Total revenues for the second quarter of 2005 increased 5.7% to $19.3 million, compared to $18.2 million in the second quarter of 2004. Pre-tax income in the second quarter of 2005 was $2.8 million compared to $4.3 million in the second quarter of 2004. Net income in the second quarter of 2005 totaled $1.8 million, or $0.05 per share on a diluted basis, compared to $43.1 million in the second quarter of 2004. Net income in the second quarter of 2004 included an income tax benefit of $38.8 million related to the utilization of net operating loss carryforwards. The second quarter of 2004 net income results presented above have been restated to reflect the impact of a $0.9 million reduction to the benefit for income taxes, decreasing net income from $44.0 million to $43.1 million, as discussed below in more detail.

Operating margin, defined as pre-tax income as a percentage of total revenues, was 15% in the second quarter of 2005, compared to 23% in the second quarter of 2004.

Richard M. McVey, Chairman and Chief Executive Officer of MarketAxess, commented, "Despite the difficult operating environment in the second quarter, driven by the auto sector downgrades and the resulting market dislocation, we are well-positioned for long-term growth with the signing of new two-year fee agreements with sixteen dealer clients on our U.S. high-grade platform. With the signing of these new agreements, we have enhanced the MarketAxess liquidity pool to the benefit of our 572 active institutional clients who utilize MarketAxess for best execution in the credit markets. Furthermore, in the second quarter we continued to build out our credit default swaps product, which we expect to bring to the market in September. Working with eleven leading global dealers, our new credit default swaps product is a natural extension for our platform and builds on MarketAxess' leadership position in electronic trading for credit markets."

Second Quarter Results

U.S. high-grade corporate bond commissions totaled $11.6 million in the second quarter of 2005, an increase of 0.6% compared to $11.5 million in the second quarter of 2004. European high-grade corporate bond commissions totaled $3.3 million in the second quarter of 2005, a decrease of 7.9% compared to $3.6 million in the second quarter of 2004. Other commissions increased 8.9% in the second quarter of 2005 to $1.8 million, compared to $1.7 million in the second quarter of 2004. Other revenue, which consists of information and user access fees, license fees, interest income and other revenue, increased 77% to $2.6 million in the second quarter of 2005 compared to $1.4 million in the second quarter 2004. Higher interest income and an increase in the number of subscribers to our Corporate BondTicker(TM) service, as well as changes to the service fee schedule introduced in the third quarter of 2004, were the primary drivers of the increase in other revenue. Our second quarter 2005 results reflect the implementation of our new U.S. high- grade fee plan on June 1, 2005.

Total expenses for the second quarter of 2005 increased 17.9% to $16.5 million, compared to $14.0 million in the second quarter of 2004. Professional and consulting fees increased to $2.7 million, compared to $0.8 million in the second quarter of 2004, largely due to increased costs associated with being a public company and consulting expenses. Technology and communications expenses increased to $2.2 million, versus $1.5 million in the second quarter of 2004, driven primarily by increased market data and data communication costs. Employee compensation and benefits increased to $8.7 million, compared to $8.4 million in the second quarter of 2004, as a result of increased costs related to employee benefit programs. These increases were partially offset by the absence of Moneyline revenue share expense. The Moneyline revenue share program, which concluded in the first quarter of 2005, accounted for $0.4 million of expense during the second quarter of 2004.

Deferred Income Tax Assets

The Company has restated its consolidated financial statements for the year ended December 31, 2004 and the first quarter of 2005 as a result of certain misapplications of Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes, relating to the recording of deferred income taxes.

In 2005, the Company retained new tax advisors who assisted with the preparation of the Company's 2004 tax returns. During a reconciliation of the 2004 tax returns to the 2004 Consolidated Statements of Operations, the Company identified that the tax benefit of $41.3 million and related deferred income tax assets for the year ended December 31, 2004 had been overstated by a net $1.1 million.

Although the Company does not consider the overstatement of $1.1 million to be material for any quarter of 2004 or the full-year 2004, the Company restated its 2004 Consolidated Financial Statements for the year ended December 31, 2004 and the three months ended March 31, 2005 because the impact of these revisions would have been material to the Company's Consolidated Financial Statements for the second quarter of 2005 if recorded in that quarter. The overstatement primarily resulted from the incorrect recording of deferred tax assets with respect to compensation expense for incentive stock options, alternative minimum tax credits and other items identified in the preparation of the tax return. The Company will file a form 10-K/A for 2004 and 10Q/A for the first quarter of 2005 reflecting the effects of the restatement.

Trading Volume

Total trading volumes in the second quarter of 2005 increased 4.3% to $72.1 billion, compared to $69.1 billion in the second quarter of 2004, but declined 19.1% when compared to the first quarter of 2005. U.S. high-grade trading volume totaled $44.7 billion in the second quarter, a 1.1% increase over 2004 second quarter volume of $44.2 billion. Total U.S. high-grade trading volume for the second quarter of 2005 includes single-dealer inquiries of $0.9 million, which the Company began separately reporting on June 1, 2005. European high-grade trading volumes in the second quarter of 2005 decreased 3.4% to $17.0 billion, compared to $17.6 billion in the second quarter of 2004. Other trading volumes in the second quarter of 2005 increased 42.2% to $10.5 billion, from $7.4 billion in the second quarter of 2004.

Credit Derivatives

In the second quarter, we continued to develop critical technology infrastructure and software for the MarketAxess credit default swaps (CDS) platform. We are proceeding with our efforts to develop a multi-dealer system to provide electronic credit derivatives trading services between dealers and institutional investors, initially focused on CDS indices in both the United States and Europe. Our objective is to offer clients a fully electronic trade process, from the provision of pre-trade information through trade initiation, execution and confirmation.

We are being assisted in these efforts by eleven of our broker-dealer clients and The Depository Trust & Clearing Corporation (DTCC).

Our plans continue to call for commercial launch of the new platform in September of 2005.

Balance Sheet Data

As of June 30, 2005, total assets were $179.3 million. This included $106.8 million in cash, cash equivalents and securities, an increase of $7.9 million when compared to March 31, 2005. The number of diluted shares outstanding on a weighted-average basis (used for EPS calculations) was 35.4 million for the second quarter of 2005. Total stockholders' equity was $164.3 million as of June 30, 2005.Download the document now 36.3 kb (Adobe Acrobat Document)