MarketAxess Holdings Inc. — 2024 Q1
Transcript
Each turn shows the speaker, their inferred role, the section, and that turn's net sentiment (×1000).
Ladies and gentlemen, thank you for standing by. Welcome to the MarketAxess First Quarter 2024 Earnings Conference Call.
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.
Good morning, and thank you for joining us to review our first quarter results. Turning to Slide 3 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 U.S. 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.
Thanks, Chris. Slide 9 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 U.S. credit and a record 1,066 active international firms.
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+.
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.
[Operator Instructions] And our first question comes from the line of Chris Allen from Citi.
I wanted to follow up on portfolio trading. You talked in the past about making inroads into the traders who control portfolio trading, who are also the key market participants for block trading. So I wonder if you could give us an update on what kind of progress you have made there adding any new clients? And also the 40% share noted in the last day of April, was that due to one large trade, new clients turning on or some other factors?
Sure, Chris. Thanks for the question. Obviously, we've had a great deal of focus on portfolio trading more recently. As you know, we recently launched our new platform, X-Pro, just last year. And obviously, we launched X-Pro specifically for portfolio trading with an embedded portfolio trading solution just 9 months ago. We've been ramping up features, functionality on that platform as well, and we've seen some of the benefits of that.
Just the chunky nature of it, and you can have a lot of spikes up and down, Chris, I mean, with adoption on any given day. As Chris pointed out, it's a targeted group. It's a relatively small number of PTs that we're all after. We estimate about 20 to 40 per day of substantial size, call it, $50 million and above. And we're all going after those.
And just on my follow-up, I just wanted to ask about X-Pro. You gave us the metric around the top 20 clients, but I'm wondering where you guys stand in rolling it out to your overall client base. And then specifically, where are you in the process for signing up with dealers for dealer access to X-Pro?
Sure. Again, just to remind everyone, X-Pro is our new platform, it comes with new features and offerings. It really allows clients to trade bonds of any size or complexity, like things like portfolio trading. It also is a cockpit for traders to start their day. So it is a unique offering from market access. We rolled out X-Pro for RFQ, traditional RFQ last year. We were targeting our largest clients.
Our next question comes from the line of Alex Kramm from UBS.
I know there's a lot of focus on portfolio trading. But if I look at your TAM chart, you clearly think that dealer-initiated opportunities is bigger. So maybe you can give us an update there. It's a very crowded space, and you obviously have admitted that you're kind of late to it. So just seeing where you stand today, any inroads you've made, any feedback you've gotten? And how pricing may be a differentiator there in particular?
Yes. Alex, it's Rich. And we feel really good about our dealer business. It's something that we've been in for a number of years. And we lead there with our flagship protocol, which is RFQ. And we've offered that to dealers for over a dozen years now. And its adoption rate is pretty wide.
And Alex, I'd just add, as Rich was mentioning, some of the new protocols and offerings that we're providing the dealers, one important one, which only rolled out in December of last year is our automation suite. It's quite a popular suite of solutions for our clients. We now provided that automation suite to dealers.
All right. Very good. And then just maybe just a super quick housekeeping question. On FPM, maybe for the first quarter or April. Can you give us a little bit of a breakdown where we stand on the different product types, high yield versus high grades, Eurobonds, et cetera?
Alex, it's Steve here. In terms of the fee per million in April, we've mostly seen pretty stable pricing across the products. What you've seen in April was the impact of higher PT, which definitely dampened it a bit. We were down overall about $2 per million. So a lot of that was PT. But I think that the Eurobonds piece was a little bit better if you think about it year-over-year.
Our next question comes from the line of Patrick Moley from Piper Sandler.
I just -- not to hammer on portfolio trading, but appreciate the disclosure around market share in the last day of April being 40%. I was hoping you could just maybe frame -- help us frame that, like how did that compare to the rest of the month and maybe where you've been year-to-date?
Yes, Patrick. And obviously, we expected a focus on portfolio trading today, and we've obviously been focused on portfolio trading for some time, particularly with rollout of new solutions to solve the portfolio trading market. We do think the portfolio of trade is an important tool for our largest clients.
Okay. And then you repurchased 10.1 million worth of shares this quarter. I think that was the first or the most significant repurchase you did since the middle of 2022. Can you just -- can you talk about that decision and maybe what we should expect in terms of the size and pace of buybacks from here?
Yes. Patrick, it's Steve here. So there's really been no change to our approach with capital. I think we're still focused on the dividend. And our buyback activity is really still focused on just offsetting dilution. And I think that we basically front-loaded some repurchases about 2 years ago. So we almost put like 2 years of repurchases a couple of years ago. So I think we'll be opportunistic going forward in terms of repurchases and -- but no change overall in terms of the philosophy for capital.
Our next question comes from the line of Kyle Voigt from KBW.
Maybe just first on the high-yield side. The share has been a bit volatile month to month this year. I guess a question on April with the uptick in share, was that primarily from higher pure ETF market maker flow given some of the elevated high-yield ETF volumes we saw in the month, but the systematic traders have remained disengaged? Or are you really starting to see in April some of those systematic traders or hedge funds reengage in that market yet that you had called out earlier this year that had kind of pulled back?
