- Net income up 34.4% to $16.7 million
- Diluted earnings per share of $0.42
- Average daily trading volume up 16.3% to 2.8 million equity and index options contracts
- Revenues up 17.7% to $55.9 million and gross margin up 21.2% to $50.4 million for the options exchange
- Pre-tax margin of 58.6% for the options exchange
The International Securities Exchange Holdings, Inc. (NYSE:ISE) today reported that net income for the quarter ended March 31, 2007 increased 34.4% to $16.7 million, or $0.42 per share on a fully diluted basis. This compares to $12.4 million, or $0.32 per share on a fully diluted basis, in the same period in 2006.
Total consolidated revenues for the quarter increased 18.6% to $56.4 million from $47.5 million in the prior year. Gross margin, or total revenues less cost of revenues, increased 21.5% to $50.5 million from $41.6 million in the first quarter of 2006. Included in our consolidated results are the revenues and expenses from the ISE Stock Exchange, our stock exchange business segment.
Total revenues for the quarter from our options exchange business segment increased 17.7% to $55.9 million. Gross margin, or total revenues less cost of revenues, increased 21.2% to $50.4 million. The average daily volume of equity and index options contracts traded increased 16.3% to 2.8 million contracts. Our stock exchange business segment recorded gross margin of $0.4 million, interest income of $0.5 million, total expenses of $3.9 million and minority interest of $3.0 million. Our stock exchange has no impact on our net income as losses are allocated solely to the minority owners. Please refer to the section titled "Segment Information" for further information.
"The economic climate in the first quarter provided a strong catalyst for growth in the options industry and ISE remained at the forefront of this growth," said David Krell, ISE's President and Chief Executive Officer. "The volatility in the financial markets spurred additional demand for options, and ISE continued to meet this demand with new and innovative products that address and anticipate the needs of investors. The cyclical trends that we have witnessed in the financial markets, together with the ongoing secular growth that we have experienced, bode well for the options industry," said Krell.
"We remain focused on realizing the organic growth opportunities in our options business, while expanding into new geographic markets and complementary asset classes. We recently announced our plans to launch a new derivatives exchange, DEX(TM), in partnership with the TSX Group. DEX is our first venture outside of the U.S. markets and we expect to begin operations in March 2009. In launching this new business, we will be able to trade options, futures and options on futures on a variety of Canadian securities."
"We are also excited about our latest product, ISE FX Options(TM), which we launched earlier this month. The foreign exchange market continues to post impressive growth rates, and we are optimistic that there is significant untapped demand for this asset class. ISE FX Options provides investors with effective risk management strategies and new trading opportunities within the growing foreign exchange asset class. Going forward, we will continue to introduce new products and new innovations, as we grow the overall market and garner our fair share of this business," concluded Krell.
First Quarter Results - Options Exchange
Income Statement
Revenues
Transaction fee revenues increased to $43.9 million from $36.9 million last year due to continued strong growth in trading volumes. Member fees and other revenues increased to $7.3 million from $5.6 million in the same period last year due to an increase in connectivity fees which are charged to market makers based on quote capacity usage. There was also an increase in connectivity fees from our subsidiary, Longitude, which was acquired in March 2006. Market data revenues decreased to $4.7 million from $5.1 million in the prior year quarter due to our lower market share of trades.
Cost of Revenues, Gross Margin
Cost of revenues for the first quarter decreased to $5.6 million from $6.0 million in the prior year quarter. Gross margin increased to $50.4 million from $41.6 million in the first quarter of 2006.
Expenses
Total expenses for the first quarter of 2007 increased to $23.6 million from $20.1 million in the first quarter of 2006. This increase was principally due to an increase in compensation and benefits expenses, in part attributable to higher stock-based incentive compensation. Technology and communications expenses increased to $4.3 million from $3.5 million due to increased network and capacity costs for our trading system. Professional fees increased to $1.7 million from $1.3 million due to higher legal fees. Marketing and business development expenses decreased to $0.5 million from $0.6 million due to the timing of marketing programs. Depreciation and amortization increased to $1.7 million from $1.5 million due to higher amortization expense of the assets of Longitude.
