Mondo Visione Worldwide Financial Markets Intelligence

FTSE Mondo Visione Exchanges Index: 81,880.84 -61.09

TSX Group Inc. Reports Results For Fourth Quarter And Full Year 2004

Date 25/01/2005

  • Revenues of $79.0 million, up 17% over fourth quarter of 2003
  • Diluted earnings per share of 81 cents for Q4, 2004, up 3% over Q4, 2003
  • Full year 2004 revenues of $295.6 million, up 26% compared with 2003
  • Full year 2004 net income of $98.4 million, increased by 29% over 2003

TSX Group Inc. [TSX:X] announced results for the fourth quarter and year ended December 31, 2004.

Revenues were $79.0 million for the fourth quarter of 2004, up 17% compared to $67.3 million for the same period in 2003, due to increased revenue from TSX Group’s three primary revenue streams, listing, trading and market data. Expenses were $36.3 million for the fourth quarter of 2004, a decrease of 7% from $39.2 million in the fourth quarter of 2003. The decrease was due to lower compensation and benefits expenses as well as lower general and administrative costs. In addition, income taxes were significantly higher in the fourth quarter of 2004 compared with the fourth quarter of 2003 due to a positive adjustment to the value of the corporation’s future tax asset in the fourth quarter of 2003, which reduced income taxes by $8.7 million.

Net income was $27.7 million, or 82 cents per common share (81 cents on a diluted basis) for the fourth quarter of 2004, representing an increase of 3% over $26.9 million, or 80 cents per common share (79 cents per share on a diluted basis) from the fourth quarter of 2003. Excluding the impact of the 2003 tax adjustment of $8.7 million (26 cents per common share; 25 cents on a diluted basis), net income in the fourth quarter of 2004 increased by 52% compared with $18.2 million, or 54 cents per common share (on a basic and diluted basis) in the fourth quarter of 2003.

Richard Nesbitt, Chief Executive Officer of TSX Group Inc. said “We are proud of the success we have had across all areas of the business. Our full year results continued to reflect the growth of our core equities business as well as the benefits of diversification with investments such as NGX and innovative initiatives such as CNX Marketlink”.

Commenting specifically on TSX Group’s financial results, Michael Ptasznik, Chief Financial Officer, said “We are pleased with the positive operating results for the fourth quarter of 2004 overall which were up 52% over the fourth quarter of 2003, if you exclude the impact of the 2003 tax adjustment. Revenue growth of 17% coupled with lower expenses led to strong bottom line performance”.

Quarter Ended December 31, 2004 compared to Quarter Ended December 31, 2003

Revenue

Listing revenue of $34.9 million in the fourth quarter of 2004 increased by $5.2 million, or 18%, compared with $29.7 million in the fourth quarter of 2003. The increase in listing revenue resulted primarily from a change in the listing fee structure on Toronto Stock Exchange. For 2004, the fee structure was modified so that initial and additional 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 fourth quarter of 2004 over the corresponding period in 2003, reflecting overall higher market capitalization of issuers at December 31, 2003 compared with December 31, 2002.

In addition, the $15.6 billion in new equity financing raised on Toronto Stock Exchange and TSX Venture Exchange during the fourth quarter of 2004 was 46% higher than the $10.7 billion raised during the same period in 2003. There were 70 new issuers listed on Toronto Stock Exchange in the fourth quarter of 2004, as compared with 42 new issuers listed in the fourth quarter of 2003. During the fourth quarter of 2004, there were 39 new issuers listed on TSX Venture Exchange compared with 26 new issuers listed in the fourth quarter of 2003.

Trading and related revenue of $27.5 million in the fourth quarter of 2004 increased by $6.3 million, or 30%, compared with $21.2 million in the fourth quarter of 2003. Trading and related revenue includes $3.7 million of trading and related revenue from Natural Gas Exchange Inc. (“NGX”), acquired by TSX Group on March 1, 2004. In the fourth quarter of 2004, 2.1 million terajoules in natural gas and electricity contracts were traded on NGX, an 11% increase over 1.9 million terajoules traded in the fourth quarter of 2003.