Kyle, it's Rich. It's a combination. I mean we were happy to see a little bit of a pickup back from March, 13.9 versus 12.7 from March. We've still got a way to come back, but we're seeing the signs that the market conditions are becoming more favorable. It's a combination of activity from both real money and from the ETF community. So it's definitely trending in the right way here, so.
Okay. And then just maybe one more follow-up on PT. You noted some of the added functionality there. But can you remind us of differences in fee structures in your PT offering versus your competitors? I recall there was maybe something you were evaluating in terms of changing the fee structure of the billing for the product.
Yes, Kyle, it's definitely a competitive space on PTs. And we've talked about it in the past that the PT fee capture is at a lower rate than income business and substantially lower than, say, all-to-all Open Trading business. And there are different ways to levy the fees. We know there are competitors out there that are trying to make a name for themselves and break into this market even going sometimes without any fees on it.
And so is that already in place? You said the move to build the dealers or...
That's going to come in place with our next major release, which is coming in the next few weeks.
Our next question comes from the line of Dan Fannon from Jefferies.
Sticking with the topic of PT. I was hoping you could just talk about what you think the normal steady state of this protocol is as a percentage of volume or where it could get to? I think you put out some numbers previously, but the market has continued to evolve. So I was hoping to get your updated thoughts on kind of what you think that protocol can ultimately be on a consistent basis?
Sure. I'll take that. And look, we certainly are at a fairly historically low levels of credit spreads and credit spread volatility. That certainly creates a ripe environment for not only in portfolio trading, but also the dealer-to-dealer mid-market match solutions. So we certainly see at these levels of volatility that we've witnessed here in 2024 and certainly, at times during 2023, higher levels of PT and higher levels of mid-market matching solutions.
Yes, Dan, I'll just add to that. I mean it's definitely here to stay. It provides a lot of benefits to clients in terms of the workflow. It's going to be interesting to see what happens when the market environment changes and volatility increases and the PT becomes a relatively more expensive trade, whether it's still going to maintain the kind of percent of the market right now, we're seeing roughly around 10%. Whether that number goes down, stays the same, I would not think that that's a number that's going to rise in a high vol environment when it becomes relatively more expensive versus doing trades in comp. So something to consider.
Great. And then just as a follow-up on expenses. I know it's early in the year, but you're already tracking towards the low end of the guidance for this year. So I guess, first, kind of what has changed since the initial guidance a couple of months ago? And then as we think about the rest of the year and the factors are going to take you to the lower than the low end or back towards the midpoint or higher? What are those? Is that just volumes? Is it market share? What are the other factors?
Dan, it's Steve here. I think if you step back, I think we're exiting a period of some pretty substantial investments that we've made with X-Pro, our proprietary data ADX. So I think we've come out of that period. In the fourth quarter, we achieved some significant efficiencies coming out of the year.
And I would just remind you that 18% of our expenses are variable. So that's the piece that can move up or down with volumes. So that's an important component to how we think about our guidance. And as we mentioned earlier in the call, we're tracking to the lower end of our guidance, and it's just too early to update where we think we'll end up being in the year.
Our next question comes from the line of Jeff Schmitt from William Blair.
On X-Pro, thinking how does it execute portfolio trades differently than what you were doing sort of prior to its rollout? And I guess importantly, though, like how does it compare to competitors now? Do you have any edge there?
Jeff, it's Rich. As you note, so from an execution perspective, it's consistent, and we have the back end of the trading system that's managing this. The real productivity gain and the difference maker is on the front end and how traders interact with our capabilities, okay?
And Jeff, I'd just add that X-Pro, both the portfolio trading tool and X-Pro for RFQ are all built in cloud-based technology. So it's all new tech that we've rolled out here. It also allows us to make changes and introduce new features and functionality in a more rapid development environment. So we've seen changes rolled out from -- really from trader feedback back out into production within weeks rather than within quarters and months.
Great. And then a question on your high-grade market share. Could you discuss how institutional RFQ share is trending? I mean, is that a part of -- in the drop at all?
Yes. On the share, I mean, we did see a bit of a decline. We are -- upon analyzing that, it's definitely due to the pickup in portfolio trading that occurred and also on the dealer business. We attribute it mostly to those 2 factors. And hence, the extra effort that we're making in both of those areas. Those are the 2 significant investment areas for us to regain share.
I would just add that our high-grade market volumes did increase in Q1 by 18%. Our block trading ADV increased as well. And more importantly, our automation continues to grow within the high-grade market. That's one area where we're highly penetrated throughout that area, and we continue to see more automation ramping up.
Our next question comes from the line of Brian Bedell from Deutsche Bank.
Maybe just sticking with X-Pro. I think you quoted about 16% of your volume now is running through X-Pro and it's accounting for 60% or nearly 60% of your portfolio trades. Just maybe if you can just comment on where you ultimately want to get that to or you think you can get X-Pro to in terms of your overall volume.
