Ladies and gentlemen, thank you for standing by. [Operator Instructions] I would now like to turn the call over to Mr. David Cresci, Investor Relations Manager at MarketAxess. Please go ahead, sir.

Good morning and welcome to the MarketAxess First Quarter 2012 Conference Call. For the call Rick McVey, Chairman and Chief Executive, will review the highlights for the quarter and will provide an update on trends in our business. 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 beliefs 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 risks 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, 2011. I would 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.

Good morning and thank you for joining us to discuss our first quarter 2012 results. We are pleased to report another set of strong quarterly results, with record revenues of $50.7 million, up 16% from a year ago, driven by strong credit market trading conditions and increases in market share from the prior year period. Pretax income was a record $22.7 million, 29% above the first quarter of 2011. Diluted EPS improved $0.35 compared to $0.27 one year ago. On the heels of significant growth in client inquiry flow, across all trading categories, total trading volume was a record $158 billion, up 17% from a year ago. Emerging market and high yield volumes were both up over 30% from the first quarter of 2011, leading to a 9% improvement in overall fee capture per million traded. Slide 4 displays some details on our quarterly results and financial strength. Strong revenue growth in the quarter was the principal driver behind the record pre-tax income of $22.7 million. EBITDA was up 28% to a record $24.6 million in the first quarter of 2012. Operating and EBITDA margins improved to 45% and 49%, respectively. Incremental margin for the quarter was 71%. Our cash and securities available for sale balance at March month end was $180 million, or $4.65 per diluted share. We continue to return money to shareholders through share repurchases and dividends. During the first quarter we repurchased 2.4 million shares, including 1.8 million shares from JP Morgan as part of their sale of shares acquired as a founding dealer of MarketAxess in 2000. We expect the share repurchases to be accretive to earnings and secondary trading liquidity has improved in our shares since the offering. The Board approved a regular quarterly dividend of $0.11 per share. Slide 5 provides an update…

Thank you, Rick. Slide 8 displays our quarterly earnings performance. Revenues of $50.7 million were up 16% from a year ago, driven principally by growth and variable transaction fee commissions. The year-over-year and sequential declines in technology products and services revenues were due to lower professional services fees and the impact of a design shift to a rental model for software sales. Total expenses were $28 million, up 8% from the first quarter of 2011, and 7% sequentially from the fourth quarter. First quarter expenses reflect some seasonal and one-time items, which I will cover momentarily. Pretax income was a record $22.7 million in the first quarter, up 29% from last year. Our effective tax rate for the first quarter was 40.7%, up from 39% in the first quarter of 2011. We're trending towards the higher end of our 2012 tax guidance range, due principally to a decline in foreign source income. Our diluted earnings per share was $0.35 on 38.7 million diluted shares. On Slide 9 we have laid out our commission revenues, trading volumes, and fees per million. Distribution fees were $16.1 million during the first quarter of 2012, up 6% from the first quarter of 2011, but down 4% sequentially from the fourth quarter. On our fourth quarter call, we flagged the distribution fee reduction on our major Eurobond fee plan as well as several dealers, including MF Global, that were coming off of the major U.S. high-grade fee plan. In addition to these changes, one more U.S. dealer has migrated to the all-variable plan at the beginning of the second quarter. Absent any other changes, compared to the first quarter 2012 level, distribution fees are projected to decline by approximately $1.8 million in the second quarter of 2012. We expect some offsetting benefits in variable transaction…

Thank you, Tony. We are pleased with the record results from the first quarter. Trading volume and revenue momentum is evident in many of our product areas, and we continue to demonstrate operating leverage. The changes taking place in fixed income will require new solutions, and we'll ultimately increase the addressable market for electronic trading. In closing today, I would like to extend a very personal thank you to Nick Rohatyn, our lead independent director. After playing an instrumental role in the founding of our business, and 12 years of service on the MarketAxess board, Nick has decided to step down following the end of the current term in June. It has been a privilege to work with Nick through our formative years, and all shareholders have benefited from his vision, advice, and support. We will continue to call on Nick as a friend and fellow shareholder for years to come, even though his official responsibilities as a director will soon come to an end. Our nominating and governance committee has successfully recruited 2 new outstanding directors to our board. Jim Sullivan is the head of Fixed Income at Prudential Investment Management, and an industry leader in credit markets. Steve Begleiter is a senior principal at Flexpoint Ford, a private equity group. Steve has extensive investment banking and business building experience. We welcome both Jim and Steve to our board, and we look forward to working with them. Now I would be happy to open the line for your questions.

