MarketAxess Holdings Inc. (MKTX) Q3 2012 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Later, we will conduct a question-and-answer session. [Operator Instructions] As a reminder, this conference is being recorded November 2, 2012. I would now like to turn the call over to Dave Cresci, Investor Relations Manager at MarketAxess. Please go ahead, sir.

Good morning, and welcome to the MarketAxess Third Quarter 2012 Conference Call. For the call, Rick McVey, Chairman and Chief Executive Officer will review the highlights for the quarter and will provide an update on trends in our businesses, 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 belief regarding future events that by their nature are uncertain. The Company’s actual results and financial condition 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 third quarter 2012 results. Earlier this morning, we’ve reported third quarter results, which show records in a number of areas. Despite software overall market volumes during the quarter, revenues were up 4% to $48.3 million driven by an 18% increase in variable transaction fees. Diluted EPS improved to a record $0.36 compared to $0.34 one year-ago. Our estimated U.S. high-grade market share reached a record level of 12.5%, compared to 11.6% in the third quarter of 2011. Combined emerging markets and high-yield volumes were up 35%, compared to a year-ago and reached a new quarterly record. CDS volume was up 51% sequentially and represented our best quarter ever for CDS trading volume. We are increasing our investment in Europe. Earlier today we announced that we have agreed to acquire Xtrakter Limited from Euroclear. Xtrakter will expand our regulatory transaction reporting, fixed income trade matching and data services for European clients. Slide 4 displays some details on our quarterly results and financial strength. We are investing heavily in new markets and technology solutions that expand our future opportunity set. In spite of these investments, we continue to report growth in operating income and EBITDA. September year-to-date EPS was $1.05 up 14% from $0.91 in the same period in 2011, and year-to-date EBITDA is $71.2 million. Free cash flow was over $61 million for the trailing 12 months, and our cash and securities balance at September month end was $204 million or $5.44 per diluted share. Our strong cash flow and cash balances will allow us to complete the Xtrakter acquisition from existing cash balances. The board has approved a regular quarterly dividend of $0.11 per share. In addition, during the quarter, we made some modest share repurchases pursuant to our existing share repurchase plan. Slide 5 provides an update on market conditions. New issuance volume strengthened in the third quarter from softer levels in the second quarter. TRACE volumes have also bounced back strongly in September and October after a weak month in August. We currently expect full-year TRACE volumes to be around the same level as the last 3 years. Taxable fixed income fund inflows continue to be very strong due to the search for yield and favorable asset class diversification. The impact of the dealer balance sheet constraints continues to be visible in the decline in block trading as a percent of overall high-grade TRACE volume. Block trades represented 38% of total trades volume in the third quarter, down from 43% in Q3 of 2011. We view this trend as favorable for our business, since we typically had a higher market share in smaller non-block trade sizes. Slide 6 summarizes the trading volume across our product categories. Overall, global volume in the third quarter was up 5% year-over-year to $138 billion. Q3 high-grade TRACE volumes were down 2%, compared to a year ago, and down 6% sequentially. The 5% increase in our U.S. high-grade volume to $86 billion was due solely to the market share improvement. Growth in investor orders was the principle driver of the market share gain. Hit rates especially for investor buy orders declined during the quarter reducing overall high grade market share gains. Eurobond volumes were down 21% from the third quarter of 2011 to $6 billion. In spite of the regional softness in Eurobond trading, our cross regional business from European investor clients into emerging markets and U.S. high-grade bonds grew 23% from the prior year period. Combined volume from European investors is flat versus the year ago period. Other product category volumes were up 9% from the third quarter of 2011 to $46 billion in the third quarter of 2012. Combined emerging markets and high-yield volumes increased 35% from the third quarter of 2011 to a new quarterly record. We believe these gains were primarily due to market share gains as high-yield TRACE volume was down 2% versus the prior year period. As you may recall, we are not reporting CDS volume in our monthly volume release. However, CDS volume was up 51% sequentially from the second quarter and reached a new quarterly record. Overall, October volumes were negatively impacted by Hurricane Sandy and a lack of trading on Monday and Tuesday of this week. Excluding those 2 days, our total average daily trading volume was similar to the very strong results in September. October estimated U.S. high-grade market share was in line with September while EM and high-yield average daily volumes hit new records. Slide 7 gives an update on our new initiatives. We remain focused on expanding our U.S. high-grade market share. We believe that structural changes in the credit markets caused by regulatory reform will drive electronic market share higher in credit markets. We are focused on growing investor order flow and expanding our electronic trade matching solutions, less block trading and smaller trade sizes are already increasing demand for electronic trading. Our dealer-to-dealer platform continued to gain traction in the third quarter. D-to-D high grade volume increased 49% from the second quarter with 58 different dealers trading. We will roll out additional functionality for the D-to-D market in the coming quarters. Our open trading solutions are designed to increase trade matching opportunities between investors. Investors submitted 22% of orders to the market list open order book during the quarter and October will show another significant increase. While still a small part of overall trading volume, investor trade matches are growing through market lists. We recently launched our client access functionality to allow clients to anonymously post indications of interest alongside dealer inventory. We have the technology ready for essential limit order book if investor and dealer demand grows for live trading. Slide 8, provides an overview of the Xtrakter business in the acquisition rational. Earlier this morning, we announced that we will acquire Xtrakter Limited from Euroclear. Xtrakter is a market leader in regulatory transaction reporting, fixed income post trade matching and market data services. We are very excited about the opportunities presented by this acquisition. Xtrakter’s business is highly complementary with MarketAxess and will provide us with an expanded set of technology solutions for European clients. The Xtrakter business serves over 200 dealers and other institutional market participants in Europe currently. The acquisition will more than double our European revenues and employees. Upcoming European market regulations including MiFID II, will increase demand for trade reporting and industry moves toward T+2 settlements will increase the demand for trade matching solutions. We expect to register Xtrakter as an Approved Publication Arrangement or APA and we will work with the industry on the upcoming requirement for a consolidated trade tape for fixed income. We believe that these data in post trade services represent an ideal fit with our existing electronic trading and data capabilities. Our value proposition for clients is driven by real-time data, electronic trading and straight-through processing tools. We believe that the acquisition of Xtrakter represents an important step to deliver a unique front to back electronic trading service including real-time data, electronic trading, regulatory transaction reporting and trade matching services for the European financial markets. Now, let me turn the call over to Tony, to provide some financial details on the Xtrakter transaction and our third quarter financial performance.

