CBOE Holdings, Inc. Reports Fourth Quarter And Full Year 2010 Results

CBOE Holdings, Inc. (Nasdaq: CBOE) today reported fourth quarter net income of $31.4 million, or$0.32 per diluted share for all stockholders and net income allocated to common stockholders of $30.7 million, or $0.31 per diluted share, compared with net income of $34.9 million, or $0.38 per diluted share, in the fourth quarter of 2009.  On an adjusted basis, net income increased 45 percent to $30.9 million, or $0.32 per diluted share, compared with $21.3 million, or $0.23 per diluted share in the fourth quarter of 2009.

CBOE Holdings' financial results for the years and fourth quarters ended December 31, 2010 and 2009 included certain items and allocations that management believes are not representative of its operating performance.  Financial measures presented on an adjusted basis and diluted and adjusted diluted earnings per share for all stockholders exclude these items to present a more meaningful comparison.  More information on the adjusted financial measures and a detailed analysis are included in the "Non-GAAP Information."

For the full year, the company reported net income of $99.4 million, or $1.04 per diluted share for all stockholders and net income allocated to common stockholders of $98.2 million, or $1.03 per diluted share, on total operating revenues of $437.1 million.  For the comparable period in 2009, the company reported net income of $106.5 million, or $1.17 per diluted share, on operating revenues of $426.1 million.  Adjusted net income for the year increased 13 percent to $105.5 million from $93.2 million in 2009, while adjusted diluted earnings per share grew 7 percent to $1.10 from $1.03 in 2009, reflecting a 6 percent increase in the weighted average shares outstanding to 95.8 million shares from 90.7 million shares.

"We delivered a strong fourth quarter as a result of continued volume gains in our proprietary products, particularly in VIX options and futures," said William J. Brodsky, CBOE Holdings Chairman and Chief Executive Officer.  "As we begin 2011, we are encouraged by recent trends in trading volume and by the early success of C2, our all-electronic exchange.  I am confident that we are well positioned to further leverage C2 and to introduce new products and services to drive long-term stockholder value."

"For the year and fourth quarter, we achieved solid profit growth, maintained a debt-free balance sheet and returned cash to stockholders," said Alan J. Dean, CBOE Holdings Executive Vice President and Chief Financial Officer. "In addition, we retired approximately 12 million shares of restricted stock through two concurrent tender offers, reducing shares outstanding by 12 percent.  We plan to continue to prudently manage expenses while investing in new initiatives that deliver top-line growth, solid bottom-line results and strong cash flow."  

The table below highlights CBOE Holdings' operating results for the comparative quarters and 12-month periods ended December 31, 2010 and 2009.

Adjusted Revenues

Adjusted operating revenues for the fourth quarter increased $16.3 million, or 17 percent, to $113.0 million.  This increase was primarily driven by a $15.0 million increase in access fees, excluding $24.1 million of deferred access fees recognized in the fourth quarter of 2009, and a $2.6 million increase in transaction fees.  The growth in access fees is attributable to a new trading access program.  On July 1, 2010, CBOE began charging monthly fees to trading permit holders.  Prior to the company's demutualization, trading permit holders who were CBOE members, or seat holders, were not assessed an access fee; the fee was only assessed to temporary members and interim trading permit holders.  These increases were offset somewhat by a $1.4 million decrease in exchange services and other fees.

The increase in transaction fees in the fourth quarter was primarily driven by a 5 percent increase in the average transaction fee per contract, offset somewhat by a 2 percent decline in trading volume versus the same period in 2009.  The average transaction fee per contract was $0.293 for the quarter compared with $0.278 in the fourth quarter of 2009.  Trading volume for the fourth quarter was 272.8 million contracts, or 4.26 million contracts per day, versus 278.4 million contracts, or 4.35 million contracts per day, in the fourth quarter of 2009.

The increase in the average transaction fee per contract primarily resulted from a shift in the volume mix.  In the fourth quarter of 2010, higher-margin index options accounted for a larger percentage of options contracts traded, representing 23.2 percent of total options contracts traded versus 22.2 percent in the fourth quarter of 2009.  The average transaction fee per contract represents total transaction fee revenue divided by total reported trading volume for the Chicago Board Options Exchange (CBOE), C2 Options Exchange (C2) and the CBOE Futures Exchange (CFE).

Exchange services and other fees were lower in the quarter, primarily due to the elimination of the hybrid electronic quoting fee at the beginning of 2010 and lower revenue from data services fees.

