1 million that was 24% above the fourth quarter of 2008.

  • At this point, we see some signs that the environment for our technology business is getting better, and we are cautiously optimistic on the outlook for 2010.

  • Income before taxes was a record $11 million and was 267% above the fourth quarter of 2008.

  • Adjusted diluted earnings per share, excluding the impact of a non-cash income tax charge of $1.3 million, was $0.17 compared to $0.05 in the fourth quarter of 2008.

  • Both the adjusted earnings per share of $0.17 and the GAAP earnings per share of $0.14 were higher than any previous quarter as a public company.

  • On slide 11, we have provided details of the non-cash tax adjustment and a reconciliation between our adjusted and GAAP net income.

  • In conjunction with our tax advisers, we have refined our state and local income tax apportionment methodology, resulting in a reduction in the rate at which we anticipate paying future state and local taxes.

  • As a result, we expect that our overall income tax rate for 2010 will be between 39% and 41% compared to a 2009 rate, excluding the fourth quarter adjustment, of 42.1%.

  • As our deferred tax asset is measured at the anticipated future rate, a favorable decrease in the anticipated tax rates result in a reduction in other deferred tax asset balance and an increase in tax expense in the period in which such changes occur.

  • Our tax provision in the fourth quarter increased by $1.3 million as a result of the change in anticipated tax rates.

  • This charge reduced our diluted earnings per share for the quarter by $0.03 from an adjusted $0.17 to a GAAP number of $0.14.

  • On slide 12, we have laid out commission revenue, trading volumes, and fees per million.

  • Commission revenues increased by $11.7 million from the fourth quarter of 2008.

  • Distribution fees of $12.1 million were up $2 million from the fourth quarter of 2008 with fees from new dealers more than offsetting those we lost during 2008 and earlier in 2009 due to bankruptcy and mergers in the dealer community.

  • Variable transaction fees of $16.5 million were up 141% from the fourth quarter of 2008, driven by a 113% increase in trading volume and higher fees per million.

  • Slide 13 provides you with the expense detail.

  • Expenses of $22.9 million were 22% above the fourth quarter of 2008.

  • The key driver of the expense increase was higher employee compensation of benefits, which increased as a result of higher incentive compensation following the record results for the quarter, and an increase in employee headcount from 185 at the end of 2008 to 212 at the end of 2009.

  • The increase in employee headcount is primarily the result of the new initiatives that we undertook during 2009.

  • We also incurred an additional $300,000 in expenses in the quarter as a result of our move to new head office premises, which will take place in February.

  • We will incur a similar additional occupancy charge in the first quarter of 2010, after which we would expect our occupancy costs to return to similar levels to the third quarter of 2009.

  • On slide 14, we show the full-year 2009 free cash flow.

  • Free cash flow for full year 2009 was $36.5 million or 2.3 times the net income of $16.1 million.

  • This represented free cash flow of $0.94 per share.

  • The board declared a quarterly cash dividend of $0.07 per share to be paid on March 3 to holders of record as of February 17.

  • The total amount of the dividend this quarter will be approximately $2.7 million.

  • On slide 15, we have our 2010 expense guidance.

  • We currently expect our 2010 full-year expenses to be in a range of $90 million to $94 million.

  • The midpoint of this range is in line with our Q4 2009 run rate, but represents an increase of 9% over full-year 2009 expenses.

  • We expect our CapEx expenses for 2009 to be in the range of $7 million to $9 million.

  • The CapEx expense includes approximately $3 million in capitalized costs relating to our new premises.

  • As noted earlier, we expect the tax rate for full year 2010 to be between 39% and 41%.

  • On slide 16, we provide balance sheet information.

  • Cash, cash equivalents and securities as of December 31 were $174 million or $4.50 per share on a diluted basis compared to $143 million at year end 2008.

  • Total stockholders' equity, including the Series B preferred stock as of December 31 was $247 million, representing book value on a diluted basis of $6.37.

  • We continue to have no bank debt.

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

  • Rick McVey - Chairman and CEO

  • In summary, we are pleased with the growth in our business over recent periods and believe that the Company fundamentals are stronger than ever.

  • Our e-trading solutions are serving a broader set of dealers and investors, increasing our growth opportunity.

  • Improving volumes and fee capture are driving revenue growth and earnings momentum.

  • We believe the market environment and regulatory trends will both be positives for our business in 2010.

  • I would now like to open the call for your questions.

  • Operator

  • (Operator Instructions).

  • Daniel Harris, Goldman Sachs.

  • Daniel Harris - Analyst

  • Clearly you had a really good year in terms of a turnaround from what we saw in prior years.

  • And as you look forward to 2010, Rick, if you had to sort of lay out, where do you see the most opportunity for you guys to continue to show that growth outside of just normal trajectory and high-grade trading?

  • What would you rank those or how would you think about those going forward?

  • Rick McVey - Chairman and CEO

  • I'm happy to comment.

  • I'm sure Kelley can chip in as well.

  • But the organic opportunity in our core products, we think, is still large.