Thank you, Rick. On Slide 9, we have summarized some financial highlights for the Xtrakter transaction. The purchase price is GBP26 million in cash. Together with approximately GBP2 million in transaction costs, the total cost of the acquisition is estimated to be around US$44 million. Closing of the transaction is continued on obtaining regulatory approval from the UK financial services authority and satisfaction of other customary conditions. We are working through the regulatory approval process and currently expect to complete the transaction in the first quarter of 2013. Xtrakter’s 2011 actual and 2012 projected revenues are both approximately $24 million. We expect that near-term revenues will be consistent with this run rate and that new opportunities to expand trade matching and data services would be realized in 2014 and beyond. We expect the acquisition to be approximately neutral to earnings per share in 2013, including the impact of the amortization of intangibles and the opportunity cost of funding. We do expect to make certain software, hardware and infrastructure technology investments over the next several years and that revenue synergies would drive accretion into 2014. Slide 10 displays our quarterly earnings performance. Revenues of $48.3 million were up 4% from a year ago, principally due to an 18% increase in variable transaction fee commissions, offset by lower distribution fees and lower technology products and services revenues. The year-over-year decline in technology products and services revenues was largely due to lower professional services fees. We narrowed our areas of focus and made some professional services headcount adjustments during this year. Total expenses were $27 million, up 11% in the third quarter of 2011 and down 2% sequentially from the second quarter. I will touch on the expense variance versus 2011 momentarily. The effective tax rate for the third quarter was 36.4%. The year-to-date effective tax rate is now 39.2%, compared to 39.6% last year. During the third quarter, we benefited from a state income tax apportionment methodology refinement. The impact of this change in estimate related to prior years amounted to approximately $0.01 per diluted share. Our diluted EPS was $0.36 on $37.5 million diluted shares. Shares repurchased during the third quarter did not materially impact the diluted share counts. On Slide 11, we have laid out our commission revenue trading volumes and in fees per million. Distribution fees were $14.6 million during the third quarter of 2012, down 10% from the third quarter of 2011 and consistent with the second quarter level. The year-over-year decline resulted from the first quarter 2012 distribution fee reduction on our major euro bound fee plan. We currently expect that fourth quarter distribution fees will be consistent with the third quarter level. U.S. high-grade fee per million were $203 in the third quarter, up from $189 in the third quarter of 2011 and consistent with the second quarter level. U.S. high-grade fee capture continues to benefit from the low yield rate environment and the longer average years to maturity of bonds traded. The other product category fees per million were $216 in the third quarter of 2012, up from $175 a year ago and from $205 in the second quarter of 2012. Higher fee capture emerging market and high yield volume accounted for the increase and represented 60% of the other product category volume in the third quarter of 2012 compared to 48% one year ago. Slide 12, provides you with the expense detail. The 11% year-over-year increase in total expenses was driven by a higher incentive bonus provision of $1 million, and $500,000 of Xtrakter deal costs. By way of reminder during the third quarter of last year, we’ve reduced the year-to-date bonus provision. Excluding these items, third quarter expenses were up approximately 5% year-over-year. Expenses for the first 9 months of 2012 were $83 million. Assuming a first quarter 2012, 2013 close date, we would expect half of the Xtrakter transaction cost to be recognized in the third and fourth quarter of 2012, and the remainder in the first quarter of 2013. Under this scenario, we believe that our full year 2012 expenses will be towards the upper end of our original guidance range of $107 million to $112 million. Excluding the Xtrakter cost, full year 2012 expenses would be near the middle of that original guidance range. On slide 13, we provide balance sheet information. Cash, cash equivalents and securities available for sale as of September 30, were $204 million compared to $248 million at year end 2011 and $238 million one year ago. Cash return to shareholders through share repurchases and our quarterly dividend over the past 12 months amounted to $96 million. We spent $1.5 million in the third quarter to repurchase 49,000 shares under the share repurchase plan. Capital expenditures totaled $9 million for the first 9 months of 2012. We recently had a successful deployment of our replacement disaster recovery data center and continue to expect that full year capital expenditures will be near the high end of the original guidance range of $8 million to $11 million. There was no change in our capital structure during the third quarter and we continue to have no bank debt. Now let me turn the call back to Rick for some closing comments.