Income, Margins and Taxes
Our pre-tax income for the first quarter of 2007 increased 28.1% to $29.5 million from $23.1 million last year. Interest and investment income increased to $2.8 million from $1.6 million primarily due to interest income from higher cash balances.
Our pre-tax margin for the first quarter increased to a record 58.6% from 55.5% last year.
Our tax rate decreased to 43.5% from 44.0% in the first quarter of 2006 due to lower tax rates on our invested cash.
Net income for the first quarter increased 29.2% to $16.7 million from $12.9 million in the prior year quarter.
Consolidated Balance Sheet
As of March 31, 2007, ISE had cash and cash equivalents and investments in securities of $289.8 million, total assets of $402.0 million, and stockholders' equity of $274.5 million. The Company recorded minority interest of $33.3 million as of March 31, 2007, which represents interests of minority shareholders in the ISE Stock Exchange. Included in cash and cash equivalents is $34.8 million from the ISE Stock Exchange which is reserved for its use. There were approximately 38.2 million shares of common stock outstanding.
First Quarter Business Highlights - Options Exchange
-- ISE was the largest equity options exchange for the first
quarter of 2007 based on total equity options trading.
-- On January 9, 2007, ISE's Board of Directors declared a
quarterly dividend of $0.05 per outstanding share of its Class
A Common Stock payable on March 30, 2007 to holders of record
as of the close of business on March 23, 2007.
-- On February 12, 2007, ISE completed the initial rollout of its
Second Market for options. Approximately 700 options classes
now trade in the Second Market. ISE also announced the
addition of three Second Market Competitive Market Makers
(CMMs(R)): Lehman Brothers Inc., DC Trading Partners LLC and
Monadnock Capital Management, LP. The total number of Second
Market CMMs is now thirteen.
-- On February 21, 2007, ISE launched an enhanced version of ISEE
Select(TM), its customized sentiment data offering. New
features include the ability to chart intraday and historical
sentiment values as well as the capability to download the
historical values for further analysis. ISE also announced
that OptionsDevil, Schaeffer's Investment Research,
SentimenTrader, and Terra Nova Financial, LLC joined the ISEE
Select marketing alliance.
-- On February 26, 2007, ISE entered into an agreement with First
Trust Advisors L.P. to create and list Exchange-Traded Funds
(ETFs) on three proprietary ISE indexes. First Trust plans to
develop ETFs based on the ISE Water Index (underlying index
ticker: HHO), ISE-Revere Natural Gas Index (underlying index
ticker: FUM), and ISE ChIndia Index (underlying index ticker:
to be determined).
-- On February 27, 2007, ISE set a new record daily trading
volume of 5,531,875 equity and index options contracts.
Trading volume in the Nasdaq-100 Index Tracking Stock (QQQQ)
also reached a new high of 1,032,296 contracts.
-- On March 5, 2007, ISE and TSX Group announced the creation of
DEX(TM), a new Canadian derivatives exchange. DEX, which is
scheduled to begin operations in March 2009, will be owned 52%
by TSX Group and 48% by ISE and will list and trade options,
futures and options on futures on a range of Canadian
securities.
-- On March 9, 2007, ISE traded its 2 billionth options contract.
This trade, which was in the Nasdaq-100(R) Trust Shares
(QQQQ), took place between Penson Financial Services, Inc. and
Ronin Capital, LLC.
-- On March 27, 2007, ISE announced a partnership with
Optionetics, Inc., a recognized leader in options education,
in a joint effort to educate retail investors about ISE FX
Options(TM). Optionetics will incorporate information and
trading strategies for ISE FX Options into its two-day seminar
series, Trading the Foreign Exchange Markets, which are
executed by its affiliate, FX Trading Education Corp. (FXTE).
