CBOE Holdings, Inc. Reports Solid Fourth Quarter And Record Full-Year 2011 Financial Results

For the year ended December 31, 2011, CBOE Holdings reported record revenues and earnings.  GAAP net income allocated to common stockholders increased 40 percent to $137.1 million, or $1.52 per diluted share, on total operating revenues of $508.1 million.  For the comparable period in 2010, the company reported GAAP net income allocated to common stockholders of $98.2 million, or $1.03 per diluted share, on operating revenues of $437.1 million.  On an adjusted basis, net income allocated to common stockholders increased 38 percent to$143.7 million from $104.2 million in 2010, while adjusted diluted earnings per share grew 47 percent to $1.60 from $1.09 in 2010.  

CBOE Holdings' financial results for the three and twelve months ended December 31, 2011 and 2010 included certain items and allocations that management believes are not representative of its operating performance.  Financial measures presented on an adjusted basis 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."

"2011 was a record year for CBOE Holdings as we set new highs across our key financial metrics, including revenues, earnings, trading volume and operating margin.  Thanks to the expertise and dedication of our employees, we continued to meet the needs of our customers throughout the year by offering the industry's most diverse product line, unparalleled customer service, and trading technology that is second to none," said William J. Brodsky, CBOE Holdings Chairman and Chief Executive Officer.  "As a result, our company is stronger than ever and well positioned for future growth and to generate increased financial returns for our stockholders."

"Our solid fourth quarter results cap an outstanding year for CBOE Holdings as we set new records for both top-line and bottom-line financial measures for 2011.  Throughout the year we continued to demonstrate strong expense control, delivering a record adjusted operating margin of 48.4 percent for 2011," said Alan J. Dean, CBOE Holdings Executive Vice President and Chief Financial Officer.  "Our strong cash flow enabled us to return nearly $92 million to stockholders through dividends and share repurchases, bringing the total returned to stockholders over the past 18 months to more than $525 million.  In addition, we ended the year with a strong cash position of more than $135 million, providing us with the flexibility to continue to enhance share value through both internal investments and other capital allocation opportunities," Dean added.

(1) A full reconciliation of CBOE Holdings' non-GAAP results to its GAAP results for the reporting periods is included in the attached tables. See "Non-GAAP Information" in the accompanying financial tables.

The table below highlights CBOE Holdings' operating results for the comparative quarters and twelve-month periods ended December 31, 2011 and 2010.

Revenues

Adjusted operating revenues in the fourth quarter of 2011 increased $7.2 million, or 6 percent, to $120.2 million from $113.0 million in 2010's fourth quarter.  This increase primarily reflects a $7.2 million increase in transaction fees and a $0.7 million increase in exchange services and other fees, offset somewhat by a $1.3 million decrease in access fees.  Access fees declined primarily due to the implementation of a sliding fee scale for certain trading permits effective January 2011.  Exchange services and other fees were up primarily due to fee increases for certain user services versus the fourth quarter of 2010.

Transaction fees increased 9 percent for the quarter due to a 10 percent increase in the average transaction fee per contract, offset slightly by a 1 percent decrease in trading volume compared with the fourth quarter of 2010.  Trading volume for the fourth quarter was 270.9 million contracts, or 4.30 million contracts per day, versus 2010's fourth quarter volume of 272.8 million contracts, or 4.26 million contracts per day.  The average transaction fee per contract increased to $0.321 compared with $0.293 in the fourth quarter of 2010.  

The increase in the average transaction fee per contract resulted primarily from a shift in trading volume mix, with higher-margin index options and futures contracts accounting for 28.9 percent of total contracts traded during the quarter versus 23.8 percent in the fourth quarter of 2010.  The average transaction fee 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 of $63.8 million for the fourth quarter of 2011 was nearly flat compared with $63.5 million in the fourth quarter of 2010.  Adjusted operating expenses for the fourth quarters of 2011 and 2010 exclude $3.7 million for severance paid pursuant to an executive employment contract and $2.0 million for accelerated stock-based compensation expense, respectively.  

The company's core operating expenses of $41.5 million for the fourth quarter of 2011 increased by $1.5 million, or 4.0 percent, compared with last year's fourth quarter, primarily driven by increases in travel and promotional expenses and employee costs, offset somewhat by lower data processing expenses.  Travel and promotional expenses were up due to an increase in advertising to support the launch of SPXpm.  The increase in employee costs was primarily related to higher expenses for employee benefits.  

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, which include royalty fees and trading volume incentives, were $14.8 million in the fourth quarter of 2011, a decrease of $0.6 million, or 4 percent, compared with the same period last year.  This decrease reflects a $2.6 million increase in royalty fees, which are directly related to higher trading volume in licensed index products, offset by a $3.2 million decrease in trading volume incentives.  The decline in trading volume incentives primarily resulted from changes to the program criteria.

Adjusted Operating Margin

The company's adjusted operating margin increased 310 basis points to 46.9 percent for the fourth quarter of 2011, compared with 43.8 percent in the same period in 2010, representing the company's sixth consecutive quarter of year-over-year operating margin increases.  The adjusted operating margin for the full-year 2011 was 48.4 percent, the highest annual level in the company's history.  

Effective Tax Rate

The GAAP effective tax rate for the fourth quarter increased to 39.2 percent from 37.2 percent in last year's fourth quarter, primarily due to the impact of an increase in the Illinois tax rate effective January 1, 2011, offset somewhat by tax benefits recorded in the fourth quarter to recognize tax credits and the adjustment of deferred tax positions.  

The adjusted effective tax rate, which excludes the benefit for tax credits related to prior years, was 39.8 percent compared with 37.2 percent for the fourth quarter of 2010.  