Thank you, Tony. We are seeing broad-based trading momentum across many product areas including U.S. high-grade, emerging markets, high-yield and CDS. We believe that we are on the right target with our open trading initiatives to develop alternative sources of liquidity for dealers and investors. We are enthusiastic about the pending acquisition of Xtrakter and the additional product capabilities it will bring to our European dealer and investor clients. We see growing momentum in our business and a larger opportunity set ahead. Now I will be happy to open the line for your questions.

[Operator Instructions] And the first question comes from the line of Patrick O’Shaughnessy from Raymond James.

First question on the deal that you guys did, can you elaborate maybe a little bit more on some of the - the revenue synergies, so many some of the cross-selling opportunities that you have with that deal and then maybe some of the cost synergies down the road, I think you kind of implied maybe 2014 for that?

Sure, Patrick. We are happy to obviously, we value the deal based on the Xtrakter core business as it exists today. So when you look the details around the MiFID II regulatory changes, and the industry move toward T+2 settlement, we do believe that there are 2 potential areas of synergies in bringing our capabilities and clients together with Xtrakter. The first is with their market leading position and regulatory transaction reporting today. They do have a broad base of transaction data that we believe will become an important part of the infrastructure as the European markets move to approve publication arrangements and eventually a consolidated trade tape. So we do think that this is an important part of the business expansion for Xtrakter, and obviously with all the work we’ve done in the MarketAxess bond ticker and the TRACE reporting in the U.S., we think it did perfectly with our value proposition for the overall electronic trading business. The second part of it is really around the trade matching services, and as dealers and investors are forced to comply with shorter settlement periods, real-time trade matching will become more important to make sure they can meet those obligations to settle trades on a shorter time cycle. So we do think in that area too given the position that Xtrakter now has with regulatory transaction reporting, there is an opportunity for us to expand those trade matching services and in some scenarios include more investor clients in the trade matching business.

Okay, that’s helpful. I guess a follow-up question, so this is probably the first deal that I think I remember you guys doing in quite some time. Do you think there could be more deals following this? So I guess you guys may be more inclined to use some of your extra cash to do deals at this point in your growth cycle or do think that this might be it for a while?

Yes, I think as we’ve said many times Patrick, if we can find businesses that fit as well as Xtrakter does with our strategic vision and our service to our clients, we will continue to be very interested. As you know, we have been disciplined, we haven’t seen that many deals that can compete with our organic growth opportunities over the last 4 or 5 years. And right now this was a transaction that fit us perfectly and if we see more of these along the way, we would be happy to take a very close look.

Okay, great. And then one last one if I could, your U.S. distribution fees, I believe went up a little bit $300,000 quarter-over-quarter, did you send up another dealer, or that’s just kind of an accounting thing?

