First Quarter Financial Highlights
- GAAP Diluted Earnings Per Share of $0.32
- Non-GAAP Diluted Earnings Per Share of $0.33 which excludes expenses related to the ISE Stock Exchange
- Net income increases 40.1% to $12.4 million
- Average daily trading volume up 37.6% to 2.4 million equity and index options contracts
- Revenues up 28.9% to $47.5 million
- Pre-tax margin of 53.3%
The International Securities Exchange (NYSE:ISE) today reported that net income for the quarter ended March 31, 2006 increased 40.1% to a record $12.4 million, or $0.32 per share on a fully diluted basis. This compares to $8.9 million, or $0.25 per share on a fully diluted basis, in the same period in 2005.
Non-GAAP net income, which excludes incremental costs related to the development of our recently announced equities exchange business, the ISE Stock Exchange, was $12.9 million, or $0.33 per share on a fully diluted basis. A full reconciliation of GAAP to non-GAAP results is included in this release.
Total revenues for the quarter increased 28.9% to $47.5 million versus $36.9 million in the prior year. Gross margin, or total revenues less cost of revenues, increased 25.0% to $41.6 million as compared to $33.3 million in the first quarter of 2005. The average daily volume of equity and index options contracts traded increased 37.6% to 2.4 million contracts as compared to 1.7 million contracts in the year-ago quarter.
"We delivered another strong performance in the first three months of 2006 as our average daily volume exceeded two million contracts for the second consecutive quarter," said David Krell, ISE's President and Chief Executive Officer. "The double digit growth in our core options business fueled a 40% increase in net income once again reflecting the operating leverage that is inherent in our business. We also continued to post strong cash flow which we now share with our stockholders by virtue of the implementation of the dividend policy that we announced last year."
"During the quarter, we made further progress in executing our strategy to grow our Information and Market Data products. In January, we announced the launch of a new market data product which provides historical market data to traders and investors to improve the effectiveness of their respective trading strategies. This product is the latest offering in our suite of market data products which will soon expand to include depth-of-book and enhanced sentiment market data offerings. Additional introductions of new products in this area will enable us to monetize the significant amount of proprietary data that we store in the normal course of our operations," added Krell.
First Quarter Results
Revenues
Total revenues for the first quarter of 2006 increased 28.9% to $47.5 million principally due to increased trading volumes. This compares to revenues of $36.9 million in the same period last year.
- Transaction fee revenues increased 38.0% to $36.9 million in the first quarter from $26.7 million last year due to increased trading volumes. Our net transaction fee revenues, which exclude activity remittance fees and ETF and license fees, increased 33.9% to $30.9 million from $23.1 million in the same period last year.
- Other member fees increased 1.4% to $5.6 million from $5.5 million in the same period last year primarily due to the sale of four additional Class B-2 memberships since the first quarter of last year.
- Market data revenues increased 9.3% to $5.1 million as compared to $4.6 million last year due to increased profit generated by OPRA. Our revenue is based on our pro rata share of total industry trades.
Cost of Revenues
- Cost of revenues for the first quarter of 2006 increased 64.3% to $6.0 million compared to $3.6 million in the first quarter of 2005 primarily due to a $1.6 million increase in activity remittance fees that we pay to the SEC and a $0.7 million increase in license fees associated with the increased volumes of certain ETFs and our equity index products.
Expenses
Total expenses for the first quarter of 2006 increased 22.6% to $21.0 million as compared to $17.2 million in the first quarter of 2005. Included in our expenses are incremental costs related to the development of the ISE Stock Exchange of $0.9 million for the first quarter of 2006 and $0.1 million for the first quarter of 2005. Excluding these costs, our expenses increased 18.1% year over year.
- Compensation and benefits expenses increased 38.2% to $11.4 million from $8.2 million primarily due to a full quarter's effect of our stock-based compensation program and increased headcount to support our overall growth and new initiatives including the ISE Stock Exchange. In total, headcount increased to 189 from 164 last year.
- Technology and communications expenses increased 4.0% to $3.5 million compared to $3.4 million in the first quarter of 2005 primarily due to fees paid to OMX for additional enhancements and maintenance and other costs related to our core trading system.
- Occupancy expenses increased 19.3% to $1.3 million primarily due to additional office space leased to support the growth of our core options business as well as the ISE Stock Exchange.
- Professional fees increased 9.5% to $1.6 million primarily due to higher accounting fees related to public company matters and higher technology consulting fees related to the ISE Stock Exchange.
- Marketing and business development expenses increased 6.1% to $0.6 million.
- Depreciation and amortization expenses increased 1.3% to $1.5 million.
- Other expenses increased 34.3% to $1.0 million primarily due to increased insurance expenses subsequent to our initial public offering and other general and administrative expenses.