[Operator instructions] Your first question will be coming from the line of Howard Chen from Credit Suisse.

Just a couple of fee, quick questions. First, Rick, you spoke to the really high growth in inquiry count during the quarter, and we can see that on Slide 6. Could you elaborate a bit more exactly where that's coming from, and what your expectations are going forward in terms of growth in inquiry count?

Yes. I think it's a couple of things. I think it reflects that in our normal sweet spot for trading activity, we're seeing an increase coming in from existing clients. We continue to work on clients that we think are under-utilizing the platform, and we have made progress with many of them with respect to the increase in activity. And as we also mentioned in the prepared remarks, we've seen very good growth in inquiry count from cross-regional clients, most notably out of Europe. So I think it's really been across the board, and it has been the primary driver of the increases in market share.

And then shifting over to Europe, I just wanted to dig in to some of that outlook and commentary on the variable pricing. I guess I don't quite understand what exactly is going on that's driving that reduced outlook to kind of the 65 level. So if you could please elaborate on that, that would be great.

Sure, Howard. It's Tony. There's a couple of things in there. Probably the first thing to note is that when we look at our Euro bond volume, it really is a combination of corporate bonds and government bonds. The way our fee plan works right now, corporate bonds are generally at 100 per million and government bonds are at 10 per million. So that mix definitely influences the fee capture. The second one, which is a little bit of a nuance, we did have a number of dealers who were on a hybrid plan, sort of similar to our U.S. high grade all-variable plan. We had several dealers who were on a hybrid plan paying a reduced fixed monthly distribution fee, a variable fee, and then an execution fee. We've now centered really around one fee plan that now eliminates that execution fee that some of these hybrid plan dealers were paying. So that hybrid execution fee was influencing fee capture prior to the fee plan change. And that's why looking at it going forward, it's really just a mix of corporate at 100 and government bonds at 10. Depending on that mixed set, $65 guidance could swing higher or lower. And I will tell you we are also very active in on-boarding new dealers. These would, in all likelihood, be sort of more regional dealers out of Europe. They would likely be on an all-variable plan, so that also could influence the fee capture going forward. But at least right now in terms of near-term guidance, think about it more around that $65 or $70 range.

That's very helpful, Tony. Finally, Rick, thanks for the update on the CDS and timing as you think about it. I just wanted a little more of an update. Are you charging today, and if not, how do you think about adjusting that fee schedule over time as you gain traction and share within that market?

Sure. No, we do not have any fee schedule in place today for CDS. And quite honestly, there are enough uncertainties in the final SEF rules and the timing of implementation that we do not expect to change that policy in the near term. We're doing the best we can with uncertain information about the rules to prepare the trading system in every respect to be ready to register as a SEF. And, Howard, I would expect that the fee model and fee capture will probably become more clear around the time that the SEF rules go fully into place.

Your next question will be coming from the line of Patrick O'Shaughnessy from Raymond James.

First thing I wanted to ask you is, Rick, if I heard you correctly you said that April to date your U.S. high grade market share is running around 11.4%, basically what you did in the first quarter?

That's correct. We said it's around the first quarter levels.

OK. So if that's the case, it seems like over the last few months your market share has stalled out a little bit, and certainly the long-term trend has been positive, but are you seeing some near-term headwinds that are kind of preventing you from seeing that next uptick?