  • And we are pleased with the return of market share gains that we have seen in US high-grade in particular.

  • So the primary focus remains unchanged.

  • We are working on building our network to increase market share in high-grade products in both the US and Europe.

  • And we believe that there is substantial opportunity in the other cash credit markets, namely high yield emerging markets and agencies.

  • And we are optimistic that the regulatory reforms that are being proposed for the derivatives markets will serve as a catalyst for more electronic trading in the future in the CDS market.

  • Kelley Millet - President

  • It's Kelley.

  • Just to dig down a little bit deeper into the core business, on the client side, it's not about client acquisition.

  • Rather, it's a very distinct sales focus on the larger firms.

  • to accelerate their adoption rates.

  • On the dealer side, as I mentioned, hit rates have come to 70%, still below the 80% pre-crisis levels.

  • But what I also indicated in the new dealer expansion, we have a lot of upside to improve the order flow that they see on count from 22% to nearly 80% for the existing dealers.

  • And although we don't forecast, and we don't disclose on an interim basis, there's nothing that we've seen in January that would give us pause in terms of improving both sides in a sense of that virtuous circle.

  • On the high-yield side, as Rick talked about, there's several initiatives on both the sales side and some very specific clients, where we think there's a real good opportunity to grow.

  • And obviously those were attractive fees per million.

  • And finally, on the EM side, obviously, that market has stabilized, but what's interesting is we are seeing good growth in our corporate business and not just in our sovereign business.

  • And once again, those are more attractive fees per million.

  • In Europe, we have a number of initiatives not only to bolster and strengthen our core euro and euro dollar businesses, but there's some initiatives underway both within sterling, and to provide some more efficient sort of price discovery and pre-trade analytics to make our core client to trading business more effective.

  • So a lot on the plate and very specific targets and goals have been set for 2010.

  • Daniel Harris - Analyst

  • That was really helpful.

  • Thanks, guys.

  • I thought it was interesting, and just made me think about cross-selling with the chart that you guys had on one of the slides with regards to the 4Q '09 versus 4Q '08 percent change and number of investors executing trades.

  • You know, as you think about the platform, how many of your clients are using more than one product so they're not only trading high grade, but they are trading high yield or they're trading emerging markets.

  • And is that an opportunity for you to consider to further penetrate the client base?

  • Kelley Millet - President

  • You know, I think that's a good point.

  • Daniel, again, it's Kelley.

  • I don't have the number right in front of me, and we can follow up.

  • But it is, in fact, a material number within the context of those 730 active clients.

  • Obviously, they are the very large global and/or index or mutual funds.

  • They are active traders typically across all asset class, especially high-grade and high-yield.

  • In the EM market, there tends to be a little bit more specialization and some smaller firms that are more active, especially regional firms.

  • And then finally, the agency business, which is probably the newest initiative within our core business, although there's some cross marketing there, a number of those firms are very specific, and those debts, as you are aware, are within the rate side of the house versus the credit side of the house.

  • And so that marketing tends to be very pinpoint.

  • But Jim or I will be happy to follow up in terms of the sort of cross marketing numbers within those 730 active accounts.

  • But it is, indeed, material.

  • Daniel Harris - Analyst

  • Okay, that sounds great.

  • And then just lastly for me, you talked about the OMS clients connecting in.

  • And I guess my question is twofold.

  • One, when you have an account that is connected in directly with their OMS, what is sort of the velocity difference you see between them and someone that doesn't have the OMS connected?

  • And then as you think about that, what is the total percentage of clients you think that have OMS's that ultimately could connect in to the MarketAxess platform?

  • Thanks a lot, guys.

  • Kelley Millet - President

  • Well, we certainly see, on a case-by-case basis, a significant acceleration of business executed or inquiries executed once that OMS integration takes place.

  • We don't really talk about what that specific number is.

  • But on any given day, we may see as much as 35% to 45% of our inquiry being submitted through the various order management systems.

  • And as you know, we are agnostic.

  • So we will integrate to either any of the vendors or their own specific customized OMS system.

  • What we really like about it is it's also a real barrier to entry because there's a lot of work that that client has to do on their part, not just on our part.

  • And we feel then we are really part of their workflow.

  • And it makes it a much more positive sale in terms of increasing flow throughout that system.

  • And you are able to involve the PMs, the traders, the mid-office and back office and compliance people.

  • So we really feel we have sort of an end-to-end solution that the larger buy-side firms really appreciate.

  • I don't know how to predict that 210 number, but if you were to look at the volume of those 210 clients that they do over the platform, it is a substantial percentage of what we do.

  • So I think that number will grow, Daniel, but I think it will be, in a sense, diminishing returns as you connect people to have fewer and fewer assets under management.

  • Daniel Harris - Analyst

  • Thanks a lot.

  • Operator

  • (Operator Instructions).

  • Hugh Miller, Sidoti.

  • Hugh Miller - Analyst

  • Good morning.

  • Just a couple of I guess questions that weren't answered.

  • One was with regards to -- I think I saw roughly about a $1.4 million sequential improvement in the distribution fees from the third quarter.

