- Revenues of $74.4 million, up 38% over first quarter, 2003
- Net income increase of 80% compared with Q1, 2003
- Earnings per share of 76 cents versus 43 cents in Q1, 2003
- NGX acquisition completed on March 1, 2004
- Declared quarterly dividend of $0.25 per common share
TSX Group Inc. [TSX:X] announced results for the first quarter ended March 31, 2004. The Company also declared a quarterly dividend of $0.25 per common share.
Revenues were $74.4 million for the first quarter of 2004, up 38% as compared with $54.1 million for the first quarter of 2003, reflecting increased revenue in the primary areas of the business. Net income was $25.8 million, or 76 cents per common share (on both a basic and fully diluted basis), for the first quarter of 2004 representing an increase of 80% over $14.4 million, or 43 cents per common share (on both a basic and fully diluted basis), for the first quarter of 2003, largely attributable to the higher revenue that was partially offset by an increase in expenses.
“We are very pleased with our financial results as well as with our accomplishments to date in 2004, including the announcement and closing of the Natural Gas Exchange acquisition, the launch of the market on close facility and expansion of U.S. dollar trading,” said Barbara Stymiest, Chief Executive Officer of TSX Group Inc. “We look forward to optimizing the opportunities presented by the NGX acquisition, as well as supporting new and existing customers with innovative products and services as we move forward,” added Ms. Stymiest.
Commenting on TSX Group’s financial results, Michael Ptasznik, Chief Financial Officer, said “The strength of market activity is evident in the revenues for the first quarter. This revenue growth, along with significant operating leverage, continues to result in strong bottom line performance.”
Revenues
Listing revenue of $31.3 million in the first quarter of 2004 increased by $9.9 million, or 46%, compared with $21.4 million in the first quarter of 2003. This improvement was primarily due to increased revenue from initial and additional listing fees resulting from new listings and robust additional financing activity. In terms of new equity financing, the $9.8 billion that was raised on Toronto Stock Exchange and TSX Venture Exchange during the first quarter of 2004 was almost three times higher than the amount raised during the same period in 2003. There were 39 new issuers listed on Toronto Stock Exchange in the first quarter of 2004, including 20 initial public offerings and 13 graduates from TSX Venture Exchange. This compares with 26 new issuers listed, including 7 initial public offerings and 14 graduates in the first quarter of 2003. During the first quarter of 2004, there were 40 new listings on TSX Venture Exchange compared with 13 new listings in the first quarter of 2003.
The increase in listing revenue on Toronto Stock Exchange also resulted from a change in the listing fee structure. During 2003, issuers listed on Toronto Stock Exchange paid initial and additional listing fees based on the number of securities being listed, subject to minimum and maximum fees. For 2004, the fee structure was modified so that these fees are based on the value, rather than the number, of securities to be listed, subject to minimum and maximum fees. In addition, the maximum fees for both initial and additional listings were increased for 2004. The 2004 fee structure for sustaining fees is the same as 2003, and is based on market capitalization of listed issuers at the end of the prior year. The revenue from sustaining fees increased in the first quarter of 2004, reflecting overall higher market capitalization of issuers at December 31, 2003 compared with December 31, 2002.
Trading and related revenue of $26.2 million in the first quarter of 2004 increased by $9.9 million, or 61%, compared with $16.3 million in the first quarter of 2003. The total value of securities traded on the Toronto Stock Exchange and TSX Venture Exchange during the first quarter of 2004 was $247.3 billion, a 66% increase over the $148.7 billion in value traded during the first quarter of 2003. The number of transactions increased by 76% from 7.1 million in the first quarter of 2003 to 12.5 million in the first quarter of 2004. In addition, on March 1, 2004 TSX Group acquired the Natural Gas Exchange (“NGX”), a leading North American marketplace for the trading and clearing of natural gas and electricity contracts. Revenues of $1.2 million from NGX for March, 2004 have also been included in trading and related revenue.
Market data revenue of $14.4 million in the first quarter of 2004 increased by $1.1 million, or 8%, compared with $13.3 million in the first quarter of 2003. The increase in revenue reflects a higher number of usage based quotes during the first quarter of 2004 compared with 2003 resulting from increased retail activity, as well as sales of premium products that display the full order book. The 102,700 professional and equivalent real-time data subscriptions at the end of the first quarter of 2004 were higher by approximately 1%, when compared to the end of the first quarter of 2003.