No. You're correct, Patrick, we've been a little bit flat here over the last couple of periods after a pretty steep increase. And as you know from history here, as well as all the other companies that you’ve covered, nothing ever moves completely in a straight line. But we're pretty excited about the future. We do think that the long-term trend in block trading is reflecting a decline. We expect that to continue, given the capital requirements and the dealer balance sheet constraints. We continue to promote the price improvements that investors are achieving on the MarketAxess system, due to the level of competition on the platform. We're really excited about the early signs of take-up in D2D trading, and the enthusiasm that the dealer community has for the enhancements that we're putting into place this quarter. As you know, D2D trading typically represents somewhere around 25% to 28% of TRACE. So when we put all of those things together, along with some of the enhancements that we're making to market lists and the regulatory trends, we feel pretty optimistic that the electronics share is going to continue to grow over the next 2 or 3 years. It's difficult to predict quarter-in and quarter-out, what that path will look like, but we like the outlook.

OK. That's fair. Next question. As far as the other categories fee capture, it sounds like you just had a really favorable mix shift. Is that a mix shift that you think is sustainable, going forwards?

Yes. Patrick, you're right. It was a pretty marked mix shift. Just to put it in perspective, we had the 3 main products in that category, which are emerging markets, high yield, and agencies. Just looking at 2011, you look at emerging markets and high yield, higher margin or higher fee capture products, they represented something like 46% or 47% of the volume in that category. We fast forward to the first quarter, and emerging markets and high yield were more like 55%. That's what really drove the significant out-performance in fee capture. It is sustainable at least. You heard some comments from Rick around, you know, where volumes are trending for April, again, very early in the month. High-yield TRACE volumes are down around 15%. Hard to gauge where emerging market values are. We've seen the same thing in agency volumes, where again, they're trending down from the first quarter levels. Where we're most excited really, it is around emerging markets anti-yield. We think that we can continue to grow market share there. Having said that, all three products are growing, so we're going to have to suffer a bit through the products mix shift as we go forward. At least where we are today, and what we're seeing in terms of increased client participation across product, again it's hard to say whether we can sustain this volume mix, but at least, in the near term it looks pretty favorable.

Then Tony, following up on the distribution fees, I think you said all told it is going to drop by about a million and a half in the second quarter. I think I have that roughly right. Then, most of that is going to be in the Eurobond distribution fees, but some of it's also going to be in the U.S. high-grade, does that sound right?

Yes, Patrick what I said is what we think it will drop based on what we know today, we think it will drop by about $1.8 million versus the first quarter level and think of it as a, sort of a 2/3, 1/3 split between the U.S. and Europe, U.S, being 2/3 of that number around $1.2 million and Europe being 1/3 or around $600 thousand. And what we have here in the U.S, there's two dealers that at the very end of the first quarter, very beginning of the second quarter migrated off of the fixed plan into the variable plan. Both were paying $200 thousand per month. You look at the second quarter impact it's around $1.2 million, and on the European side we do have the carry-over impact from the March 1st feed plan change. The impact there, quite frankly, is a little bit less than what we had anticipated. There are several dealers who have yet to migrate from paying $50 thousand Euros per month to $25 thousand Euros per month, so the impact in Europe is a little bit lower than what we had originally anticipated but $1.8 million in total impact. And Patrick, I say again, it's based on what we know today. I mentioned before that we're hoping to onboard some European dealers, all be it most of those we think will be all variable plan dealers. We have the same thing in the U.S. where we're in the middle of on-boarding a number of new dealers. There's also several dealers who are on the variable plan right now that may or may not upgrade to the fixed plan, yet to be seen. So there is some movement here in between plans and in the distribution fees. But at least, based on what we know today, that's the best guidance we can give for Q2.

All right, gotcha, and then one last modeling question, if I could. On the technology products and services revenue line item, it sounds like you changed your business model a little bit there in terms of how you charge. So is the $2.9 million that you put up in terms of revenue in the first quarter kind of the new run rate going forward?