The total value of securities traded on Toronto Stock Exchange and TSX Venture Exchange was $222.0 billion in the fourth quarter of 2004, an increase of 18% from the $188.4 billion in value traded for the fourth quarter of 2003. The number of transactions increased by 15% to 11.6 million in the fourth quarter of 2004 from 10.1 million in the fourth quarter of 2003.

Market data revenue of $14.4 million in the fourth quarter of 2004 increased by $0.4 million, or 3%, compared with $14.0 million in the fourth quarter of 2003. The increase reflects a higher number of professional and equivalent real-time data subscriptions. The 107,610 subscriptions at the end of the fourth quarter of 2004 were higher by approximately 6%, when compared to 101,795 at end of the fourth quarter of 2003, partly reflecting increased sales to U.S. customers. The increase in revenue is also attributable to an overall price increase, which was effective September 1, 2004, as well as revenue from CNX Marketlink*, a joint initiative launched with Canada NewsWire during the fourth quarter of 2003. The revenue growth was somewhat offset by the impact of certain users converting to an alternate fee model under which the fees for usage based quotes are capped.

Business services revenue of $2.0 million in the fourth quarter of 2004 decreased by $0.2 million, or 9%, compared with $2.2 million in the fourth quarter of 2003. The decrease is primarily related to a change in the pricing for technology services provided to Market Regulation Services Inc. (“RS”), reflecting cost savings from migrating to a more cost efficient technology solution. RS, which is 50% owned by TSX Group, paid TSX Group $1.8 million in the fourth quarter of 2004 for technology related services as compared to $2.0 million in the fourth quarter of 2003.

Expenses

Compensation and benefits costs of $19.2 million for the fourth quarter of 2004 decreased by $2.6 million, or 12%, from $21.8 million in the fourth quarter of 2003. The decrease is primarily attributable to lower long term compensation expense related to both share options and share appreciation rights than was recorded in the fourth quarter of 2003, offset by salary increases and the inclusion of costs pertaining to NGX employees. During the fourth quarter of 2003 a program was established to effectively hedge non-performance based compensation expense related to share price appreciation, which mitigated the impact in 2004. The number of employees at December 31, 2004 was 553, including 30 NGX employees, compared with 524 at December 31, 2003.

Information and trading systems costs of $4.5 million for the fourth quarter of 2004 increased by $0.1 million, or 2%, from $4.4 million in the fourth quarter of 2003. The increase is primarily attributable to higher lease costs, somewhat offset by lower maintenance costs as operational efficiencies were realized.

General and administrative costs of $8.8 million decreased by $1.3 million, or 13%, from $10.1 million in the fourth quarter of 2003. The decrease is primarily attributable to lower spending related to product and brand marketing and reduced usage of external contractors, somewhat offset by higher expenses related to the inclusion of NGX expenses for the fourth quarter of 2004. TSX Group paid RS $0.7 million for regulation services in the fourth quarter of 2004 as compared to $0.8 million in the fourth quarter of 2003. The decrease related to lower fees charged for the RS services.

Amortization of $3.8 million for the fourth quarter of 2004 increased by $0.9 million, or 31%, from $2.9 million in the fourth quarter of 2003, and included $0.7 million related to amortization of the tangible and intangible assets associated with the acquisition of NGX.

Loss from Investment in Affiliate of $0.2 million represents TSX Group’s approximate 45% share of CanDeal.ca Inc.’s (“CanDeal”) loss for the fourth quarter of 2004, a decrease of $0.2 million from a loss of $0.4 million in the fourth quarter of 2003.

Investment Income of $1.3 million in the fourth quarter of 2004 decreased by $0.4 million, or 24%, compared with $1.7 million in the fourth quarter of 2003. The decrease was primarily attributable to a lower amount of cash available for investment following the payment of a special dividend of $168.7 million on December 31, 2003.