  • And I think you guys had mentioned that you were anticipating a pickup after the third quarter conference call about $800,000 with some newer signings and so forth.

  • If you could just talk about kind of the improvement there and what was kind of driving that.

  • Jim Rucker - CFO

  • It's Jim Rucker.

  • In the end, for the fourth quarter, we ended up, as you say, with distribution fees higher than we had originally thought going into the quarter because we ended up with more new dealers signing on for platform than we anticipated at the time.

  • So that was a positive result for the quarter.

  • And looking forward, we think that the fourth-quarter run rate is going to continue through into 2010.

  • Hugh Miller - Analyst

  • Okay.

  • And can you talk about how many dealers that are now on relative to third?

  • Jim Rucker - CFO

  • The total number on the platform now is 67.

  • I don't have the number in front of me of those that joined in the fourth quarter.

  • But there were a few that joined during the quarter.

  • Hugh Miller - Analyst

  • Yes.

  • Certainly, I can look that up myself.

  • And I guess, if you guys could just talk a little bit about any of the potential risks that you could see regarding volumes and average fee per million pricing, sometime later this year, 2011, if we start to get into an environment where we see rates rising?

  • Kelley Millet - President

  • It's Kelley.

  • If I talk about sort of the top level as it relates to trace, there's a number of factors in our minds that affect that.

  • Obviously, the new issue business has an impact over time on the activity in the marketplace.

  • From what we read research-wise, it's expected that new issue volumes will still be very robust, although suddenly lower, likely, year over year.

  • In fact, in Europe, it may be slightly higher as you've seen a number of articles as people are really in a sense replacing bank funding with corporate securities.

  • Second, there's a lot of discussion around tighter bid offers spreads.

  • Given my experience in the dealer community as a trading head, in fact, tighter bid offer spreads can be beneficial to trading volumes, in that one, it is the true cost that bid offer spread, the true transaction cost of the buy side.

  • And secondly, among the dealer community, there's a much greater degree of comfort of the willingness to use balance sheet if they feel they can get the other side of that trade with a reasonable bid offer, especially if they're shorting bonds and especially if they are shorting bonds in the short end.

  • In terms of our overall percentage or share of trades, again, we've spoken about it.

  • It's our absolute requirement to drive higher inquiry levels, and it's obviously doing what we can within the dealer community.

  • And again, by getting the new dealers to see more inquiry, to drive those hit rates closer to the pre-crisis levels, which, as I mentioned earlier, were in and around 80%.

  • Hugh Miller - Analyst

  • I guess that leads me to another question, but that's excellent color there.

  • With regards to the regional dealers seeing roughly about 22% of the inquiries universe of about 80% for the existing dealers; and I know you guys have to kind of balance between what they can see relative to the dealers that pay full for the access to the platform.

  • Can you give us a sense as to where that number could grow to once they are fully up to speed and ramped up?

  • Kelley Millet - President

  • Well, if you look at the major dealers, there is no reason why the new dealers could not approach the Company average in terms of the current level, the existing dealers seeing approximately 79% of orders by count.

  • With the regionals, it's a little bit more difficult to predict in that the buy-side clients do limit in a sense the portfolio dealers that they engage with.

  • So, it may be more difficult to get the regional dealer group as a whole to that level.

  • (technical difficulty) standpoint, it's very difficult to predict.

  • But historically, when you look at on boarding to moving towards an average, it can take as long as sort of 12 to 16 months.

  • So we feel good about the progress we will make this year, but I don't think I'm in a position to predict sort of if and when we get to that absolute level.

  • Hugh Miller - Analyst

  • Okay.

  • And then I think you guys had mentioned that there was kind of -- especially at the beginning, with the lack of liquidity out there -- a very big push to kind of get more of the regionals signed up from the institutional client standpoint just to kind of be able to get better liquidity and so forth.

  • And can you talk about whether or not that still seems to be a significant driving force or now that we've got kind of improved responses from the larger dealers, if they've kind of backed off of that necessity?

  • Kelley Millet - President

  • Look, we stand at about 60 dealers in the US high-grade market, of which 27 are in the major program.

  • There is no doubt that the large major dealers seem to be committing more capital.

  • So, all else being equal, we do believe that adding a number of the large dealers, new dealers that have balance sheet will have, we think, a significant impact on improvement of hit rates and trading volume.

  • Within the regionals, however, they really play a very powerful role in the performance of our odd lot business.

  • So in terms of fees per million in those smaller sized trades, as well as the regional fee plan, they are very important in terms of sustaining a strong fee per million.

  • So I almost look at the two types of dealers that have been added to the system as playing two distinct, yet equally valuable roles.

  • Hugh Miller - Analyst

  • Okay.

  • Thank you very much.

  • Operator

  • With no further questions in queue, I would now like to turn the call back to Mr.

  • Rick McVey for closing remarks.

  • Rick McVey - Chairman and CEO

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

  • Operator

  • Ladies and gentlemen, thank you for your participation in today's conference.

  • This concludes your presentation.

  • You may now disconnect.

  • Good day.