Patrick, on that one, towards the end of the third quarter, we did have one of the dealers on the all variable plan, move up or convert to the fixed plan. So, that accounted for most of that distribution fee difference in the U.S.

Then can we expect to see a little bit more sequential increase than in the fourth quarter?

I said that will be largely consistent distribution fees that'd be consistent with the third quarter. There could be a slight uptick for this one dealer, yes.

The next question is from the line of Niamh Alexander of KBW.

Hi, just on the cash again, I guess this is a time, ahead of all the tax changes to our - folks are trying to figure out, who is going to pay a special dividend ahead of taxes and what all that means. Can you help me understand, you’ve done this deal, I still think you have excess cash outside of this deal, but am I thinking right that you probably want to keep some powder dry here because they could be some opportunities with all this regulatory changes and some fall outs. And as well as, maybe Tony, you would update us, I know certain levels it’s a may be a return of capital if you did do a certain place dividend, so therefore impending tax changes might not make a difference?

Sure, sure. Niamh, you’re right. We still have even after the Xtrakter acquisition, we’ll still have a lot of cash and even looking at it right now, if we payout $44 million or so for Xtrakter and even after paying out the year-end bonuses, it’s pretty reasonable to expect that we have something north of $150 million in cash. And even at that time, still a strong balance sheet, unlevered, lots of debt capacity, still generating lots of free cash flow. We still think that we can maintain the capital management policy and still act accordingly along with dividends and share repurchases. We still have that flexibility. When it comes to things like special dividends, I will tell you right now it’s probably a little less likely having done the Xtrakter acquisition, but we will continue to access whether we want to do something around a special dividend or expand the stock repurchase plan. And there is still a lot of uncertainly around what’s happening with the expiring tax rules, so we’ll continue to take a look at it with the board in the fourth quarter. But we do still have the capacity, I think you’re right, so your observation on and the question before from Patrick also around acquisitions and are there others out there. I think we do want to maintain a strong balance sheet, strong cash position for those opportunities that could come along.

And then, if I could, what you’re beating it’s at the rate card because of this continued strength in high yield and the emerging markets. Great to see. Can you give us some more color. You think you’ve gained some share because the overall industry volume is down. Have you gathered new customers, is it the same customers, the European customers trading, what is that do you think that’s driving overall market growth? And then can you give us an update on kind of the go local in the emerging market. How is that going?

Yes, happy to do so. I think we are seeing a broader base of clients active in the EM products and high yield products. It tends to be the people that have been active with us in the high grade product that are increasing utilizing the trading capabilities and the transaction services for EM and high-yield. And the industry volumes have been kind of flat. Clearly the EM and high yield traffic is partly driven by the search for yield, but we are very pleased that we are starting to see a significant pickup in market share that’s traded electronically and more comfort from investors and dealers in doing so across the MarketAxess platform. With respect to local markets, we are on track with our plans for the year, we are signing up more Latin American clients that can be active not only in the Latin American local markets, but also on our U.S. and European platforms. We are increasing the number of dealers that are available for market making in the local markets. Not a huge part of what we’re doing in the EM business overall today, but we’re happy with the progress and we think it will have an impact down the road.

Okay, fair enough, thanks. And then if I could move back to your high-grade market and you’ve rolled out the list functionality. Thank you for the data points you’ve given us in the presentation on the increasing trade count. Can you just maybe give us an update or some more color about how that’s going? And then secondly in the high-grade, just to go back to all the things that we felt moved your stock earlier in the year, but headlines about a new potential competitive venues, have you had any clients - have you been reaching out, have you had any clients kind of data switching or finding more matches on these venues or by the way we want you to cut your fees in MarketAxess, because we have an alternative?

Yes, I’m happy to address that, I think this path involves a significant shift in behavior for investor clients. In my own views it will take time to develop. And we’re very pleased with the foundation that’s being built on the MarketAxess system. We obviously have the largest base of investor electronic order flow in credit in the U.S. markets currently. And virtually every week, we’re seeing an increase in the number of orders that are going into market lists. There was a significant step up as I mentioned in the third quarter. There has been another big step up in October. So I think investor willingness to expose orders more broadly and get orders into market list is a very encouraging sign. On the other side, every week we are seeing more investor set up watch lists, so they can be alerted when orders come into the system that may fit with their portfolio needs. And that is starting to trigger more investor-to-investor trade matches. As I cautioned earlier that too is in early stages and it’s a tiny part of what we are doing, but I think if you look at the number of clients that are involved, the number of orders that we are seeing, the trade matches, all of these are encouraging signs and we think are complementing the service that we provide to expand beyond just purely the dealer liquidity pool. With respect to the competition, we don’t really have anything new there, obviously, there are a number of initiatives out in the marketplace. It’s our understanding that none of them are seeing instant gratification. In many cases, we continue to believe that they do not compete directly with what we do. And I think our independence and the size of our dealer and investor installed network give us a very large advantage, as long as we continue to innovate and add new technology matching solutions to the existing platform on MarketAxess.