Income Taxes were $16.1 million for the fourth quarter of 2004, compared to $2.5 million in the fourth quarter of 2003. The effective tax rate increased from approximately 9% for the fourth quarter of 2003 to approximately 37% for the fourth quarter of 2004. The lower tax rate in the fourth quarter 2003 related primarily to an adjustment of $8.7 million in the value of the future tax asset. In December, 2003, the Ontario government enacted legislation to increase the provincial corporate income tax rate from 12.5% to 14.0% effective January 1, 2004. As a result of this change in the provincial tax rate, the value of the future tax asset was increased and income tax expense was reduced for 2003.

Year Ended December 31, 2004 compared to Year Ended December 31, 2003

For the year 2004, revenues were $295.6 million, an increase of $61.9 million, or 26%, from $233.7 million in 2003 due to increases in the three primary revenue streams, listing, trading and market data. Expenses of $144.5 million in 2004 increased by $9.5 million, or 7%, from $135.0 million in 2003. The increase was largely due to the inclusion of NGX expenses for ten months ended December 31, 2004 and higher general and administrative costs, partially offset by a decrease in information and trading systems costs. Net income was $98.4 million, or $2.91 per common share ($2.88 on a diluted basis), compared with net income of $76.4 million, or $2.26 per common share ($2.25 on a diluted basis) for 2003, representing an increase of 29%. These results reflect increased revenues, partially offset by higher expenses, higher income taxes and lower investment income.

Revenue

Listing revenue >of $127.1 million in 2004 increased by $28.9 million, or 29%, compared with $98.2 million in 2003. This improvement was due to the previously discussed change in Toronto Stock Exchange’s listing fee structure and increased financing activity on both exchanges. The $42.6 billion in new equity financing raised on Toronto Stock Exchange and TSX Venture Exchange in 2004 was 35% higher than the $31.5 billion raised during 2003. There were 204 new issuers listed on Toronto Stock Exchange in 2004, as compared with 128 new issuers listed in 2003. In 2004, there were 142 new issuers listed on TSX Venture Exchange compared with 76 new issuers listed in 2003.

The revenue from sustaining fees also increased in 2004 over 2003, reflecting overall higher market capitalization of issuers at December 31, 2003 compared with December 31, 2002. For 2005, sustaining fees will be based on the December 31, 2004 market capitalization. There are no planned changes in pricing or listing fee structure on Toronto Stock Exchange for 2005.

Trading and related revenue of $99.6 million in 2004, increased by $27.7 million, or 39%, compared with $71.9 million in 2003, largely due to an increase in both the total value of securities traded and number of transactions. The total value of securities traded on Toronto Stock Exchange and TSX Venture Exchange was $844.8 billion in 2004, a 29% increase over the $655.3 billion in value traded during 2003. The number of transactions on Toronto Stock Exchange and TSX Venture Exchange increased by 31% to 43.1 million in 2004 from 33.0 million in 2003.

In addition, revenues of $10.8 million from NGX for the period from March 1, 2004 to December 31, 2004 have been included in trading and related revenue. In the period from March 1, 2004 to December 31, 2004, 6.4 million terajoules in natural gas and electricity contracts were traded on NGX, a 19% increase over 5.4 million terajoules traded in this 10 month period during 2003.

Market data revenue of $58.8 million in 2004 increased by $6.2 million, or 12%, compared with $52.6 million in 2003. The increase reflects a higher number of professional and real-time data subscriptions. The 107,610 professional and equivalent real-time data subscriptions at the end of 2004 are higher by approximately 6% when compared to 101,795 at the end of 2003, partly reflecting sales of premium products that display the full order book. In addition, the increase reflects the benefits from increased retail activity, and the revenue from CNX Marketlink, a joint initiative launched with Canada NewsWire during the fourth quarter of 2003. As well, during the third quarter of 2004, there were revenue recoveries of approximately $1.5 million related to under-reported usage of real-time quotes.

