MarketAxess Earnings: Net Income Falls Because of Lower Corporate Bond Market Share and Pricing

Wide-moat-rated MarketAxess MKTX reported weak third-quarter earnings that were in line with our expectations as lower market share and reduced fee capture hurt results. MarketAxess’ net revenue was effectively flat from last year at $172 million, while its net income fell 7.4% to $54.9 million when compared with the year-ago period. While these were not good results, we were already aware of the market share issues, which were behind a recent 13% reduction in our fair value estimate. As we incorporate these results, we do not expect to materially alter our $305 per share fair value estimate.

MarketAxess’ results were once again undermined by weak variable transaction revenue, which declined 6.2% from last year to $144.3 million. The decline was due to both flat trading volume and lower average credit fee per million, with U.S. corporate bond trading being the most meaningful contributor to the weakness. High-grade and high-yield U.S. corporate bond market share fell 1.1% and 3.2%, respectively, to 20% and 16.1%. This led to a 1% increase in high-grade bond trading volume but a 20% decrease in high-yield volume. MarketAxess’ market share does tend to fall during periods of low credit spread volatility, which was a factor in the third quarter, but we view the firm’s difficulties growing its share as disappointing.

MarketAxess’ average fee per million for credit bonds fell 6.5% during the quarter to $154.9 per million. We view this decline as resulting from market conditions and mix shift, not competitive pressure. One factor that determines MarketAxess’ fees for investment-grade bond trading is the duration of the bond being traded, which falls when interest rates rise. This has led to downward pressure on pricing since the Federal Reserve began to hike rates last year. High-yield bond trading also enjoys higher fee capture than the firmwide average, meaning that mix shift away from high-yield corporate bonds has been an additional headwind to MarketAxess’ pricing.