Second Quarter 2014 Financial Highlights
- Operating Revenue of $143.9 Million Compared With $150.8 Million, Down 5 Percent
- GAAP Net Income Allocated to Common Stockholders of $42.6 Million Compared With $45.5 Million; Diluted EPS of $0.50 Versus $0.52, Down 4 Percent
- Adjusted Net Income Allocated to Common Stockholders of $42.6 Million Compared With $47.0 Million(1); Adjusted Diluted EPS of $0.50 Versus $0.54, Down 7 Percent
- Board Increases Quarterly Dividend by 17 Percent to $0.21; Increases Share Repurchase Authorization by $100 Million
CBOE Holdings, Inc. (NASDAQ: CBOE) today reported net income allocated to common stockholders of $42.6 million, or $0.50 per diluted share, for the second quarter of 2014, compared with $45.5 million, or $0.52 per diluted share, in the second quarter of 2013. On an adjusted basis, net income allocated to common stockholders was $42.6 million, or $0.50 per diluted share, compared with $47.0 million, or $0.54 per diluted share, in the same period last year. Operating revenue for the quarter was $143.9 million, down 5 percent compared with $150.8 million in the second quarter of 2013.
There were no non-GAAP adjustments for the second quarter of 2014. Financial results presented on an adjusted basis for the second quarter of 2013 exclude certain items, including accelerated stock-based compensation and certain other expenses, which are detailed in the reconciliation of non-GAAP results.
"While second-quarter results reflected lackluster trading volume industry-wide and muted market volatility, CBOE posted solid financial results and continued to deliver long-term value, both to our shareholders and market participants," said Edward T. Tilly, CBOE Holdings Chief Executive Officer. "We were pleased to increase our quarterly dividend as well as our share repurchase authorization and are very encouraged with the response to our extended trading hours for VIX futures, which now trade nearly 24 hours a day, five days a week. Moreover, we continued to advance our strategic growth initiatives so that CBOE is well positioned to benefit in more favorable market conditions."
"During the second quarter, we generated $33 million in cash flow from operations and returned $73 million in cash to shareholders through dividends and share repurchases. This brings our cumulative return of capital to nearly $975 million since 2010," said Alan J. Dean, CBOE Holdings Executive Vice President and Chief Financial Officer. "We remain focused on creating value for our shareholders and are pleased that our strong cash flow generation allows us to both invest in our business and increase cash returned to shareholders."
(1) |
A full reconciliation of our non-GAAP results to our GAAP results for the 2014 and 2013 reporting periods is included in the attached tables. See "Non-GAAP Information" in the accompanying financial tables. |
Key Statistics and Financial Highlights
The table below highlights CBOE Holdings' operating results on a GAAP basis and an adjusted basis for the comparative quarters ended June 30, 2014 and 2013. Financial results presented on an adjusted basis provide supplemental information to facilitate period-over-period comparisons by adjusting for certain items that management believes are not indicative of the company's core operating performance.
(in millions, except per share, revenue per contract and trading days) |
2Q 2014 |
2Q 2013 |
Y/Y Change |
YTD 2014 |
YTD 2013 |
Y/Y Change |
||||||
Key Statistics: |
||||||||||||
Total Trading Days |
63 |
64 |
124 |
124 |
||||||||
Average Daily Volume (options and futures) |
4.83 |
4.96 |
(3%) |
5.22 |
4.67 |
12% |
||||||
Total Trading Volume (options and futures) |
304.4 |
317.4 |
(4%) |
647.2 |
579.3 |
12% |
||||||
Average Revenue Per Contract |
$ |
0.322 |
$ |
0.334 |
(4%) |
$ |
0.326 |
$ |
0.354 |
(8%) |
||
GAAP Financial Highlights: |
||||||||||||
Total Operating Revenues |
$ |
143.9 |
$ |
150.8 |
(5%) |
$ |
301.8 |
$ |
293.5 |
3% |
||
Total Operating Expenses |
74.2 |
75.4 |
(2%) |
150.1 |
148.7 |
1% |
||||||
Operating Income |
69.7 |
75.4 |
(8%) |
151.7 |
144.8 |
5% |
||||||
Operating Margin % |
48.4% |
50.0% |
(160) bps |
50.3% |
49.3% |
100 bps |
||||||
Net Income |
$ |
43.0 |
$ |
46.2 |
(7%) |
$ |
92.0 |
$ |
