MarketAxess Holdings Inc. (MKTX)

Q2 2010 Earnings Call

July 28, 2010 8:30 am ET

Executives

Dave Gretzky - Investor Relations Manger

Rick McVey - Chairman and Chief Executive Officer

Kelly Millet - President

Tony DeLise - Chief Financial Officer

Analysts

Hugh Miller – Sidoti

Chris Donat - Sandler O'Neill

Howard Chen – Credit Suisse

Michael Wong – Morningstar

Presentation

Operator

Ladies and gentlemen, thank you for standing by. At this time, all participants are in a listen-only mode. Later we'll conduct a question-and-answer session. (Operator Instructions) As a remainder, this conference is being recorded Wednesday, July the 28, 2010.

I would now like to turn the call over to Dave Gretzky, Investor Relations Manger at MarketAxess. Please go ahead, sir.

Dave Gretzky

Good morning. And welcome to the MarketAxess second quarter 2010 conference call. On the call, Rick McVey, Chairman and Chief Executive Officer will review highlights for the quarter, Kelly Millet, President, will provide an update on trends in our businesses and then Tony DeLise, 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 materially from what is indicated in those forward-looking statements.

For discussion of some of the risk 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, 2009. I'd 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

Good morning and thank you for joining us to discuss our second quarter 2010 results. We are pleased to report another set of strong quarterly results with record revenues of $35.3 million of 37% from a year-ago. And a record pre-tax income of $11.9 million, 107% above second quarter of 2009. The strong revenue growth combined with operating leverage lead to a marked improvement in operating margins to approximately 34%. EPS of $0.18 was more than double year-ago levels.

Variable transaction fees were the largest contributor to revenue growth and were up 53% driven by a combination of volume and fee per million growths. Fee capture remained strong reflecting additional contributions from our regional dealer fee plant. Total trading volume of $98 million was 47% above a year-ago.

Investor order fall in to this system was up 30% and we now have 80 market making dealers up from 60 one year ago.

Slide 4 displays the details on our financial strength. For the trailing 12 months ended June 30th 2010. EBITDA and free cash flow were both approximately $50 million in each case more than double the levels from one year ago. Trailing 12 months operating margin expanding to 32%. Our cash and securities balance at June month end was $188 billion or $4.75 per diluted shares. When assessing alternatives for deploying our capital we have four priorities. Our first priority is to grow the business by investing in both existing products and new product opportunities such as CDS. We continue to evaluate additive acquisitions in the e-trading market data or trading technologies states. We are returning capital through our shareholders through our regular quarterly cash dividend. The Board is approved our fourth quarterly dividend of $0.07 per share.

Finally, we recently announced the $30 million share repurchase program. The buyback was principally established to offset the increase in our diluted share accounts. The repurchase program started in July and it expected to be accretive.

Slide five provides an update on the current regulatory reform in our credit to flows swap platform. On July, 21, the financial regulatory reform bill was signed which contains two important mandates regarding electronic trading of OTC derivatives.

First, standardized swaps must be cleared by an approved clearing organization. And second, Clearable swaps must be traded on an exchange or swap execution facility. We believe that in regulations will create a stronger and sounder OTC derivatives market. The ultimate result is likely to be a larger OTC swap market with a broader set of industry participants. We intended to register and operate as a swap execution facility which will be regulated by the SEC and CFTC.

Although the room making process is expected to take approximately 12 to 18 months we are preparing now for transition to e-trading for standardized swaps. Based on data published by the DTC [ph] Trade ware house, we estimate that the total average daily trading volume in the client to deal our CDS market is approximately 50 to $60 billion including index and single main swaps. We currently expect the e-trading mandate to apply to 50 to 75% of the daily CDS volume.

We believe our improving credit trading technology and our large institutional credit-trading network are valuable assets in the CDS space. We are focused on this opportunity.

Now, let me turn the call over to Kelly for more detail regarding our second quarter business results.

Kelly Millet

Thank you, Rich. Slide six provides an update on market conditions. Through the second quarter credit market conditions weaken slightly demonstrated by an increase in credit spreads and credit spread volatility along with softer new issuance volume. High-grade credit spread as measured by the Credit Suisse Lucy Index end of the quarter at 158 basis points above treasury, an increase from 118 basis points at the end of the first quarter. And credit spread volatility with 6.5% at June on '10 up from 3.8% at the end of March.

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