CBOE Holdings Reports Fifth Consecutive Year Of Record Financial Results

CBOE Holdings, Inc. (NASDAQ: CBOE) announced today its financial results for the fourth quarter and full year ended December 31, 2015. 

For the quarter ended December 31, 2015, the company reported GAAP net income allocated to common stockholders of $50.2 million, or $0.61 per diluted share, compared with $49.1 million, or $0.58 per diluted share, in the fourth quarter of 2014.  On an adjusted basis, net income allocated to common stockholders was $48.9 million, or $0.59 per diluted share, compared with $53.6 million, or $0.64 per diluted share, in the prior year period.  GAAP operating revenue for the fourth quarter was $156.0 million, down 6 percent compared to $166.5 million in 2014's fourth quarter.  Adjusted operating revenue was $154.0 million, down 8 percent compared to $166.5 million in the fourth quarter of 2014.  

For the year ended December 31, 2015, GAAP net income allocated to common stockholders rose 8 percent to $204.1 million, or $2.46 per diluted share, on GAAP operating revenue of $634.5 million.  For 2014, the company reported GAAP net income allocated to common stockholders of $188.4 million, or $2.21 per diluted share, on GAAP operating revenue of $617.2 million.  On an adjusted basis, net income allocated to common stockholders increased 2 percent to $198.9 million from $194.5 million in 2014.  Adjusted diluted earnings per share grew 5 percent to $2.40 from $2.28 in 2014, on adjusted operating revenue of $632.5 million in 2015 and $617.2 million in 2014.

Financial results presented on an adjusted basis for the fourth quarter of 2015 and the years ended December 31, 2015 and 2014 exclude certain items, including the recognition of revenue related to prior periods, accelerated stock-based compensation, severance expense, tax provisions related to prior years and impairment charges, which are detailed in the reconciliation of non-GAAP results.

"I am pleased with our record financial results for the year, particularly in light of the persistent low volatility and lower options trading volumes seen industrywide in 2015. CBOE Holdings posted record volume in our index trading complex led by new all-time highs in SPX options and VIX futures. We also significantly expanded our proprietary product line and our global customer reach, while forming new alliances to complement our core strengths and diversify our product line," said Edward T. Tilly, CBOE Holdings' Chief Executive Officer. "2016 is off to a strong start and we are excited about the opportunities ahead as we pursue our mission to be the leader in providing innovative products that facilitate and enhance trading in a global marketplace, while creating value for our customers and our shareholders."

"CBOE's ability to further develop trading in our premium products while optimizing our operational efficiency, drove new highs in revenue and earnings, making 2015 our fifth consecutive year of record financial results.  Our strong financial position enabled us to reward shareholders through increased dividend payments and share repurchases in 2015, returning nearly $73 million through dividends and $135 million in share repurchases while continuing to reinvest to grow our business," said Alan J. Dean, CBOE Holdings' Executive Vice President and Chief Financial Officer.

¹A 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.

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 and twelve-month periods ended December 31, 2015 and 2014. 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.

 

Adjusted Operating Revenue

Adjusted operating revenue was $154.0 million in the fourth quarter of 2015, a decrease of $12.5 million, or 8 percent, compared to $166.5 million in 2014's fourth quarter.  Adjusted operating revenue excludes $2.0 million of prior period revenue recognized in the fourth quarter of 2015, included in other revenue.  This revenue was recognized to adjust for incorrect coding of transactions by an exchange participant related to prior periods.  The decline in adjusted operating revenue primarily reflects a decrease of $11.9 million in transaction fees and $1.3 million in access fees, partly offset by a $2.4 million increase in exchange services and other fees. 

Transaction fees decreased 10 percent for the quarter due to a 25 percent decline in trading volume, offset somewhat by a 20 percent increase in the average revenue per contract (RPC) compared with 2014's fourth quarter.  Total trading volume was 271.6 million contracts, or 4.25 million contracts per day, compared with 361.2 million contracts, or 5.64 million contracts per day, in 2014's record-setting fourth quarter.  RPC for the quarter was $0.408 compared with $0.340 in the fourth quarter of 2014. 

The increase in RPC primarily reflects a shift in the mix of products traded towards index options and futures contracts, which generate the highest RPC.  These product categories accounted for 40.9 percent of trading volume in the fourth quarter of 2015 compared with 35.3 percent in the fourth quarter of 2014.  In addition, the RPC increased across each product category as a result of fee adjustments and lower volume discounts and incentives. 

The average RPC represents total transaction fees recognized for the period for Chicago Board Options Exchange^® (CBOE^®), C2 Options Exchange (C2) and CBOE Futures Exchange (CFE^®) divided by total contracts traded during the period.

Adjusted Operating Expenses

GAAP and adjusted operating expenses were $80.1 million for the fourth quarter of 2015, up $2.4 million or 3 percent, compared with adjusted operating expenses of  $77.7 million in the fourth quarter of 2014.   Adjusted operating expenses exclude $1.9 million of severance expense in the fourth quarter of 2014.

