Yahoo Finance MarketAxess Holdings Inc. (NASDAQ:MKTX) Q1 2024 Earnings Call Transcript
MarketAxess Holdings Inc. (NASDAQ:MKTX) Q1 2024 Earnings Call Transcript May 7, 2024
MarketAxess Holdings Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Ladies and gentlemen, thank you for standing by. Welcome to the MarketAxess First Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. As a reminder, this conference call is being recorded on May 7, 2024. I would now like to turn the call over to Steve Davidson, Head of Investor Relations at MarketAxess. Please go ahead, sir.
Stephen Davidson: Good morning and welcome to the MarketAxess First Quarter 2024 Earnings Conference Call. For the call, Chris Concannon, Chief Executive Officer, will provide you with a strategic update on the company. Rich Schiffman, Global Head of Trading Solutions will update you on the performance of our markets this quarter and then I will review the financial results. Before I turn the call over to Chris, 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 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 31st, 2023. I would also direct you to read the forward-looking statement disclaimer 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 Chris.
Christopher Concannon: Good morning, and thank you for joining us to review our first quarter results. Turning to slide three of my strategic update. We delivered 4% total revenue growth, including the benefit of our Pragma acquisition and earnings per share was $1.92. While we are not happy with recent trends in our estimated market share in US credit, we recognize the importance of being equally strong in the faster growing areas of the market and we have a quick strategy to return to higher levels of share growth. We are attacking these faster growing areas of the market while maintaining and building on our leadership in the institutional investor RFQ market. Our strength in this segment of the market is underpinned by our leading global client franchise and the largest single source of liquidity in the credit markets, Open Trading.
First, in the quarter, our global client franchise continued to expand. We had a record 2,100 active client firms. Next, we delivered record commission revenues across several credit product areas. US high grade commission revenue grew 8%, and we delivered record levels of commission revenue in emerging markets, Eurobonds and municipal bonds, helping to offset the impact of lower US high yield activity. The benefits of our geographic and product diversification continue to pay dividends. Non-US credit revenue was a record $92 million in the quarter, representing a record 44% of total revenue. Last, we continue to be disciplined around our expense management with total operating expenses increasing only 9%, including the impact of Pragma. We delivered these results against a market backdrop of historically low levels of credit spread volatility, which has created the ideal conditions for growth of portfolio trading and dealer centric protocols.
These low levels of volatility have also impacted ETF market participants and hedge funds, decreasing activity in our US high yield business. We believe, however, that our estimated share will recover with more normal levels of spread volatility due to the diversified liquidity on our platform. We were pleased to see an improvement in estimated high yield share in the back half of April. We are encouraged by the strong new issuance calendar to the start of the year as well as the increase in trading velocity. Strong new issuance is an indicator of healthy growth in our market and increased trading velocity means that dealers are trading more with much smaller balance sheets. This trend should only continue with significantly higher bond yields, making fixed income a very attractive asset class.
This is a key attribute of our market today. All our clients need to do more with less and we are very well positioned to address this need. Slide four illustrates how portfolio trading and dealer initiated trading significantly expanded the overall market in April. Since 2019, portfolio trading and dealer initiated flow have grown at four-year CAGRs of 38% and 10%, respectively, compared to 2% for client initiated flow. The growth of these segments is closely linked because dealers typically recycle the risk from a portfolio trade in the interdealer market. For portfolio trading, we have made substantial investments in our PT solution and the share gains we saw at the end of April indicate that we have designed a very competitive trading solution for our clients.
We will continue to rapidly deploy enhancements to our platform as we are still in the early stages of PT innovation. For dealer initiated flow, we are now delivering the same trading automation tools to dealers seeking liquidity that have been rapidly growing with investor clients. These tools improve dealers' trading efficiency and help solve their need to rapidly exit inventory risk. Approximately 30% of the liquidity we provide to dealers comes from our investor client firms. Accompanying the electronification of larger sized portfolio trades is the explosion in ticket count as shown on the right hand side of this slide. X-Pro, our new platform designed to make trading more efficient is now handling 55% of US credit trade count for our 22 largest clients.
Slide five illustrates key trends in portfolio trading. The growth of PT is a very important step in the evolution of the market. Portfolio trading is a protocol of immediacy, which has helped accelerate the electronification of larger size trades, representing approximately 10% of the high-grade and high-yield TRACE market in April. Portfolio trading has also allowed traders to do more, more efficiently and with a streamlined workflow. The impressive growth of portfolio trading shows us the sizable demand our clients have for immediacy and efficiency, with the average notional per line item of a PT trending lower. We believe we must address that demand for immediacy and efficiency in all products and across all types of market environments.
This is a great trend for the market overall and it is a strong indicator of future e-trading demand for trades of all sizes. But we do believe that historically low credit spread volatility has created very supportive market conditions for the recent growth in portfolio trading. Slide six frames the US high grade market opportunity. While portfolio trading and dealer initiated trading have been growing faster, we are also continuing our investments in higher margin, high quality areas of the market. Our launch of credit algorithms and block trading solutions on X-Pro are targeting the more challenging parts of the market that have not migrated to electronic trading solutions. The client initiated segment of the market excluding PT is an estimated $620 million revenue opportunity, representing approximately 58% of the total estimated e-trading opportunity in US high grade.
And as trade size is greater than $5 million are broken down into smaller trade, we believe that the higher fee per million, combined with an increase in velocity can drive this revenue opportunity significantly higher. We believe that the market opportunity over the long-term is actually moving into our sweet spot, not away from it. In summary, we are attacking the higher growth areas like portfolio trading and dealer initiated execution while we are keeping our focus on building solutions for the largest, most attractive parts of the credit markets. Slide seven, we highlight the client toolkit we are building for the future. MarketAxess is a global network with a privileged position in the credit markets. The unique tools that we are building for traders are being delivered by X-Pro, getting traders a portal to access our powerful data and analytics, our automation and algorithmic trading tools and the single largest source of liquidity in the credit markets.