Business services revenue of $2.2 million in the first quarter of 2004 decreased by $0.2 million, or 8%, compared with $2.4 million in the first quarter of 2003. The decrease is primarily related to a change in the pricing structure for technology services provided to Market Regulation Services Inc. (“RS”), reflecting cost savings from migrating to a lower cost technology solution. RS, which is 50% owned by TSX Group, paid $1.9 million in the first quarter of 2004 for technology related services as compared to $2.2 million in the first quarter of 2003.
Expenses
Compensation and benefits costs of $19.0 million for the first quarter of 2004 increased by $0.8 million, or 4%, from $18.2 million in the first quarter of 2003. The increase is primarily attributable to higher costs associated with long-term compensation incentives, salary increases, which were effective at the beginning of 2004, and salary costs associated with NGX employees for March, 2004. In addition, during the first quarter of 2004 there were lower expenses related to organizational changes and to defined pension benefits compared with the first quarter of 2003. The number of employees at March 31, 2004 was 552, including 26 employees who joined TSX Group upon the acquisition of NGX, compared with 532 at March 31, 2003.
Information and trading system costs of $3.8 million for the first quarter of 2004 decreased by $0.9 million, or 19%, from $4.7 million in the first quarter of 2003. The decrease is primarily attributable to the savings from lower lease and maintenance costs as operational efficiencies were realized.
General and administrative costs of $9.6 million for the first quarter of 2004 increased by $3.0 million, or 45%, from $6.6 million in the first quarter of 2003. The increase is primarily attributable to increased spending related to marketing costs, including branding, business development, as well as higher occupancy costs compared with the first quarter of 2003. In addition, NGX expenses were included for the month of March, 2004. TSX Group paid RS $0.9 million for regulation services in the first quarter of 2004 as compared to $1.0 million in the first quarter of 2003.
Amortization of $2.8 million for the first quarter of 2004 was essentially unchanged from the first quarter of 2003.
Investment Income of $2.0 million for the first quarter of 2004 increased by $1.2 million, or 150%, compared with $0.8 million in the first quarter of 2003. The increase was largely attributable to more favourable returns on short term bond and mortgage investments during 2004 compared with 2003, that were realized upon redemption of investment units, partially offset by a lower amount of cash available for investment during the first quarter of 2004 following the payment of a special dividend of $168.7 million on December 31, 2003.
Income Taxes of $15.0 million for the first quarter of 2004 increased by $7.0 million, compared with $8.0 million in the first quarter of 2003. The effective tax rate increased from approximately 36% in the first quarter of 2003 to 37% in the first quarter of 2004.
Liquidity and Capital Resources
Cash, investments and marketable securities were $125.2 million at March 31, 2004, an increase of $7.6 million from $117.6 million at December 31, 2003. Cash generated from operations of $44.3 million for the first quarter of 2004 was partially offset by the quarterly dividend of $0.25 per common share, or $8.5 million, paid on March 31, 2004. In addition, on March 1, 2004, there was a net cash outflow of approximately $27.1 million for the acquisition of NGX, as described in Cash Flow used in Investing Activities.
NGX Collateral Arrangements and Clearing Backstop Fund
As part of its clearing operations, NGX becomes the counterparty to each transaction, thereby guaranteeing the fulfillment of every contract that is executed on its electronic trading platform. To manage the risks associated with its clearing activities NGX is fully collateralized and maintains a $30.0 million clearing backstop fund. TSX Group is the guarantor of this fund, and has pledged $30.0 million of investments and marketable securities related to its obligations as a guarantor.
NGX requires each counterparty (the “Contracting Party”) to provide collateral in the form of cash or letters of credit based on the magnitude of its unsettled contractual obligations, which may be accessed in the event of default by a Contracting Party. The collateral provided in the form of cash (“the cash collateral deposits”) is segregated in individually designated bank accounts held at a major Canadian chartered bank by NGX which acts as trustee for these funds. The cash collateral deposits, together with letters of credit provided by all the Contracting Parties, exceed all of the outstanding credit exposure, as determined by NGX, for all its unsettled contractual obligations at any point in time.
Total assets were $773.1 million at March 31, 2004, an increase of $498.5 million from $274.6 million at the end of 2003. The increase is primarily due to the inclusion of energy contract receivables of $451.0 million related to the clearing operations of NGX. As the clearing counterparty to every trade, NGX also carries offsetting liabilities in the form of energy contract payables, which were $450.4 million at March 31, 2004. In addition, $31.0 million was recorded in the first quarter of 2004 to reflect the goodwill associated with the purchase of NGX as well as the intangible asset, relating to customer relationships.