The revenue growth was somewhat offset by the impact of certain users converting to an alternate fee model under which the fees for usage based quotes are capped. While most users, who would benefit, had converted to this model by the end of 2004, revenue growth in 2005 could be affected by this factor. The growth in market data revenue was also somewhat offset by the negative impact of the appreciation of the Canadian dollar versus the U.S. dollar during 2004. TSX Group derived approximately $18.1 million Canadian in both 2004 and 2003 from market data sales to customers paying in U.S. dollars.

Business services revenue of $8.4 million in 2004 decreased by $0.7 million, or 8%, compared with $9.1 million in 2003. The decrease is primarily related to a change in the pricing for technology services provided to RS, reflecting cost savings from migrating to a more cost efficient technology solution. RS paid TSX Group $7.3 million in 2004 for technology related services as compared to $8.1 million in 2003.

Expenses

Compensation and benefits costs of $73.6 million for 2004 increased by $0.4 million, or 1%, from $73.2 million in 2003. The change is attributable to the inclusion of costs pertaining to NGX employees for the period from March 1, 2004 to December 31, 2004 and salary increases, which were largely offset by reduced long-term compensation expense related to both share options and share appreciation rights. During the fourth quarter of 2003, a program was established to effectively hedge non-performance based compensation expense related to share price appreciation, which mitigated the impact in 2004.

Information and trading systems costs of $15.8 million for 2004 decreased by $1.5 million, or 9%, from $17.3 million in 2003. The decrease is primarily attributable to savings from lower lease and maintenance costs as operational efficiencies were realized.

General and administrative costs of $42.1 million increased by $8.8 million, or 26%, from $33.3 million in 2003. The increase is partially attributable to the inclusion of NGX costs for the period from March 1, 2004 to December 31, 2004 and higher expenses related to product and brand marketing compared with 2003. The increase is also related to the settlement of arbitration proceedings with Ashton Technology Canada Inc. for $3.6 million.

TSX Group paid RS $3.1 million for regulation services in 2004 as compared to $3.6 million in 2003. The decrease related to lower fees charged for the RS services.

Amortization of $13.0 million for 2004 increased by $1.8 million, or 16%, from $11.2 million in 2003, primarily reflecting $1.7 million of amortization of the tangible and intangible assets associated with the acquisition of NGX.

Loss from Investment in Affiliate of $1.2 million represents TSX Group’s approximate 45% share of CanDeal’s loss for 2004, and is essentially unchanged from the loss in 2003.

Investment Income of $4.8 million for 2004 decreased by $5.4 million, or 53%, compared with $10.2 million in 2003. The decrease was primarily attributable to a lower amount of cash available for investment following the payment of a special dividend of $168.7 million on December 31, 2003.

Income Taxes were $56.2 million in 2004, compared to $31.3 million in 2003. The effective tax rate increased from approximately 29% for 2003 to approximately 36% for 2004. The lower tax rate in 2003 related primarily to an adjustment of $8.7 million in the value of the future tax asset in 2003. In December, 2003, the Ontario government enacted legislation to increase the provincial corporate income tax rate from 12.5% to 14.0% effective January 1, 2004. As a result of this change in the provincial tax rate, the value of the future tax asset was increased and income tax expense was reduced for 2003.

Liquidity and Capital Resources

Cash and marketable securities were $171.6 million at December 31, 2004, an increase of $54.0 million from $117.6 million at the end of 2003. Cash generated from operating activities was $127.0 million for 2004, compared with $82.0 million in 2003. On March 1, 2004, there was a net cash outflow of $27.2 million for the acquisition of NGX, as described in Cash Flows used in Investing Activities. During 2004, TSX Group paid two dividends of $0.25 per common share, and two dividends of $0.33 per common share, or $39.3 million in aggregate.

