MarketAxess (NASDAQ: MKTX ) published its third-quarter results (link opens a PDF) this morning, and as the following table shows, the numbers were disappointing -- by Wall Street's standards. The fixed-income trading platform missed on both revenues and earnings per share. Those misses have short-term investors spooked today, and shares are down around 5.5%. Long-term investors, on the other hand, ought to be a little more sanguine. I don't see any signs that the business franchise is impaired, and, although investors will need to continue monitoring potential competitors and, particularly, structural developments in the bond markets, the latest set of results are well within the bounds of normal business fluctuations.
| Revenues | $64.2 million 5% | $64.9 million |
| Adjusted EPS | $0.46 7% | $0.47 |
Source: Company documents, Thomson Reuters I/B/E/S
Putting the revenue slowdown in perspective
Yes, year-over-year revenue growth decelerated in the third quarter, to 5.1%, but that's to be expected in light of what CEO Rick McVey referred to as a "summer seasonal slowdown... and heavy new issue calendar" (MarketAxess facilitates secondary market trading, rather than new issues). Keep in mind the context: Transaction fees in U.S. High Grade bonds -- MarketAxess' largest segment -- were down 11.2% year over year in the third quarter on lower volume and unit fees (crucially, market share was relatively stable at 14.6% versus 14.9%.) However, "Other Credit" (junk bonds, emerging markets, and eurobonds, etc) made up the shortfall, with transaction fees surging 32.6%, which contributed to record commission revenues of $54.5 million (up 5.1%).
Note that over the nine-month period ending on Sept. 30, revenues rose 8%, which is consistent with the 8.5% long-term growth assumption that Hidden Gems co-advisor Andy Cross made when he re-recommended MarketAxess last July.
Below revenues, costs were broadly in line with the company's long-term goals, yielding a very healthy operating profit margin of 44%, up from 43.2% (adjusted) in the prior year period. Even though MarketAxess is a growth company, it has the profitability and the financial flexibility (no debt!) to return some of those profits to its shareholders, repurchasing over 200,000 shares in the quarter at an average price of approximately $55.35 (not to mention the $0.16 per share quarterly dividend).
Don't overreact to volatility
While investors aren't reacting well to these results, it looks to me like they're overreacting to the natural course of a business that contains some inherent volatility -- volatility that can swing to produce positive effects, too. As McVey mentioned on the conference call Wednesday morning: "The first few weeks [of the fourth quarter] represent a meaningful pickup in secondary [trading] activity... This is another environment in which we're getting greater volatility and greater interest in electronic trading." He also went to note that "based on the trends we're seeing so far this month, we would expect a modest increase in market share over the third quarter average."
I see no reason for long-term investors to alter their stance on MarketAxess -- it's a solid franchise, led by competent managers that are focused on opportunities for long-term growth.
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