- Reorganization costs decreased 76.5% to $24.0 thousand as compared to $102.0 thousand last year that resulted from our decision to reorganize into a holding company structure.
Income, Margins and Taxes
Pre-tax income increased 35.0% to $22.2 million versus $16.4 million last year. Included in pre-tax income is interest and investment income which increased to $1.6 million compared to $0.3 million primarily due to higher cash balances. Our pre-tax margin for the first quarter increased to 53.3% from 49.4% last year. Excluding incremental costs related to the ISE Stock Exchange, our pre-tax margins increased to 55.5% from 49.7% last year.
Our tax rate decreased to 44.0% for the first quarter as compared to 46.0% last year primarily due to a lower tax rate on returns from our invested cash.
Net income for the first quarter increased 40.1% to $12.4 million from $8.9 million in the prior year quarter. Excluding incremental costs related to the ISE Stock Exchange, net income increased 44.9% to $12.9 million from $8.9 million in the prior quarter.
Balance Sheet
As of March 31, 2006, ISE had cash and cash equivalents of $179.3 million, total assets of $289.1 million, and stockholders' equity of $199.2 million. There were approximately 39.3 million shares of common stock outstanding on a fully diluted basis.
The Company recorded minority interest of $2.9 million as of March 31, 2006, representing interest of a minority shareholder in the Company's subsidiary Longitude LLC.
First Quarter Business Highlights
- ISE was the largest equity options exchange for the first quarter of 2006 based on total equity options trading.
- ISE set a new monthly average daily volume record of 2.7 million equity and index options contracts traded for the month of January and a new average daily volume record of 2.4 million equity and index options contracts traded for the quarter.
- ISE set a new daily trading volume record of 4.6 million equity and index options contracts on January 20, 2006.
- In March 2006, ISE declared and paid a quarterly dividend of $0.05 per outstanding share of its Class A Common Stock.
- On January 24, 2006, ISE announced the launch of a new market data offering that provides comprehensive historical market data.
- On March 24, 2006, the Company acquired the intellectual property and other related assets of Longitude, Inc., inventor of a proprietary and patented technology that uses parimutuel principles to run derivatives auctions that aggregate liquidity and produce fair and efficient market-driven prices. The new entity, Longitude LLC, became an operating unit of ISE, which retains majority-ownership in partnership with Goldman Sachs. Goldman Sachs had a pre-existing interest in the entity which it is increasing as a result of the transaction.
INTERNATIONAL SECURITIES EXCHANGE, INC.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
(unaudited)
Three Months Ended
March 31, March 31,
2006 2005
--------- ---------
Revenues:
Transaction fees $36,867 $26,714
Other member fees 5,622 5,546
Market data 5,055 4,625
--------- ---------
Total revenues 47,544 36,885
Cost of revenues:
Activity remittance fees 4,345 2,702
License fees 1,625 931
--------- ---------
Total cost of revenues 5,970 3,633
Gross margin 41,574 33,252
Expenses:
Compensation and benefits 11,368 8,227
Technology and communications 3,518 3,383
Occupancy 1,318 1,105
Professional fees 1,628 1,487
Marketing and business development 622 586
Depreciation and amortization 1,517 1,498
Other 1,033 769
--------- ---------
Total direct expense 21,004 17,055
Reorganization 24 102
Offering cost - -
--------- ---------
Total expenses 21,028 17,157
--------- ---------
Operating income 20,546 16,095
Interest and investment income 1,611 322
--------- ---------
Income before provision for income taxes 22,157 16,417
Provision for income taxes 9,739 7,556
--------- ---------
Net income $12,418 $8,861
========= =========
Earnings per share:
Basic $0.33 $0.27
Diluted $0.32 $0.25
Weighted average number of shares outstanding:
Basic 37,102 33,059
Diluted 39,254 34,946
INTERNATIONAL SECURITIES EXCHANGE, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(in thousands)
March 31, December 31,
2006 2005
------------ ------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $179,289 $170,927
Accounts receivable, net 39,364 35,048
Income tax receivable 2,944 -
Securities owned 4,934 9,890
Other current assets 2,164 2,745
------------ ------------
Total current assets 228,695 218,610
Securities owned 5,507 7,244
Accounts receivable 600 587
Fixed assets, net 28,557 29,205
Deferred tax asset, net 21,197 22,333
Other assets 4,503 2,517
------------ ------------
Total assets 289,059 280,496
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Current liabilities:
Accounts payable, accrued expenses and other
liabilities 13,944 15,406
Compensation and benefits payable 3,373 8,371
Deferred revenue 5,161 4,687
Income taxes payable - 372
Payment for order flow payable 10,044 12,233
------------ ------------
Total current liabilities 32,522 41,069
Deferred revenue 50,441 50,238
Other liabilities 4,034 4,211
------------ ------------
Total liabilities 86,997 95,518