Adjusted Expenses

Adjusted operating expenses for the fourth quarter of 2010 of $63.5 million increased $1.5 million, or 2 percent, compared to $62.0 million in the fourth quarter of 2009.  This increase was primarily due to the recognition of continuing stock-based compensation expense of $3.2 million.

Core operating expenses for the fourth quarter of 2010 increased $1.2 million to $40.0 million, including the addition of the stock-based compensation expense noted above, but not the accelerated stock-based compensation expense of $2.0 million recognized in the quarter.  Excluding the continuing stock-based compensation expense, core operating expenses of $36.7 million decreased $2.1 million or 5 percent, as the company successfully controlled expenses.

Core operating expenses represent total operating expenses less volume-based expenses, depreciation and amortization, accelerated stock-based compensation expense and unusual or one-time expenses.  Volume-based expenses include royalty fees and trading volume incentives.  

Volume-based expenses were $15.4 million in the fourth quarter of 2010, representing a decrease of $1.0 million, or 6 percent, compared with the fourth quarter of 2009.  The decline resulted from a $1.4 million decrease in trading volume incentives, offset somewhat by a $0.4 millionincrease in royalty fees.  The decrease in trading volume incentives is primarily related to lower volume in equity and ETF options, which decreased 2 percent and 8 percent, respectively.  Modifications made to the trading volume incentive program also contributed to the decline in this expense.  The increase in royalty fees is directly related to higher trading volume in the company's licensed index products, with total volume in index options up 2 percent over 2009's fourth quarter.  

Adjusted Operating Margin

The company's operating margin was 44.2 percent for the fourth quarter 2010 compared with 46.9 percent in the same period in 2009.  On an adjusted basis, the company's operating margin increased 800 basis points to 43.8 percent for the fourth quarter of 2010 from 35.8 percent for the same period in 2009, as adjusted operating income grew faster than adjusted revenues, demonstrating the leverage in the company's business model and expense control measures.

Fourth Quarter 2010 Operational Highlights and Recent Developments

• On October 29, 2010, C2 Options Exchange, a new all‐electronic exchange, began operations.  As part of a measured rollout, through the end ofJanuary 2011, C2 has listed 356 classes, representing substantially all of the most active options classes and series in the Penny Pilot Program.  
• On January 7, 2011, the company began publishing volatility index values on five highly active company stocks --  Apple, Amazon, IBM, Google and Goldman Sachs.  This is the first time the company has applied its CBOE Volatility Index methodology to options on individual stocks.
• On January 12, 2011, the company launched a web page displaying VIX term structure data, calculated every 15 seconds throughout the trading day.
• On February 1, 2011, CBOE reported that average daily volume (ADV) in January was 5.29 million contracts, a 9 percent increase from January 2010ADV of 4.85 million contracts and a 35 percent increase from December 2010 ADV of 3.93 million contracts.
• On February 7, 2011, CBOE announced that on Wednesday, February 23, the Exchange will begin publishing values for the CBOE S&P 500 Skew Index (ticker symbol: SKEW), a benchmark measure of the perceived risk of extreme negative moves — often referred to as "tail risk" or a "black swan" event — in U.S. equity markets.  
• On February 7, 2011, Market Data Express, LLC, a subsidiary of CBOE Holdings, Inc., launched a new market data service known as "CBOE Streaming Markets" (CSM).  The service provides three separate, direct datafeeds of real-time quotations and trade information from CBOE, C2 Options Exchange(C2) and the CBOE Stock Exchange (CBSX).
• On February 9, 2011, CBOE and Standard & Poor's (S&P) announced that Hang Seng Indexes Company will begin disseminating a volatility index for the Hang Seng Index on February 21, 2011, which will use the CBOE Volatility Index (VIX) methodology.

Financial Guidance

CBOE Holdings currently expects the following for the year ended December 31, 2011:

• CBOE implemented a number of fee changes effective January 3, 2011, with the intent of driving incremental volume to its marketplace by providing fee incentives and leveraging the strength of its proprietary products.  These fee changes are expected to generate approximately $3.0 million to $5.0 million in additional net operating revenue for 2011.  This increase reflects higher transaction fees, regulatory fees and exchange services fees, offset somewhat by a decline from the fourth quarter's annualized run rate for access fees.  Significant changes in trading volume and transaction mix could impact these projections.
• The company does not provide guidance on trading volumes.  The company expects the fee changes to increase its average transaction fee per contract (RPC) by $0.003 to $0.004 in 2011.  This increase assumes the continuation of a higher growth rate in the company's index products relative to its equities and exchange traded funds.  Changes in trading volume and transaction mix would result in fluctuations in RPC.
• Consolidated access fees are expected to be in a range of $65.0 million to $68.0 million, up compared with $41.4 million reported for 2010, but lower than the annualized run rate based on the 2010 fourth quarter.  This implied decline is primarily due to the company's implementation of a market maker trading permit sliding fee scale for multiply-listed products, but is expected to be offset somewhat by a new access fee for trading an S&P 500contract on C2.  This access fee is expected to be implemented the first month following the contract launch. The company plans to announce the fee for this trading permit closer to the contract launch and will provide further information at that time.  
• Core expenses for 2011 are expected to be in the range of $173.0 million to $177.0 million.  This excludes accelerated stock-based compensation expense noted below.  
• Continuing stock-based compensation expense should fall in the range of $12.2 million to $12.7 million for the full year.  
• The company plans to recognize approximately $0.5 million in accelerated stock-based compensation expense for the year.  This expense is expected to be amortized over the first four months of 2011.  The 2011 accelerated stock-based compensation expense reflects a reduction in the size of the company's board, with three members coming off the board in May.  This expense is reported in employee costs and will be included in the company's non-GAAP reconciliation.  
• The consolidated effective tax rate is expected to be in the range of 41.0 to 41.4 percent for the year ended December 31, 2011, including the projected impact of a January 1, 2011 increase in the Illinois state tax rate.  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.
• Depreciation and amortization expense should be in the range of $35.0 to $37.0 million for 2011.  
• Capital expenditures are projected in the range of $30.0 million to $35.0 million in 2011, primarily driven by ongoing investments in systems hardware and software that enhance trading technology.

Tender Offers

On November 23, 2010, CBOE Holdings concluded two concurrent tender offers for 5,983,713 shares of its Class A-1 common stock and for 5,983,713 shares of its Class A-2 common stock, each at a price of $25.00 per share.  Subsequent to the closing, 31,723 shares of Class A-1 common stock and 18,746 shares of A-2 common stock were purchased due to clerical adjustments.  Total shares outstanding were reduced by approximately 12 percent as a result of the tender offers.

Dividend

On February 9, 2011, CBOE Holdings, Inc. announced that its Board of Directors declared a quarterly cash dividend of $0.10 per share.  The dividend is payable March 25, 2011, to stockholders of record at the close of business on March 4, 2011.

Earnings Conference Call

Executives of CBOE Holdings will host a conference call to review its fourth quarter financial results today, February 10, 2011, at 8:30 a.m. EST/7:30 a.m. CST.  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 noon EST, February 10, through midnight, February 24, 2011, by calling (800) 642-1687 within the U.S. and Canada, or (706) 645-9291 for international callers, using replay code 32988368.

About CBOE Holdings

CBOE Holdings, Inc. is the holding company for Chicago Board Options Exchange (CBOE) and other subsidiaries.  CBOE, the largest U.S. options exchange and creator of listed options, continues to set the bar for options trading through product innovation, trading technology and investor education. CBOE offers equity, index and ETF options, including proprietary products, such as S&P 500 options (SPX), the most active U.S. index option, and options on the CBOE Volatility Index (VIX). Other products engineered by CBOE include equity options, security index options, LEAPS options, FLEX options, and benchmark products such as the CBOE S&P 500 BuyWrite Index (BXM). CBOE's Hybrid Trading System incorporates electronic and open-outcry trading and is powered by CBOEdirect, a proprietary, state-of-the-art electronic platform that also supports the C2 Options Exchange (C2), CBOE Futures Exchange (CFE), CBOE Stock Exchange (CBSX) and OneChicago. CBOE is home to the world-renowned Options Institute and www.cboe.com, named "Best of the Web" for options information and education. CBOE is regulated by the Securities and Exchange Commission (SEC), with all trades cleared by the AAA-rated Options Clearing Corporation (OCC).