-- On March 28, 2007, ISE announced that Timber Hill LLC, the
market making subsidiary of Interactive Brokers, will serve as
the Primary Market Maker (PMM(R)) for the first four currency
pairs of ISE FX Options that will be listed on the Exchange.
Additionally, Citigroup Derivatives Markets Inc., Lehman
Brothers Inc., and Optiver US, LLC will act as Competitive
Market Makers (CMMs(R)) in a variety of the products. Trading
will initially take place in the following four currency
pairs: USD/EUR (Symbol: EUI), USD/GBP (Symbol: BPX), USD/JPY
(Symbol: YUK), and USD/CAD (Symbol: CDD).
First Quarter Business Highlights - Stock Exchange
-- On January 24, 2007, the ISE Stock Exchange added all of the
securities that comprise the S&P 1500 to its fully-displayed
stock market. Additionally, the ISE Stock Exchange now offers
full route-out capabilities to prevent trade-throughs.
-- On February 5, 2007, ISE announced that Lava Trading Inc.
added the ISE Stock Exchange as an equity execution
destination. Lava joins other trading solutions providers
connected to the ISE Stock Exchange, including InstaQuote,
MIXIT, Neovest, Portware, Orc Software, and Order Execution
Services.
-- On February 13, 2007, ISE completed the rollout of its
fully-displayed stock market for the ISE Stock Exchange.
Traders can now access approximately 6,000 National Market
System (NMS) securities through both ISE's non-displayed
liquidity pool, MidPoint Match(TM) and its displayed market.
-- On March 5, 2007, the Regulation NMS Order Protection Rule
went into effect for exchanges. The ISE Stock Exchange was
created to operate most effectively in a Reg NMS environment
and was fully compliant prior to the March effective date.
INTERNATIONAL SECURITIES EXCHANGE HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
(unaudited)
Three Months
Ended
March 31,
2007 2006
-------- --------
Revenues:
Transaction fees $44,478 $36,867
Member fees and other 7,117 5,622
Market data 4,809 5,055
-------- --------
Total revenues 56,404 47,544
Cost of revenues:
Activity remittance fees 4,079 4,345
License fees, liquidity rebates, and brokerage fees 1,829 1,625
-------- --------
Total cost of revenues 5,908 5,970
Gross margin 50,496 41,574
Expenses:
Compensation and benefits 15,071 11,368
Technology and communications 4,563 3,518
Occupancy 1,461 1,318
Professional fees 2,080 1,628
Marketing and business development 784 622
Depreciation and amortization 1,866 1,517
Other 1,417 1,033
-------- --------
Total direct expenses 27,242 21,004
Reorganization - 24
-------- --------
Total expenses 27,242 21,028
Operating income 23,254 20,546
Interest and investment income 3,233 1,611
Minority interest 3,040 -
-------- --------
Income before provision for income taxes 29,527 22,157
Provision for income taxes 12,843 9,739
-------- --------
Net income $16,684 $12,418
======== ========
Earnings per share:
Basic $ 0.44 $ 0.33
Diluted $ 0.42 $ 0.32
Weighted average number of shares outstanding:
Basic 38,137 37,102
Diluted 40,095 39,254
INTERNATIONAL SECURITIES EXCHANGE HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(in thousands)
March 31, December 31,
2007 2006
------------ ------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 190,244 $ 200,015
Accounts receivable, net 41,342 34,815
Income tax receivable 8,997 9,644
Securities owned 67,906 60,090
Other current assets 5,475 2,415
------------ ------------
Total current assets 313,964 306,979
Securities owned 31,616 32,724
Fixed assets, net 30,443 29,009
Deferred tax asset, net 20,288 21,932
Other assets 5,643 5,781
------------ ------------
Total assets 401,954 396,425
============ ============
LIABILITIES, MINORITY INTEREST AND STOCKHOLDERS' EQUITY
LIABILITIES
Current liabilities:
Accounts payable and accrued expenses 19,183 19,430
Compensation and benefits payable 4,055 12,453
Deferred revenue 6,015 5,129
Payment for order flow payable 11,886 10,262
------------ ------------
Total current liabilities 41,139 47,274
Deferred revenue 49,675 50,954
Other liabilities 3,401 3,609
-------------------------
Total liabilities 94,215 101,837
Minority interest 33,283 36,323
------------ ------------
STOCKHOLDERS' EQUITY 274,456 258,265
------------ ------------
------------ ------------