NGX Collateral Arrangements and Clearing Backstop Fund: As part of its clearing operations, NGX becomes the central counterparty to each transaction, thereby guaranteeing the performance of every contract that is executed on its electronic trading platform. To manage the risks associated with its clearing activities, NGX holds collateral to cover each counterparty’s (“Contracting Party”) exposure and maintains a $30.0 million clearing backstop fund. TSX Group is the guarantor of this fund, and has pledged $30.0 million of marketable securities related to its obligations as guarantor.

NGX requires each Contracting Party to provide collateral in the form of cash or letters of credit based on the margins required for its unsettled contractual obligations, which may be accessed in the event of default by such 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 $967.4 million at December 31, 2004, an increase of $692.8 million from $274.6 million at the end of 2003. The increase is primarily due to the inclusion of energy contract receivables of $608.4 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 $607.5 million at December 31, 2004. In addition, $31.6 million was recorded in 2004 to reflect the goodwill and intangible asset associated with the purchase of NGX. As well, cash and marketable securities at the end of 2004 increased by $54.0 million over the total at the end of 2003.

Shareholders’ Equity was $280.8 million at December 31, 2004, an increase of $63.5 million from $217.3 million at the end of 2003. The increase is primarily attributable to net income of $98.4 million in 2004, offset by dividend payments totalling $39.3 million.

At both December 31, 2004 and January 25, 2005, there were 33,890,291 common shares issued and outstanding. There were 2,800,000 common shares originally reserved for issuance under a share option plan of which 140,200 common shares were issued on the exercise of stock options in 2004. At both December 31, 2004 and January 25, 2005, 665,950 options were outstanding.

Cash Flows from Operating Activities were $30.0 million in the fourth quarter of 2004, compared with $26.9 million in the fourth quarter of 2003, representing an increase of $3.1 million. A significant contributor to cash flows in the fourth quarter of 2004 was $31.5 million of net income before amortization ($29.8 million in the fourth quarter of 2003).

For the year ended December 31, 2004, cash flows from operating activities were $127.0 million compared with $82.0 million for 2003, representing an increase of $45.0 million. A significant contributor to cash flows in 2004 was $111.4 million of net income before amortization ($87.6 million in 2003). There was also an increase of $13.7 million in income taxes payable in 2004 ($6.7 million decrease in 2003).

Cash Flows used in Investing Activities were $23.5 million in the fourth quarter of 2004, compared with $151.0 million generated from investing activities in the fourth quarter of 2003, representing a decrease of $174.5 million. During the fourth quarter of 2004, $20.2 million was invested in marketable securities. In addition, during the fourth quarter of 2004, there were $3.3 million of capital expenditures primarily related to further technology investments targeted at maintaining best in class systems and leasehold improvements associated with TSX Group’s business continuity plan. During the fourth quarter of 2003, $152.5 million (net) in marketable securities were sold prior to the payment of a special dividend of $168.7 million on December 31, 2003. In addition, during the fourth quarter of 2003, there were $1.5 million of capital expenditures primarily related to technology investments.

Cash flows used in investing activities were $81.2 million in 2004, compared with $110.2 million generated from investing activities in 2003, representing a decrease of $191.4 million. During 2004, $44.7 million was invested in marketable securities. On March 1, 2004, TSX Group acquired NGX at a purchase price of $39.4 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 $27.2 million. In addition, there were $9.3 million of capital expenditures in 2004, primarily related to further technology investments targeted at maintaining best in class systems and leasehold improvements associated with the business continuity plan. During 2003, $117.3 million (net) in marketable securities were sold, and there were $7.1 million of capital expenditures, primarily related to the renovation of TSX Broadcast & Conference Centre in the second quarter of 2003.

Outlook

Commenting on TSX Group’s outlook, Mr. Nesbitt said: “We continue to remain confident in the goal of long-term annual earnings per share growth in the 10 to 12 percent range although we expect to see variation in growth rates on both a quarterly and annual basis. We remain committed to pursuing the opportunities that surround us for enhancing our core business, extending our pre-eminent domestic position through diversification and expanding geographically.”

Click here to download the TSX Group's consolidated statements.