CBOE Holdings, Inc. Reports Second Quarter 2012 Financial Results - Diluted EPS Of $0.44, Up 22 Percent

Second Quarter GAAP Financial Highlights

• Operating Revenues Up 10 Percent to $132.6 Million
• Net Income Allocated to Common Stockholders Increases 16 Percent to $37.9 Million
• Diluted EPS Up 22 Percent to $0.44
• Operating Margin Increases 290 Basis Points to 49.8 Percent
• Average Daily Trading Volume of 4.80 Million Contracts, Up 8 Percent Versus 2Q11
• Total Market Share of 29.8 Percent for the Quarter, Up 290 Basis Points from 26.9 Percent in Second Quarter of 2011(1)

CBOE Holdings, Inc. (NASDAQ: CBOE) today reported second quarter 2012 net income allocated to common stockholders of $37.9 million, or $0.44 per diluted share, compared with $32.6 million, or $0.36 per diluted share in the second quarter of 2011. Operating revenues of $132.6 million for the second quarter increased 10 percent compared with $120.3 million in the second quarter of 2011.

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"We are pleased to report our eighth consecutive quarter of earnings per share growth. Our strong performance in multi-listed options products, the continued growth of our proprietary products, and a prudent approach to cost management enabled our company to achieve outstanding financial results despite lower industry-wide trading volume," said William J. Brodsky, CBOE Holdings Chairman and CEO. "Our company continues to generate and return enhanced value to our stockholders, and we are especially pleased with our Board's recent action to increase our quarterly dividend payment by 25 percent and increase our share repurchase authorization by $100 million."

"Our focus on controlling expenses, even as we continue to invest in technology infrastructure and other growth initiatives, resulted in another quarter of strong growth in operating leverage. Along with growing operating revenues by 10 percent, our disciplined expense management yielded an increase in operating income of 17 percent, which generated an operating margin of 49.8 percent, a gain of 290 basis points compared with second quarter 2011," said Alan J. Dean, CBOE Holdings Executive Vice President and Chief Financial Officer. "We have a solid balance sheet, strong free cash flow and a clear focus on creating value for stockholders as demonstrated by our consistent financial results and our actions," Dean added.

For the first half of 2012, net income allocated to common stockholders was $70.8 million, or $0.81 per diluted share, compared with $64.7 million, or $0.72 per diluted share, in the comparable period last year. Operating revenues were $253.9 million for the first six months of 2012, up 4 percent from $244.3 million in the prior year period.

¹ Represents options market share for CBOE and C2, adjusted to exclude dividend trades.

The table below highlights CBOE Holdings' operating results on a GAAP basis and an adjusted basis for the comparative quarters ended June 30, 2012 and 2011. Financial results presented on an adjusted basis provide supplemental information to measure period-over-period comparisons by adjusting for certain items that are not indicative of the company's core operating performance.

Revenues

Operating revenues were $132.6 million in the second quarter of 2012, up $12.3 million, or 10 percent, from $120.3 million in the second quarter of 2011. The increase was primarily driven by increases of $8.6 million in transaction fees, $1.5 million in market data fees and $3.6 million in exchange services and other fees, offset somewhat by a decrease of $0.9 million in access fees. The decline in access fee revenue primarily reflects fee changes for trading permits implemented at the start of 2012. The increase in exchange services and other fees was driven by fee increases implemented at the start of the year. The growth in market data fees reflects higher revenue derived from the Options Price Reporting Authority (OPRA) and CBOE's market data services.

Transaction fees increased 10 percent for the quarter due to an 8 percent increase in trading volume and a 2 percent increase in the average transaction fee per contract compared with last year's second quarter. Trading volume for the second quarter was 302.6 million contracts, or 4.80 million contracts per day, versus 2011 second-quarter volume of 280.2 million contracts, or 4.45 million contracts per day. The average revenue per contract (RPC) increased to $0.314 compared with $0.308 in the second quarter of 2011.

The RPC increase was primarily driven by a shift in the trading volume mix, with higher-margin index options and futures contracts accounting for 28.0 percent of total contracts traded during the quarter, compared with 26.2 percent in the second quarter of 2011. RPC for the quarter was also affected by transaction fee changes implemented in 2012, which increased the RPC on index options and futures contracts versus the prior year, while a new Volume Incentive Program decreased the RPC on multiply-listed options (equities and exchange-traded funds). Overall, the increases in the RPC for index options and futures contracts more than offset the RPC declines in multiply-listed options. The average revenue per contract represents total transaction fee revenue divided by total reported trading volume for CBOE, C2 Options Exchange (C2) and CBOE Futures Exchange (CFE).

Adjusted Operating Expenses

Adjusted operating expenses, which exclude the accelerated recognition of stock-based compensation expense, increased $2.8 million, or 4 percent, to $66.5 million compared with $63.7 million in the second quarter of 2011. This increase primarily reflects higher costs for royalty fees, outside services and employee costs, offset somewhat by a decrease in trading volume incentives.

