MarketAxess Holdings Inc ( MKTX)

Q3 2010 Earnings Call

October 27, 2010 8:30 am ET

Executives

Dave Cresci - IR Manager

Rick McVey - Chairman and CEO

Kelly Millet - President

Tony DeLise - CFO

Analysts

Hugh Miller - Sidoti and Company

Howard Chen - Credit Suisse

Patrick O'Shaughnessy - Raymond James

Pre s entation

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, October 27th, 2010.

I would now like to turn your call over to Dave Cresci, Investor Relations Manager at MarketAxess. Please go ahead, sir.

Dave Cresci

Good morning. And welcome to the MarketAxess third quarter 2010 conference call. For 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 a 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 third quarter 2010 results. This morning we reported another set of stronger quarterly results. Our record revenues and earnings reflect strong momentum at our core e-trading product areas, continued strength in investor order flow and disciplined expense management.

Operating margin improved to 36% during the third quarter, a significant increase from 28.5% one year ago. EPS of $0.22 was almost double year ago levels.

Variable transaction fees were the largest contributor to revenue growth and were up 29% driven by a combination of volume and fee per million growths. Fee capture per million increased during the quarter, reflecting additional contributions from our regional dealer fee plan and stronger emerging market and high yield bond volume. Total trading volume of $105 billion was 25% above a year-ago and the highest since pre-credit crisis levels in the second quarter of 2007.

Industrial order flow in to the system was up 8% and 16% in US high grade. Increased investor order flow and improved dealer hit rates combined, increased our estimated US high grade market share to 8.3% versus 6.5% in the third quarter of 2009.

Slide 4 displays the details on our financial strength. For the third quarter EBITDA grew to $15 million and our EBITDA margin reached 40% up from 34% one year ago.

Free cash flow of more $50 million in the last 12 months has provided the financial flexibility to comfortably execute our share repurchase program and meet our quarterly cash dividend. During the quarter we repurchased 1.6 million shares of our common stock at a cost of $23 million. We expect the repurchase program to conclude in the fourth quarter, which will meet the objective to offset the increase of our diluted share count, which occurred from 2009 to mid 2010.

Our cash and securities balance at September month end was $183 million compared to $188 million at the end of June. During the third quarter we expended a total of $26 million on the share repurchase program and the quarterly dividend. We largely covered the entire capital management related expenditures with cash flow generated during the current period. Our Board will continue to consider capital management opportunities for our share holders on our regular basis.

Slide 5 provides an update on regulatory reform in our credit to flows swap platform. We are encouraged by the pace of activity in the rule-writing process, by both of the key regulators the CFTC and the SEC. We believe the regulators are on track to finalize the new rules for OTC derivatives markets by the target date next July. The first rules on conflicts of interest have already been released and we expect further clarification on swap execution facility principles within the next few months.

We believe that our transparent trading protocols and our independent governance model will meet the principles for a swap execution facility. We would expect the new rules for trading and clearing, standardized swaps to be in effect 60 to 90 days after the rules are finalized. We don’t know yet how broad the universe of clearable swaps will be, but we continue to expect to run 80% of the CDS market will eventually be centrally cleared, which will trigger the requirement for execution on an exchange for a swap execution facility.

Bond within the CDS market was down from pre-crisis levels is still substantially greater than volumes in the cash credit bond markets. A good portion of the CDS volume takes place in highly liquid indices and we believe the client-to-dealer volume represents about 35 to 40% of the CDS total.

Key questions remain on whether the rules will provide exemptions from the execution requirements for block trades and the number of viable entities that could become [SAS].

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