88.5 |
4% |
||
Net Income Allocated to Common Stockholders |
$ |
42.6 |
$ |
45.5 |
(6%) |
$ |
91.1 |
$ |
87.3 |
4% |
||
Diluted EPS |
$ |
0.50 |
$ |
0.52 |
(4%) |
$ |
1.06 |
$ |
1.00 |
6% |
||
Weighted Average Shares Outstanding |
85.8 |
87.3 |
(2%) |
86.1 |
87.3 |
(1%) |
||||||
Adjusted Financial Highlights (1) |
||||||||||||
Total Operating Expenses |
$ |
74.2 |
$ |
73.6 |
1% |
$ |
147.5 |
$ |
143.7 |
3% |
||
Operating Income |
69.7 |
77.2 |
(10%) |
154.3 |
149.8 |
3% |
||||||
Operating Margin % |
48.4% |
51.2% |
(280) bps |
51.1% |
51.0% |
10 bps |
||||||
Net Income |
$ |
43.0 |
$ |
47.7 |
(10%) |
$ |
93.5 |
$ |
92.1 |
2% |
||
Net Income Allocated to Common Stockholders |
$ |
42.6 |
$ |
47.0 |
(9%) |
$ |
92.6 |
$ |
90.8 |
2% |
||
Diluted EPS |
$ |
0.50 |
$ |
0.54 |
(7%) |
$ |
1.08 |
$ |
1.04 |
4% |
(1) |
A full reconciliation of our non-GAAP results to our GAAP results for the 2014 and 2013 reporting periods is included in the attached tables. See "Non-GAAP Information" in the accompanying financial tables. |
Revenues
Operating revenue was $143.9 million in the second quarter of 2014, down $6.9 million, or 5 percent, from $150.8 million in the second quarter of 2013. The decrease primarily reflects lower revenue of $8.2 million in transaction fees and $0.7 million in regulatory fees, offset somewhat by an increase of $2.1 million in market data fees.
Transaction fees decreased 8 percent in the quarter driven by a 4 percent decrease in trading volume and a 4 percent decrease in the average revenue per contract (RPC) compared with the second quarter of 2013. Additionally, this year's second quarter had one less trading day versus last year's second quarter. Total trading volume in the second quarter was 304.4 million contracts, or 4.83 million contracts per day, compared with volume of 317.4 million contracts, or 4.96 million contracts per day, in last year's second quarter. RPC was $0.322 compared with $0.334 in the second quarter of 2013.
The decrease in RPC primarily resulted from a shift in the mix of products traded and higher volume-based incentives in the second quarter of 2014 for certain multiply-listed options (options on equities and exchange-traded products). Lower-margin, multiply-listed options accounted for 66.1 percent of trading volume in the second quarter of 2014 compared to 65.3 percent in the second quarter of 2013. Higher margin, index options and futures contracts accounted for 33.9 percent of trading volume in the quarter compared with 34.7 percent in the second quarter of 2013.
The average revenue per contract represents total transaction fee revenue divided by total reported trading volume for Chicago Board Options Exchange (CBOE), C2 Options Exchange (C2) and CBOE Futures Exchange (CFE®).
Adjusted Operating Expenses
Adjusted operating expenses were $74.2 million for the quarter, up $0.6 million, or 1 percent, compared with $73.6 million in the second quarter of 2013. There were no adjustments in the second quarter of 2014. For the second quarter of 2013, adjusted operating expenses exclude $0.8 million of accelerated stock-based compensation and $1.0 million of additional expense for the final resolution of an SEC investigation.
The company's core operating expenses, which include total operating expenses less volume-based expenses, depreciation and amortization, accelerated stock-based compensation expense and unusual or one-time expenses, were $48.5 million for the second quarter of 2014, down $1.1 million, or 2 percent, compared with last year's second quarter. The decline in core operating expenses primarily reflects a $1.7 million decrease in outside services, offset somewhat by increases of $0.3 million and $0.4 million in facilities costs and other expenses, respectively.
Volume-based expenses, which include royalty fees and trading volume incentives, were $15.8 million in the second quarter of 2014, an increase of $0.4 million, or 3 percent, compared with the same period last year. This increase resulted from royalty fees and trading volume incentives each increasing by $0.2 million. The increase in royalty fees primarily resulted from higher expenses for fees linked to order flow for certain multiply-listed options and fees related to market data sales.