Forward-Looking Statements

This press release contains statements which may be considered forward-looking statements within the meaning of the Securities Exchange Act of 1934, including, without limitation, statements regarding operating strategies, future plans and financial results. Forward-looking statements may be accompanied by words such as "anticipate", "believe", "could", "estimate", "expect", "forecast", "intend", "may", "possible", "predict", "project" or similar words, phrases or expressions.  These statements are not guarantees of future performance and involve risks, uncertainties and assumptions that are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or implied in any forward-looking statements made herein. Among the factors that might affect our performance are: legislative or regulatory changes affecting the options markets, including a possible cap of transaction fees; changes in law or government policy, including changes relating to the recently enacted or proposed legislation relating to the current economic crisis; changes to the tax treatment for options trading, including the possible imposition of a transaction tax on options transactions; increasing competition by foreign and domestic entities, including increased competition from new entrants into our markets and consolidation of existing entities; our ability to continue introducing competitive new products and services on a timely, cost-effective basis, including through our electronic trading capabilities, and our ability to maintain the competitiveness of our existing products and services; our ability to adjust our fixed costs and expenses if our revenues decline; our ability to maintain existing customers, develop strategic relationships and attract new customers; our ability to keep pace with rapid technological developments, including our ability to complete the development and implementation of the enhanced functionality required by our customers; our ability to accommodate increases in trading volume and order transaction traffic without failure or degradation of performance of our systems; our ability to maintain our growth effectively; the costs associated with protecting our intellectual property rights and our ability to operate our business without violating the intellectual property rights of others; our ability to preserve and maintain our exclusive licenses; our ability to generate revenue from our market data that may be reduced or eliminated by the growth of electronic trading or declines in subscriptions; changes in our rate per contract due to shifts in the mix of the products traded, the trading venue and the mix of customers; the ability of our compliance and risk management methods to effectively monitor and manage our risks; changes in price levels and volatility in the derivatives markets and in the equity markets in general; economic, political and market conditions, including the recent volatility of the capital and credit markets and the impact of current economic conditions on the trading activity of our current and potential customers; our ability to continue to generate funds to allow us to continue to invest in our business; industry and customer consolidation; decreases in trading activity; and the unfavorable resolution of material legal proceedings.

The Company does not undertake any obligation to update the information contained herein, which speaks only as of the date of this press release.  More detailed information about factors that may affect our performance may be found in our filings with the Securities and Exchange Commission, including our Quarterly Report on Form 10-Q for the quarter ended March 31, 2010 under the heading "Forward-Looking Statements" and/or "Risk Factors," and other reports filed by the Company from time to time with the SEC. Such discussions regarding risk factors and forward-looking statements are incorporated herein by reference.

The condensed consolidated statements of income, balance sheets and statements of cash flows are unaudited and subject to reclassification.

Trademarks

CBOE®, Chicago Board Options Exchange®, CBOEdirect®, CBOE Volatility Index®, VIX®, FLEX®, Hybrid®, LEAPS®, CFE®, CBSX® and CBOE Stock Exchange® are registered trademarks of Chicago Board Options Exchange, Incorporated (CBOE).   SPX(SM), BXM(SM), The Options Institute(SM), Weeklys(SM), C2(SM), C2 Options Exchange(SM), and CBOE Futures Exchange(SM) are service marks of CBOE.  Standard & Poor's®, S&P® and S&P 500® are registered trademarks of Standard & Poor's Financial Services LLC and have been licensed for use by CBOE. All other trademarks and servicemarks are the property of their respective owners.

CBOE-F

Non-GAAP Information

In addition to disclosing results determined in accordance with GAAP, CBOE Holdings has disclosed certain non-GAAP measures of operating performance.  The non-GAAP measures provided in this press release include core operating expenses, adjusted operating revenues, adjusted operating expenses, adjusted operating income, adjusted operating margin, adjusted income before income taxes, adjusted income tax provision, adjusted net income, adjusted diluted net income per common share, adjusted diluted earnings per share (EPS) for all stockholders and diluted EPS for all stockholders.

Management believes that the non-GAAP financial measures presented in this press release, including adjusted net income and core operating expenses, provide useful and comparative information to assess trends in our core operations and a means to evaluate period-to-period comparisons.  Non-GAAP financial measures disclosed by management, including adjusted diluted EPS, are provided as additional information to investors in order to provide them with an alternative method for assessing our financial condition and operating results.  These measures are not in accordance with, or a substitute for, GAAP, and may be different from or inconsistent with non-GAAP financial measures used by other companies.

Core operating expenses is the company's operating expenses after excluding (i) volume-based expenses, (ii) depreciation and amortization expense, (iii) accelerated stock-based compensation expense, (iv) the exercise right appeal settlement and other unusual or one-time expenses.

The table below shows the reconciliation of each financial measure from GAAP to non-GAAP.  The footnotes contain a detailed description of each item excluded from the adjusted financial measure.

The table below shows the calculation of the net income allocated to common stockholders and basic and diluted earnings per common share allocated to common stockholders.