Okay. So there are no inclination or push back on the fees, other than the unusual?

Obviously, we have not made any fee changes. As Tony reported earlier, the fees remain constant on the system and it’s really product and maturity mix that is moving the fee capture around.

The next question comes from the line of Hugh Miller, Sidoti & Company.

Just I guess as a follow-up on kind of the improvement in the use of order lists that you guys have talked about. Obviously you guys have tried to add some functionality there. But is there any particular reason you are hearing from clients as to that the change in sentiment there and why they are more willing to kind of use that and kind of focus on the client-to-client cost matching now relatively to times past?

Yes, I think that our constraint on market liquidity is causing investors to be much more proactive about developing alternative sources of liquidity. And even though as you know, TRACE volumes are likely to be flat again this year overall. If you look at the turnover of outstanding corporate debt, turnover is declining, because the base of outstanding debt is up about 28% or so over the last 4 or5 years, so flat TRACE volumes reflect a decline in overall market turnover. And if that continues, it becomes more and more difficult to create alpha in active portfolio management strategies. And investors I think are moving with their fee to develop new solutions to address that problem, created primarily by the regulatory changes that are taking place in the industry. So we see tremendous support, not just in what they are doing with market list, but also in the input that they are providing to us, and various ways that we can help to address the problem. Obviously as I mentioned earlier, the declined in block trading, may be positive for electronic market share in credit markets. It’s a very difficult challenge for large money managers that are trying to move larger positions through the market. So I think you do see that there is a broad recognition among institutional investors and dealers that they need to act differently to develop new solutions. And we’re very pleased to see the breadth of support that we have around the new functionality that we have been developing.

Okay, great color there. And I guess, in talking about some of the comments you made about market share and obviously with some of the challenges to the hit rate during the third quarter, anything touch of an headwind. I was wondering if you could just make any commentary about the hit rate you’re kind of seeing in October. And I know you typically tend to have a seasonal benefit on the market share towards the latter part of the year as we see even more trading of the non-block size trade. So, I mean is that something you are still confident in as we think about the fourth quarter on your share?

Yes, let me address the hit rate question and then Tony can talk a little bit about the seasonal impacts on share typically for the fourth quarter. But oddly enough we have a shortage of credit bonds in the market currently and you can see that with the demand that exists for new issues as they come to market and also the demand for secondary paper. And dealer inventories as you are at 10-year lows. So we are seeing the biggest gap currently in our hit rates for bids wanted versus offers wanted that we have ever seen. And as a result offers wanted are having a very difficult time getting filled and that is where the overall hit rate on the MarketAxess system has declined somewhat. And as I mentioned earlier, we think that that has held back our market share gains, because the investor order flow growth continues to be very strong. Typically, these imbalances do get corrected over time, but that’s the short-term situation that we are in. And in a healthier environment, we would expect not only the growth in investor order flow. We would also expect to see the hit rates back above 70%. And I think in a more balanced market, that’s what we continue to expect.

And then just a follow-up just on October share and how that relates to the full fourth quarter, just looking back over the last several years, and if history does tell us anything, the fourth quarter is typically our strongest market share quarter, and just looking back over the last several years, it’s anywhere from 60 basis points to 130 basis points higher than the third quarter. Now it will be a typical pattern for us, but even within the quarter, we can look at market share by month. October is always the lowest market share. As everybody knows, December is always the highest market share month during the quarter. So, if history proves out here, we are confident we can get this market share number back above Q3 levels and back in line with the historical growth you’ve seen from Q3 to Q4.

Okay, great color there. And one house-keeping question, I do appreciate the additional detail for the Xtrakter deal. As we think about the revenue that you guys have mentioned there, roughly about $24 million, is that all in kind of the revenue areas with the technology fees or will some of that actually flow through on the European high grade based on some of the trading solutions or how should we think about that?