Great question. And obviously, X-Pro is designed to replace our legacy user interface for our clients. So we intend to put X-Pro in front of all traders and all clients globally. X-Pro, you'll see X-Pro rolling out in Europe and throughout the international client base this summer. So we're excited to continue the rollout of X-Pro not just for traditional RFQ, but more importantly, for portfolio trading.
That's great. Actually, that leads into the second follow-up question on that, and that's the large block sizes. So I think you quoted that last time like [ 30% to 60% ] of the market is trade sizes over $5 million. That's obviously been the area where more has been done with voice over time, and it's been tougher to crack.
Yes, Brian, it's Rich. I mean we think it's going to increase. And I've said before, we're going to see a high penetration rate across all sizes. Some of that might just be trade processing and more efficient ways to do a bilateral trade with a known dealer. And that's fine. That's part of what this portion of X-Pro is designed to do very efficiently.
Brian, I would just add that we hear regularly from our clients that they obviously want to do more with less. They're not hiring traders on their desks. That's a trend that we've seen. And this area of the market is a fairly inefficient area from just a workflow perspective. You can imagine using phones and chat has not been the end result of this market evolution.
Our next question comes from the line of Michael Cyprys from Morgan Stanley.
I have a question on Pragma. Maybe changing topics away from PT. I was hoping you could update us on the progress there with Pragma. Maybe you can elaborate on the contribution of the business, how you see the growth path ahead. And strategically, maybe you could update us on how you see this being strategically additive to the firm?
Sure. Obviously, we closed on the Pragma transaction in the fourth quarter, and we're quickly integrating Pragma into the broader MarketAxess technology framework. We're excited about some of the technology synergies that we're seeing. Obviously, Pragma has been a key ingredient to the launch of the first credit algo in the credit space. So we're excited to see that algo and the demand that -- and the feedback that we're getting from clients on the algo.
Great. And just a follow-up question, if I could, on emerging markets. Great to see the renewed strength, particularly in local markets, EM, particularly in April. Just curious what you're seeing there. Maybe you can elaborate a bit more broadly on the EM initiatives that you have and any other regions that you're particularly more focused on? And where do you see scope for more innovation ahead in EM?
Sure. On the EM front, pretty excited about the growth that we've seen in EM in Q1. Obviously, we were seeing lower volumes in 2023. And we weren't expecting that to change, but it did change and obviously saw record volumes, record ADV and obviously, record commission revenue up almost 11% in Q1.
Our next question comes from the line of Alex Blostein from Goldman Sachs.
Just one for me. You spoke extensively today and just over the last couple of quarters that the path towards more of sort of bridging the gap in IG with some of the market share is likely going to come from PT and dealer-initiated RFQ. Can you talk a little bit about the pricing and the fee per million in both of those?
Sure, Alex. It's Rich. And yes, I did mention about the fee capture in PT being lower. With dealer business, which tends to be -- it's an Open Trading, it's an all-to-all type of business, where we're delivering more value, our fee capture is relatively higher there.
Our next question comes from the line of Ben Budish from Barclays.
I just wanted to double check on the dealer initiated segment. I don't think you talked about how much of your business that comprises today. So can you maybe talk about that and where it's been in the past? And then looking forward, if you think about how much of that piece can electronify versus the broader market in IG? How do you think about the potential there versus client to dealer and some of the other trade types?
Yes. Ben, it's Rich again. And no, we definitely feel strongly about our opportunities there. And you can say, roughly speaking, it's about 30% of our RFQ activity is coming from dealers initiating on the RFQ side. So that has room to grow. And again, as I was just saying, it's a promising area of fee capture. That's, right now, using our RFQ protocols. As we introduce our matching solutions in the market, which we know has been very attractive to firms and also our order book live markets is another area that we think is going to be attractive to that user base, it's pretty significant.
Our next question comes from the line of Eli Abboud from Bank of America.
Can we have a little bit more of an update on Adaptive Auto-X? I think last quarter, you mentioned that 13 clients were using it. How has penetration progressed? And what can you share about the early feedback?
Sure, Eli. Yes, we're pretty excited about the innovation of Adaptive Auto-X, as I mentioned earlier, it's the first client algorithm launched in the credit space. Right now, we have 25 clients live on Adaptive Auto-X. There's about 30 clients approved, still waiting to be onboarded. And then there's more, obviously, in the pipeline. We also are excited about a new launch of an algo this summer, really a dynamic liquidity-taking solution.
Got it. And you mentioned the block trading had a particularly strong quarter earlier. How much of this is attributable to this early progress on Adaptive Auto-X? Or is it other technologies and protocols that are driving that progress so far?
Really, the block trading that we're seeing the success in, particularly in EM, we offer a request for market that has been an offering, a protocol that we launched quite some time ago, and that's really been driving some of our block trading experience here.
That concludes our Q&A session. I will now turn the conference back over to Chris Concannon for closing remarks.
Great. Well, thank you for joining us today. We're exceptionally excited about the things that we're building and rolling out this summer, and we look forward to updating you on our progress at our next quarter call. Thanks, everyone, for joining.
Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.