We are an increasingly integrated ecosystem focused on making life easier for traders while solving for our clients' need to do more with less. Now let me turn the call over to Rich to provide you with an update on our markets.
Richard Schiffman: Thanks, Chris. Slide nine highlights the continued strong expansion of our client network. We had a record 2,118 active client firms trading on our platforms in the first quarter, which included 1,619 client firms active in US credit and a record 1,066 active international firms. Trading volume from hedge fund and private bank clients increased 23% year-over-year and represented 18% of total credit volume up from 16% in the prior year. Adoption of our automation suite of products continues to grow as shown on slide 10. We experienced another quarter of record automation trade volume and count with three-year CAGRs of 34% and 40%, respectively, and a record 231 active automation client firms. Automation trade volume now represents 10% of our total credit volume and a record 25% of our total credit trades.
There were a record 11 million algo responses from dealers, an increase of 50% year-over-year. On slide 11, we highlight the expansion of our trading business across geographies and products. Continuing the theme of strength in our international businesses, we generated record international client trade volume and trade count in the first quarter. Trade volume was up 13% versus last year with a three-year CAGR of 10%. Trade count was up 10% versus last year with a three-year CAGR of 19%. A key driver of this strength was record total emerging markets trading volume, up 15% year-over-year driven by a 28% increase in local currency trading volumes. Our LATAM and APAC clients generated record levels of emerging markets ADV in the quarter, up 11% and 55% respectively.
We were pleased to see a strong increase in EM volumes in the first quarter and that strength has continued into April. Emerging markets continues to be a very attractive growth opportunity for the company. Last week, we announced that Dan Burke has joined the company as Global Head of Emerging Markets. We're excited to have Dan's experienced leadership in this important and growing business. Axess IQ, our front end for private banking clients, generated ADV of $140 million, an increase of 22% and record trade count of 62,000, up 54% compared to the prior year. We are also seeing strong product diversification in municipal bonds with record estimated market share of 6.5%, up from 5.7% in the prior year. Slide 12 provides an update on Open Trading, our market leading all-to-all liquidity pool.
Open Trading ADV was $4.4 billion and share of total credit volume was 34%, down from 37% in the prior year. Hedge fund trade activity has continued to expand on our platform, with record ADV of $1.9 billion in the quarter, up 30% from the prior year. A total of 202 hedge funds provided liquidity through Open Trading in the quarter, a 6% increase from the prior year. Lower volatility and lower price dispersion in the market reduces the price improvement opportunity in OT as shown on the lower left of this slide. And it has also impacted our high-yield product area, as shown in the chart on the lower right as ETF market maker activity has declined. Open Trading continues to be the largest single source of secondary liquidity in the US credit markets driven by our diverse liquidity pool.
Now let me turn the call over to Steve to review our financial performance.
Stephen Davidson: Thank you, Rich. On slide 14, we provide a summary of our first quarter financials. We delivered revenue of $210 million, up 4% from the prior year. These results include $8 million from the Pragma acquisition. Foreign currency was a $1 million benefit in the quarter. Information services revenue of $12 million was up 8%, including a $200,000 benefit from currency fluctuations. The increase was driven by new contracts as we continue to experience strong adoption across our data product suite, especially CP+. Post-trade services revenue of $11 million was up 8%, including a $200,000 benefit from currency fluctuations. The favorable interest rate environment contributed $6 million of interest income, up from $4 million.
The effective tax rate was 24.9% and we reported diluted EPS of $1.92 per share. On slide 15, we provide more detail on our commission revenue and our fee capture. Total commission revenue increased $3 million or 2% in the quarter. The increase in credit commission revenue was due to stronger estimated market volume across several product areas mostly offset by lower estimated market share and high yield on lower credit spread volatility. The reduction in total credit fee capture from the prior year was driven principally by product mix specifically lower high yield activity. The decline in fixed distribution fees was driven principally by the consolidation of two global bank trading desk operations. On slide 16, we provide a summary of our operating expenses.
First quarter operating expenses of $118 million included $8 million from Pragma and a $600,000 negative impact from foreign currency fluctuations. Based on the progression of expenses in the first quarter, operating expenses for full year 2024 are tracking to the low end of the previously stated guidance range of $480 million to $500 million. On slide 17, we provide an update on our balance sheet, cash flow and capital management. Our balance sheet continues to be solid, with cash and investments totaling $513 million as of March 31st, and we had no outstanding borrowings under the credit facilities. We repurchased 47,000 shares in the quarter for a total of $10 million and a total of $90 million remains on the current Board authorization.
During the trailing 12 months, we paid out approximately $110 million in quarterly dividends to our shareholders. Our Board of Directors declared a regular quarterly cash dividend of $0.74 per share based on the financial performance of the company. Now let me turn the call back to Chris for his closing comments.
Christopher Concannon: Thanks, Steve. In summary, on slide 18, we continue to execute very well against our growth strategy in the first quarter. The increase in new issuance, higher rates and an increase in velocity of trading all point to a healthy and growing fixed income market. We are disappointed with our market share in US credit, and we've recognized the importance of being equally strong in the faster growing segments of the market. We have a clear strategy to attack these areas, leveraging X-Pro as our delivery mechanism for the retooling of our trading offering. While we continue to drive adoption of X-Pro with clients, we are maintaining our leadership position in the investor client e-trading space. And our focus continues to be on the largest, most attractive order flow in the credit markets and building the client toolkit of the future and to help our clients do more with less. Now we would be happy to open the line for your questions.
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