Total liabilities, minority interest
and stockholders' equity $ 401,954 $ 396,425
============ ============
INTERNATIONAL SECURITIES EXCHANGE HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
Three Months Ended
March 31,
2007 2006
--------- ---------
Cash flows from operating activities:
Net income $ 16,684 $ 12,418
Adjustments to reconcile net income to cash
provided by/(used in) operating activities:
Depreciation and amortization 1,866 1,517
Minority interest (3,040) 2,882
Stock based compensation 2,991 2,024
Deferred taxes 1,644 1,136
Unrealized gain on securities owned and
available for sale securities, net (32) (296)
Excess tax benefits from share-based payment
arrangements (2,366) (3,314)
(Increase)/decrease in operating assets:
Accounts receivable, net (6,527) (4,329)
Income tax receivable 3,013 370
Securities owned 1,323 2,033
Other assets (3,064) 578
Increase/(decrease) in operating liabilities:
Accounts payable and accrued expenses (247) (1,462)
Compensation and benefits payable (8,398) (4,998)
Income tax payable - (372)
Deferred revenue (393) 677
Payment for order flow payable 1,624 (2,189)
Other liabilities (208) (177)
--------- ---------
Net cash provided by operating activities 4,870 6,498
--------- ---------
Cash flows from investing activities:
Purchase of fixed assets (3,158) (852)
Purchase of intangible assets - (2,000)
Purchase of available for sale securities (7,979) -
Maturities of available for sale securities - 4,973
--------- ---------
Net cash (used in)/provided by investing
activities (11,137) 2,121
--------- ---------
Cash flows from financing activities:
Dividend (1,941) (1,894)
Proceeds from options exercised 266 294
Share repurchase (4,195) (1,971)
Excess tax benefits from share-based payment
arrangements 2,366 3,314
--------- ---------
Net cash used in financing activities (3,504) (257)
--------- ---------
(Decrease)/Increase in cash and cash equivalents (9,771) 8,362
Cash and cash equivalents, beginning of period 200,015 170,927
--------- ---------
Cash and cash equivalents, end of period $190,244 $179,289
========= =========
INTERNATIONAL SECURITIES EXCHANGE HOLDINGS, INC.
KEY STATISTICAL INFORMATION - OPTIONS BUSINESS
Three Months
Ended
March 31,
2007 2006
-------- --------
Trading Days 61 62
----------------------------------------------------------------------
Average daily trading volume (1) (2)
Equity and Index Options
----------------------------------------------------
Total U.S. industry equity and index options traded
(in thousands) 9,990 7,828
Our equity and index options traded (in thousands) 2,773 2,384
Our market share of equity and index options traded 27.8% 30.5%
Equity Options
----------------------------------------------------
Total U.S. industry equity options traded (in
thousands) 9,033 7,202
Our equity options traded (in thousands) 2,728 2,356
Our market share of equity options traded 30.2% 32.7%
Index Options
----------------------------------------------------
Total U.S. industry index options traded (in
thousands) 957 626
Our index options traded (in thousands) 45 28
Our market share of index options traded 4.7% 4.5%
----------------------------------------------------------------------
Our member total trading volume (sides, in thousands): (3)
Account type:
Customer 141,620 127,302
Firm proprietary 47,089 32,232
Market maker 149,680 136,097
-------- --------
Total Sides 338,389 295,631
----------------------------------------------------------------------
Our market share of total industry trading: (4)
Customer 29.4% 32.1%
Firm proprietary 23.6% 24.9%
Market maker 27.9% 30.6%
----------------------------------------------------------------------
Revenue:
Average transaction fee per side (5) $0.130 $0.125
Average cost of transaction fee per side (6) ($0.016) ($0.020)
-------- --------
Average net transaction fee per side (6) $0.113 $0.105
Average transaction fee per revenue side (7) $0.174 $0.176
----------------------------------------------------------------------
Our trades:(8)
Average contracts per trade 18.5 16.2
Average trades per day (in thousands) 150.1 147.2
Total trades (in thousands) 9,156 9,126
Our market share of industry trade volume 31.7% 33.8%
----------------------------------------------------------------------