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 $45.0 million for the second quarter of 2012, up $3.1 million, or 8 percent, compared with last year's second quarter. The increase was primarily driven by higher expenses for outside services, employee costs and travel and promotional expenses.

Volume-based expenses, which include royalty fees and trading volume incentives, were $13.2 million in the second quarter of 2012, representing an increase of $0.3 million, or 2 percent, compared with the same period last year. This increase reflects a $1.6 million increase in royalty fees, which are directly related to higher trading volume in licensed index products, offset somewhat by a $1.3 million decrease in trading volume incentives. The decline in trading volume incentives primarily resulted from changes to the incentive program criteria.

Adjusted Operating Margin

The company's adjusted operating margin increased 280 basis points to 49.8 percent for the second quarter of 2012, compared with 47.0 percent in the same period in 2011, representing the company's eighth consecutive quarter of year-over-year adjusted margin growth and the second highest quarterly adjusted operating margin reported in the company's history.

Effective Tax Rate

The company reported an effective tax rate of 41.4 percent for the quarter versus 40.7 percent in last year's second quarter, primarily reflecting a higher provision for uncertain tax positions offset somewhat by the benefit of a new tax apportionment method enacted by Illinois.

Second Quarter 2012 Operational Highlights and Recent Developments

• For a second consecutive quarter, CFE experienced record-setting quarterly trading volume.
• On April 25, the company announced that CFE and DRW Trading Group had entered into an agreement that will allow CFE to use DRW's patent-pending methodology to create variance futures that, for the first time, match the quoting conventions and economic performance of over-the-counter stock index variance swaps. CFE plans to introduce a new futures contract based on the variance of the S&P 500® (SPX^SM) later this year, subject to regulatory approval.
• On May 16, CBOE and the China Financial Futures Exchange (CFFEX) announced that they signed a Memorandum of Understanding which establishes an open channel of communication and lays the foundation for future collaborative efforts between the exchanges.
• On May 23, CFE launched trading on the CBOE NASDAQ-100 Volatility Index futures contract (ticker symbol VXN, futures symbol VN). VXN^SM, which measures the volatility of the NASDAQ-100® Index, is calculated through the application of CBOE's VIX® methodology to the prices of options on NDX.
• On May 25, CBOE and The McGraw-Hill Companies, Inc. announced that the Illinois Appellate Court ruled in favor of CBOE, McGraw-Hill and CME Group Index Services, LLC, regarding the index options litigation brought against the International Securities Exchange, LLC (ISE). The ruling affirms an injunction that prohibits ISE from listing or offering a market for trading in options on either the S&P 500® Index or the Dow Jones Industrial Average^SM, as to which CBOE holds exclusive licenses. The injunction also forbids OCC, which clears trading for all U.S. options exchanges, from clearing options on these indexes unless they are traded pursuant to CBOE's exclusive licenses.
• On June 18, CBOE began disseminating values for its first interest rate-based volatility index, the CBOE Interest Rate Volatility Index (ticker: SRVX). The SRVX^SM Index is designed to offer fixed income options traders and portfolio managers a standardized and transparent measure of interest rate swap volatility.
• On July 27, CBOE introduced a fully-electronic process for trading SPX Variance Strips, a portfolio of S&P 500 Index options intended to replicate S&P 500 implied variance exposure, in a single transaction. Trading in SPX Variance Strips (ticker: VSTRP) is aimed at qualified professional investors and will employ a special quoting convention similar to the over-the-counter method for quoting variance swaps.
• On August 1, the company reported that ADV for total options in July was 4.15 million contracts, nearly a ten-percent decrease from June 2012 ADV of 4.61 million contracts and a nine-percent decrease from July 2011 ADV of 4.57 million contacts. In addition, CFE reported ADV of 91,386 contracts in July 2012, up 56 percent from 58,532 contracts per day in July 2011 and a 12-percent decrease from the 103,274-contract ADV in the record-breaking June 2012.

2012 Fiscal Year Financial Guidance

Based on year-to-date financial results, the company made the following revision to its 2012 fiscal year financial guidance:

• Revenue from exchange services and other fees is expected to exceed the higher end of its previously provided guidance range of $24.0 million to $26.0 million and is now expected to be between $27.0 million to $29.0 million for fiscal 2012.

In addition, the company reaffirmed the following fiscal year 2012 financial guidance that was provided in its February 8, 2012 earnings press release:

• Access fees are expected to be in a range of $64.0 million to $67.0 million.
• Core expenses are expected to be in the range of $173.0 million to $178.0 million. The company expects core expenses to be at the low end of the guidance range if volume in 2012 is flat to up 4 percent and at the high end of the range if volume growth is 5 percent or higher.
• Continuing stock-based compensation expense, included in core expenses above, is expected to be in the range of $12.2 million to $12.7 million.
• The consolidated effective tax rate is expected to be in the range of 41.2 percent to 41.7 percent. 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 in the range of $33.0 million to $35.0 million.
• Capital expenditures in the range of $30.0 million to $35.0 million.