------------ ------------
Minority interest 2,882 -
STOCKHOLDERS' EQUITY 199,180 184,978
------------ ------------
Total liabilities & stockholders' equity $289,059 $280,496
============ ============
INTERNATIONAL SECURITIES EXCHANGE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
Three Months Ended
March 31,
2006 2005
--------- ---------
Cash flows from operating activities:
Net income $12,418 $8,861
Adjustments to reconcile net income to cash
provided by/(used in) operating activities:
Depreciation and amortization 1,517 1,498
Minority interest 2,882 -
Stock based compensation 2,024 379
Deferred taxes 1,136 (1,513)
Unrealized (gain)/loss on securities owned and
available for sale securities, net (296) 58
Excess tax benefits from share-based payment
arrangements (3,314) -
(Increase)/decrease in operating assets:
Accounts receivable, net (4,329) (3,498)
Income tax receivable 370 8,195
Securities owned 2,033 3,895
Other assets 578 3,216
Increase/(decrease) in operating liabilities:
Accounts payable and accrued expenses (1,462) 5,917
Compensation and benefits payable (4,998) (10,250)
Income tax payable (372) -
Deferred revenue 677 (768)
Payment for order flow payable (2,189) 8,602
Other liabilities (177) (183)
--------- ---------
Net cash provided by operating activities 6,498 24,409
--------- ---------
Cash flows from investing activities:
Purchase of fixed assets (852) (274)
Purchase of intangible assets (2,000)
Maturities of available for sale securities 4,973 -
--------- ---------
Net cash provided by/(used in) investing
activities 2,121 (274)
--------- ---------
Cash flows from financing activities:
Dividend (1,894) (11,784)
Net proceeds from initial public offering - 70,673
Proceeds from options exercised 294 -
Share repurchases (1,971) -
Excess tax benefits from share-based payment
arrangements 3,314 -
--------- ---------
Net cash provided by/(used in) financing
activities (257) 58,889
--------- ---------
Increase in cash and cash equivalents 8,362 83,024
Cash and cash equivalents, beginning of period 170,927 44,847
--------- ---------
Cash and cash equivalents, end of period $179,289 $127,871
========= =========
INTERNATIONAL SECURITIES EXCHANGE, INC.
KEY STATISTICAL INFORMATION
Three Months Ended
March 31, March 31,
2006 2005
--------- ---------
Trading Days 62 61
----------------------------------------------------------------------
Average daily trading volume: (1) (2)
Equity and Index Options
------------------------
Total U.S. industry equity and index options traded
(in thousands) 7,828 5,700
Our equity and index options traded (in thousands) 2,384 1,733
Our market share of equity and index options traded 30.5% 30.4%
Equity Options
--------------
Total U.S. industry equity options traded (in
thousands) 7,202 5,223
Our equity options traded (in thousands) 2,356 1,727
Our market share of equity options traded 32.7% 33.1%
Index Options
-------------
Total U.S. industry index options traded (in
thousands) 626 477
Our index options traded (in thousands) 28 5
Our market share of index options traded 4.5% 1.1%
----------------------------------------------------------------------
Our member total trading volume (sides, in
thousands): (3)
Customer 127,302 87,507
Firm proprietary 32,232 18,219
Market maker 136,097 105,649
--------- ---------
Total sides 295,631 211,375
----------------------------------------------------------------------
Our market share of total industry trading: (4)
Customer 32.1% 30.7%
Firm proprietary 24.9% 21.2%
Market maker 30.6% 32.6%
----------------------------------------------------------------------
Revenue:
Average transaction fee per side (5) $0.125 $0.126
Average cost of transaction fee per side (6) ($0.020) ($0.017)
--------- ---------
Average net transaction fee per side (6) $0.105 $0.109
Average transaction fee per revenue side (7) $0.176 $0.180
----------------------------------------------------------------------
Our trades: (8)
Average contracts per trade 16.2 17.1
Average trades per day (in thousands) 147.2 101
Total trades (in thousands) 9,126 6,163
Our market share of industry trades 33.8% 35.6%
----------------------------------------------------------------------
Our listed issues: (9)
Average number of issues traded during the period 854 705
----------------------------------------------------------------------
Our members (average number trading during period)
PMMs 10 10
CMMs 142 139
EAMs 102 94
--------- ---------
Total 254 243
----------------------------------------------------------------------
Employees at end of period 189 164
----------------------------------------------------------------------
(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 do not currently receive transaction fees from
non-broker-dealer customer sides, except for options on our
premium products.
(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 have charged our members for executing
non-broker-dealer customer orders on our exchange except for
options on our premium products. 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. For the three months ended
March 31, 2006 and March 31, 2005, we have waived and discounted
$9,541 and $6,511 of our fees, respectively.