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 $49.7 million for the fourth quarter of 2015, an increase of $3.2 million or 7 percent, compared with the fourth quarter of 2014.  The increase primarily reflects higher expenses for professional fees and outside services, partially offset by lower expenses for compensation and benefits. The increase in professional fees and outside services is primarily attributed to the company's outsourcing of certain regulatory services to FINRA, which occurred in December 2014. The decrease in compensation and benefits largely reflects lower expenses related to salaries due to a  workforce reduction in 2014 resulting from the outsourcing of certain regulatory services.

Volume-based expenses, which include royalty fees and order routing, were $18.1 million in the fourth quarter of 2015, a decrease of $2.1 million or 10 percent, compared with the same period a year ago.  The decrease reflects lower royalty fees of $1.5 million and order-routing fees of $0.6 million.  The decline in royalty fees is due to lower trading volume in licensed products versus 2014's fourth quarter.

Adjusted Operating Margin

The adjusted operating margin for the fourth quarter of 2015 of 48.0 percent, declined by 540 basis points compared with 53.4 percent in the prior year period, primarily due to the lower revenue base.  The adjusted operating margin for the full-year 2015 of 50.3 percent was down 130 basis points from 2014's operating margin of 51.6 percent. 

Adjusted Effective Tax Rate

The company's GAAP effective tax rate was 36.7 percent for the fourth quarter of 2015, compared with 41.2 percent in 2014's fourth quarter. The adjusted effective tax rate was 36.7 percent for the fourth quarter of 2015, compared with 39.4 percent in 2014's fourth quarter.  The lower adjusted effective tax rate is primarily the result of a deduction for certain dividends recognized in the fourth quarter of 2015.  The company's adjusted effective tax rate for the full-year 2015 was 38.0 percent compared to 38.2 percent for 2014.

Fourth Quarter 2015 Operational Highlights and Recent Developments

• On February 1, 2016, the company reported that January 2016 average daily volume (ADV) for total options was 5.15 million contracts, a 32 percent increase from December 2015 and unchanged from January 2015. In addition, CFE reported that January 2016 ADV was 272,021 contracts, an increase of 19 percent from January 2015 and a 32 percent increase from December 2015.
• On January 25, 2016, the company announced that it made a majority equity investment in The Vest Financial Group Inc. (Vest), an investment advisor that provides options-centric products. Through its subsidiaries, Vest provides options-based investment advisory services through packaged products and develops technology solutions for options-based investments.
• On December 11, 2015, Environmental Financial Products, LLC (EFP) and CBOE Holdings launched the American Financial Exchange (AFX), an electronic marketplace for small and mid-sized banks to lend and borrow short-term funds.
• On December 9, 2015, CBOE launched the first international extension of the world-renowned CBOE Options Institute at the Singapore Exchange.
• On November 23, 2015, CBOE introduced five new options-based strategy performance benchmark indexes tied to the Russell 2000^® Index (RUT) that focus on options as risk management and yield enhancing investment tools.
• On October 20, 2015, CBOE started trading options on three FTSE Russell indexes: the Russell 1000^® Index, the Russell 1000 Value Index and the Russell 1000 Growth Index.
• On October 16, 2015, the company announced a minority investment in CurveGlobal, a new interest rate derivatives venture of the London Stock Exchange Group (LSEG) and a number of major dealer banks.
• On October 1, 2015, the company added SPXPM index options to its 2:00 a.m. to 8:15 a.m. CT extended trading session.

Return of Capital to Stockholders

During the fourth quarter of 2015, the company repurchased 516,644 shares of its common stock under its share repurchase program at an average price of $67.29 per share, for an aggregate purchase price of $34.8 million.  For the full-year 2015, the company repurchased 2,144,545 shares at an average price of $61.63, for an aggregate purchase price of $132.2 million.

Since the inception of its share repurchase program in 2011 through December 31, 2015, the company has repurchased 9,999,615 shares of its common stock at an average price of $44.25 per share, for a total of $442.5 million.

As of December 31, 2015, the company had approximately $57.5 million of availability remaining under its existing share repurchase authorization.

2016 Fiscal Year Financial Guidance

CBOE Holdings currently expects the following for the year ending December 31, 2016:

• Core operating expenses are expected to be in the range of $211.0 million to $215.0 million, an increase of 8 to 10 percent compared with $195.5 million in 2015. The increase in core expenses is due in part to higher costs associated with regulatory services and the addition of Livevol, Inc., which was acquired in August of 2015. However, both of these categories contribute revenue that is expected to offset these incremental expenses.
• Continuing stock-based compensation expense included in core operating expenses is expected to be approximately $13.5 million for the full year.
• Depreciation and amortization expense is expected to be in the range of $46.0 million to $48.0 million.
• The consolidated effective tax rate is expected to be in the range of 38.5 percent to 39.5 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.
• Capital expenditures are projected to be in the range of $47.0 million to $49.0 million, reflecting the company's ongoing investments in systems hardware and software to support and enhance its trading technology.

Earnings Conference Call

Executives of CBOE Holdings will host a conference call to review its fourth quarter financial results today, February 3, 2016, 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 (866) 807-9684 from the United States, (866) 450-4696 from Canada or (412) 317-5415 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 10:30 a.m. CT, February 3, through 11:00 p.m. CT, February 11, 2016, by calling (877) 344-7529 from the U.S., (855) 669-9658 from Canada or (412) 317-0088 for international callers, using replay code 10077649.