Shareholders’ equity was $236.9 million at March 31, 2004, an increase of $19.6 million from $217.3 million at the end of 2003. The increase is attributable to net income of $25.8 million in the first quarter of 2004, including $0.1 million related to NGX for March, 2004, proceeds from the exercise of stock options of $1.8 million, somewhat offset by the quarterly dividend payment of $8.5 million.
At March 31, 2004 there were 33,834,941 common shares issued and outstanding. There were 2,800,000 common shares originally reserved for issuance under a share option plan of which 84,850 were exercised in the first quarter of 2004. At March 31, 2004, 826,300 options were outstanding.
At April 26, 2004, there were 33,836,941 common shares issued and outstanding, and 824,300 options outstanding under the share option plan.
Cash Flow from Operations was $44.3 million in the first quarter of 2004, compared with $21.5 million in the first quarter of 2003, representing an increase of $22.8 million. A significant contributor to cash flow in the first quarter of 2004 was $28.6 million of net income excluding amortization ($17.1 million in the first quarter of 2003). The acquisition of NGX was facilitated through an arrangement reached with the Bourse de Montréal Inc. (“Bourse de Montreal”) that considers the memorandum of agreement (“MOA”) signed in 1999, at the time of the realignment of Canadian capital markets. This arrangement included a payment to the Bourse de Montréal totaling $5.0 million, which will be expensed over a period of five years, being the remaining term of the MOA. This has been reflected in both the increase in accounts receivable and prepaid expenses and increase in other assets for the first quarter of 2004 of $12.9 million ($8.1 million increase in the first quarter of 2003).
In addition, the billing of listed issuer sustaining fees, which is reflected in the increase in deferred revenue of $32.4 million ($29.8 million increase in the first quarter of 2003) resulted in an increase in both cash and accounts receivable. This deferred revenue will be recognized over the balance of 2004. There was essentially no increase in income taxes payable in the first quarter of 2004 ($13.1 million decrease in the first quarter of 2003).
Cash Flow used in Investing Activities was $30.8 million in the first quarter of 2004. On March 1, 2004, TSX Group acquired NGX at an approximate purchase price of $39.3 million plus $0.8 million of closing costs, less cash held by NGX of $13.0 million at March 1, 2004, for a net cash outflow of approximately $27.1 million.
Capital and Other Asset Expenditures are related to certain technology components that are not leased, leasehold improvements and furniture and fixtures. Capital expenditures in the first quarter of 2004 were $2.9 million, compared with $1.0 million in 2003. The capital expenditures made in the first quarter of 2004 were primarily related to further technology investments targeted at maintaining our best in class systems and renovation of the TSX Conference Centre.
Dividends
The Board of Directors of TSX Group Inc. declared a quarterly dividend of $0.25 on each outstanding common share of the company, payable on June 30, 2004 to shareholders of record at the close of business on May 31, 2004.
Outlook
Commenting on TSX Group’s outlook, Ms. Stymiest said: “We continue to remain confident in our goal of long-term annual earnings per share growth in the 10 to 12 percent range. Growth rates will vary on both a quarterly and annual basis, which in part reflects economic and market conditions. We will continue to invest in the various opportunities available as we execute our growth strategies of enhancing our core business, diversifying and extending our pre-eminent domestic position as well as expanding geographically. NGX is an ideal example of how we plan to deliver on our strategies”.
Financial Statements Governance Practice
The Finance & Audit Committee of the Board of Directors of TSX Group Inc. reviewed this press release as well as the financial statements and Management’s Discussion and Analysis (“MD&A”), and recommended they be approved by the Board of Directors. Following review by the full Board, the financial statements, MD&A and the contents of this press release were approved.
About TSX Group Inc.
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TSX Group operates Canada's two national stock exchanges serving the senior equity and public venture equity markets as well as NGX, a leading North American exchange for the trading and clearing of natural gas and electricity contracts. TSX are the initials attached to the core equity operations of the TSX Group (www.tsx.com): Toronto Stock Exchange, TSX Venture Exchange, TSX Markets, TSX Datalinx, TSX Technologies. TSX Group is headquartered in Toronto and maintains offices in Montreal, Winnipeg, Calgary and Vancouver.