(6) Average net transaction fee per side is calculated by subtracting
cost of sales from transaction fees and dividing the result by the
total number of sided 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.
GAAP to Non-GAAP Reconciliation
In an effort to provide investors with additional information regarding the Company's results as determined by U.S. generally accepted accounting principles, or GAAP, the Company also discloses certain non-GAAP information which management believes provides useful information to investors. Management reviews this non-GAAP financial measurement when evaluating the Company's financial performance and results of operations; therefore, we believe it is useful to provide information with respect to these non-GAAP measurements so as to share this perspective of management. Non-GAAP measurements do not have any standardized meaning and are therefore unlikely to be comparable to similar measures presented by other companies. These non-GAAP financial measures should be considered in the context with our GAAP results.
We have disclosed financial measures that reference our net transaction fees which we define as our transaction fees less activity remittance fees and ETF and index license fees. Under GAAP, activity remittance fees and ETF and index license fees are required to be recorded on a gross basis. Since activity remittance fees and ETF and index license fees are entirely offset by corresponding amounts in transaction fees, management believes that presenting net transaction fees provides a clearer measure of our transaction related performance.
We have also disclosed financial measures that exclude incremental costs related to the development of our new equities exchange business, the ISE Stock Exchange. These costs do not relate to our core business of operating an equities and index options exchange. Management believes that presenting our results excluding these costs provides a clearer measure of our results and performance.
INTERNATIONAL SECURITIES EXCHANGE, INC.
GAAP TO NON GAAP RECONCILIATION
(in thousands, except per share amounts)
(unaudited)
Three Months Ended
March 31, March 31,
2006 2005
--------- ---------
GAAP Transaction fees, as reported $36,867 $26,714
Less activity remittance fees 4,345 2,702
Less license fees 1,625 931
--------- ---------
Net transaction fees, as adjusted 30,897 23,081
--------- ---------
GAAP Total expenses, as reported $21,028 $17,157
Less ISE Stock Exchange direct expenses 900 117
--------- ---------
Total expenses excluding ISE Stock Exchange
expenses 20,128 17,040
--------- ---------
GAAP Income before provision for income taxes, as
reported 22,157 16,417
Less ISE Stock Exchange direct expenses 900 117
--------- ---------
Income before provision for income taxes excluding
ISE Stock Exchange expenses 23,057 16,534
--------- ---------
GAAP Net income, as reported $12,418 $8,861
Less ISE Stock Exchange direct expenses, net of tax 495 64
--------- ---------
Net income excluding ISE Stock Exchange expenses 12,913 8,925
--------- ---------
GAAP Diluted earnings per share, as reported $0.32 $0.25
Less ISE Stock Exchange direct expenses, net of tax 0.01 0.01
--------- ---------
Diluted earnings per share excluding ISE Stock
Exchange expenses $0.33 $0.26
--------- ---------
Gross Margin 41,574 33,252
GAAP pre-tax margins, as reported 53.3% 49.4%
Pre-tax margins excluding ISE Stock Exchange
expenses 55.5% 49.7%
Earnings Conference Call
ISE will host a conference call to discuss its first quarter 2006 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) 659-1966 and dialing the participant passcode 35471845. An archived recording of the call will be available from 10:30 a.m. on April 27, 2006 until midnight on April 28, 2006 and can be accessed by calling (888) 286-8010 and dialing the participant passcode 23592545. An archived replay of the call will be available on the Investor Relations section of the Company's web site at www.iseoptions.com.
ISE Background
The International Securities Exchange (ISE) is one of the leading marketplaces for trading derivatives and equities, founded on the principle that technology fosters and infuses new efficiencies and operational innovations into securities trading. ISE developed an innovative market structure that integrated auction market principles into an advanced screen-based trading system launching the first fully electronic US options exchange in May 2000. It is now the world's largest equity options exchange.
ISE continually enhances its trading systems and develops new products, including indexes and market data, to provide investors with the best marketplace and investment tools to trade smarter. For more information about ISE, its options products and its technology, visit www.iseoptions.com and for more information about the ISE Stock Exchange LLC, visit www.isestock.com.
Certain matters discussed in this press release are "forward looking statements" intended to qualify for the safe harbor from liability established by the Private Securities Litigation Reform Act of 1995. These statements relate to future events or our future financial performance, and involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements, to be materially different from those contemplated by the forward looking statements. We undertake no ongoing obligation, other than that imposed by law, to update these statements. Factors that could affect our results, levels of activity, performance or achievements and cause them to materially differ from those contained in the forward looking statements can be found in our filings with the Securities and Exchange Commission, including our annual report on Form 10-K, current reports on Form 8-K and quarterly reports on Form 10-Q.