Fourth Quarter 2011 Operational Highlights and Recent Developments

• On October 4, the company's all-electronic exchange, C2, began trading SPXpm options, the company's new S&P 500 Index options product.
• On November 1, CBOE Executive Vice Chairman Edward T. Tilly succeeded Edward J. Joyce as President and Chief Operating Officer of CBOE Holdings,CBOE and C2. Mr. Joyce stepped down for medical reasons after serving as President and Chief Operating Officer since June 2000.
• On December 12, CBOE Futures Exchange, LLC (CFE) announced that James F. Lubin, a 30-year veteran of the futures industry, had been named Managing Director of CFE to lead CFE's strategic direction.
• On December 13, the company announced its investment in the Intellectual Property Exchange International (IPXI), the first financial exchange focused on intellectual property. In addition, CBOE Executive Vice President Richard DuFour was named to IPXI's board of directors.
• On January 9, CFE launched trading in security futures on the CBOE Emerging Markets ETF Volatility Index (Index ticker: VXEEM; futures symbol: VXEM). Options on VXEEM were launched on January 31, 2012 at CBOE.
• On February 1, the company reported that average daily volume (ADV) for total options in January 2012 was 4.52 million contracts, a 27 percent increase from December 2011 ADV of 3.55 million contracts and a 15 percent decrease from January 2011 ADV of 5.29 million contracts. In addition, CFE reported ADV of 40,564 contracts in January 2012, up 4 percent compared with 38,908 per day during January 2011 and a 31 percent increase from 30,885 contracts per day in December 2011.
• On February 2, CFE launched trading in futures on the Radar Logic 25-Metropolitan Statistical Area (MSA) RPX Composite Index (ticker symbol: RPXCP), which tracks values of the U.S. residential housing market as a whole.

Share Repurchase Plan  

During the fourth quarter of 2011, the company repurchased 1,236,100 shares of its common stock at an average price of $25.97 per share, for approximately $32 million.  The shares were purchased as part of the company's $100 million share repurchase plan that was authorized onAugust 2, 2011.  Over the last five months of 2011, the company used $47 million to repurchase 1,836,000 shares of common stock at an average price of $25.59 per share.

As of December 31, 2011, the company had approximately $53 million remaining on its existing stock repurchase authorization.

Dividends

As announced on February 8, 2012, CBOE Holdings' Board of Directors declared a quarterly dividend of $0.12 per share, payable March 23, 2012to shareholders of record on March 2, 2012.

2012 Fiscal Year Financial Guidance

CBOE Holdings currently expects the following for the year ended December 31, 2012:

• The company expects revenue from exchange services and other fees to be in the range of $24.0 million to $26.0 million, a projected increase of about$6.0 million to $8.0 million from $18.2 million reported in 2011. This increase primarily reflects higher fees related to connectivity charges, registration fees and co-location fees.
• Consolidated access fees are expected to be in a range of $64.0 million to $67.0 million, reflecting the expected net impact of access fee changes implemented on January 3, 2012.
• 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. The projected increase in core expenses in 2012 reflects the carryover of projects deferred in 2011 and additional expenses to support revenue growth initiatives.
• 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 for the full year.
• The consolidated effective tax rate is expected to be in the range of 41.2 percent to 41.7 percent for the year ended December 31, 2012. 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 is expected to be in the range of $33.0 million to $35.0 million.
• Capital expenditures are projected in the range of $30.0 million to $35.0 million, primarily driven by ongoing investments in systems hardware and software that enhance trading technology.

Earnings Conference Call

Executives of CBOE Holdings will host a conference call to review its fourth quarter financial results today, February 9, 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, February 9, through 11:00 p.m. CT, February 23, 2012, by calling (800) 585-8367 within the U.S. and Canada, or (404) 537-3406 for international callers, using replay code 37608845.

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 (the VIX Index). 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 OCC.

Forward-Looking Statements

This press release may contain forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995.  Forward-looking statements are those statements that reflect our expectations, assumptions or projections about the future and involve a number of risks and uncertainties.  These statements are only predictions based on our current expectations and projections about future events. There are important factors that could cause actual results to differ materially from that expressed or implied by the forward-looking statements, including: legislative or regulatory changes; changes in law or government policy; increasing competition; loss of our exclusive licenses; decrease in trading volumes; an inability to introduce competitive new products and services; competitive pressures on our existing products, services and trading access fees; changes in price levels and volatility in the derivatives and equity markets; economic, political and market conditions; increases in our fixed costs and expenses; loss of existing customers; difficulty developing strategic relationships and attracting new customers; increased costs related to, or the loss of, intellectual property; rapid technological developments; increases in trading volume and order transaction traffic that we cannot accommodate; our ability to maintain our growth effectively; damage to our reputation and brand name; loss of market data revenue; detrimental changes to our fee structure; failure to effectively monitor and manage our risks; customer consolidation; and changes to the tax treatment for options trading.

More detailed information about factors that may affect our performance may be found in our filings with the SEC, including in our Annual Report on Form 10-K for the year ended December 31, 2010 and other filings made from time to time with the SEC.  

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 and SPX(SM), BXM(SM), BuyWrite(SM), The Options Institute(SM), CBOE Futures Exchange(SM), and VXEEM(SM) and VXEM(SM) are service marks of CBOE.  Standard & Poor's®, S&P® and S&P 500® are registered trademarks of Standard & Poor'sFinancial Services LLC and have been licensed for use by CBOE and C2.  C2(SM), C2 Options Exchange (SM) and SPXpm(SM) are service marks ofC2 Options Exchange, Incorporated.  All other trademarks and service marks are the property of their respective owners.

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 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.  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 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.