It's a good question, Patrick, and it really is really the new sort of data point or baseline that we would suggest modeling off of. And there's 2 things there. It's not only the shift in the revenue model. So previously software sales were a onetime revenue event, so one time license event in the month that you booked the license and delivered the software you recorded the revenue. Beginning in the fourth quarter we began to shift to a revenue model, which we believe is beneficial long term increases reoccurring revenue, we think it's the right thing for the business. Definitely some short terms paying when you do that, so that is one item driving it. And really the second item, I mentioned in the prepared remarks, that the professional services fees were down versus the fourth quarter level. We are making some adjustments in our professional services focus areas, some geographic adjustments. And that's why when you look at Q1, we really think that would be the new data point or the jumping off point for tech services going forward.

Your next question will be coming from the line of Hugh Miller from Sidoti and Company.

I guess I had one in housekeeping about the tax rate. It seemed to kind of come in at a touch higher than what we've seen in the past, and just your expectation going forward for that.

Sure. Sure. There are lots of estimates that go into a tax rate, and the single biggest one is projecting out for the full year income by taxing jurisdiction. So you have to make some estimates going forward. You're also estimating out levels of permanent differences like meals and entertainment, which are non-deductible, and tax-free interest. You could also have discrete items that impact the tax rate, like a tax rate change or an audit inclusion. But when you look at where we are in the first quarter, 40.7%, and even if you compare it to the full year 2011, which was around 39.5%, it's definitely up. And 2 items in particular; the biggest one is the reduction in foreign source income. So for us foreign source income is predominantly coming out of the U.K. Within our provision it's taxed at 35%. You compare that to U.S. source income, which is taxed at something above 40%. So when you take federal plus a state impact, something above 40%. That mix of U.S. and foreign source income is a big factor, and the biggest factor in why our tax rate is up. The second thing is, at least right now, Congress has not extended or acted to extend the research credit. We have some pretty substantial expenses around our capitalized software and improvements that we're making to the trading platform around CDS and D2D and open trading and all the other initiatives we have on. But right now since Congress hasn't acted, we can't build that into the effective tax rate. So right now it is trending at the higher end of the range, but, Hugh, there's things that could happen if Congress acted on the research credit. There are other favorable permanent differences around option exercises that could influence the rate. But again, based on the projections right now, it looks like we're trending at that higher end.

All right. Great color there. And I know you guys reiterated your expense guidance for the year. I was just wondering if you could just give us a little bit of color on some of the geographic expansion efforts that you are taking upon you now and how that might influence costs, if there's much in the way of costs associated with that?

Sure, Hugh. I'll tackle the first part on the expense guidance. Let me give you a little more color on that. Within the expense guidance, it does include some of this geographic expansion that we have going on, predominantly in Brazil and in Southeast Asia. We reiterated our guidance, $107 million, $112 million for the full year. If you take that Q1 expenses, there's definitely a couple of one-time items, and some seasonal items in there that wouldn't make Q1, really, be a normal run rate. We did have the JP Morgan offering cost in there for $200,000. There's definitely some seasonal payroll taxes that do run through the first quarter. In order of magnitude on that one, for 2011, payroll taxes in the first quarter were $700,000 higher than Q2 through Q4. That's because we have the way FICO works, and we have restrictive stock vesting in the first quarter, that generates employer taxes. That's definitely a big seasonal item. Even to a lesser extent, on our advertising spend in the first quarter, particularly, around CDS, was higher than what we would have expect going forward. We also had a bad debt charge at our technology services group, which we hope to reverse in future periods. We have a very formula driven bad debt reserve policy right now, when something ages out not so gracefully, we end up reserving for it. When you tally up these items, it comes out to somewhere around a $1 million. If you take that $1 million off of the first quarter expenses that would get you a jumping off rate of something like $27 million for the quarter. Just in terms of overall guidance, if we make some adjustments to the first quarter, again, it gets you to somewhere around $27 million. Baked into our forward-looking estimates, that does include some of this geographic expansion; some of those expenses are already built in, even in the first quarter. We did open the office in Brazil, we have staffed up that office. We do have several people already on the ground in Singapore and Hong Kong. There's a couple of hires that will come on board as we go throughout the year. Again, baked into the guidance does include some of the geographic expansion, as well.