Return of Capital to Stockholders through Share Repurchase and Dividend Payments

During the second quarter of 2012, the company repurchased 722,424 shares of its common stock under its $100 million share repurchase program at an average price of $26.44 per share, for a total of $19.1 million. Year to date, the company has repurchased 1,871,424 shares at an average price of $26.58 per share, for an aggregate purchase price of $49.7 million. As of June 30, 2012, the company had $3.3 million remaining on this $100 million program, authorized in August 2011.

As announced on July 31, 2012, CBOE Holdings' Board of Directors increased the company's quarterly cash dividend by 25 percent to $0.15 per share from $0.12 per share and authorized the company to repurchase an additional $100 million of its outstanding unrestricted common stock. This new authorization will be in addition to any unused amount remaining under the August 2011 repurchase authorization. The dividend increase is effective with the dividend payable on September 21, 2012 to stockholders of record on August 31, 2012.

Dean said, "Together, dividend payments and the share repurchase plan provide the company with the flexibility to efficiently deploy capital, which is particularly important in light of impending tax law changes. Along with our Board, we will continue to consider and review all alternatives to enhance stockholder value."

Earnings Conference Call

Executives of CBOE Holdings will host a conference call to review its second quarter financial results today, August 2, 2012, 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 2, through 11:00 p.m. CT, August 16, 2012, by calling (800) 585-8367 within the U.S. and Canada, or (404) 537-3406 for international callers, using replay code 94634813.

CBOE Holdings, Inc.
Selected Quarterly Operating Statistics
Average Daily Volume by Product (in thousands)
	2Q 2012		1Q 2012		4Q 2011		3Q 2011		2Q 2011
PRODUCT:
Equities	2,007		2,320		1,695		1,968		1,936
Indexes	1,252		1,174		1,202		1,590		1,114
Exchange-traded funds	1,451		1,321		1,366		1,861		1,348
Total Options Average Daily Volume	4,710		4,815		4,263		5,419		4,398
Futures	93		67		38		62		48
Total Average Daily Volume	4,803		4,882		4,301		5,481		4,446
Mix of Trading Volume by Product
	2Q 2012		1Q 2012		4Q 2011		3Q 2011		2Q 2011
PRODUCT:
Equities	41.8%		47.5%		39.4%		35.9%		43.5%
Indexes	26.1%		24.0%		28.0%		29.0%		25.1%
Exchange-traded funds	30.2%		27.1%		31.7%		34.0%		30.3%
Futures	1.9%		1.4%		0.9%		1.1%		1.1%
Total	100.0%		100.0%		100.0%		100.0%		100.0%
Average Revenue Per Contract by Product
	2Q 2012		1Q 2012		4Q 2011		3Q 2011		2Q 2011
Trading Days	63		62		63		64		63
PRODUCT:
Equities	$0.123		$0.110		$0.167		$0.159		$0.169
Indexes	0.677		0.658		0.631		0.605		0.627
Exchange-traded funds	0.180		0.171		0.212		0.192		0.202
Total Options Average Transaction Fee	0.288		0.261		0.312		0.301		0.295
Futures	1.607		1.697		1.329		1.371		1.477
Total Average Transaction Fee Per Contract	$0.314		$0.280		$0.321		$0.313		$0.308
Transaction Fees by Product (in thousands)
	2Q 2012		1Q 2012		4Q 2011		3Q 2011		2Q 2011
PRODUCT:
Equities	$	15,617	$	15,894	$	17,860	$	20,019	$	20,582
Indexes	53,383		47,907		47,808		61,524		44,028
Exchange-traded funds	16,429		14,036		18,230		22,836		17,120
Total Options Transaction Fees	$	85,429	$	77,837	$	83,898	$	104,379	$	81,730
Futures	9,456		6,998		3,149		5,461		4,510
Total Transaction Fees	$	94,885	$	84,835	$	87,047	$	109,840	$	86,240

Non-GAAP Information

In addition to disclosing results determined in accordance with GAAP, CBOE Holdings has disclosed certain non-GAAP measures of operating performance. 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. The non-GAAP measures provided in this press release include core operating expenses, adjusted operating expenses, adjusted operating income, adjusted operating margin, adjusted effective tax rate, adjusted net income, adjusted net income allocated to common stockholders and adjusted diluted earnings per share.

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.

The table below shows core operating expenses, which is the company's operating expenses after excluding (i) volume-based expenses, (ii) depreciation and amortization expense, (iii) accelerated stock-based compensation expense and (iv) other unusual or one-time expenses.

 

The table below shows the reconciliation of each financial measure from GAAP to non-GAAP. The non-GAAP financial measures exclude the impact of those items detailed in the footnotes below and are referred to as adjusted financial measures.

 

 

 

 

 

SOURCE CBOE Holdings, Inc.