Our listed issues: (9)
Average number of issues traded during the period 1,643 854
----------------------------------------------------------------------
Our Members (average number trading during period)
PMMs 10 10
CMMs 147 142
EAMs 110 102
-------- --------
Total 267 254
----------------------------------------------------------------------
Employees (period average)
Full-time equivalent (10) 182 189
----------------------------------------------------------------------
(1) Represents single counted contract volume. For example, a
transaction of 500 contracts on our exchange is counted as a single
500 contract transaction for purposes of calculating our volumes,
even though we may receive transaction fees from parties on both
sides of the transaction, one side of a transaction, or in some
cases, neither side of a transaction.
(2) Our market share is calculated based on the number of contracts
executed on our exchange as a percentage of total industry contract
volume.
(3) Represents each side of a buy or sell transaction. For example, a
transaction of 500 contracts on our exchange is counted as two sides
of 500 contracts, representing a buy and a sell transaction. We
generally do not charge our members for executing non-broker-dealer
customer orders on our exchange except for options on our premium
products as well as options for listings in our Second Market.
(4) Represents our market share of total U.S. industry equity and
index trading for members trading on our exchange based on contract
trading volume.
(5) Average transaction fee per side is calculated by dividing our
transaction fees by the total number of sides executed on our
exchange. We generally do not charge our members for executing non-
broker-dealer customer orders on our exchange except for options on
our premium products as well as options for listings in our Second
Market. Comparing our average transaction fee per side to our average
transaction fee per revenue side reflects the negative effect of our
fee waivers or reductions on our revenues, on a per side basis.
(6) Average cost of transaction fee per side is calculated by
subtracting cost of revenues from transaction fees, which we refer to
as net transaction fees, and dividing the result by the total number
of sides executed on our exchange.
(7) Our average transaction fee per revenue side reflects the
transaction fee we charge to our market participants per our publicly
available pricing schedules. These schedules were part of rule
proposals that became effective upon filing pursuant to Section
19(b)(3)(A) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). The Securities and Exchange Commission may abrogate
such rule proposals within 60 days of filing if it determines that
such action is necessary or appropriate in the public interest, for
the protection of investors or otherwise in furtherance of the
purposes of the Exchange Act.
(8) Members can have several contracts per trade. Trades represent the
number of trades cleared through The Option Clearing Corporation, or
the OCC. Market data revenue is generated on a per trade basis, not
on a contract basis.
(9) By "issues" we mean the number of securities underlying our
options. We trade multiple options series on each underlying
security.
(10) Excludes full-time equivalent employees of ISE Stock Exchange,
LLC, beginning April 2006.
Segment Information
We operate two segments - an options exchange segment and a stock exchange segment. Pursuant to the terms of our agreement with the strategic investors of the ISE Stock Exchange and in accordance with U.S. GAAP, we are the primary beneficiary of the ISE Stock Exchange and consolidated its financial results. We exercise a majority of the voting interest of the ISE Stock Exchange; however, all losses are allocated solely to the minority owners. Consolidation of the ISE Stock Exchange does not currently have any effect on our net results of operations and will not until it generates net profits. Therefore, consolidation increases our revenues and expenses to reflect 100% of the ISE Stock Exchange's results; however, these revenues and expenses are offset dollar-for-dollar by minority interest since we are not required to recognize any of its losses.
