For the first six months of 2005, net income increased 18.4% to $17.0 million, or $0.46 per share on a fully diluted basis compared to $14.4 million, or $0.42 per share on a fully diluted basis, in the first half of 2004.
"We are pleased to report record revenues and another quarter of double digit-growth in our average daily volume and net income," said David Krell, ISE's President and Chief Executive Officer. "Our core businesses remain robust and our index business continues to make solid gains. The momentum that we are experiencing underscores our competitive advantage in the marketplace as investors increasingly acknowledge that ISE provides the tightest markets, the best liquidity and an unparalleled level of customer service."
"We continue to develop and expand our index business. In May, we launched index options on the Russell 1000(R), Russell 2000(R) and Mini-Russell 2000(R) in concert with our overall strategy to expand our reach in the index segment of the options industry. In June, we expanded our proprietary index business and launched the ISE Semiconductors, ISE-CCM Homeland Security, ISE Oil and Gas Services, ISE Gold, and ISE Homebuilders indexes. The success that we have experienced with the Nasdaq-100(R) index demonstrates the potential that exists in index options and we remain encouraged by the growth that we have seen thus far. Going forward, we plan to launch additional proprietary indexes and third-party indexes that will complement our existing products. We are confident that our expertise and track record in equity options will translate into continued success in our index options business," Krell added.
Second Quarter Results
Revenues
Total revenues for the second quarter of 2005 increased 15.1% to $35.0 million principally due to increased trading volumes. Transaction fee revenues increased 21.2% to $24.0 million in the second quarter from $19.8 million last year and market data revenues increased 10.6% to $4.8 million from $4.3 million in the year ago quarter. Other member fees decreased 10.0% to $5.2 million from $5.8 million last year due to lower connectivity and network fees we charge our members. The decrease in other member fees is offset by lower expenses we incur for providing these services. Other revenues increased to $1.0 million as compared to $0.5 million last year primarily due to income generated by our higher cash balances.
Expenses
Total expenses for the second quarter of 2005 increased 22.9% to $20.5 million as compared to $16.7 million in the second quarter of the prior year. Included in our second quarter 2005 expenses is the full quarter effect of stock based compensation of $1.5 million and other public company related expenses. Second quarter 2004 expenses included $0.6 million of reorganization costs.
- Compensation and benefits expenses increased 27.7% to $9.9 million primarily due to increased headcount to support our growth and the full quarter effect of stock based compensation which we began recording on March 9, 2005 after our initial public offering.
- Technology and communications expenses declined 21.1% to $3.3 million primarily due to the elimination of licensing fees paid to OMX(US) Inc. ("OMX") resulting from restructuring an agreement with them in June 2004. The new agreement changed our licensing fee from a variable fee based on trading volume to a fixed license fee. Our second quarter 2004 expenses included $1.3 million related to this variable fee. In addition, we incurred increased costs for maintenance and enhancement of our systems.
- Occupancy expenses increased 11.9% to $1.1 million primarily due to increased space requirements for disaster recovery purposes.
- Professional fees increased 88.1% to $1.2 million primarily due to higher public company related expenses as well as increased legal fees associated with ongoing litigation. The litigation arose from our decision to trade options on certain exchange traded funds without seeking a license from the creators of the indices underlying those funds, and a challenge to our right to trade options on the ISE Gold index.
- Marketing and business development expenses increased 45.5% to $1.1 million primarily due to the roll-out of our index trading initiatives.
- Depreciation and amortization expenses increased to $1.5 million in the second quarter of 2005 from $0.5 million in the year ago quarter reflecting the impact of the amortization of $1.0 million for our trading license with OMX referred to above.
- Other expenses increased 83.2% to $2.5 million primarily due to fees we pay for trading licensed products. Fees that we incur to trade licensed products increased 67.6% to $1.3 million for the quarter. These fees are offset by surcharges we charge members for trading licensed products and are included in our transaction fees revenues.
Income, Taxes and Margins
Pre-tax income increased 5.6% to $14.5 million for the second quarter versus $13.7 million last year. Our pre-tax margin for the second quarter was 41.5% versus 45.2% last year.
Our tax rate decreased to 43.9% for the second quarter compared to 49.4% last year. Our rate was significantly higher last year due to the non-deductibility of our reorganization expenses related to our initial public offering. Our rate in this year's quarter also reflects a lower tax rate on returns from our invested cash.
Net income for the second quarter increased 17.1% to $8.1 million from $6.9 million in the prior year quarter.
Balance Sheet
As of June 30, 2005, ISE had cash and cash equivalents of $140.1 million, total assets of $255.6 million, and shareholders' equity of $159.2 million. There were approximately 36.7 million shares of common stock outstanding.
"The increase in our expenses reflects the additional costs associated with our decision to become a public company as well as the investment in people and infrastructure required to support our current and future business initiatives," said Bruce Cooperman, Chief Financial Officer. "Our expense management discipline enables us to generate margins that are among the highest in the industry while at the same time charging fees that are among the lowest in the industry. We fully intend to maintain these distinctions in the months ahead," concluded Cooperman.
Second Quarter Business Highlights
- ISE traded its one billionth contract on May 24, 2005.
- ISE was the largest U.S. equity options exchange for the second quarter of 2005 based on total equity options trading. ISE traded more volume in its own listings than any other options exchange.
- ISE continued to expand its index options business and listed three new options on Russell indexes. On May 16, 2005, ISE launched options on the Russell 1000(R) index, Russell 2000(R) index and Mini-Russell 2000(R) index.
- In June, ISE launched its first five sector indexes: ISE Homebuilders, ISE Semiconductor, ISE-CCM Homeland Security, ISE Oil and Gas Services, and ISE Gold.
- On June 15, 2005, ISE enhanced its trading system to permit Electronic Access Members (EAM) to route "preferenced orders" to any ISE market maker.
Earnings Conference Call
ISE will host a conference call to discuss its second quarter 2005 results at 10:00 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. Investors can also listen to the conference call by dialing (800)-435-1398 (Pass code: 30963972). An archived recording of the call will be maintained on this site from July 28, 2005 until midnight on July 29, 2005 and can be accessed by calling (888)-286-8010 (Pass code:61218887). An investor presentation that will be referenced during the call will also be posted to the web site.
ISE Background
The International Securities Exchange, the world's largest equity options exchange, was founded on the principle that technology fosters and infuses new efficiencies and operational innovations into securities trading. After developing an innovative market structure that integrated auction market principles into an advanced screen-based trading system, ISE launched the first fully electronic US options exchange in May 2000. ISE continually enhances its trading systems to provide investors with the best marketplace to execute their options orders.
For more information about ISE, its products and its technology, visit www.iseoptions.com.
Forward-Looking statements: 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 registration statement on Form S-1, current reports on Form 8-K and quarterly reports on Form 10-Q, as amended.
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