OK. Great color. Moving into the color and detail you gave us with regards to the shift in the 2 dealers on the U.S. high-grade platform, going to variable from the all-you-can-trade option. I was wondering if you’re getting a sense as to what's causing them to make that change, and I realize the next question will be dependent of volumes from them, but do you anticipate that shift is going to be somewhat revenue neutral do you know in the second quarter or not?

Let me clear up on the 2 dealers, because in one case, and this was one that we had previously flagged, it's a dealer that had ramped up, in response to the credit crisis several years ago, ramped up a debt. They have closed down the debt. So in that one particular case, we don't think that there's going to be a variable revenue offset. So that's one of them. And the second one that just migrated off the beginning of the second quarter, yes, we do think that there will be a variable revenue offset. The way many of the dealers work on the variable plan, there is a minimum commitment. It's not quite what they were paying in terms of their distribution fee, but we do think there will be a revenue offset. It might not be exactly one to one, but there should be a revenue offset for that one.

OK. Great. And then the last question I had was just with regards to, we've had a little bit of time since some of the news that hit the papers again about BlackRock's offering for a client-to-client trading platform. I was just wondering if you could give us your sense on any potential competition that you could foresee from that over time and your thoughts there.

Yes, I’d be happy to take that one, Hugh. I do think the discussions around the crossing network are reflective of growth and interest among all investors in promoting and establishing alternative sources of liquidity and moving toward a more open and electronic model for fixed income. And quite honestly, what BlackRock has said publicly about their intentions doesn't overlap significantly with what we do. And our own view is that any increase in electronic connectivity in credit markets will ultimately be a good thing for both MarketAxess and the overall market. So we have seen broad based support in the new initiatives that we have around market lists and some of our initiatives to complement dealer liquidity with open order books. We think we're on the right track there, and we are seeing very good early signs of support around those initiatives and some others that have come up along the way.

[Operator instructions] Your next question is coming from the line of Matthew Heinz from Stifel, Nicolaus.

I'm wondering if I can just get an update on some of the new initiatives you highlighted at the investor day, primarily revolving around the retail initiative and the client-to-client open trading.

Yes, happy to comment on those. The D2D initiative, as we've said in the past, is mostly focused on helping dealers clean up smaller balance sheet items, and this is directly related to the new regulatory capital requirements. In the old model, dealers were perfectly happy to sit on thousands of line items, many of which might've been 3 million and under, and wait until they found a client order on the other side. That has changed entirely, and there's more interest now in using any possible channel to move those inventory items along more quickly. So mostly what we're seeing is an interest in using MarketAxess, and specifically our list functionality, to move smaller line items, typically 3 and 4 million and under, out through the system. It serves as a product pipeline for lots of regional dealers that may have an end investor order that the large dealers are not seeing, and I think it's a very positive development for us. And it's a way that we can add value back to the dealers in light of the capital requirement changes that they are facing. On the market list side there was a lot of interest in opening up orders on the MarketAxess system throughout 2008. Market liquidity improved in '09 and 2010, and the vast majority of business went back to the traditional channel between investors and dealers. There's more interest again in complementing dealer liquidity with the open order book. We've made some enhancements to our market list functionality so that it's streamlined, and we believe will be more efficient for all market participants to use, and many of those enhancements and changes are going out this quarter.

OK. And then one follow-up on the BlackRock network. Just wanted to get your incremental thoughts on how that could impact you, not so much from a competition standpoint, but more on how it could impact the volume that BlackRock currently does on your platform?

What they’ve said again, Matt, is that they're focused on crossing block trades within their own portfolios. What you and others saw last week was clarification that they have pretty modest expectations in terms of the amount of business that can ultimately be crossed because of the level of fragmentation and illiquidity in most corporate bonds. So I think at the margin that they expect to get some benefit from this. They've been clear that they don't have any interest in this hitting the Street. They don't expect to become a broker dealer, so we view what they're doing as complementary to what we do on the MarketAxess system. And, as I mentioned, we think there are ways that we can increase electronic connectivity with all major clients in the years ahead.