Operating Margin
The company reported an adjusted operating margin of 48.4 percent for the second quarter of 2014 compared with 51.2 percent for the second quarter of 2013. Margins declined by 280 basis points this quarter, primarily due to lower operating revenue.
Effective Tax Rate
The company reported an effective tax rate of 38.1 percent for the quarter versus 38.4 percent in last year's second quarter. Year to date, the company's effective tax rate is 39.0 percent, in line with its guidance range for the full-year 2014 of 38.5 percent to 39.5 percent.
Operational Highlights and Recent Developments
- On July 10, CFE reported record trading volume in VIX futures during non-U.S. trading hours, when 59,650 contracts traded from Wednesday afternoon to Thursday morning.
- On July 7, CBOE introduced PM-settled, End-of-Month options series (EOM) -- with expiration dates falling on the last business day of the month -- for its S&P 500® Index (SPXSM) options.
- On June 22, CFE further expanded its trading hours for CBOE Volatility Index® (VIX® index) futures to nearly 24 hours a day, five days a week to accommodate Asian market hours and to provide a growing worldwide user base even greater access and flexibility in trading VIX futures.
- On April 10, CBOE began trading CBOE Short-Term Volatility IndexSM (VXSTSM Index or "Short-Term VIX Index") options with weekly expirations.
2014 Fiscal Year Financial Guidance
The company announced that, in light of the subdued trading volumes, it is taking steps to reduce expenses. Based on these actions and year-to-date results, the company is lowering its guidance for core operating expenses for the 2014 fiscal year. The company now expects core expenses to be in the range of $186.0 million to $190.0 million, down from its previous guidance of $191.0 million to $196.0 million.
The company reaffirmed its financial guidance for the 2014 fiscal year for the following:
- Continuing stock-based compensation expense included in core expenses is expected to be approximately $13.0 million for the full year.
- Capital expenditures are expected to be in the range of $47.0 million to $50.0 million.
- Depreciation and amortization expense is expected to be in the range of $38.0 million to $40.0 million.
- Adjusted effective tax rate for the full-year 2014 is expected to be in the range of 38.5 percent to 39.5 percent. The most significant differences in the adjusted effective rate and the statutory rate are state income taxes and discrete items relating to the current period. Significant changes in trading volume, expenses, state and local tax rates and other items, including ongoing state and federal tax audits, could materially impact this expectation.
Return of Capital to Stockholders
As announced on July 30, 2014, CBOE Holdings' Board of Directors increased the company's quarterly dividend by 17 percent to $0.21 per share and authorized an additional $100 million for its share repurchase program. This new authorization will be in addition to any unused amount remaining under the company's existing share repurchase authorizations.
The dividend increase is effective with the third quarter dividend, payable September 19, 2014, to stockholders of record as of August 29, 2014.
During the second quarter of 2014, the company repurchased 1,011,178 shares of its common stock under its share repurchase program at an average price of $50.57 per share, for a total of $51.1 million. Year to date, the company has repurchased 1,712,046 shares of its common stock under its share repurchase program at an average price of $51.56 per share, for a total of $88.3 million.
Since the inception of its share repurchase program in 2011 through June 30, 2014, the company has repurchased 6,351,870 shares of its common stock at an average price of $36.26 per share, for a total of $230.3 million.
At July 30, 2014, the company had approximately $150.2 million of availability remaining under its existing share repurchase authorizations.
Earnings Conference Call
Executives of CBOE Holdings will host a conference call to review its second quarter financial results today, August 1, 2014, at 8:30 a.m. ET/7:30 a.m. CT. The conference call and any accompanying slides will be publicly available via live webcast from the Investor Relations section of the company's website at www.cboe.com under Events & Presentations. Participants may also listen via telephone by dialing (877) 372-0876 from the United States or Canada, or (253) 237-1167 for international callers. Telephone participants should place calls 10 minutes prior to the start of the call. The webcast will be archived on the company's website for replay. A telephone replay of the earnings call also will be available from approximately 11:00 a.m. CT, August 1, 2014, through 11:00 p.m. CT, August 8, 2014, by calling (855) 859-2056 within the U.S. and Canada, or (404) 537-3406 for international callers, using replay code 68813605.