INTERNATIONAL SECURITIES EXCHANGE HOLDINGS, INC.
STATEMENTS OF OPERATIONS BY BUSINESS SEGMENT
(in thousands)
(unaudited)
Three Months Ended
March 31, 2007
Options Stock ISE
Exchange Exchange Elimination Holdings
------------------ ----------- ---------
Revenues:
Transaction fees $43,885 $ 593 $ - $44,478
Member fees and other 7,310 74 (267) 7,117
Market data 4,743 66 - 4,809
-------- -------- ---------- --------
Total revenues 55,938 733 (267) 56,404
Cost of revenues:
Activity remittance fees 3,897 182 - 4,079
License fees, liquidity
rebates, and brokerage fees 1,656 173 - 1,829
-------- -------- ---------- --------
Total cost of revenues 5,553 355 - 5,908
Gross margin 50,385 378 (267) 50,496
Expenses:
Compensation and benefits 12,798 2,502 (229) 15,071
Technology and communications 4,271 296 (4) 4,563
Occupancy 1,260 221 (20) 1,461
Professional fees 1,697 383 - 2,080
Marketing and business
development 537 247 - 784
Depreciation and amortization 1,729 147 (10) 1,866
Other 1,335 86 (4) 1,417
-------- -------- ---------- --------
Total direct expenses 23,627 3,882 (267) 27,242
Reorganization - - - -
-------- -------- ---------- --------
Total expenses 23,627 3,882 (267) 27,242
Operating income 26,758 (3,504) - 23,254
Interest and investment
income 2,769 464 - 3,233
Minority interest - 3,040 - 3,040
-------- -------- ---------- --------
Income before provision for
income taxes 29,527 - - 29,527
Provision for income taxes 12,843 - - 12,843
-------- -------- ---------- --------
Net income $16,684 $ - $ - $16,684
======== ======== ========== ========
Three Months Ended
March 31, 2006
Options Stock ISE
Exchange Exchange Holdings
-----------------------------
Revenues:
Transaction fees $ 36,867 $ - $ 36,867
Member fees and other 5,622 - 5,622
Market data 5,055 - 5,055
--------- --------- ---------
Total revenues 47,544 - 47,544
Cost of revenues:
Activity remittance fees 4,345 - 4,345
License fees, liquidity rebates, and
brokerage fees 1,625 - 1,625
--------- --------- ---------
Total cost of revenues 5,970 - 5,970
Gross margin 41,574 - 41,574
Expenses:
Compensation and benefits 10,933 435 11,368
Technology and communications 3,460 58 3,518
Occupancy 1,277 41 1,318
Professional fees 1,278 350 1,628
Marketing and business development 622 - 622
Depreciation and amortization 1,509 8 1,517
Other 1,025 8 1,033
--------- --------- ---------
Total direct expenses 20,104 900 21,004
Reorganization 24 - 24
--------- --------- ---------
Total expenses 20,128 900 21,028
Operating income 21,446 (900) 20,546
Interest and investment income 1,611 - 1,611
Minority interest - - -
--------- --------- ---------
Income before provision for income taxes 23,057 (900) 22,157
Provision for income taxes 10,144 (405) 9,739
--------- --------- ---------
Net income $ 12,913 $ (495) $ 12,418
========= ========= =========
Earnings Conference Call
ISE will host a conference call to discuss its first quarter 2007 results at 8:30 a.m. Eastern Time today. The conference call will be web cast and can be accessed on the Investor Relations section of ISE's web site at www.iseoptions.com. An investor presentation that will be referenced during the call will be posted to the web site. Investors can also listen to the conference call by calling (800) 599-9795 and dialing the participant passcode 90542572. An archived recording of the call will be available from 10:30 a.m. on April 25, 2007 until midnight on April 26, 2007 and can be accessed by calling (888) 286-8010 and dialing the participant passcode 98916666. An archived replay of the call will be available on the Investor Relations section of the Company's web site at www.iseoptions.com.