OK. And then one quick follow-up to that. Have you seen any more major institutional clients that are implementing similar minimum sized requirements, like BlackRock has, that require certain smaller trade sizes to go through MarketAxess?

We aren't privy really, to the internal policies of any of our clients. I think it's pretty clear by the growth in our market share that more and more investors are embracing the notion that a greater percentage of their trading should be done electronically. We think that if we continue to deliver efficient functionality that allows them to access broader sources of liquidity through these changing times, that we will be successful in continuing to grow our share. We really, we don't have anything that we know specifically about internal policies but we can see very clearly not just in high-grade, but across almost all of our major product categories, that there is a trend toward greater electronic trading in credit.

Your next question is coming from a line of Niahm Alexander from Keefe, Bruyette & Woods.

If I could just, this on this kind of potential for other venues and to be out there. I mean, it's taken you a long time and a lot of client relationships to get to where you are. Didn't MarketAxess also at one point set up the functionality for buy side to match buy side and it's just very challenging. Is that fair? People have to kind of shield their liquidity and I'm just trying to get a sense of how difficult it really could be for somebody like a BlackRock or even competitors to come out and do something.

That's right, Niahm. When we do the deep dive on TRACE, even if you had access to 100% of the client orders during the day you wouldn't see a huge percentage of matching opportunities, and it is reflective of the nature of the securities in credit that they trade infrequently. In fact, a vast majority of corporate bonds that are reported to TRACE only trade one time per day. So, there's a limited universe of more liquid bonds that could create some matching opportunities. We think the Market List functionality and a few other things that we can do to compliment what we do with multi-dealer liquidity today are very positive steps in that direction. But you're right. The total matching opportunity, because of the illiquidity in the market, is relatively small.

OK. Fair enough. Thanks for clarifying, Rick. And then, if I could go to Europe, because you saw, I guess we have another step down in price, but for a very short time, it was very good over there. I mean, you're starting to see corporate issuance and finally this intermediation of bank lending and the stuff you showed us at the analyst day for the quarter were looking really good in terms of volume. Is that fair? When things normalized you did see there is potential for a significant lift to the revenue base there, just from the activity. Is it more kind of the industry activity or is it still more your market position right now that's kind of limiting the growth there?

Well, 2 things on that. We do think we have a much larger opportunity in Europe. We've said in the past that we need to do a better job delivering unique liquidity in technology solutions. We've been fast at work on that every quarter. We did see a significant turnaround during the first quarter, but the market over there continues to be very volatile and very sensitive to sentiment shifts around sovereign debt concerns. You would know more about that than we would, Niahm, but our guess is that's here to stay. This is not going to be solved in a quarter or 2, and that over the next 2 or 3 years we're going to be faced with these swings in investor sentiment that radically change the risk appetite and liquidity in the market. We'll see positive periods as we did during the first quarter. We are optimistic that all of the initiatives to provide backstop funding for European sovereigns will ultimately pay off along with the fiscal responses that are working their way through the European region. But it's not going to happen overnight. I think we will see ebbs and flows in sentiment and market activity over the next few years.

OK. Fair enough, Rick. Then, lastly, on the revenue side again. You are seeing phenomenal growth in the revenue line, helped by the emerging markets and the high yield. That seems to be where a lot of the flows are going this year as well. You've had to pick up in the rate capture, do you think that it's within your sights that maybe that product category could at some point exceed the core kind of high-grade category in the next two to three years?

Well, we're pleased with the growth. If you're looking for a forecast of where that is going, I think the best we can do is be transparent with you on the trends and the fee models as the other category has consistently been outstripping the growth percentage in volume in the high-grade category. We do like the fact that we're seeing the market share trend coming through across more products more clearly now than we may have 2 years ago. As we've said many times, you know, with EM and a high yield, the market is at an earlier stage in embracing electronic trading, so we do think there is a significant growth opportunity there. We think we're on the right track.

[Operator instructions]

It sounds like there are no further questions. So thanks very much for joining us this morning, and we look forward to talking to you next quarter.

Ladies and gentlemen, that concludes today's conference. We thank you for your participation. You may now disconnect. Have a great day.