We haven’t settled on exactly where we are going to report the Xtrakter revenues. I think if we keep with the current view, it would end up following down in the data area and any exhaust that we get from the trading on the Eurobond onside, would flow up into the product category. We haven’t quite settled on how we’re going to show that right now.

Okay. And last question I had was just, obviously, I think, the noise around the elections has kind of pushed off progress made on any type of CDS regulation, but can you just give us an update on where things stand now and what you’re hearing in your expectations for timetables?

Sure. I’d be happy to and I think you’re right. The elections have sidetracked things temporarily. I was invited to a small gathering with Chairman Gensler for about a week ago with the group of likely SEFs. And in that meeting he said that the CFTC still hopes to finalize the SEF rules by the end of this year. He acknowledged that they do have a busy calendar over the next few months. But he said that the final rule set was now on the hands of the commissioners and that they would be studying that carefully. And that was his hope that they could come to consensus and finalize those rules by the end of this year. We’ve heard less from the SEC with respect to their timetable for the securities-based SEF rules. I think we would all be guessing, but most people think at this point, it’s likely to be later in 2013 when we see the SEC securities-based SEF rules.

The next question comes from the line of Matthew Heinz from Stifel, Nicolaus.

Just have a question on the hit rates in the market share trends in 3Q. I guess I’m just wondering if you’re seeing some of that new issue backlog. I think we saw some record issuance for this time a year in 3Q. Just wondering if you’re seeing some of that backlog clear out, this may have weighed on hit rate share a little bit in 3Q and whether you expect that new issuance to begin and turning over in the secondary market in 4Q, the lack of liquidity is out there?

Yes, October was obviously another pretty good month for new issues. The activity is higher than it was in the second quarter and you’re absolutely right to point out that when the new issue calendar is active, typically our share falls a bit as the focus goes to the new issue allocations and trading that’s being conducted on swap with the underwriters. We would typically expect as we move later into the fourth quarter that the new issue calendar does slowdown. And that’s one of the factors that I think causes our share through the fourth quarter to typically improve. And then when you flip into the New Year, the first quarter is normally very active quarter for new issues. I think part of the question is on the timing. We are seeing pre-refunding and early rollovers and issuance from various corporations because the yield rate environment is so attractive. So there may be some front loading of new issue supply coming to the market now, that all else equal would cause supply to be a little bit less in the future periods.

Okay. And do you think there’s been any kind of pull forward of new issuance that typically takes place in the first quarter and generally weighs on your share in that period?

It’s hard to know. The new issue numbers are strong, but they are not off the chart, so I would be hesitant to say that we think that the activity in the last few months has pulled anything meaningful out of the first quarter calendar.

Okay. And then if I could just a follow up on Xtrakter, you said it would be EPS neutral in 2013, including amortization, but I’m just wondering how much accretion you might expect on a cash basis? And then also how much did you bake into your valuation in terms of maybe the regulatory catalysts with MiFID II and the consolidated trade tape in Europe?

Sure, so Matt's just taking the first part of the question on the cash flow piece of it. In the prepared remarks, I mentioned that it would be neutral to earnings in 2013. And that’s after the amortization of intangibles. And we haven’t finished the appraisal work there, yet, but you just sort of rule of thumb for acquisitions like this it’s something like 25% of the purchase price over the tangible assets. It could fall into amortizable intangibles. And again, we haven’t finished the work but that number could be something like $1 million U.S. in terms of amortization of intangibles each year. But I do caution, what we’re doing here, we will be investing in people, and systems, and infrastructure mainly on the technology side. So when we look at over the next 4 years for Xtrakter, it’s based on our current view. It could be something like $8 million sterling or $9 million sterling that will be investing, and again technology investments around people, systems and infrastructure over the next 4 years or so. And some of that is capital spending, for example we will be building out some new data centers and investing in technology system. So some of that is capital spending, a lot of that is front-end loaded, so purely looking at it from a cash flow standing point. We do not expect it to be a significant contributor to free cash flow.

On the second part of the question, Hugh, as we mentioned earlier, we valued the Xtrakter business based on its core business today. As you would expect, we looked at a number of different ways with respect to multiples, comparable transactions, DCF model. But we are attracted to the potential synergies that may come from this deal down the road, which you alluded to as the MiFID II regulations take hold probably later in 2014. And with over a 4 million transaction regulatory reports per day going through Xtrakter and the leading position in fixed income trade reporting specifically, we really like being in the center of that. And we think we can expand our services to our European clients, and certainly operating in a real time environment for trade reporting and transactions is what we do today. So that’s clearly part of the appeal to the transaction, but our valuation was based on their core business as it exists today.

The next question comes from the line of Jillian Miller from BMO Capital Markets. Go ahead, sir.

So I just wanted to ask one more question on Xtrakter, I’m sure you guys are getting sick of hearing it. But when I hear consolidated tape that makes me think of kind of like a utility business and something that wouldn’t necessarily be generating the type of margins that you guys are used to in your other businesses. So I just - I’m just sure I’m just missing something some nuance of the business model, but maybe you could just give us a little bit more detail about that?

Ron, talk about the margins and I will talk about the…

Sure, sure. Jillian, just looking historically at this business standalone, the operating margins have bounced around a little bit. But in recent years, they’ve been in that 15% to 20% range. And we will be making as I mentioned, making some investments here in the near-term, so that will cause some depression in operating margins, but we certainly think, once the revenue synergies kick in, and once we come from these new technology investments drive some efficiencies into the business. We do think longer-term that we can get those growth rates and margins. If could be consistent with what you are seeing out from us, out of the Xtrakter standalone business. And that would be excluding the potential synergies and impact on trading on our European platform. So, Rick mentioned one of the important elements is integrating what Xtrakter does and can do into our trading platform in Europe. And there, we do think that there is a significant benefit there if we have strong form of price discovery built into the trading platform would give us an advantage.

And, Jillian, just looking back at the experience in the U.S. there was a significant uptick in the electronic trading market share of following the implementation of the TRACE tape in 2002. And I do think all the quality real-time price data is critical to getting investors and dealers more comfortable with increasing electronic trading share. So, we do believe that this is a core part of our future European product offering, again in line with the regulatory changes. That really getting our quality real-time product fully integrated in what we do in electronic trading is likely to be positive for the electronic trading share in Europe.

Okay, that makes sense. Then one other thing I want to ask you guys about, TradeWeb last month added, I guess a dealer-to-dealer portion to its electronic trading platform for CDS seems to be getting some initial traction and there is a lot of buzz about it. I just want to get your thoughts on whether, opening up your dealer-to-client model to dealer-to-dealer as well might be something you’re looking at and I guess just more broadly in how you're looking to position yourselves competitively in the evolving CDS electronic trading market?

Yes, we’re not exactly sure exactly what’s the buzz of activity is on other competitor platforms for CDS. We saw some of the press reports on D2D that you alluded to. Certainly we’re wide open to that. We have obviously expanded our bond offering to dealer-to-dealer business because of the demand that we have from existing bond clients. And we would certainly be open to doing that with respect to the CDS platform as well. And it is early days. We’re going to have some fairly significant regulatory changes for the CDS market in the upcoming year or 2. And I think a lot has to be determined in terms of the competitive landscape around SEF’s for both indices and single names and in the D2D and the client-to-dealer market. We do feel very good about the functionality that we’ve been adding to our CDS system. The breath of participation that we now have and the independence that we enjoy as a public company, which is also one of the key criteria outlined in the SEF proposed rules.

Okay, thanks. I mean, with respect to the SEF proposed rules, it looks like there is some delays coming and - but potentially if Romney is elected, we could see more than delays that could be - that the SEF rules are fundamentally changed watered you’re down or even eliminated. So I just would like to get your thoughts on what that means for the CDS initiative? I mean is this a viable business that it still have the same type of growth potential absence SEF rules or in a scenario where the SEF rules are materially different?

I think that’s a good question. I agree that there is a bit more uncertainty about the timing now then what we would have expected 6 months ago. And our view is that the benefits of electronic trading within fixed income securities and derivatives are coming through in the market share gains and the investor behavior changes that we see across multiple products. And eventually CDS will follow suit and move in that direction as well. The pace of that adoption clearly will depend on the regulatory changes. And I continue to believe that when it comes to the swap rules that there seems to be bipartisan support. There might be some differences in the rule side and the timing of implementation. But it’s our view that in most scenarios you’re going to see them continue to move forward with finalizing and implementing the rules for SEFs and security-based SEFs.

Okay, thanks. And just one final one from me on the incremental margins, I mean they are going to be lower this year and I know you are investing a lot in CDS and some other new initiatives, but just wondering as we look to 2013 especially given some of the investments you mentioned related to Xtrakter, Should we be back at that 60% to 70% type of incremental margin level that we are at kind of before this year or going forward should we be more around kind of the 2012 level?

Yes, Jillian, on the incremental margins, our view continues to be and this would be absent the impact of Xtrakter that, we still can generate incremental margins in that 60% to 70% range, albeit we haven’t yet demonstrated those sorts of incremental margins this year, but we still believe that over the longer-term for that core business we can still generate those types of incremental margins. Then obviously it’s going to be an impact once we roll in Xtrakter here. We’ll try and give you more visibility on that as the months go on. The deal-- hopefully we’ll closing the first quarter, we’ll have more to say about it and more to say about the financial impact and outlook for 2013 at that point in time. But again, just thinking about the core business, even with the investments we’re making, if we can continue to drive that top line revenue growth, we still feel good about those longer-term incremental margins in that 60% to 70% range.

The next question is from the line of Howard Chen of Credit Suisse.

I think the financials you present that are helpful and there has been a lot of questions. But could you just give us a sense of what’s growth has been like over the past few years under the Euroclear ownership before accounting for integration cost, amortization and your synergy expectations?

On the - Howard, on the top line revenue numbers, you look back over the last or 2 or 3 or 4 years under the Euroclear umbrella. Xtrakter’s revenues have been around US$24 million, US$25 million, something between GBP15 million to GBP16 million. That’s been a pretty consistent revenue number there. And again, I mentioned before, on the margin side, they’ve bumped around a little bit, but thinking about sort of a normalized margin, it’s been in that 15% to 20% range.

Great, that’s really helpful. Thanks Tony. And then, one of the last meaningful transactions I recall you doing was Greenline that helped you bolster your technology business and fixed connectivity. Rick, maybe just as it appears down the road. Can you just update us on how growth within that portion of the business has been and how returns have been versus your initial expectations upon deal announcement back in 2008?

Greenline, obliviously, we are reporting within our technology business, so it’s been quite visible. The transaction, much like Xtrakter, was a bolt-on to our existing business. We feel good about promoting fixed standards throughout the fixed income industry and the work that we are doing with clients there. It’s obvious to see that the growth rates from Greenline have not matched the core business, but perhaps that’s because the core business growth rates exceeded most expectation over the last 4 years. So we still think that fixed certification software solutions are valuable piece of the overall offering and fit with our business objectives, but the growth rate there has not been as strong as what we’ve seen in the core.

Okay, great. And then just final one, just a follow-up on what you briefly touched on before regarding issuance levels and your market share. You spoke in the past - right post of new issue good to that business might still be done over the phone. Has that evolved or changed at all with all the structural and cyclical issues going on in the credit markets and is that any different in your experience in the high yield market versus the U.S. high-grade market?

I think the impact is similar and certainly, Howard, you are familiar with that dynamic. When a new issue calendar is active all of the focus in the credit markets is on that calendar. And often times, investors have large block swap trades to do to clear room to purchase new issues and it’s highly likely that those transactions are going to be conducted with the underwriters that control the allocations on the new issue. So there is a slice of that secondary market in a TRACE volume that is directly attached to the new issue supply. And when the new issues are more active than not, that will else equal will have a dilutive effect on our overall share. And I think the key thing is if you look over time and this is why we think quarterly measures of market share are probably a better guide than looking at monthly stats, but if you look over time the share gains continue to be very visible in our business. And then based on everything we see going on with investor orders across products, we think that trend is still very much intact.

And the next question is from the line of Niamh Alexander from KBW.

Hi, sorry. Just one follow-up on Xtrakter and I know you said it’s going to be earnings neutral next year anyway and you’re hoping for some accretion in 2014. But for me it’s like the leading with the trade analytics has been so important for you to kind of build the business especially with liquidity so fragmented. So I don’t consider it to be utility, but to understand better in the European context, does TradeWeb competitor over there, do Bloomberg, do they have to use that data, does everybody have to kind of report their trades there yet? Or is it something kind of hoping for as a rule kind of get more clear?

The primary clients of the regulatory transaction reporting services of Xtrakter are the dealers need.

Okay.

So irrespective of where they transact their bond trades in Europe, they would be reporting them in many cases through Xtrakter. There are other approved regulatory mechanisms in Europe today, but the leading provider of those services for the fixed income markets in Europe is Xtrakter.

So your competitors would likely have to have access to that information as well?

I suspect that in terms of some of the data contracts that exist within Xtrakter, some of the competitors that you mentioned are currently utilizing that data, yes.

Thank you. We have no further question in queue. [Operator Instructions]

Well, thank you very much for joining us today. And we look forward to talking to you again next quarter.

Thank you, ladies and gentlemen, that concludes your conference call today. You may now disconnect. Have a great day. Thank you.